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EX-31 - EXHIBIT 31.1 - SBT Bancorp, Inc.ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

[X]  QUARTERLY Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended 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: 000-51832

SBT Bancorp, Inc.

 (Exact Name of Registrant as Specified in Its Charter)

 

     Connecticut                                                  

                  20-4346972                 

 

(State or Other Jurisdiction of 

 (I.R.S. Employer

 

Incorporation or Organization)

 Identification No.)

 

 

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

                   06070

 

(Address of Principal Executive Offices) 

               (Zip Code)

 

      

(860) 408-5493

(Registrant's Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]     No [  ]

 

 

 
- 1 -

 

 

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

 

Large accelerated filer [  ]       

Accelerated filer [  ]

 

 

Non-accelerated filer [  ]   

Smaller reporting company [X]

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]     No [X]

 

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

 

As of October 31, 2014, the registrant had 901,211 shares of its Common Stock, no par value per share, outstanding.

 

 

 
- 2 -

 

  

table of contents

 

SBT Bancorp, Inc. and Subsidiary

 

 

    Page No.
     

PART I - FINANCIAL INFORMATION

     

Item 1. Financial Statements

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

 4

     
 

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

5
     
 

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

  6
     
 

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

  7
     
 

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

  8
     

 

Notes to Condensed Consolidated Financial Statements – (unaudited)

  9 - 23
      

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

24 - 32

     

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

  32
     

Item 4. Controls and Procedures  

  32
     

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings  

  33
     

Item 1A. Risk Factors  

  33
      

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

  33
      

Item 3. Defaults Upon Senior Securities  

  33
      

Item 4. Mine Safety Disclosures  

  33
      

Item 5. Other Information  

  33
      

Item 6. Exhibits  

  33-34
     

SIGNATURES  

  35
      

EXHIBIT INDEX  

  36

 

 

 
- 3 -

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

 

 

 

 

9/30/14

   

12/31/13

 
   

(Unaudited)

         
ASSETS                

Cash and due from banks

  $ 8,535     $ 13,355  

Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank

    13,599       24,165  

Money market mutual funds

    486       346  

Federal funds sold

    53       724  

Cash and cash equivalents

    22,673       38,590  
                 

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

    85,051       87,449  

Federal Home Loan Bank stock, at cost

    1,260       2,196  

Loans held-for-sale

    7,140       2,861  
                 

Loans

    282,593       279,667  

Less allowance for loan losses

    2,761       2,792  

Loans, net

    279,832       276,875  
                 

Premises and equipment, net

    1,517       1,618  

Accrued interest receivable

    1,020       1,074  

Other real estate owned

    130       -  

Bank owned life insurance

    7,130       6,729  

Other assets

    4,613       4,456  

Total assets

  $ 410,366     $ 421,848  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Deposits:

               

Demand deposits

  $ 100,685     $ 116,015  

Savings and NOW deposits

    211,843       173,500  

Time deposits

    63,612       68,989  

Total deposits

    376,140       358,504  

Securities sold under agreements to repurchase

    3,845       4,390  

Federal Home Loan Bank advances

    -       30,000  

Other liabilities

    1,591       1,558  

Total liabilities

    381,576       394,452  
                 

Stockholders' equity:

               

Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000 shares issued and outstanding at September 30, 2014 and December 31, 2013; liquidation value of $1,000 per share

    8,985       8,976  

Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 901,625 shares and 901,211 shares, respectively, at September 30, 2014 and 900,264 shares and 899,850 shares, respectively, at December 31, 2013

    10,116       10,136  

Retained earnings

    10,345       10,347  

Treasury stock, 414 shares

    (7 )     (7 )

Unearned compensation-restricted stock awards

    (235 )     (401 )

Accumulated other comprehensive loss

    (414 )     (1,655 )

Total stockholders' equity

    28,790       27,396  

Total liabilities and stockholders' equity

  $ 410,366     $ 421,848  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 
- 4 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for per share amounts)

 

   

For the three months ended

   

For the nine months ended

 
   

9/30/2014

   

9/30/2013

   

9/30/2014

   

9/30/2013

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 2,599     $ 2,541     $ 7,753     $ 7,195  

