Table of Contents

 

 

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 quarter ended September 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: 0-54271

 

 

FRATERNITY COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		27-3683448
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
764 Washington Boulevard, Baltimore, Maryland		21230
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number, including area code: (410) 539-1313

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated, 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		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

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

As of November 10, 2014, the registrant had 1,381,082 shares of common stock issued and outstanding.

 

 

 

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INDEX

 

				PAGE
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements			1
		Consolidated Statements of Financial Condition as of September 30, 2014 and December 31, 2013 (unaudited)			1
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)			2
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September  30, 2014 and 2013 (unaudited)			3
		Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)			4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)			5
		Notes to Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			51
Item 4.		Controls and Procedures			52
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			52
Item 1A.		Risk Factors			52
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3.		Defaults Upon Senior Securities			53
Item 4.		Mine Safety Disclosures			53
Item 5.		Other Information			53
Item 6.		Exhibits			53
SIGNATURES

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

 

		September 30, 2014				December 31, 2013
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	873,104			$	973,466
Interest-bearing deposits in other banks			12,562,897				14,378,207
Total cash and cash equivalents			13,436,001				15,351,673
Investment securities:
Available-for-sale - at fair value			14,580,128				16,354,661
Held-to-maturity - at amortized cost (fair value approximates $9,370,915 and $8,101,210, respectively)			9,225,102				8,069,424
Loans - net of allowance for loan losses of $1,850,000 and $1,528,000 (2014 and 2013, respectively)			115,540,724				114,577,707
Other real estate owned			22,500				1,921,706
Property and equipment, net			855,785				948,907
Federal Home Loan Bank stock - at cost - restricted			1,049,800				1,103,700
Ground rents - net of valuation allowance of $44,703 (2014 and 2013)			824,543				829,243
Accrued interest receivable			553,216				504,599
Investment in bank-owned life insurance			4,813,690				4,692,872
Deferred income taxes			1,320,585				1,384,832
Other assets			589,882				630,864
TOTAL ASSETS		$	162,811,956			$	166,370,188
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits		$	113,880,110			$	118,100,920
Advances from the Federal Home Loan Bank			20,000,000				20,000,000
Advances by borrowers for taxes and insurance			806,657				658,173
Other liabilities			910,248				806,844
Total liabilities			135,597,015				139,565,937
Stockholders’ Equity:
Preferred stock, $0.01 par value; authorized 1,000,000; none issued			0				0
Common stock, $0.01 par value; authorized 15,000,000; issued and outstanding, 1,381,082 shares at September 30, 2014 and 1,392,923 shares at December 31, 2013			13,811				13,929
Additional paid in capital			12,229,601				12,236,878
Retained earnings - substantially restricted			16,092,647				16,175,369
Unearned ESOP shares			(872,850	)			(952,200	)
Accumulated other comprehensive loss			(248,268	)			(669,725	)
Total stockholders’ equity			27,214,941				26,804,251
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	162,811,956			$	166,370,188

See accompanying notes.

 

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FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
INTEREST INCOME:
Interest and fees on loans:
Real estate loans		$	1,301,247			$	1,421,045			$	4,041,825			$	4,228,071
Other loans			1,274				1,386				3,710				3,943
Interest and dividends on investments and bank deposits			169,907				168,833				533,891				516,772
Income from ground rents owned			17,179				8,949				37,297				33,252
Total interest income			1,489,607				1,600,213				4,616,723				4,782,038
INTEREST EXPENSE:
Interest on deposits			288,260				328,296				865,013				1,050,642
Interest on borrowings - short term			7,183				7,184				21,316				16,289
Interest on borrowings - long term			148,159				148,158				439,644				439,644
Total interest expense			443,602				483,638				1,325,973				1,506,575
NET INTEREST INCOME			1,046,005				1,116,575				3,290,750				3,275,463
PROVISION FOR LOAN LOSSES			319,551				143,299				225,120				131,407
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			726,454				973,276				3,065,630				3,144,056
NON-INTEREST INCOME:
Gain on sale of investment securities			1,828				0				1,828				43,335
Income on bank-owned life insurance			41,088				42,056				120,818				123,579
Gain on sale of loans			0				0				8,506				50,126
Other income / (expense)			(404	)			5,909				75,395				16,103
Total non-interest income			42,512				47,965				206,547				233,143
NON-INTEREST EXPENSES:
Salaries and employee benefits			593,375				628,365				1,840,599				1,717,219
Occupancy expenses			137,887				138,398				428,613				408,290
Legal fees			39,895				60,962				154,553				133,278
Federal Deposit Insurance premiums			26,245				34,469				87,196				104,850
Accounting and auditing expense			41,537				39,450				127,350				124,645
Data processing expense			112,451				99,208				345,523				312,119
Directors fees			36,556				53,008				109,168				100,817
Other general and administrative expenses			98,016				153,537				457,319				450,413
Total non-interest expenses			1,085,962				1,207,397				3,550,321				3,351,631
(LOSS) INCOME BEFORE INCOME TAX BENEFIT			(316,996	)			(186,156	)			(278,144	)			25,568
INCOME TAX BENEFIT			(172,178	)			(95,027	)			(195,422	)			(51,274	)
NET (LOSS) INCOME		$	(144,818	)		$	(91,129	)		$	(82,722	)		$	76,842
(LOSS) EARNINGS PER COMMON SHARE - BASIC		$	(0.10	)		$	(0.07	)		$	(0.06	)		$	0.06
(LOSS) EARNINGS PER COMMON SHARE - DILUTED		$	(0.10	)		$	(0.07	)		$	(0.06	)		$	0.06

See accompanying notes.

 

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FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
NET (LOSS) INCOME		$	(144,818	)		$	(91,129	)		$	(82,722	)		$	76,842
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period			45,173				(147,330	)			704,257				(990,567	)
Less: income taxes on unrealized gains (losses) arising during the period			(18,069	)			58,932				(281,703	)			396,227
			27,104				(88,398	)			422,554				(594,340	)
Less: Reclassification adjustment for realized gains			(1,828	)			0				(1,828	)			(43,335	)
Income taxes on reclassification adjustment			731				0				731				17,334
			(1,097	)			0				(1,097	)			(26,001	)
OTHER COMPREHENSIVE INCOME (LOSS)			26,007				(88,398	)			421,457				(620,341	)
COMPREHENSIVE (LOSS) INCOME		$	(118,811	)		$	(179,527	)		$	338,735			$	(543,499	)

See accompanying notes.

 

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Fraternity Community Bancorp, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

 

		Common Stock				Additional Paid In Capital				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance, January 1, 2013		$	15,061			$	13,965,375			$	16,285,930			$	(1,058,000	)		$	74,301			$	29,282,667
Net Income			0				0				76,842				0				0				76,842
Other Comprehensive Loss			0				0				0				0				(620,341	)			(620,341	)
Restricted Stock Awards, net of repurchases $25,364			303				79,546				0				0				0				79,849
Common stock repurchased			(1,103	)			(1,496,337	)			0				0				0				(1,497,440	)
ESOP shares released or committed for release			0				28,460				0				79,350				0				107,810
Balance, September 30, 2013		$	14,261			$	12,577,044			$	16,362,772			$	(978,650	)		$	(546,040	)		$	27,429,387
Balance, January 1, 2014		$	13,929			$	12,236,878			$	16,175,369			$	(952,200	)		$	(669,725	)		$	26,804,251
Net Loss			0				0				(82,722	)			0				0				(82,722	)
Other Comprehensive Income			0				0				0				0				421,457				421,457
Restricted Stock Awards, net of repurchases $0			0				78,906				0				0				0				78,906
Stock Based Compensation			0				54,940				0				0				0				54,940
Common stock repurchased			(118	)			(178,708	)			0				0				0				(178,826	)
ESOP shares released or committed for release			0				37,585				0				79,350				0				116,935
Balance, September 30, 2014		$	13,811			$	12,229,601			$	16,092,647			$	(872,850	)		$	(248,268	)		$	27,214,941

See accompanying notes.

 

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FRATERNITY COMMUNITY BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(82,722	)		$	76,842
Adjustments to reconcile net (loss) income provided by operating activities:
Depreciation			87,344				78,502
Gain on sale of available-for-sale securities			(1,828	)			(43,335	)
Gain on sale of other real estate owned			(41,638	)			0
Gain on sale of loans			(8,506	)			(50,126	)
Origination of loans held for sale			(528,000	)			(2,277,084	)
Proceeds from sale of loans held for sale			536,506				2,327,210
Amortization/accretion of premium/discount			103,606				(93,699	)
Increase in value of bank-owned life insurance			(120,818	)			(123,579	)
Decrease in valuation of other real estate owned			100,000				0
Stock based compensation			133,846				105,213
Stock based compensation (ESOP)			116,935				107,810
Deferred income taxes			(195,422	)			0
Provision for loan losses			225,120				131,407
Changes in operating assets and liabilities:
Accrued interest receivable and other assets			9,773				10,386
Other liabilities			103,404				53,539
Net cash provided by operating activities			437,600				303,086
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans			(1,598,536	)			(1,754,959	)
Redemption of ground rents			4,700				12,500
Acquisition of property and equipment			(11,631	)			(243,981	)
Increase in value of other real estate owned			0				(101,198	)
Purchase of:
Investment securities available-for-sale			0				(6,503,794	)
Investment securities held-to-maturity			(1,456,423	)			0
Proceeds from:
Sales and maturities of investment securities available-for-sale			1,423,291				5,222,745
Principal paydowns on investment securities available-for-sale			899,288				2,081,760
Principal paydowns on investment securities held-to-maturity			332,048				310,094
Sale of Federal Home Loan Bank stock			53,900				59,300
Sale of other real estate owned			2,251,243				0
Net cash provided by (used in) investing activities			1,897,880				(917,533	)

 

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Fraternity Community Bancorp, Inc.

Consolidated Statements of Cash Flows (Continued)

 

		Nine Months Ended September 30,
		2014				2013
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits			(4,220,810	)			(2,814,790	)
Borrowings from the Federal Home Loan Bank			0				5,000,000
Repayments of Federal Home Loan Bank borrowings			0				(5,000,000	)
Repurchase of common stock			(178,826	)			(1,522,804	)
Increase in advances by borrowers for taxes and insurance			148,484				131,025
Net cash used in financing activities			(4,251,152	)			(4,206,569	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,915,672	)			(4,821,016	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			15,351,673				18,178,281
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	13,436,001			$	13,357,265
Cash paid for interest		$	1,327,181			$	1,507,306
Cash paid for taxes		$	0			$	55,064
Transfer of loans to other real estate owned		$	410,399			$	221,449

See accompanying notes.

