Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Naugatuck Valley Financial CorpFinancial_Report.xls
EX-32 - EXHIBIT 32 - Naugatuck Valley Financial Corpv408980_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Naugatuck Valley Financial Corpv408980_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Naugatuck Valley Financial Corpv408980_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, DC 20549

____________

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from ______________ to _____________

 

Commission file number: 0-54447

 

 

                  NAUGATUCK VALLEY FINANCIAL CORPORATION                  

(Exact name of registrant as specified in its charter)

 

MARYLAND   01-0969655
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    

 

333 CHURCH STREET, NAUGATUCK, CONNECTICUT   06770
(Address of principal executive offices)   (Zip Code)

  

                                 (203) 720-5000                                

(Registrant’s telephone number, including area code)

  N/A  
  (Former name, former address and former fiscal year, if changed since last report)  

 

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

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

  Large Accelerated Filer ¨ Accelerated Filer ¨
  Non-accelerated Filer ¨ Smaller Reporting Company x
  (Do not check if a smaller reporting company)  

 

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

Yes ¨ No x

 

As of May 8, 2015, there were 7,002,208 shares of the registrant’s common stock outstanding.

 

1
 

 

NAUGATUCK VALLEY FINANCIAL CORPORATION

 

Table of Contents

Part I. Financial Information Page No.
       
  Item 1. Consolidated Financial Statements (unaudited)  
       
    Consolidated Statements of Financial Condition at March 31, 2015 and  
    December 31, 2014 3
       
    Consolidated Statements of Operations for the three months ended  
    March 31, 2015 and 2014 4
       
    Consolidated Statements of Comprehensive Income (Loss) for the three  
    months ended March 31, 2015 and 2014 5
       
    Consolidated Statements of Changes in Stockholders’ Equity for the three  
    months ended March 31, 2015 and 2014  6
       
    Consolidated Statements of Cash Flows for the three months ended  
    March 31, 2015 and 2014 7
       
    Notes to Unaudited Consolidated Financial Statements 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results  
    of Operations 36
       
    Liquidity and Capital Resources 46
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 49
       
  Item 4. Controls and Procedures 49
       
       
Part II. Other Information  
       
  Item 1. Legal Proceedings 50
       
  Item 1A. Risk Factors 50
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
       
  Item 3. Defaults Upon Senior Securities 51
       
  Item 4. Mine Safety Disclosures 51
       
  Item 5. Other Information 51
       
  Item 6. Exhibits 51
       
Signatures   52
       
Exhibits      

 

2
 

  

Part I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (unaudited)

 

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)

 

(In thousands)  March 31,
2015
   December 31, 2014 
     
ASSETS          
Cash and due from depository institutions  $7,024   $10,940 
Federal funds sold   755    - 
Cash and cash equivalents   7,779    10,940 
Investment securities available-for-sale, at fair value   86,185    77,538 
Investment securities held-to-maturity, at amortized cost   12,454    13,441 
Loans held for sale   2,209    1,062 
Loans receivable, net   370,064    363,259 
Accrued income receivable   1,660    1,599 
Foreclosed real estate   100    335 
Premises and equipment, net   9,184    9,125 
Bank owned life insurance   10,459    10,393 
Federal Home Loan Bank ("FHLB") of Boston stock, at cost   4,548    4,548 
Other assets   2,390    2,850 
Total assets  $507,032   $495,090 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities          
Deposits  $378,984   $373,459 
FHLB advances   61,914    53,762 
Mortgagors' escrow accounts   2,224    4,341 
Deferred tax liabilities   824    651 
Other liabilities   1,894    2,006 
Total liabilities   445,840    434,219 
Stockholders' equity          
Preferred stock, $.01 par value; 1,000,000 shares authorized;          
no shares issued or outstanding   -    - 
Common stock, $.01 par value; 25,000,000 shares authorized;          
7,002,366 shares issued; 7,002,208 shares outstanding at          
March 31, 2015 and December 31, 2014, respectively   70    70 
Paid-in capital   58,725    58,698 
Retained earnings   3,586    3,323 
Unearned employee stock ownership plan ("ESOP") shares (294,387 shares          
at March 31, 2015 and December 31, 2014)   (2,480)   (2,480)
Treasury Stock, at cost (158 shares at March 31, 2015 and          
December 31, 2014)   (1)   (1)
Accumulated other comprehensive income, net of tax   1,292    1,261 
Total stockholders' equity   61,192    60,871 
Total liabilities and stockholders' equity  $507,032   $495,090 

 

See accompanying notes to unaudited consolidated financial statements.