Investment securities

    431       522       1,351       1,612  

Federal funds sold and overnight deposits

    28       8       60       29  

Total interest and dividend income

    3,058       3,071       9,164       8,836  

Interest expense:

                               

Deposits

    213       219       647       655  

Federal Home Loan Bank advances

    1       -       3       8  

Repurchase agreements

    2       7       9       3  

Total interest expense

    216       226       659       666  
                                 

Net interest and dividend income

    2,842       2,845       8,505       8,170  
                                 

Provision for loan losses

    25       120       55       230  
                                 

Net interest and dividend income after provision for loan losses

    2,817       2,725       8,450       7,940  

Noninterest income:

                               

Service charges on deposit accounts

    119       118       353       368  

(Loss) gain on sales and writedowns of available-for-sale securities, net

    -       (6 )     96       98  

Other service charges and fees

    173       116       556       479  

Increase in cash surrender value of life insurance policies

    55       51       151       159  

Gain on loans sold and commission fee income

    261       111       382       1,203  

Investment services fees and commissions

    43       87       172       172  

Other income

    16       9       74       8  

Total noninterest income

    667       486       1,784       2,487  

Noninterest expense:

                               

Salaries and employee benefits

    1,564       1,631       5,140       5,088  

Occupancy expense

    363       290       1,030       849  

Equipment expense

    112       69       340       188  

Advertising and promotions

    177       235       461       593  

Forms and supplies

    45       42       139       109  

Professional fees

    167       134       377       386  

Directors’ fees

    65       62       196       187  

Correspondent charges

    42       77       173       242  

Postage

    -       23       31       66  

FDIC assessment

    80       64       285       119  

Data processing

    170       156       490       434  

Other expenses

    388       377       1,187       939  

Total noninterest expense

    3,173       3,160       9,849       9,200  

Income before income taxes

    311       51       385       1,227  

Income tax provision (benefit)

    53       (34 )     (66 )     224  

Net income

  $ 258     $ 85     $ 451     $ 1,003  

Net income available to common stockholders

  $ 233     $ 56     $ 375     $ 923  

Weighted average shares outstanding, basic

    883,998       871,055       882,158       870,695  

Earnings per common share, basic

  $ 0.26     $ 0.06     $ 0.42     $ 1.06  

Weighted average shares outstanding, assuming dilution

    888,335       877,916       886,694       876,185  

Earnings per common share, assuming dilution

  $ 0.26     $ 0.06     $ 0.42     $ 1.05  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 
- 5 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013

 

(Unaudited)

(Dollars in thousands)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(unaudited)

   

(unaudited)

 

Net income

  $ 258     $ 85     $ 451     $ 1,003  

Other comprehensive (loss) income, net of tax:

                               

Net change in unrealized holding gain/loss on securities available-for-sale

    (250 )     (6 )     1,977       (3,241 )

Reclassification adjustment for net realized losses (gains) in net income

    -       6       (96 )     (98 )

Other comprehensive (loss) income, before tax

    (250 )     -       1,881       (3,339 )

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

    85       -       (640 )     1,136  

Other comprehensive (loss) income, net of tax

    (165 )     -       1,241       (2,203 )

Comprehensive income (loss)

  $ 93     $ 85     $ 1,692     $ (1,200 )

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 
- 6 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

 

                                   

Unearned

   

Accumulated

         
   

Preferred

                           

Compensation-

   

Other

         
   

Stock

   

Common

   

Treasury

   

Retained

   

Restricted

   

Comprehensive

         
   

Series C

   

Stock

   

Stock

   

Earnings

   

Stock Awards

   

(Loss) Income

   

Total

 

Balance, December 31, 2012

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

Net income

    -       -       -       1,003       -       -       1,003  

Other comprehensive loss, net of tax

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

Preferred stock dividend-SBLF

    -       -       -       (71 )     -       -       (71 )

Preferred stock amortization (accretion)

    9       -       -       (9 )     -       -       -  

Stock based compensation

    -       -       -       -       117       -       117  

Dividends declared common stock

    -       -       -       (376 )     -       -       (376 )

Common stock issued

    -       28       -       -       -       -       28  

Balance, September 30, 2013

  $ 8,973     $ 9,929     $ (7 )   $ 10,366     $ (251 )   $ (1,075 )   $ 27,935  
                                                         

Balance, December 31, 2013

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

Net income

    -       -       -       451       -       -       451  

Other comprehensive income, net of tax

    -       -       -       -       -       1,241       1,241  

Preferred stock dividend-SBLF

    -       -       -       (67 )     -       -       (67 )