 

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FRATERNITY COMMUNITY BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS

ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

 

1.	NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Fraternity Community Bancorp, Inc. (the “Company”) was incorporated on October 12, 2010 to serve as the holding company for Fraternity Federal Savings & Loan Association (the “Bank”), a federally chartered savings bank. On March 31, 2011, in accordance with a Plan of Conversion adopted by its Board of Directors and approved by its members, the Bank converted from a federal mutual savings bank to a federal stock savings bank and became the wholly owned subsidiary of the Company. The conversion was accomplished through the sale and issuance of 1,587,000 shares of common stock at a price of $10.00 per share, through which the Company received proceeds of approximately $14,968,600, net of offering expenses of approximately $901,400. In connection with the conversion, the Bank’s Board of Directors adopted an employee stock ownership plan (the “ESOP”) which subscribed for 8% of the sum of the number of shares, or 126,960 shares of common stock sold in the offering. All material intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the Office of the Comptroller of the Currency (the “OCC”) regulations, upon the completion of the conversion, the Bank restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or any other period. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain amounts from prior period financial statements may have been reclassified to conform to the current period’s presentation.

Nature of Operations

Fraternity Federal Savings and Loan (the “Bank”) provides a full range of banking services to individuals and businesses through its main office and three branches in the Baltimore metropolitan area. Its primary deposit products are certificates of deposit and demand, savings, NOW, and money market accounts. Its primary lending products are consumer loans and real estate mortgages.

 

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Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings per Common Share

Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, excluding unallocated ESOP shares. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options outstanding and restricted stock grants.

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of related taxes, which are also recognized as separate components of shareholders’ equity.

 

2.	INVESTMENT SECURITIES

The amortized cost and fair values of investment securities are as follows:

 

		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds		$	1,500,000			$	3,105			$	0			$	1,503,105
Obligations of U.S. Government Agencies			5,997,836				0				360,596				5,637,240
Municipal Bonds			1,000,000				24,570				0				1,024,570
Mortgage-backed securities:
FNMA			4,470,096				8,678				68,753				4,410,021
GNMA			995,525				18,399				0				1,013,924
FHLMC			2,988				0				0				2,988
Federal Agency CMO			772,346				0				38,401				733,945
Private Label CMO			251,324				3,011				0				254,335
		$	14,990,115			$	57,763			$	467,750			$	14,580,128

 

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		September 30, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Held-to-maturity:
Municipal Bonds		$	2,103,800			$	68,853			$	15,744			$	2,156,909
SBA Pools			2,447,294				0				65,383				2,381,911
Mortgage-backed securities:
FNMA			4,674,008				158,087				0				4,832,095
		$	9,225,102			$	226,940			$	81,127			$	9,370,915

 

		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale:
Bank Notes and Corporate Bonds		$	1,500,000			$	0			$	1,845			$	1,498,155
Obligations of U.S. Government Agencies			5,997,686				0				759,026				5,238,660
Municipal Bonds			1,000,000				0				88,700				911,300
Mortgage-backed securities:
FNMA			5,945,252				24,257				191,649				5,777,860
GNMA			1,186,994				7,640				21,492				1,173,142
FHLMC			623,033				4,343				911				626,465
Federal Agency CMO			909,604				0				68,664				840,940
Private Label CMO			283,206				4,933				0				288,139
		$	17,445,775			$	41,173			$	1,132,287			$	16,354,661

 

		December 31, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Held-to-maturity:
Municipal Bonds		$	2,123,116			$	3,863			$	52,573			$	2,074,406
SBA Pools			1,197,400				0				54,447				1,142,953
Mortgage-backed securities:
FNMA			4,748,908				137,053				2,110				4,883,851
		$	8,069,424			$	140,916			$	109,130			$	8,101,210

The amortized cost and fair value of debt securities at September 30, 2014 and December 31, 2013 by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have to call or repay obligations with or without call or prepayment penalties.

 

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		September 30, 2014
		Available-for-Sale
		Amortized Cost				Fair Value
Due in less than one year		$	1,500,000			$	1,503,105
Due in five years through ten years			591,798				600,217
Due after ten years			12,898,317				12,476,806
		$	14,990,115			$	14,580,128

 

		September 30, 2014
		Held-to-Maturity
		Amortized Cost				Fair Value
Due in one year through five years		$	3,236,938			$	3,333,676
Due in five years through ten years			4,132,530				4,169,581
Due after ten years			1,855,634				1,867,658
		$	9,225,102			$	9,370,915

 

		December 31, 2013
		Available-for-Sale
		Amortized Cost				Fair Value
Due in less than one year		$	1,500,000			$	1,498,155
Due in one year through five years			7,415				7,364
Due in five years through ten years			778,271				786,833
Due after ten years			15,160,089				14,062,309
		$	17,445,775			$	16,354,661

 

		December 31, 2013
		Held-to-Maturity
		Amortized Cost				Fair Value
Due in one year through five years		$	3,541,943			$	3,649,827
Due in five years through ten years			2,072,862				2,036,709
Due after ten years			2,454,619				2,414,674
		$	8,069,424			$	8,101,210

The Bank recognized gross gains on sales of available-for-sale securities of $8,147 and $43,335 for the nine months ended September 30, 2014 and 2013, respectively. The Bank recognized gross losses on sales of available-for-sale securities of $6,319 and $0 for the nine months ended September 30, 2014 and 2013, respectively.

 

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Securities with unrealized losses, segregated by length of impairment, as of September 30, 2014 and December 31, 2013 were as follows:

 

		Less than 12 Months								More than 12 Months								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
September 30, 2014
Available-for-sale:
Obligations of U.S. Government Agencies		$	0			$	0			$	5,637,240			$	360,596			$	5,637,240			$	360,596
Mortgage-backed securities:
FNMA			0				0				3,804,045				68,753				3,804,045				68,753
Federal Agency CMO			0				0				733,945				38,401				733,945				38,401
		$	0			$	0			$	10,175,230			$	467,750			$	10,175,230			$	467,750
Held-to-Maturity:
Municipal Bonds		$	0			$	0			$	503,648			$	15,744			$	503,648			$	15,744
SBA Pools			1,562,688				11,992				884,606				53,391				2,447,294				65,383
		$	1,562,688			$	11,992			$	1,388,254			$	69,135			$	2,950,942			$	81,127

 

		Less than 12 Months								More than 12 Months								Total
		Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses				Estimated Fair Value				Unrealized Losses
December 31, 2013
Available-for-sale:
Bank Notes and Corporate Bonds		$	0			$	0			$	1,498,155			$	1,845			$	1,498,155			$	1,845
Obligations of U.S. Government Agencies			3,944,880				552,806				1,293,780				206,220				5,238,660				759,026
Municipal Bonds			911,300				88,700				0				0				911,300				88,700
Mortgage-backed securities:
FNMA			3,949,576				191,457				21,661				192				3,971,237				191,649
GNMA			1,109,080				21,492				0				0				1,109,080				21,492
FHLMC			414,957				911				0				0				414,957				911
Federal Agency CMO			0				0				840,940				68,664				840,940				68,664
		$	10,329,793			$	855,366			$	3,654,536			$	276,921			$	13,984,329			$	1,132,287
Held-to-Maturity:
Municipal Bonds		$	1,058,760			$	18,530			$	474,706			$	34,043			$	1,533,466			$	52,573
SBA Pools			814,974				25,278				327,979				29,169				1,142,953				54,447
Mortgage-backed securities:
FNMA			1,562,003				2,110				0				0				1,562,003				2,110
		$	3,435,737			$	45,918			$	802,685			$	63,212			$	4,238,422			$	109,130

 

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Declines in the fair value of investment securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Furthermore, as of September 30, 2014, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2014, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Bank’s consolidated income statement.

 

3.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans and allowance for loan losses consisted of the following:

 

		September 30, 2014				December 31, 2013
Real Estate Loans:
Owner Occupied One- to- four family		$	78,791,717			$	79,190,821
Non Owner Occupied One- to- four family			12,377,690				12,405,389
Home Equity Lines of Credit			7,206,269				8,129,950
Commercial Real Estate			15,786,642				13,164,122
Residential Construction			2,231,127				2,463,458
Land			943,633				685,464
Total Real Estate Loans			117,337,078				116,039,204
Consumer Loans			53,646				66,503
Commercial Loans			0				0
Total Loans			117,390,724				116,105,707
Less:
Allowance for loan losses			(1,850,000	)			(1,528,000	)
Total loans and allowance for loan losses		$	115,540,724			$	114,577,707

Management segregates its loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. These risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments:

Owner Occupied One- To- Four Family Residential Loans. This portfolio segment consists of the origination of first mortgage loans and closed end home equity second mortgage loans secured by one- to- four family residential properties located in our market area. The Company offers both fixed and adjustable rate

 

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products on properties located in the Company’s primary market area. These loans are generally for terms of 15, 20 and 30 years amortized on a monthly basis. The Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Non Owner Occupied One- To-Four Family Real Estate Loans. Loans secured by investment properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases, although we might accept a second mortgage where the combined loan-to-value ratio is low.

Home Equity Lines of Credit. This portfolio segment consists primarily of open end, second mortgage loans secured by one–to-four family residential properties. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate Loans. This portfolio segment consists primarily of loans secured by commercial real estate. Loans secured by commercial real estate generally may have larger balances and more risk of default than one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Residential Construction Loans. This portfolio includes construction loans to individuals and builders, primarily for the construction of residential properties. Construction financing generally involves greater risk than long-term financing on improved, owner-occupied real estate. Our portfolio consists of both construction/permanent loans to individuals for their principal residence as well as speculative construction loans to builders. Construction loans are underwritten on the basis of the estimated value of the property as completed. For our construction/permanent loans to individuals for their principal residence, repayment is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as employment levels. Repayment can also be impacted by changes in property values on residential properties. For our speculative construction loans to builders, repayment is primarily dependent on the cashflows of the builder and the success of the project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long term financing.

Land. This portfolio consists primarily of first mortgage loans on developed residential land. Land loans have a higher level of risk than loans for the purchase of existing homes since collateral values can only be estimated at the time the loan is approved.

Consumer Loans. This portfolio segment includes small balance unsecured loans to individuals, automobile loans and deposit account loans. Consumer loans are generally originated at higher interest rates than residential mortgage loans because of their higher risk. Collections are highly dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. In the case where collateral may be present, repossessed collateral for a defaulted loan may not provide an adequate source of repayment as a result of damage, loss or depreciation.