 

3
 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands, except share data)  2015   2014 
         
Interest income          
Interest and fees on loans  $4,079   $4,246 
Interest and dividends on investments and deposits   618    662 
Total interest income   4,697    4,908 
Interest expense          
Interest on deposits   570    604 
Interest on borrowed funds   195    154 
Total interest expense   765    758 
           
Net interest income   3,932    4,150 
           
Provision for loan losses   -    - 
           
Net interest income after provision for loan losses   3,932    4,150 
           
Noninterest income          
Service charge income   152    173 
Fees for other services   63    72 
Mortgage banking income   218    148 
Income from bank owned life insurance   66    66 
Net gain on sale of investments   416    158 
Income from investment advisory services, net   43    94 
Other income   31    32 
Total noninterest income   989    743 
           
Noninterest expense          
Compensation, taxes and benefits   2,481    3,016 
Occupancy   540    543 
Professional fees   410    519 
FDIC insurance premiums   163    261 
Insurance   175    145 
Computer processing   347    369 
Expenses on foreclosed real estate, net   19    210 
Writedowns on foreclosed real estate   -    27 
Directors' compensation   94    102 
Advertising   116    96 
Supplies   66    69 
Other expenses   247    345 
Total noninterest expense   4,658    5,702 
           
Income (loss) before provision (benefit) for income taxes   263    (809)
           
Provision (benefit) for income taxes   -    - 
           
Net income (loss)  $263   $(809)
           
Earnings (loss) per common share - basic and diluted  $0.04   $(0.12)

 

See accompanying notes to unaudited consolidated financial statements.

 

4
 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

 

   Three Months Ended 
   March 31, 
(In thousands)  2015   2014 
         
Net income (loss)  $263   $(809)
Other comprehensive income (loss):          
Unrealized gain on available-for-sale investment securities   621    595 
Reclassification adjustment for net gains recognized in net income (1)   (416)   (158)
Other comprehensive income before tax effect   205    437 
Income tax expense related to items in other          
comprehensive income (loss)   (174)   (118)
Reclassification adjustment net of tax amount   31    319 
Total comprehensive income (loss)  $294   $(490)

 

(1) Net gain (loss) on sale of investments is the affected line item in the Consolidated Statements of Operations.

 

See accompanying notes to unaudited consolidated financial statements.

 

5
 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Three months ended March 31, 2015 and 2014 (unaudited)

 

   Common   Paid-in   Retained   Unearned ESOP   Treasury   Accumulated Other Comprehensive     
(In thousands)  Stock   Capital   Earnings   Shares   Stock   Income (Loss)   Total 
                                    
Balance at December 31, 2013  $70   $58,757   $2,322   $(2,824)  $(1)  $(90)  $58,234 
Net income (loss)   -    -    (809)   -    -    -    (809)
Other comprehensive income   -    -    -    -    -    319    319 
                                    
Balance at March 31, 2014  $70   $58,757   $1,513   $(2,824)  $(1)  $229   $57,744 

 

   Common   Paid-in   Retained   Unearned ESOP   Treasury   Accumulated Other Comprehensive     
(In thousands)  Stock   Capital   Earnings   Shares   Stock   Income (Loss)   Total 
                             
Balance at December 31, 2014  $70   $58,698   $3,323   $(2,480)  $(1)  $1,261   $60,871 
Net income (loss)   -    -    263    -    -    -    263 
Stock based compensation - options   -    27    -    -    -    -    27 
Other comprehensive income   -    -    -    -    -    31    31 
                                    
Balance at March 31, 2015  $70   $58,725   $3,586   $(2,480)  $(1)  $1,292   $61,192 

 

See accompanying notes to unaudited consolidated financial statements.

 