Preferred stock amortization (accretion)

    9       -       -       (9 )     -       -       -  

Stock based compensation

    -       -       -       -       117       -       117  

Dividends declared common stock

    -       -       -       (377 )     -       -       (377 )

Forfeited restricted stock awards

    -       (90 )     -       -       90       -       -  

Restricted stock awards

    -       41       -       -       (41 )     -       -  

Common stock issued

    -       29       -       -       -       -       29  

Balance, September 30, 2014

  $ 8,985     $ 10,116     $ (7 )   $ 10,345     $ (235 )   $ (414 )   $ 28,790  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 
- 7 -

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

For the nine months ended

 
   

9/30/2014

   

9/30/2013

 

Cash flows from operating activities:

               

Net income

  $ 451     $ 1,003  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

               

Interest capitalized on interest-bearing time deposits with other banks

    -       (100 )

Amortization of securities, net

    301       482  

Amortization of mortgage servicing rights

    285       185  

Writedown of available-for-sale securities

    7       14  

Gain on sales of available-for-sale securities

    (103 )     (112 )

Change in deferred loan origination costs, net

    (79 )     (295 )

Provision for loan losses

    55       230  

Loans originated for sale

    (28,920 )     (55,814

Proceeds from sales of loans

    24,979       56,728  

Gains on sales of loans

    (338 )     (914

Writedown on other real estate owned

    25       96  

Loss on sale of other real estate owned

    1       -  

Depreciation and amortization

    294       163  

Accretion on impairment of operating lease

    (33 )     (22 )

Increase in other assets

    (953 )     (195 )

Decrease in interest receivable

    54       18  

(Increase) decrease in taxes receivable

    (67 )     154  

Increase in cash surrender value of bank owned life insurance

    (151 )     (160 )

Stock-based compensation

    117       117  

Increase (decrease) in other liabilities

    14       (288 )

Increase in interest payable

    49       19  

Net cash (used in) provided by operating activities

    (4,012 )     1,309  
                 

Cash flows from investing activities:

               

Maturities and redemptions of interest-bearing time deposits with other banks

    -       1,075  

Redemption (purchases) of Federal Home Loan Bank stock

    936       (1,218 )

Purchases of available-for-sale securities

    (3,011 )     (35,184 )

Proceeds from maturities of available-for-sale securities

    5,946       21,373  

Proceeds from sales of available-for-sale securities

    1,139       5,649  

Loan originations and principal collections, net

    8,283       (36,762 )

Loans purchased

    (11,925 )     (4,925 )

Recoveries of loans previously charged off

    14       6  

Proceeds from sale of other real estate owned

    539       -  

Premium paid on bank owned life insurance

    (250 )     -  

Capital expenditures

    (255 )     (909 )

Net cash provided by (used in) investing activities

    1,416       (50,895 )
                 

Cash flows from financing activities:

               

Net increase in demand deposits, NOW and savings accounts

    23,013       24,063  

Decrease in time deposits

    (5,377 )     (657 )

Net (decrease) increase in securities sold under agreements to repurchase

    (545 )     362  

(Paydown of) proceeds from Federal Home Loan Bank advances

    (30,000 )     10,000  

Proceeds from issuance of common stock

    29       28  

Dividends paid - preferred stock

    (67 )     (71 )

Dividends paid - common stock

    (374 )     (363 )

Net cash (used in) provided by financing activities

    (13,321 )     33,362  
                 

Net decrease in cash and cash equivalents

    (15,917 )     (16,224 )

Cash and cash equivalents at beginning of period

    38,590       34,100  

Cash and cash equivalents at end of period

  $ 22,673     $ 17,876  
                 

Supplemental disclosures:

               

Interest paid

  $ 610     $ 647  

Income taxes paid

    1       70  

Loans transferred to other real estate owned

    695       -  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 
- 8 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(Dollars in thousands)

 

NOTE 1 – BASIS OF PRESENTATION

 

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

 

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

 

NOTE 2 – STOCK-BASED COMPENSATION

 

At September 30, 2014, the Company maintained a stock-based employee compensation plan. The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements. During the nine months ended September 30, 2014, the Company recognized $117 thousand in stock-based employee compensation expense. During the nine months ended September 30, 2013, the Company recognized $117 thousand in stock-based employee compensation expense.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

 

1.