 

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Commercial Loans. This portfolio segment consists of unsecured lines of credit and closed end loans to business owners that have personal guarantees. These loans generally have higher interest rates and shorter terms than one- to- four family residential loans. These loans have a higher level of risk than one- to- four family residential loans. The increased risk is due to the increased difficulty of monitoring and higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

The balance of impaired loans was $5,583,488 and $4,575,824 as of September 30, 2014 and December 31, 2013, respectively. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen. All of our impaired loans are either a troubled debt restructuring or are on nonaccrual status.

Nonperforming/Past Due Loans - Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. Non-accrual loans totaled $2,121,818 and $1,080,286 at September 30, 2014 and December 31, 2013, respectively. There were no accruing loans that were more than 90 days past due at September 30, 2014 and December 31, 2013.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, we have segmented our loan portfolio by product type. Our loan segments are owner occupied one-to-four family residential, non owner occupied one-to-four family residential, home equity lines of credit (“HELOC”), commercial real estate, residential construction, land, consumer and commercial.

To establish the allowance for loan losses, loans are pooled by portfolio class and an historical loss percentage is applied to each class. The historical loss percentage is based upon the previous eight quarters history. This rolling history is utilized so that we have the most current and relevant charge-off trend data. These charge-offs are segregated by loan segment and compared to their respective loan segment average balances for the same period in order to calculate the charge-off percentage. That calculation determines the required allowance for loan loss level. The Company then applies additional loss multipliers to the different segments of loans to reflect various environmental factors. For individually evaluated loans (impaired loans), we do additional analyses to determine the impairment. Management applies judgment to develop its own view of loss probability within that range, using external and internal parameters with the objective of establishing an allowance for losses inherent within these portfolios as of the reporting date.

The Bank’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient enough to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments. As of September 30, 2014, there are five loans totaling $3,461,670 classified as troubled debt restructurings. As of December 31, 2013 there are six loans totaling $3,881,957 classified as troubled debt restructurings.

 

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The credit quality of the loan portfolio is summarized quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan loss portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions defined as follows:

 

•

Pass – loans which are well protected by the current net worth and paying capacity of the obligor(s) or by the fair value, less cost to acquire and sell, of any underlying collateral.

 

•

Special Mention – loans with well-defined risk issues which creates a high level of uncertainty regarding the long term viability of the business. These loans exhibit material negative financial trends due to company specific or economic conditions. If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations.

 

•

Substandard – loans in which the primary source of repayment is gone and causing us to rely upon a secondary source of repayment or in which the collateral has deteriorated or must be liquidated for repayment of the loan. These loans are characterized by the distinct possibility that the institution will sustain some loss if the weaknesses are not corrected.

 

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The following tables show credit quality indicators, the aging of receivables, and disaggregated balances of loans receivable and the allowance for loan losses as of September 30, 2014 and December 31, 2013:

Credit Risk Analysis of Loans Receivable

As of September 30, 2014

 

		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Total
Pass		$	78,336,305			$	10,573,620			$	7,080,448			$	14,637,102			$	2,231,127			$	943,633			$	53,646			$	0			$	113,855,881
Special Mention			263,485				0				0				0				0				0				0				0				263,485
Substandard			191,927				1,804,070				125,821				1,149,540				0				0				0				0				3,271,358
Total		$	78,791,717			$	12,377,690			$	7,206,269			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	117,390,724
Credit risk profile based on payment activity:
Performing		$	78,599,790			$	10,573,620			$	7,080,448			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	115,268,906
Nonperforming			191,927				1,804,070				125,821				0				0				0				0				0				2,121,818
Total		$	78,791,717			$	12,377,690			$	7,206,269			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	117,390,724

 

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Credit Risk Analysis of Loans Receivable

As of December 31, 2013

 

		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Total
Pass		$	78,205,713			$	10,065,786			$	7,840,054			$	11,996,653			$	2,463,458			$	685,464			$	66,503			$	0			$	111,323,631
Special Mention			457,008				2,077,313				0				0				0				0				0				0				2,534,321
Substandard			528,100				262,290				289,896				1,167,469				0				0				0				0				2,247,755
Total		$	79,190,821			$	12,405,389			$	8,129,950			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	116,105,707
Credit risk profile based on payment activity:
Performing		$	78,662,721			$	12,143,099			$	7,840,054			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	115,025,421
Nonperforming			528,100				262,290				289,896				0				0				0				0				0				1,080,286
Total		$	79,190,821			$	12,405,389			$	8,129,950			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	116,105,707

 

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Aged Analysis of Past Due Loans Receivable

As of September 30, 2014

 

		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Total
30-59 Days Past Due		$	117,445			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	117,445
60-89 Days Past Due			0				0				59,925				0				0				0				0				0				59,925
Greater Than 90 Days Past Due			93,069				1,799,831				0				0				0				0				0				0				1,892,900
Total Past Due			210,514				1,799,831				59,925				0				0				0				0				0				2,070,270
Current			78,581,203				10,577,859				7,146,344				15,786,642				2,231,127				943,633				53,646				0				115,320,454
Total Loans Receivable		$	78,791,717			$	12,377,690			$	7,206,269			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	117,390,724
Recorded Investment > 90 Days and Accruing		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0

 

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Aged Analysis of Past Due Loans Receivable

As of December 31, 2013

 

		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Total
30-59 Days Past Due		$	224,165			$	0			$	24,493			$	0			$	0			$	0			$	0			$	0			$	248,658
60-89 Days Past Due			3,001				0				0				0				0				0				0				0				3,001
Greater Than 90 Days Past Due			450,480				263,486				90,192				0				0				0				0				0				804,158
Total Past Due			677,646				263,486				114,685				0				0				0				0				0				1,055,817
Current			78,513,175				12,141,903				8,015,265				13,164,122				2,463,458				685,464				66,503				0				115,049,890
Total Loans Receivable		$	79,190,821			$	12,405,389			$	8,129,950			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	116,105,707
Recorded Investment > 90 Days and Accruing		$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0			$	0

 

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The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30, 2014 and 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

		Owner Occupied 1- 4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Unallocated				Total
Three months ended:
September 30, 2014:
Beginning Balance		$	784,340			$	339,926			$	97,264			$	157,676			$	23,532			$	8,495			$	820			$	0			$	115,947			$	1,528,000
(Recovery of) provision for loan losses			(9,988	)			228,404				1,544				190				(1,221	)			3,300				(149	)			0				97,471				319,551
Charge-offs			(185	)			0				0				0				0				0				0				0				0				(185	)
Recoveries			1,605				0				1,029				0				0				0				0				0				0				2,634
Net recoveries			1,420				0				1,029				0				0				0				0				0				0				2,449
Ending Balance		$	775,772			$	568,330			$	99,837			$	157,866			$	22,311			$	11,795			$	671			$	0			$	213,418			$	1,850,000
Three months ended:
September 30, 2013:
Beginning Balance		$	797,121			$	266,468			$	61,965			$	170,490			$	18,930			$	14,223			$	852			$	250			$	19,701			$	1,350,000
Provision for (recovery of) loan losses			110,716				91,941				(3,892	)			(39,987	)			8,562				(5,619	)			767				(59	)			(19,130	)			143,299
Charge-offs			0				0				0				0				0				0				0				0				0				0
Recoveries			3,702				3,000				999				0				0				0				0				0				0				7,701
Net recoveries			3,702				3,000				999				0				0				0				0				0				0				7,701
Ending Balance		$	911,539			$	361,409			$	59,072			$	130,503			$	27,492			$	8,604			$	1,619			$	191			$	571			$	1,501,000

 

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		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Unallocated				Total
Nine months ended:
September 30, 2014:
Beginning Balance		$	901,766			$	353,240			$	106,851			$	131,641			$	24,635			$	8,568			$	924			$	0			$	375			$	1,528,000
(Recovery of) provision for loan losses			(219,837	)			215,090				(10,051	)			26,225				(2,324	)			3,227				(253	)			0				213,043				225,120
Charge-offs			(185	)			0				0				0				0				0				0				0				0				(185	)
Recoveries			94,028				0				3,037				0				0				0				0				0				0				97,065
Net recoveries			93,843				0				3,037				0				0				0				0				0				0				96,880
Ending Balance		$	775,772			$	568,330			$	99,837			$	157,866			$	22,311			$	11,795			$	671			$	0			$	213,418			$	1,850,000
Nine months ended:
September 30, 2013:
Beginning Balance		$	810,892			$	206,099			$	74,807			$	191,357			$	36,945			$	32,217			$	868			$	240			$	41,575			$	1,395,000
Provision for (recovery of) loan losses			120,222				218,389				(18,732	)			(60,854	)			(9,453	)			(77,863	)			751				(49	)			(41,004	)			131,407
Charge-offs			(25,777	)			(66,079	)			0				0				0				0				0				0				0				(91,856	)
Recoveries			6,202				3,000				2,997				0				0				54,250				0				0				0				66,449
Net (charge-offs) recoveries			(19,575	)			(63,079	)			2,997				0				0				54,250				0				0				0				(25,407	)
Ending Balance		$	911,539			$	361,409			$	59,072			$	130,503			$	27,492			$	8,604			$	1,619			$	191			$	571			$	1,501,000

 

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The following table details the amounts evaluated for impairment collectively and individually allocated to each portfolio segment as of September 30, 2014, December 31, 2013 and September 30, 2013, detailed on the basis of the impairment methodology used by the Company.