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

 

 

2.

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

 

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

 

 

 
- 9 -

 

 

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

 

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

 

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

 

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

 

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.

 

 

 
- 10 -

 

 

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

 

 

1.

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

 

2.

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

 

3.

those changes in fair value are reflected in earnings.

 

Under ASU 2014-13, entities that meet these criteria are provided an alternative under which they can choose to eliminate the difference between the fair value of financial assets and financial liabilities of a consolidated collateralized financing entity. If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured in accordance with ASC 820, “Fair Value Measurement,” and differences between the fair value of the financial assets and the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

 

1.

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

 

2.

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

 

3.

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

 

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

 

NOTE 4 – FAIR VALUE MEASUREMENT DISCLOSURES

 

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

 

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

 

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

 

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

 

 

 
- 11 -

 

 

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

 

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

 

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

 

Loans held-for-sale: Fair values for the loans held-for-sale are estimated based on outstanding investor commitments, or in the absence of such commitments, are based on current investor yield requirements.

 

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

 

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

 

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

 

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

 

Assets Measured at Fair Value on a Recurring Basis

 

           

Fair Value Measurements at Reporting Date Using:

 
           

Quoted prices in

   

Significant

   

Significant

 
           

Active Markets for

   

Other Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
    (Dollars In Thousands)   

September 30, 2014:

                               

Debt securities issued by U.S. government corporations and agencies

  $ 18,543     $ -     $ 18,543     $ -  

Obligations of states and municipalities

    16,021       -       16,021       -  

Mortgage-backed securities

    49,962       -       49,962       -  

SBA loan pools

    525       -       525       -  
    $ 85,051     $ -     $ 85,051     $ -  
                                 

December 31, 2013:

                               

Debt securities issued by U.S. government corporations and agencies

  $ 18,247     $ -     $ 18,247     $ -  

Obligations of states and municipalities

    13,973       -       13,973       -  

Mortgage-backed securities

    54,568       -       54,568       -  

SBA loan pools

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

 

 

 
- 12 -

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

    Fair Value Measurements at Reporting Date Using:  
           

Quoted prices in

   

Significant

   

Significant

 
           

Active Markets for

   

Other Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
    (Dollars In Thousands)  

September 30, 2014:

                               

Other real estate owned

  $ 130     $ -     $ -     $ 130  
    $ 130     $ -     $ -     $ 130  

 

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

 

   

September 30, 2014

 
   

Carrying

   

Fair Value

 
   

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 22,673     $ 22,673     $ -     $ -     $ 22,673  

Available-for-sale securities

    85,051       -       85,051       -       85,051  

Federal Home Loan Bank stock

    1,260       1,260       -       -       1,260  

Loans held-for-sale

    7,140       -       -       7,247       7,247  

Loans, net

    279,832       -       -       286,942       286,942  

Accrued interest receivable

    1,020       1,020       -       -       1,020  
                                         

Financial liabilities:

                                       

Deposits

    376,140       -       376,472       -       376,472  

Securities sold under agreements to repurchase

    3,845       -       3,845       -       3,845  

 

   

December 31, 2013

 
   

Carrying

   

Fair Value

 
   

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

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

Available-for-sale securities

    87,449       -       87,449       -       87,449  

Federal Home Loan Bank stock

    2,196       2,196       -       -       2,196  

Loans held-for-sale

    2,861       -       -       2,909       2,909  

Loans, net

    276,875       -       -       277,539       277,539  

Accrued interest receivable

    1,074       1,074       -       -       1,074  
                                         

Financial liabilities:

                                       

Deposits

    358,504       -       358,961       -       358,961  

Securities sold under agreements to repurchase

    4,390       -       4,390       -       4,390  

Federal Home Loan Bank advances

    30,000       -       30,000       -       30,000  

 

 

NOTE 5 – EARNINGS PER COMMON SHARE

 

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

 

 

 
- 13 -

 

 

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

 

   

For the three months ended

 
   

9/30/14

   

9/30/13

 
   