 

		Owner Occupied 1-4 Family Residential				Non Owner Occupied 1-4 Family Residential				Home Equity Lines of Credit				Commercial Real Estate				Construction				Land				Consumer				Commercial				Total
September 30, 2014:
Loans individually evaluated for impairment		$	3,458,455			$	1,804,070			$	320,963			$	0			$	0			$	0			$	0			$	0			$	5,583,488
Loans collectively evaluated for impairment		$	75,333,262			$	10,573,620			$	6,885,306			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	111,807,236
Balance at September 30, 2014		$	78,791,717			$	12,377,690			$	7,206,269			$	15,786,642			$	2,231,127			$	943,633			$	53,646			$	0			$	117,390,724
December 31, 2013:
Loans individually evaluated for impairment		$	3,815,829			$	262,289			$	497,706			$	0			$	0			$	0			$	0			$	0			$	4,575,824
Loans collectively evaluated for impairment		$	75,374,992			$	12,143,100			$	7,632,244			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	111,529,883
Balance at December 31, 2013		$	79,190,821			$	12,405,389			$	8,129,950			$	13,164,122			$	2,463,458			$	685,464			$	66,503			$	0			$	116,105,707
September 30, 2013:
Loans individually evaluated for impairment		$	4,083,976			$	269,289			$	593,678			$	0			$	0			$	0			$	0			$	0			$	4,946,943
Loans collectively evaluated for impairment		$	76,141,927			$	11,608,408			$	7,876,209			$	13,050,291			$	2,749,178			$	688,329			$	76,382			$	13,273			$	112,203,997
Balance at September 30, 2013		$	80,225,903			$	11,877,697			$	8,469,887			$	13,050,291			$	2,749,178			$	688,329			$	76,382			$	13,273			$	117,150,940

 

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Management reviews and identifies loans and investments that require designation as nonperforming assets and troubled debt restructurings. Nonperforming assets include loans accounted for on a non-accrual basis, loans past due by 90 days or more but still accruing, and other real estate owned. Troubled debt restructurings include loans in which the borrower was having financial difficulty, and we agreed to modify the loan. Information with respect to nonperforming assets and troubled debt restructurings at September 30, 2014 and December 31, 2013 is as follows:

 

		September 30, 2014				December 31, 2013
Non-Accrual Loans:
Owner-occupied one- to- four family		$	191,927			$	528,100
Non owner-occupied one- to- four family			1,804,070				262,290
Home Equity Lines of credit			125,821				289,896
Total Non-Accrual Loans			2,121,818				1,080,286
Other Real Estate Owned, net			22,500				1,921,706
Loans 90 days or more past due and still accruing			0				0
Total Nonperforming Assets			2,144,318				3,001,992
Troubled Debt Restructurings			3,461,670				3,881,957
Troubled Debt Restructurings included In Non-Accrual Loans			(0	)			(386,419	)
Troubled Debt Restructurings and Total Nonperforming Assets		$	5,605,988			$	6,497,530

At September 30, 2014 and December 31, 2013, there were no loans 90 days past due or more and still accruing interest. At September 30, 2014, the Company had twenty eight loans on non-accrual status with foregone interest in the amount of $128,121. At December 31, 2013, the Company had twenty one loans on non-accrual status with foregone interest in the amount of $129,519.

 

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The following table presents loans individually evaluated for impairment by class of loan as of September 30, 2014 and December 31, 2013:

 

		As of September 30, 2014												As of December 31, 2013
		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no allowance recorded:
Owner Occupied one- to- four family residential		$	640,629			$	651,525			$	0			$	782,371			$	810,780			$	0
Non Owner Occupied one- to- four family residential			139,823				205,902				0				16,751				82,830				0
Home Equity Lines of Credit			320,963				320,963				0				497,706				567,234				0
Total with no allowance		$	1,101,415			$	1,178,390			$	0			$	1,296,828			$	1,460,844			$	0
With an allowance recorded:
Owner Occupied one- to- four family residential		$	2,817,826			$	2,817,826			$	210,773			$	3,033,457			$	3,033,457			$	210,773
Non Owner Occupied one- to- four family residential			1,664,247				1,691,978				382,234				245,539				273,270				64,234
Total with an allowance		$	4,482,073			$	4,509,804			$	593,007			$	3,278,996			$	3,306,727			$	275,007
Grand total:
Owner Occupied one- to- four family residential		$	3,458,455			$	3,469,351			$	210,773			$	3,815,828			$	3,844,237			$	210,773
Non Owner Occupied one- to- four family residential			1,804,070				1,897,880				382,234				262,290				356,100				64,234
Home Equity Lines of Credit			320,963				320,963				0				497,706				567,234				0
Grand total		$	5,583,488			$	5,688,194			$	593,007			$	4,575,824			$	4,767,571			$	275,007

 

 

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Information on impaired loans for the three and nine months ended September 30, 2014 is as follows:

 

		For the Three Months Ended September 30, 2014								For the Nine Months Ended September 30, 2014
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no allowance recorded:
Owner Occupied one- to- four family residential		$	441,720			$	7,214			$	443,104			$	17,355
Non Owner Occupied one- to- four family residential			78,287				0				57,775				2,312
Home Equity Lines of Credit			419,877				5,323				444,368				14,459
Total with no allowance		$	939,884			$	12,537			$	945,247			$	34,126
With an allowance recorded:
Owner Occupied one- to- four family residential		$	2,808,445			$	23,167			$	2,811,329			$	69,277
Non Owner Occupied one- to- four family residential			725,237				0				541,093				25,111
Total with an allowance		$	3,533,682			$	23,167			$	3,352,422			$	94,388
Grand total:
Owner Occupied one- to- four family residential		$	3,250,165			$	30,381			$	3,254,433			$	86,632
Non Owner Occupied one- to- four family residential			803,524				0				598,868				27,423
Home Equity Lines of Credit			419,877				5,323				444,368				14,459
Grand total		$	4,473,566			$	35,704			$	4,297,669			$	128,514

 

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Information on impaired loans for the three and nine months ended September 30, 2013 is as follows:

 

		For the Three Months Ended September 30, 2013								For the Nine Months Ended September 30, 2013
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no allowance recorded:
Owner Occupied one- to- four family residential		$	1,482,732			$	4,400			$	1,879,046			$	13,866
Non Owner Occupied one- to- four family residential			150,520				0				199,082				0
Home Equity Lines of Credit			550,819				6,543				471,586				18,137
Land			0				0				31,000				0
Total with no allowance		$	2,184,071			$	10,943			$	2,580,714			$	32,003
With an allowance recorded:
Owner Occupied one- to- four family residential		$	2,830,981			$	43,772			$	2,589,404			$	66,793
Non Owner Occupied one- to- four family residential			94,153				0				62,768				0
Total with an allowance		$	2,925,134			$	43,772			$	2,652,172			$	66,793
Grand total:
Owner Occupied one- to- four family residential		$	4,313,713			$	48,172			$	4,468,450			$	80,659
Non Owner Occupied one- to- four family residential			244,673				0				261,850				0
Home Equity Lines of Credit			550,819				6,543				471,586				18,137
Land			0				0				31,000				0
Grand total		$	5,109,205			$	54,715			$	5,232,886			$	98,796

 

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The following table reflects impaired loans as of September 30, 2014 and December 31, 2013. A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen.

 

		September 30, 2014				December 31, 2013
Impaired performing loans:
Owner occupied one- to- four family		$	0			$	0
Non owner occupied one- to- four family			0				0
Home equity lines of credit			0				0
Commercial			0				0
Construction			0				0
Land			0				0
Troubled debt restructurings:
Owner occupied one- to- four family			3,266,528				3,287,728
Non owner occupied one- to- four family			0				0
Home equity lines of credit			195,142				207,810
Commercial			0				0
Construction			0				0
Land			0				0
Total impaired performing loans			3,461,670				3,495,538
Impaired nonperforming loans (nonaccrual):
Owner occupied one- to- four family			191,927				141,681
Non owner occupied one- to- four family			1,804,070				262,290
Home equity lines of credit			125,821				289,896
Commercial			0				0
Construction			0				0
Land			0				0
Troubled debt restructurings:
Owner occupied one- to- four family			0				386,419
Non owner occupied one- to- four family			0				0
Home equity lines of credit			0				0
Commercial			0				0
Construction			0				0
Land			0				0
Total impaired nonperforming loans (nonaccrual)			2,121,818				1,080,286
Total impaired loans		$	5,583,488			$	4,575,824

Loans may be periodically modified in a troubled debt restructuring (TDR), where the Company will make concessions to a borrower having financial difficulty to help the borrower remain current on the loan and/or to avoid foreclosure. When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is generally recognized through a charge-off through the allowance, however, if a specific reserve has been established, impairment is recognized through the provision for loan losses. At September 30, 2014, we had five loans that were restructured totaling $3,461,670. Four loans, totaling

 

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$3,266,528 were secured by owner-occupied one- to- four family residential properties and one loan totaling $195,142 is a home equity line of credit. At December 31, 2013, we had six loans that were restructured totaling $3,881,957. Five loans, totaling $3,674,147 were secured by owner-occupied one- to- four family residential properties and one loan totaling $207,810 is a home equity line of credit.

The following table is a summary of impaired loans that were modified due to a TDR by class for the three and nine months ended September 30, 2014 and 2013. The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts immediately after the modification:

 

Modifications for the Nine Months Ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential			0			$	0			$	0
Modifications for the Nine Months Ended September 30, 2013
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential			1			$	769,303			$	748,393
Modifications for the Three Months Ended September 30, 2014
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential			0			$	0			$	0
Modifications for the Three Months Ended September 30, 2013
		Number of Contracts				Pre-Modification Outstanding Recorded Investments				Post-Modification Outstanding Recorded Investments
Troubled Debt Restructuring:
Owner occupied one- to- four family residential			0			$	0			$	0

 

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The following table presents loans by loan class modified as TDR’s within the previous twelve months from, and for which there was a payment default (90 days or more past due) during the three and nine months ended September 30, 2014 and 2013:

 

Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
	0			$	0				0			$	0
Three Months Ended September 30, 2013								Nine Months Ended September 30, 2013
Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
	2			$	646,141				2			$	646,141

 

4.	EMPLOYEE RETIREMENT PLANS

The Bank sponsors an employee 401(k) savings and investment plan. The plan covers substantially all employees meeting age and service requirements and provides for both employee and employer matching contributions under Safe Harbor provisions. Expenses related to this plan for the nine months ended September 30, 2014 and 2013 were $46,914 and $47,157, respectively.

In connection with the conversion to stock form, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase 126,960 shares, or 8% of the Common Stock issued in the offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first and the remainder will be applied to principal. The loan is expected to be repaid over a period of 12 years.

Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation, of all active participants. Participants will vest their accrued benefits under the employee stock ownership plan at the rate of 33.33% per year beginning in year two. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation of service, or termination of the ESOP.

The debt of the ESOP, in accordance with generally accepted accounting principles, is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become

 

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outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the nine months ended September 30, 2014 and 2013 was $116,935 and $107,810, respectively.

A summary of ESOP shares at September 30, 2014 and 2013 is as follows:

 

		2014				2013
Shares committed for release			39,675				29,095
Unearned shares			87,285				97,865
Total ESOP shares			126,960				126,960
Fair Value of unearned shares		$	1,309,275			$	1,345,644

 

5.	STOCK-BASED COMPENSATION

In May 2012, the Company’s shareholders approved a new Equity Incentive Plan (the “2012 Equity Incentive Plan”). The 2012 Equity Incentive Plan allows for up to 63,480 shares to be issued to employees, executive officers or Directors in the form of restricted stock, and up to 158,700 shares to be issued to employees, executive officers or Directors in the form of stock options. At September 30, 2014 and December 31, 2013, there were 33,000 restricted stock awards issued and outstanding and 69,600 stock option awards granted under the 2012 Incentive Plan.

Under the above plan, the exercise price is the market price at date of grant. The maximum option term is ten years and the vesting period is 25% immediately, 25% after one year, 25% after two years and 25% after three years. The Company issues new shares to satisfy share option exercises. Total compensation costs that have been charged against income for the stock option plan was $54,940 and $0, respectively, for the nine months ended September 30, 2014 and 2013.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical data. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the Federal Funds rate in effect at the time of the grant.

The fair value of options granted during 2013 was determined using the following weighted-average assumptions as of grant date.

 

		2013
Risk-free interest rate			0.25	%
Expected term			10.0 years
Expected stock price volatility			24.36	%
Dividend yield			0.0	%

 

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A summary of stock option activity for the nine months ended September 30, 2014 and twelve months ended December 31, 2013 is as follows:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
September 30, 2014:
Outstanding at beginning of year			69,600			$	13.65				10.0 years			$	38,280
Granted			0				0.00								0
Exercised			0				0.00								0
Forfeited, exchanged or expired			(0	)			0.00								0
Outstanding at end of period			69,600			$	13.65				9.1 years			$	38,280
Exercisable at end of period			17,400			$	13.65				9.1 years			$	9,570
		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
December 31, 2013:
Outstanding at beginning of year			0			$	0.00							$	0
Granted			69,600				13.65				10.0 years				38,280
Exercised			0				0.00								0
Forfeited, exchanged or expired			(0	)			0.00								0
Outstanding at end of year			69,600			$	13.65				9.8 years			$	38,280
Exercisable at end of year			17,400			$	13.65				9.8 years			$	9,570

As of September 30, 2014, there was $152,613 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.08 years.

Restricted Stock: The specific terms of each restricted stock award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of the stock was determined using the total number of restricted stock awards granted multiplied by the fair market value of a share of Company stock at the grant date. Restricted stock awards are vested 25% immediately, 25% after one year, 25% after two years and 25% after three years.

A summary of changes in the Company’s nonvested shares for the nine months ended September 30, 2014 and twelve months ended December 31, 2013 is as follows:

 

		Shares				Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014			24,748			$	12.75
Granted			0				0.00
Vested			(8,252	)			0.00
Forfeited			(0	)			0.00
Nonvested at September 30, 2014			16,496			$	12.75

 

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		Shares				Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2013			0			$	0.00
Granted			33,000				12.75
Vested			(8,252	)			12.75
Forfeited			(0	)			0.00
Nonvested at December 31, 2013			24,748			$	12.75

As of September 30, 2014 and 2013, the Company recorded restricted stock awards expense of $78,906 and $105,213. As of September 30, 2014, there was $201,560 of total unrecognized compensation cost related to nonvested shares granted under the 2012 stock incentive plan. The cost is expected to be recognized over a weighted-average period of 1.92 years.

 

6.	REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (OCC). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of September 30, 2014 and December 31, 2013 (the most recent notification from the OCC), the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. Nothing has come to management’s attention since the institution’s most recent notification of being classified as “well capitalized” that would cause such classification to change. The following table details the Bank’s capital position:

 

		Actual								For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio
		(dollars in thousands)								(dollars in thousands)
As of September 30, 2014:
Total Risk-Based Capital (to risk-weighted assets)		$	24,798				27.26	%		$	9,097				10.0	%
Tier I Capital (to risk-weighted assets)		$	23,652				26.00	%		$	5,458				6.0	%
Tier I Capital (to adjusted total assets)		$	23,652				14.53	%		$	8,139				5.0	%

 

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		Actual								For Capital Adequacy Purposes and to be Well Capitalized Under the Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio
		(dollars in thousands)								(dollars in thousands)
As of December 31, 2013:
Total Risk-Based Capital (to risk-weighted assets)		$	24,857				26.96	%		$	9,220				10.0	%
Tier I Capital (to risk-weighted assets)		$	23,700				25.71	%		$	5,531				6.0	%
Tier I Capital (to adjusted total assets)		$	23,700				14.19	%		$	8,351				5.0	%

On July 25, 2013, the Company authorized the repurchase of up to 142,830 shares of its common stock. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price and to provide a source of liquidity for the Company’s shares. As of September 30, 2014, there have been 73,200 shares repurchased by the Company, for an aggregate expenditure totaling $1,012,012, at an average price of $13.83.

 

7.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2014 and 2013:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2014 Net Unrealized Gain and Losses on Investment Securities				September 30, 2013 Net Unrealized Gain and Losses on Investment Securities				September 30, 2014 Net Unrealized Gain and Losses on Investment Securities				September 30, 2013 Net Unrealized Gain and Losses on Investment Securities
Beginning Balance		$	(274,275	)		$	(457,642	)		$	(669,725	)		$	74,301
Other comprehensive income (loss) before reclassifications			27,104				(88,398	)			422,554				(594,340	)
Amounts reclassified from accumulated other comprehensive loss			(1,097	)			0				(1,097	)			(26,001	)
Net current period other comprehensive income (loss)			26,007				(88,398	)			421,457				(620,341	)
Ending Balance		$	(248,268	)		$	(546,040	)		$	(248,268	)		$	(546,040	)

 

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The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2014 and 2013:

 

		September 30, 2014				September 30, 2013
		Amount Reclassified from Accumulated Other Comprehensive Income				Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income Is Presented
Reclassification adjustment for realized gains		$	(1,828	)		$	(43,335	)		Non-Interest Income
			731				17,334			Income Tax Expense
Total Reclassification for the Period		$	(1,097	)		$	(26,001	)		Net of Tax

 

8.	FAIR VALUE MEASUREMENTS

Measurement of fair value under U.S. GAAP establishes a hierarchy that prioritizes observable and unobservable inputs used to measure fair value, as of the measurement date, into three broad levels, which are described as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The following table presents the Bank’s assets measured at fair value on a recurring basis:

 

		Fair Value at September 30, 2014				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds		$	1,503,105			$	0			$	1,503,105			$	0
Obligations of U.S. Government agencies			5,637,240				0				5,637,240				0
Municipal Bonds			1,024,570				0				1,024,570				0
FNMA			4,410,021				0				4,410,021				0
GNMA			1,013,924				0				1,013,924				0
FHLMC			2,988				0				2,988				0
Federal Agency CMO			733,945				0				733,945				0
Private label CMO			254,335				0				254,335				0
		$	14,580,128			$	0			$	14,580,128			$	0
Total assets measured at fair value		$	14,580,128			$	0			$	14,580,128			$	0

 

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		Fair Value at December 31, 2013				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Bank Notes and Corporate Bonds		$	1,498,155			$	0			$	1,498,155			$	0
Obligations of U.S. Government agencies			5,238,660				0				5,238,660				0
Municipal Bonds			911,300				0				911,300				0
FNMA			5,777,860				0				5,777,860				0
GNMA			1,173,142				0				1,173,142				0
FHLMC			626,465				0				626,465				0
Federal Agency CMO			840,940				0				840,940				0
Private label CMO			288,139				0				288,139				0
		$	16,354,661			$	0			$	16,354,661			$	0
Total assets measured at fair value		$	16,354,661			$	0			$	16,354,661			$	0

Available-for-sale Securities

Securities classified as available-for-sale are reported at fair value utilizing Level 2 Inputs. For these securities, the Bank obtains fair values from an external pricing service or bid quotations received from securities dealers. The observable data may include dealer quotes, cash flows, U.S. Treasury yield curve, trading levels, credit information, and the terms and conditions of the security, among other things.

Financial Instruments Measured on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain other financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

For assets measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the assets:

 

		Fair Value at September 30, 2014				Quoted Prices (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one- to- four family		$	3,247,682			$	0			$	3,247,682			$	0
Non owner occupied one- to- four family			1,421,836				0				1,421,836				0
Home Equity Lines of Credit			320,963				0				320,963				0
		$	4,990,481			$	0			$	4,990,481			$	0
Other real estate owned		$	22,500			$	0			$	22,500			$	0

 

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		Fair Value at December 31, 2013				Quoted Prices (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired Loans:
Owner occupied one- to- four family		$	3,605,055			$	0			$	3,605,055			$	0
Non owner occupied one- to- four family			198,056				0				198,056				0
Home Equity Lines of Credit			497,706				0				497,706				0
		$	4,300,817			$	0			$	4,300,817			$	0
Other real estate owned		$	1,921,706			$	0			$	1,921,706			$	0

Impaired Loans

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

If the impaired loan is identified as collateral dependent, then the fair value method measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Other Real Estate Owned

We record our other real estate owned at the lower of cost or estimated fair value less estimated selling costs. Estimated fair value is generally based upon an independent appraisal of the collateral. We consider these collateral values to be estimated using Level 2 inputs.

 

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9.	FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates, methods, and assumptions are set forth below for the Bank’s financial instruments as of September 30, 2014 and December 31, 2013.

 

		September 30, 2014
						Estimated Fair Value
		Carrying Value				Level One				Level Two				Level Three				Total
Assets:
Securities - available-for-sale		$	14,580,128			$	0			$	14,580,128			$	0			$	14,580,128
Securities - held-to-maturity			9,225,102				0				9,370,915				0				9,370,915
Loans, net of allowance			115,540,724				0				4,990,481				113,024,982				118,015,463
Federal Home Loan Bank stock			1,049,800				0				1,049,800				0				1,049,800
Liabilities:
Deposit accounts and advances by borrowers			114,686,767				0				0				114,917,072				114,917,072
Advances from the FHLB			20,000,000				0				0				20,549,103				20,549,103

 

		December 31, 2013
						Estimated Fair Value
		Carrying Value				Level One				Level Two				Level Three				Total
Assets:
Securities - available-for-sale		$	16,354,661			$	0			$	16,354,661			$	0			$	16,354,661
Securities - held-to-maturity			8,069,424				0				8,101,210				0				8,101,210
Loans, net of allowance			114,577,707				0				4,300,817				112,002,812				116,303,629
Federal Home Loan Bank stock			1,103,700				0				1,103,700				0				1,103,700
Liabilities:
Deposit accounts and advances by borrowers			118,759,093				0				0				119,172,829				119,172,829
Advances from the FHLB			20,000,000				0				0				20,590,659				20,590,659

(a) Securities - The fair value of securities excluding Federal Home Loan Bank stock, is based on bid prices received from an external pricing service or bid quotations received from securities dealers.