(In Thousands, Except Share and Per Share Data)

 

Basic earnings per share computation:

               

Net income

  $ 258     $ 85  

Preferred stock net accretion

    (3 )     (3 )

Cumulative preferred stock dividends

    (22 )     (26 )

Net income available to common stockholders

  $ 233     $ 56  
                 

Weighted average shares outstanding, basic

    883,998       871,055  
                 

Basic earnings per share

  $ 0.26     $ 0.06  
                 

Diluted earnings per share computation:

               

Net income

  $ 258     $ 85  

Preferred stock net accretion

    (3 )     (3 )

Cumulative preferred stock dividends

    (22 )     (26 )

Net income available to common stockholders

  $ 233     $ 56  
                 

Weighted average shares outstanding, before dilution

    883,998       871,055  

Dilutive potential shares

    4,337       6,861  

Weighted average shares outstanding, assuming dilution

    888,335       877,916  
                 

Diluted earnings per share

  $ 0.26     $ 0.06  

 

   

For the nine months ended

 
   

9/30/14

   

9/30/13

 
   

(In Thousands, Except Share and Per Share Data)

 

Basic earnings per share computation:

               

Net income

  $ 451     $ 1,003  

Preferred stock net accretion

    (9 )     (9 )

Cumulative preferred stock dividends

    (67 )     (71 )

Net income available to common stockholders

  $ 375     $ 923  
                 

Weighted average shares outstanding, basic

    882,158       870,695  
                 

Basic earnings per share

  $ 0.42     $ 1.06  
                 

Diluted earnings per share computation:

               

Net income

  $ 451     $ 1,003  

Preferred stock net accretion

    (9 )     (9 )

Cumulative preferred stock dividends

    (67 )     (71 )

Net income available to common stockholders

  $ 375     $ 923  
                 

Weighted average shares outstanding, before dilution

    882,158       870,695  

Dilutive potential shares

    4,536       5,490  

Weighted average shares outstanding, assuming dilution

    886,694       876,185  
                 

Diluted earnings per share

  $ 0.42     $ 1.05  

 

 

 
- 14 -

 

 

NOTE 6 – INVESTMENT SECURITIES

 

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

      Less than 12 Months       12 Months or Longer       Total  
      Fair       Unrealized       Fair       Unrealized       Fair       Unrealized  
      Value       Losses       Value       Losses       Value       Losses  
      (Dollars in thousands)  

September 30, 2014

                                               

Debt securities issued by U.S. government corporations and agencies

  $ 1,060     $ 3     $ 17,483     $ 219     $ 18,543     $ 222  

Obligations of states and municipalities

    1,014       24       1,757       56       2,771       80  

Mortgage-backed securities

    3,292       15       39,741       1,178       43,033       1,193  

Total temporarily impaired securities

  5,366     42     58,981     1,453     64,347     1,495  
                                                 
                                                 

Other-than-temporarily impaired securities

                                               

Mortgage-backed securities

    -       -       319       29       319       29  

Total temporarily impaired and other-than-temporarily impaired securities

  $ 5,366     $ 42     $ 59,300     $ 1,482     $ 64,666     $ 1,524  
                                                 
                                                 

December 31, 2013:

                                               

Debt securities issued by U.S. government corporations and agencies

  $ 18,247     $ 520     $ -     $ -     $ 18,247     $ 520  

Obligations of states and municipalities

    3,340       198       -       -       3,340       198  

Mortgage-backed securities

    42,185       1,958       6,240       359       48,425       2,317  

Total temporarily impaired securities

  63,772     2,676     6,240     359     70,012     3,035  
                                                 

Other-than-temporarily impaired securities

                                               

Mortgage-backed securities

    -       -       331       40       331       40  

Total temporarily impaired and other- than-temporarily impaired securities

  $ 63,772     $ 2,676     $ 6,571     $ 399     $ 70,343     $ 3,075  

 

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

 

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

 

     

Investment Portfolio

 
     

(Dollars in thousands)

 
                                         
     

September 30, 2014

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

         
   

Cost

   

Gains

   

Losses

   

Value

   

Yield

 

Available-for-sale securities:

                                       

U.S government and agency securities

                                       

Due after one year through five years

  $ 16,265     $ -     $ 172     $ 16,093