(b) Loans - Loans were segmented into portfolios with similar financial characteristics. Loans were also segmented by loan category. Each loan category was further segmented by fixed and adjustable rate interest terms and performing and nonperforming categories. The fair value of residential loans was calculated by discounting anticipated cash flows based on weighted-average contractual maturity, weighted-average coupon, and discount rate.

The fair value for nonperforming loans was determined by reducing the carrying value of nonperforming loans by the Company’s historical loss percentage for each specific loan category.

 

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(c) Federal Home Loan Bank Stock - The fair value of Federal Home Loan Bank stock approximates its carrying value based on the redemption provisions of the Federal Home Loan Bank.

(d) Deposits and Advances by Borrowers - The fair value of deposits with no stated maturity, such as noninterest bearing deposits, interest-bearing NOW accounts, money market and statement savings accounts, is deemed to be equal to the carrying amounts. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate for certificates of deposit was estimated using the rate currently offered for deposits of similar remaining maturities.

(e) Advances from the FHLB - Fair values are estimated by discounting carrying values using a cash flow approach based on market rates as of September 30, 2014 and December 31, 2013.

(f) Off-Balance Sheet Financial Instruments - The Company’s adjustable rate commitments to extend credit move with market rates and are not subject to interest rate risk. The rates and terms of the Company’s fixed rate commitments to extend credit are competitive with others in the various markets in which the Company operates. The fair values of these instruments are immaterial.

(g) Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates.

 

10.	EARNINGS PER SHARE

The factors used in the earnings per share computation are as follows:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Basic
Net (Loss) Income		$	(144,818	)		$	(91,129	)		$	(82,722	)		$	76,842
Weighted average common shares outstanding			1,389,420				1,436,543				1,391,742				1,455,284
Basic (loss) earnings per common share		$	(.10	)		$	(.07	)		$	(.06	)		$	.06
Diluted
Net (Loss) Income		$	(144,818	)		$	(91,129	)		$	(82,722	)		$	76,842
Weighted average common shares outstanding for basic earnings per common share			1,389,420				1,436,543				1,391,742				1,455,284
Add: Dilutive effects of common stock equivalents			0				0				0				0
Average shares and dilutive potential common shares			1,389,420				1,436,543				1,391,742				1,455,284
Diluted (loss) earnings per common share		$	(.10	)		$	(.07	)		$	(.06	)		$	.06

 

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11.	RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. Early adoption and retrospective application is permitted. ASU 2013-11 became effective for the Company on January 1, 2014 and did not have a significant impact on its financial position or results of operations.

In January 2014, the FASB issued ASU No. 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The guidance clarifies 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 all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or 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. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments of ASU 2014-04 are effective for the Company on January 1, 2015, and may be applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04. The Company will evaluate these amendments but does not believe they will have an impact on its financial position or results of operations.

In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contract 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 (for example, insurance contracts or lease contracts). 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. The guidance provides steps to follow to achieve the core principle. An entity should disclose

 

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sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

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Item 2.

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

Forward-Looking Statements

When used in this Report, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, competition and information provided by third-party vendors and the matters described under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

Fraternity Community Bancorp, Inc. (the “Company”) is a Maryland corporation incorporated on October 12, 2010 by Fraternity Federal Savings and Loan Association (the “Bank”) to be its holding company following the Bank’s conversion from the mutual to the stock form of organization (the “Conversion”). The Conversion was completed on March 31, 2011 and also on that date, the Company completed its public stock offering and issued 1,587,000 shares of its common stock for aggregate proceeds of $15,870,000, and net proceeds of $14,968,610. The Company’s business is the ownership of the outstanding capital stock of the Bank. The Company does not own or lease any property but instead uses the premises, equipment and other property of the Bank with payment of appropriate rental fees as required by applicable law and regulations, under the terms of an expense allocation agreement between the Company and the Bank.

Founded in 1913, the Bank is a community-oriented financial institution, dedicated to serving the financial service needs of customers and businesses within its market area, which consists of Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of deposit products and provide loans secured by real estate located in our market area. Our real estate loans consist primarily of one- to- four family mortgage loans, as well as commercial real estate loans, land loans, home equity lines of credit and residential construction loans. We also offer consumer loans and, to a limited extent, commercial business loans. We currently operate out of our corporate headquarters and main office in Baltimore and full-service branch offices located in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation, examination and supervision by the Office of the Comptroller of the Currency, our primary federal regulator, and the Federal Deposit Insurance Corporation, our deposit insurer.

The Company and the Bank maintain an Internet website at http://www.fraternityfed.com. Information on our website should not be considered a part of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established

 

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through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

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

Assets. At September 30, 2014, total assets decreased by $3.6 million to $162.8 million at September 30, 2014 from $166.4 million at December 31, 2013. The decrease in assets for the nine months ended September 30, 2014 was due mainly to a $1.9 million decrease in other real estate owned from $1.9 million at December 31, 2013 to $22,500 at September 30, 2014. Additionally, there was a decrease in cash and cash equivalents of $2.0 million, from $15.4 million at December 31, 2013, to $13.4 million as of September 30, 2014, and a decrease in available-for-sale investment securities of $1.8 million, from $16.4 million at December 31, 2013, to $14.6 million as of September 30, 2014. Offsetting this was an increase of $1.0 million in loans receivable, net, from $114.6 million at December 31, 2013 to $115.6 million at September 30, 2014.

Loans. Net loans receivable increased by $1.0 million, or .8%, from $114.6 million at December 31, 2013 to $115.6 million at September 30, 2014, primarily as a result of increased demand. Commercial real estate loans increased by $2.6 million, or 19.9%, from $13.2 million at December 31, 2013 to $15.8 million at September 30, 2014.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $2.0 million, or 12.5%, from $15.4 million at December 31, 2013 to $13.4 million at September 30, 2014 primarily as a result of a decrease in our deposits of $4.2 million, an increase in loans receivable, net, of $1.0 million, and a decrease of $1.9 million in other real estate owned.

Securities. Our available-for-sale securities decreased by $1.8 million, or 10.9%, from $16.4 million as of December 31, 2013, to $14.6 million at September 30, 2014. Our held-to-maturity securities increased by $1.2 million, or 14.3%, from $8.1 million at December 31, 2013 to $9.2 million at September 30, 2014.

Deposits. Total deposits decreased by $4.2 million, or 3.6%, from $118.1 million at December 31, 2013, to $113.9 million at September 30, 2014, primarily as a result of certificates of deposits maturing that had carried much higher interest rates, and depositors looking for a higher yield elsewhere than the low interest rates we are offering on those products currently.

Borrowings. Total borrowings remained stable at $20.0 million at September 30, 2014 and December 31, 2013.

Stockholders’ Equity. Stockholders’ equity increased by $410,700, or 1.5%, from $26.8 million at December 31, 2013 to $27.2 million at September 30, 2014 due primarily to a reduction in accumulated other comprehensive loss of $421,400. As of December 31, 2013, we had an accumulated loss of $669,700, compared to $248,300 as of September 30, 2014.

 

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Results of Operations for the Three Months Ended September 30, 2014 and 2013 (unaudited)

Overview. We had a net loss of $144,800 for the three months ended September 30, 2014, as compared to a net loss of $91,100 for the three months ended September 30, 2013. Net interest income decreased for the three months ended September 30, 2014 by $70,600 or 6.3%, from $1,116,600 for the three months ended September 30, 2013 to $1,046,000 for the three months ended September 30, 2014. We had a provision for loan losses of $319,600 for the three months ended September 30, 2014, as compared to a provision for loan losses of $143,300 for the three months ended September 30, 2013. Non-interest income decreased $5,500, or 11.4%, for the three months ended September 30, 2014, from $48,000 for the three months ended September 30, 2013 to $42,500 for the three months ended September 30, 2014. Non-interest expense decreased by $121,400, or 10.1%, for the three months ended September 30, 2014, from $1,207,400 for the three months ended September 30, 2013 to $1,086,000 for the three months ended September 30, 2014. Income tax benefit increased by $77,200, from $95,000 for the three months ended September 30, 2013 to $172,200 for the three months ended September 30, 2014.

Net Interest Income. Net interest income decreased by $70,600, or 6.3%, from $1,116,600 for the three months ended September 30, 2013 to $1,046,000 for the three months ended September 30, 2014. The decrease in net interest income is primarily attributable to lower interest rates on our interest earning assets. Our interest rate spread is negatively impacted by the low interest rate environment which makes it difficult to lower deposit rates to the extent of the declines in market interest rates. Our interest rate spread has decreased from 2.72% for the three months ended September 30, 2013 to 2.50% for the three months ended September 30, 2014, primarily due to a 42 basis point decrease in the average yield of loans receivable, net.

Interest on loans receivable, net decreased by $119,900, or 8.4%, from $1,422,400 for the three months ended September 30, 2013 to $1,302,500 for the three months ended September 30, 2014, due to a 42 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net remained stable at $116.4 million at September 30, 2014 and 2013.

Interest on investment securities available-for-sale decreased by $11,200, or 11.3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, as the result of a 9 basis point decrease in the average yield, and a decrease in the average balance of investment securities available-for-sale of $1.3 million, or 7.5%. Interest on investment securities held-to-maturity increased by $9,100, or 16.9%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, as the result of an 11 basis point increase in the average yield, and a $920,700, or 12.6%, increase in the average balance of investment securities held-to-maturity.

Interest on cash and cash equivalents remained low during the three months ended September 30, 2014 and 2013 due to the historically low prevailing market rates during those periods.

During the three months ended September 30, 2014, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates. Interest on time deposits decreased by $34,900, or 11.1%, from $316,200 for the three months ended September 30, 2013, to $281,300 for the three months ended September 30, 2014, due to an 18 basis point decrease in the average cost of time deposits. The average balance of time deposits increased by $2.3 million, or 2.5%, from $91.5 million at September 30, 2013 to $93.8 million at September 30, 2014. Interest on brokered deposits decreased by $3,800, or 100.0%, from $3,800 for the three months ended September 30, 2013, to $0 for the three months ended September 30, 2014, as those deposits matured and were not replaced. Interest on NOW and money market accounts increased by $200, or 11.0%, from $1,800 for the three months ended September 30, 2013, to $2,000 for the three months ended September 30, 2014, due to a $1.2 million, or 18.9%, increase in the average balance of NOW and money market accounts. Interest on passbook accounts decreased by $1,500, or 22.9%, from $6,500 for the three months ended September 30, 2013 to $5,000 for the three months ended September 30, 2014, due primarily to a $2.5 million, or 17.0%, decrease in the average balance of passbook accounts. The average balance of passbook accounts decreased during the three months ended September 30, 2014, from $15.0 million as of September 30, 2013 to $12.5 million as of September 30, 2014.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, remained stable at $155,300 for three months ended September 30, 2014 and 2013. At September 30, 2014 and December 31, 2013, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties. The weighted average interest rate of these three advances that carry large prepayment penalties is 3.865%.

 

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

 

		Three Months Ended September 30,
		2014												2013
		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
Assets:
Interest-bearing deposits in other banks		$	13,374,805			$	8,783				.26	%		$	10,848,901			$	7,933				.29	%
Loans receivable, net (3)			116,437,751				1,302,521				4.47				116,446,775				1,422,431				4.89
Investment securities available-for-sale (1)			15,747,130				87,988				2.24				17,030,030				99,224				2.33
Investment securities held-to-maturity (2)			8,216,448				63,224				3.08				7,295,729				54,089				2.97
Other interest-earning assets			1,935,742				27,091				5.60				1,998,209				16,536				3.31
Total interest-earning assets			155,711,876				1,489,607				3.83				153,619,644				1,600,213				4.17
Noninterest-earning assets			7,965,801												9,880,562
Total assets		$	163,677,677											$	163,500,206
Liabilities and equity:
Time deposits		$	93,768,224			$	281,284				1.20	%		$	91,525,081			$	316,234				1.38	%
NOW and money market			7,250,976				1,992				.11				6,099,206				1,795				.12
Passbook			12,452,509				4,984				.16				15,001,955				6,465				.17
Brokered deposits			0				0				.00				335,759				3,802				4.53
Federal Home Loan Bank advances			20,000,000				155,342				3.11				20,000,000				155,342				3.11
Total interest-bearing liabilities			133,471,709				443,602				1.33				132,962,001				483,638				1.45
Noninterest-bearing liabilities			2,792,717												2,889,333
Total liabilities			136,264,426												135,851,334
Total equity			27,413,251												27,648,872
Total liabilities and equity		$	163,677,677											$	163,500,206
Net interest income						$	1,046,005											$	1,116,575
Interest rate spread											2.50	%											2.72	%
Net interest margin											2.69	%											2.91	%
Ratio of average interest-earning assets to average interest-bearing liabilities											116.66	%											115.54	%

 

(1)	Investment securities available-for-sale are presented at fair market value.

(2)	Investment securities held-to-maturity are presented at amortized cost.

(3)	Loans placed on nonaccrual status are included in average assets.

Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

 

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We had a provision for loan losses of $319,600 for the three months ended September 30, 2014, as compared to a provision for loan losses of $143,300 for the three months ended September 30, 2013, primarily due to one loan relationship covering seven non-owner occupied one- to- four family residential loans. At September 30, 2014, the allowance for loan losses was $1.9 million, or 1.58%, of the total loan portfolio, as compared to $1.5 million, or 1.32%, of the total loan portfolio at December 31, 2013. The increase of $349,000 in the allowance for loan losses is primarily due to the loan relationship discussed above.

Non-accrual loans totaled $2.1 million at September 30, 2014 compared to $1.1 million at December 31, 2013. Net loan recoveries amounted to $2,400 during the three months ended September 30, 2014, compared to net loan recoveries of $7,700 during the three months ended September 30, 2013. As of September 30, 2014, non-accrual loans included fourteen owner occupied one- to- four family residential loans totaling $191,900, twelve non-owner occupied one-to-four family residential loans totaling $1.8 million and two home equity lines of credit totaling $125,800. As of December 31, 2013, non-accrual loans included one troubled debt restructured loan totaling $386,400, eighteen one-to- four family residential loans totaling $404,000 and two home equity lines of credit totaling $289,900. The total increase of $1.0 million in non-accrual loans is primarily due to one loan relationship covering seven non-owner occupied one- to- four family residential loans.

Impaired loans totaled $5.6 million at September 30, 2014 compared to $4.6 million at December 31, 2013. As of September 30, 2014, impaired loans included eighteen one-to-four family owner-occupied residential loans totaling $3.5 million, twelve non-owner-occupied one-to-four family residential loans totaling $1.8 million and three home equity line of credit loans totaling $321,000. Included in these are five troubled debt restructured loans totaling $3.5 million, all of which are on accrual status. As of December 31, 2013, impaired loans included eighteen one- to- four family owner-occupied residential loans totaling $3.8 million, five non-owner-occupied one-to-four family residential loans totaling $262,900 and three home equity line of credit loans totaling $497,700. Included in these are six troubled debt restructured loans totaling $3.9 million. Of these six troubled debt restructured loans, five loans totaling $3.5 million were on accrual status, and one loan totaling $386,400 was on non-accrual status.

Other real estate owned totaled $22,500 at September 30, 2014 compared to $1.9 million at December 31, 2013. The decrease in other real estate owned was due to the sale of a luxury residential property that had secured a speculative construction loan and the sale of an owner occupied property during 2014. Other real estate owned at September 30, 2014 consisted of one non-owner occupied property. Other real estate owned at December 31, 2013 consisted of one luxury residential property that was a speculative construction loan (totaling $1.7 million), one owner occupied property and one non-owner occupied property.

Management also reviews individual loans for which full collectability may not be reasonably assured and considers, among other matters, the estimated fair value of the underlying collateral. This evaluation is ongoing and results in variations in our provision for loan losses.

 

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The following table provides information with respect to our nonperforming assets at the dates indicated:

 

		At
		September 30, 2014				December 31, 2013
		(unaudited)
Nonaccrual loans:
Real estate loans:
One- to- four family		$	1,995,997			$	790,390
Lines of credit			125,821				289,896
Consumer			0				0
Total		$	2,121,818			$	1,080,286
Accruing loans past due 90 days or more		$	0			$	0
Total of nonaccrual loans and accruing loans 90 days Or more past due		$	2,121,818			$	1,080,286
Other real estate owned			22,500				1,921,706
Total nonperforming assets		$	2,144,318			$	3,001,992
Troubled debt restructurings		$	3,461,670			$	3,881,957
Troubled debt restructurings included in non-accrual loans			(0	)			(386,419	)
Troubled debt restructurings and total nonperforming assets		$	5,605,988			$	6,497,530
Total of nonaccrual loans and accruing loans past due 90 days or more to total loans			1.81	%			.93	%
Total of nonaccrual loans and accruing loans past due 90 days or more to total assets			1.30	%			.65	%
Total nonperforming assets to total assets			1.32	%			1.80	%

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

		Three Months Ended September 30,
		2014				2013
Allowance for loan losses at beginning of period		$	1,528,000			$	1,350,000
Charge-offs:
Real estate loans:
Owner occupied one- to- four family			185				0
Non-owner occupied one- to- four family			0				0
Lines of credit			0				0
Commercial			0				0
Residential construction			0				0
Land			0				0
Commercial			0				0
Consumer			0				0
Total charge-offs			185				0
Recoveries			2,634				7,701
Net recoveries			(2,449	)			(7,701	)
Provision for loan losses			319,551				143,299
Allowance at end of period		$	1,850,000			$	1,501,000
Allowance for loan losses to total loans at the end of the period			1.58	%			1.29	%
Net recoveries to average loans outstanding during the period			.00	%			(.01	)%

 

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Noninterest Income. Total noninterest income decreased by $5,500, or 11.4%, from $48,000 for the three months ended September 30, 2013 to $42,500 for the three months ended September 30, 2014. The decrease was primarily attributable to a decrease in other income of $6,300, or 106.8%. The decrease in other income was due to a decrease in ATM income/expense of $4,400 and a decrease in penalty income of $1,000.

Noninterest Expenses. Total noninterest expenses decreased by $121,400, or 10.1%, from $1,207,400 for the three months ended September 30, 2013 to $1,086,000 for the three months ended September 30, 2014. The decrease primarily was attributable to a decrease in salaries and employee benefits of $35,000, or 5.6%, a decrease in directors fees of $16,500, or 31.0%, a decrease in legal fees of $21,100, or 34.6%, and a decrease in other general and administrative expenses of $55,500, or 36.2%. The decrease in other general and administrative expenses was due to a decrease in advertising expense of $32,600 and a decrease in real estate owned expense of $22,400.

Income Tax Expense. We recognized an income tax benefit of $172,200 during the three months ended September 30, 2014, as compared to an income tax benefit of $95,000 for the three months ended September 30, 2013.

Results of Operations for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

Overview. We had a net loss of $82,700 for the nine months ended September 30, 2014, as compared to net income of $76,800 for the nine months ended September 30, 2013. Net interest income increased for the nine months ended September 30, 2014 by $15,300 or 0.5%, from $3,275,500 for the nine months ended September 30, 2013 to $3,290,800 for the nine months ended September 30, 2014. We had a provision for loan losses of $225,100 for the nine months ended September 30, 2014, as compared to a provision for loan losses of $131,400 for the nine months ended September 30, 2013. Non-interest income decreased $26,600, or 11.4%, for the nine months ended September 30, 2014, from $233,100 for the nine months ended September 30, 2013 to $206,500 for the nine months ended September 30, 2014. Non-interest expense increased by $198,700, or 5.9%, for the nine months ended September 30, 2014, from $3,351,600 for the nine months ended September 30, 2013 to $3,550,300 for the nine months ended September 30, 2014. Income tax benefit increased by $144,100, from $51,300 for the nine months ended September 30, 2013 to $195,400 for the nine months ended September 30, 2014.

Net Interest Income. Net interest income increased by $15,300, or 0.5%, from $3,275,500 for the nine months ended September 30, 2013 to $3,290,800 for the nine months ended September 30, 2014. The increase in net interest income is primarily attributable to a lower cost of funds. Our interest rate spread has increased from 2.59% for the nine months ended September 30, 2013 to 2.63% for the nine months ended September 30, 2014, primarily due to a 14 basis point decrease in the average yield on interest-earning assets offset by an 18 basis point decrease in the average yield on interest-bearing liabilities.

Interest on loans receivable, net decreased by $186,500, or 4.4%, from $4.2 million for the nine months ended September 30, 2013 to $4.0 million for the nine months ended September 30, 2014, due to a 30 basis point decrease in the average yield. The decrease in the average yield on loans was attributable to market rates remaining at an historically low level. The average balance of loans receivable, net increased by $2.0 million, or 1.7%, from $114.8 million at September 30, 2013 to $116.8 million at September 30, 2014.

Interest on investment securities available-for-sale decreased by $4,100, or 1.4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, as the result of a $2.0 million, or 11.0%, decrease in the average balance of investment securities available-for-sale, offset in part by a 24 basis point increase in the average yield. Interest on investment securities held-to-maturity increased by $10,400, or 6.3%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, as the result of a $594,600, or 8.0%, increase in the average balance of investment securities held-to-maturity, offset in part by a 5 basis point decrease in the average yield.

Interest on cash and cash equivalents remained low during the nine months ended September 30, 2014 and 2013 due to the historically low prevailing market rates during those periods.

During the nine months ended September 30, 2014, we were able to reduce interest paid on deposits primarily as the result of time deposits being rolled over at lower rates in response to general declines in market interest rates. Interest on time deposits decreased by $165,300, or 16.4%, from $1,008,200 for the nine months

 

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ended September 30, 2013, to $842,900 for the nine months ended September 30, 2014, due to a 27 basis point decrease in the average cost of time deposits. The average balance of time deposits increased by $2.4 million, or 2.5%, from $92.0 million at September 30, 2013 to $94.4 million at September 30, 2014. Interest on brokered deposits decreased by $11,200, or 100.0%, from $11,200 for the nine months ended September 30, 2013, to $0 for the nine months ended September 30, 2014, as those deposits matured and were not replaced. Interest on passbook accounts decreased by $9,100, or 36.2%, from $25,200 for the nine months ended September 30, 2013 to $16,100 for the nine months ended September 30, 2014, due primarily to a decrease in the average balance and a 5 basis point decrease in the average cost of passbook accounts. The average balance of passbook accounts decreased by $2.6 million, or 16.5%, during the nine months ended September 30, 2014, from $15.9 million as of September 30, 2013 to $13.3 million as of September 30, 2014.

Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank advances, increased by $5,000, or 1.1%, from $455,900 for nine months ended September 30, 2013 to $460,900 for the nine months ended September 30, 2014, due to an increase of 3 basis points in the average cost of these other interest-bearing liabilities. At September 30, 2014 and December 31, 2013, we had $20.0 million of Federal Home Loan Bank advances, of which $15.0 million are long-term advances that carry large prepayment penalties.

 

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using monthly balances, and non-accrual loans are included in average balances only. Amortization of net deferred loan fees are included in interest income on loans and are insignificant. No tax-equivalent adjustments were made. Nonaccruing loans have been included in the table as loans carrying a zero yield.

 

		Nine Months Ended September 30,
		2014												2013
		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
Assets:
Interest-bearing deposits in other banks		$	13,185,674			$	27,644				.28	%		$	13,938,084			$	26,931				.26	%
Loans receivable, net (3)			116,759,019				4,045,535				4.62				114,797,187				4,232,014				4.92
Investment securities available-for-sale (1)			16,234,278				298,039				2.45				18,234,231				302,133				2.21
Investment securities held-to-maturity (2)			8,006,903				175,599				2.92				7,412,279				165,185				2.97
Other interest-earning assets			1,949,543				69,906				4.78				2,016,927				55,775				3.69
Total interest-earning assets			156,135,417				4,616,723				3.94				156,398,708				4,782,038				4.08
Noninterest-earning assets			8,959,102												9,468,067
Total assets		$	165,094,519											$	165,866,775
Liabilities and equity:
Time deposits		$	94,358,900			$	842,881				1.19	%		$	92,028,062			$	1,008,187				1.46	%
NOW and money market			7,241,238				6,048				.11				6,135,635				6,008				.13
Passbook			13,264,708				16,084				.16				15,884,073				25,212				.21
Brokered deposits			0				0				.00				333,919				11,235				4.49
Federal Home Loan Bank advances			20,000,000				460,960				3.07				20,000,000				455,933				3.04
Total interest-bearing liabilities			134,864,846				1,325,973				1.31				134,381,689				1,506,575				1.49
Noninterest-bearing liabilities			2,978,585												3,173,335
Total liabilities			137,843,431												137,555,024
Total equity			27,251,088												28,311,751
Total liabilities and equity		$	165,094,519											$	165,866,775
Net interest income						$	3,290,750											$	3,275,463
Interest rate spread											2.63	%											2.59	%
Net interest margin											2.81	%											2.79	%
Ratio of average interest-earning assets to average interest-bearing liabilities											115.77	%											116.38	%

 

(1)	Investment securities available-for-sale are presented at fair market value.

(2)	Investment securities held-to-maturity are presented at amortized cost.

(3)	Loans placed on nonaccrual status are included in average assets.

Provision and Allowance for Loan Losses. We maintain an allowance at a level necessary to absorb management’s best estimate of probable loan losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. In addition, the allowance considers the level of loans which management monitors as a result of inconsistent repayment patterns. Management has identified commercial real estate loans as an area for expected increased lending. Such loans carry a higher degree of credit risk than our historical single-family lending.

 

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We had a provision for loan losses of $225,100 for the nine months ended September 30, 2014, as compared to a provision for loan losses of $131,400 for the nine months ended September 30, 2013, primarily due to one loan relationship covering seven non-owner occupied one- to- four family residential loans. At September 30, 2014, the allowance for loan losses was $1.9 million, or 1.58%, of the total loan portfolio, as compared to $1.5 million, or 1.32%, of the total loan portfolio at December 31, 2013. The increase of $349,000 in the allowance for loan losses is primarily due to the loan relationship discussed above.

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

		Nine Months Ended September 30,
		2014				2013
Allowance for loan losses at beginning of period		$	1,528,000			$	1,395,000
Charge-offs:
Real estate loans:
Owner occupied one-to four-family			185				25,777
Non-owner occupied one-to four-family			0				66,079
Lines of credit			0				0
Commercial			0				0
Residential construction			0				0
Land			0				0
Commercial			0				0
Consumer			0				0
Total charge-offs			185				91,856
Recoveries			97,065				66,449
Net (recoveries) charge-offs			(96,880	)			25,407
Provision for loan losses			225,120				131,407
Allowance at end of period		$	1,850,000			$	1,501,000
Allowance for loan losses to total loans at the end of the period			1.58	%			1.28	%
Net (recoveries) charge-offs to average loans outstanding during the period			(.08	)%			.02	%

Noninterest Income. Total noninterest income decreased by $26,600, or 11.4%, from $233,100 for the nine months ended September 30, 2013 to $206,500 for the nine months ended September 30, 2014. The decrease was primarily due to a decrease of $41,500, or 95.8%, in the gain on sale of investments and a decrease of $41,600, or 83.0%, in the gain on sale of loans, offset in part by $26,700 in proceeds received from an insurance company for two REO properties previously sold and a $41,700 gain on the sale of an REO property.

Noninterest Expenses. Total noninterest expenses increased by $198,700, or 5.9%, from $3,351,600 for the nine months ended September 30, 2013 to $3,550,300 for the nine months ended September 30, 2014. The increase primarily was attributable to an increase in salaries and employee benefits of $123,400, or 7.2%, due to the addition of the stock award and stock option plans, an increase in directors fees of $8,400, or 8.3%, due to the addition of the stock award and stock option plans, an increase in legal fees of $21,300, or 16.0%, an increase in data processing expense of $33,400, or 10.7%, and an increase in other general and administrative expenses of $6,900, or 1.5%.

Income Tax Expense. We recognized an income tax benefit of $195,400 during the nine months ended September 30, 2014, as compared to an income tax benefit of $51,300 for the nine months ended September 30, 2013.

 

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

We regularly adjust our investments in liquid assets available to meet short-term liquidity needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of our asset/liability management policy. We do not have long-term debt or other financial obligations that would create long-term liquidity concerns.

Our most liquid assets are cash and cash equivalents. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and cash equivalents totaled $13.4 million. Securities classified as available-for-sale, amounting to $14.6 million at September 30, 2014, provides an additional source of liquidity. In addition, at September 30, 2014, we had the ability to borrow a total of approximately $49.6 million from the Federal Home Loan Bank of Atlanta and had $20.0 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if needed, we have a $3.0 million line of credit with another bank, on which we had no outstanding balance at September 30, 2014.

Certificates of deposit due within one year of September 30, 2014 totaled $27.4 million, or 29.3%, of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressures. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2015. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For the nine months ended September 30, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable as the Company is a smaller reporting company.

 

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Item 4.

Controls and Procedures

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as that term is defined in Rule 13a-5(e). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

Periodically, there may be various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A.

Risk Factors

For information regarding the Company’s risk factors, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission on March 28, 2014. As of the date of this filing, the risk factors of the Company have not changed materially from those reported in the Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding stock repurchases during the periods indicated:

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased As Part of a Publicly Announced Repurchase Program (1)				Maximum Number of Shares That May Yet Be Purchased Under the Repurchase Program (1)
July 1-31, 2014			0			$	0				0				77,130
August 1-31, 2014			0				0				0				77,130
September 1-30, 2014			7,500				15.15				0				69,630
TOTAL			7,500

 

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(1)	On July 25, 2013, Fraternity Community Bancorp, Inc. announced that it had approved a stock repurchase program to acquire up to 142,830 shares, or 10%, of the Company’s outstanding common stock.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

The Company’s 2015 Annual Meeting of Shareholders will be held on May 12, 2015.

 

Item 6.

Exhibits

 

No.		Description
3.1		Articles of Incorporation of Fraternity Community Bancorp, Inc. (1)
3.2		Bylaws of Fraternity Community Bancorp, Inc. (1)
4.0		Form of Common Stock Certificate of Fraternity Community Bancorp, Inc. (1)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications
101.0		The following materials from Fraternity Community Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Financial Condition; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the related Notes.

 

(1)	Incorporated herein by reference to the Company’s Registration Statement on Form S-1, as amended (File No. 333-170215).

 

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SIGNATURES

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

 

				FRATERNITY COMMUNITY BANCORP, INC.
November 14, 2014
				By:		/s/ Thomas K. Sterner
						Thomas K. Sterner
						Chairman of the Board and Chief Executive Officer
						(Principal Executive Officer)
				By:		/s/ Michelle L. Miller
						Michelle L. Miller
						Chief Financial Officer
						(Principal Financial Officer)