6
 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

    Three Months Ended  
    March 31,  
(In thousands)   2015     2014  
Cash flows from operating activities                
Net income (loss)   $ 263     $ (809 )
Adjustments to reconcile net loss to cash provided by operating activities:                
Depreciation and amortization expense     201       180  
Net (gain) loss on sales of foreclosed assets     (1 )     65  
Writedowns on foreclosed real estate     -       27  
Mortgage banking activity:                
Gain on sales of mortgage loans     (217 )     (143 )
Mortgage loans originated for sale     (5,921 )     (3,616 )
Proceeds from sale of mortgage loans     4,991       4,162  
Net amortization of investment premiums and discounts     96       36  
Net gain on sale of investments     (416 )     (158 )
Stock-based compensation     27       -  
Net change in:                
Accrued income receivable     (61 )     (241 )
Deferred loan fees     (2 )     (9 )
Cash surrender value of life insurance     (66 )     (66 )
Other assets     460       7  
Other liabilities     (112 )     (853 )
Net cash (used in)/provided by operating activities     (758 )     (1,418 )
Cash flows from investing activities                
Proceeds from maturities, calls and repayments of available-for-sale securities     4,205       4,348  
Proceeds from sale of available-for-sale securities     4,620       6,052  
Proceeds from maturities of held-to-maturity securities     826       1,212  
Purchase of available-for-sale securities     (16,787 )     (47,809 )
Loan originations net of principal payments     (6,803 )     314  
Purchase of premises and equipment     (260 )     (208 )
Proceeds from the sale of foreclosed assets     236       978  
Net cash (used in)/provided by investing activities     (13,963 )     (35,113 )
Cash flows from financing activities                
Net change in time deposits     991       (823 )
Net change in other deposit accounts     4,534       (1,112 )
Proceeds from FHLB advances     12,131       24,000  
Repayment of FHLB advances     (3,979 )     (77 )
Net change in mortgagors' escrow accounts     (2,117 )     (2,129 )
Change in other borrowings     -       2,012  
Net cash provided by/(used in) financing activities     11,560       21,871  
Net change in cash and cash equivalents     (3,161 )     (14,660 )
Cash and cash equivalents at beginning of period     10,940       26,374  
Cash and cash equivalents at end of period   $ 7,779     $ 11,714  
Supplementary disclosures of cash flow information:                
Non-cash investing activities:                
Transfer of loans to foreclosed assets   $ -     $ 338  
Interest paid   $ 563     $ 743  
Income taxes paid   $ -     $ -  
Unrealized gains on available for sale securities arising during the period   $ 205     $ 438  

 

See accompanying notes to unaudited consolidated financial statements.

 

7
 

 

Notes to Unaudited Consolidated Financial Statements

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Operations

 

Naugatuck Valley Financial Corporation (“Naugatuck Valley Financial” or the “Company”) is a stock savings and loan holding company incorporated in the State of Maryland. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary bank, Naugatuck Valley Savings and Loan (“Naugatuck Valley Savings” or the “Bank”). The Company became the holding company for the Bank effective June 29, 2011.

 

Naugatuck Valley Savings is a federally chartered stock savings association and has served its customers in Connecticut since 1922. The Bank operates as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses with a variety of deposit and lending products from its full service banking offices in the Greater Naugatuck Valley region of southwestern Connecticut. The Bank attracts deposits from the general public and uses those funds to originate one-to-four family, multi-family and commercial real estate, construction, commercial real estate, construction, commercial business and consumer loans.

 

At March 31, 2015, Naugatuck Valley Savings had one wholly-owned subsidiary, Church Street OREO One, LLC. Church Street OREO One, LLC was established in February 2013 to hold properties acquired through foreclosure as well as from non-judicial proceedings.

 

Basis of Presentation

 

The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’s wholly owned subsidiaries, Naugatuck Valley Mortgage Servicing Corporation (through December 31, 2014) and Church Street OREO One, LLC. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the December 31, 2014 audited Consolidated Financial Statements and the accompanying Notes included in our Annual Report on Form 10-K. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and the results of its operations and its cash flows at the dates and for the periods presented.

 

In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition, and the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, deferred income taxes and the valuation of and the evaluation for other than temporary impairment (“OTTI”) on investment securities. While management uses available information to recognize losses and properly value these assets, future adjustments may be necessary based on changes in economic conditions both in Connecticut and nationally.

 

The Company’s only business segment is Community Banking. This segment represented all the revenues, income and assets of the consolidated Company and therefore, is the only reported segment as defined by FASB ASC 820, Segment Reporting.

 

Management has evaluated subsequent events for potential recognition or disclosure in the consolidated financial statements as of the date of this filing. No subsequent events were identified that would have required a change to the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

 

Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

8
 

 

Certain reclassifications have been made to the prior period amounts to conform with the March 31, 2015 consolidated financial statement presentation. These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or financial position.

 

Summary of Significant Accounting Policies

 

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2014 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies compared with those contained in our Form 10-K disclosure for the year ended December 31, 2014.

 

Recently Adopted Accounting Guidance

 

Income Taxes — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: (a consensus of the FASB Emerging Issues Task Force). In July 2013, the FASB issued ASU 2013-11. Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU became effective during the three months ended June 30, 2014. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

 

Receivables – Troubled Debt Restructurings by Creditors: In January 2014, the FASB issued ASU 2014-04. This update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. The ASU became effective in January 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.

 

Transfer and Servicing (Topic 860) — Repurchase to Maturity Transactions, Repurchase Refinancings and Disclosures: In June 2014, the FASB issued ASU 2014-11. The standard introduces two new disclosure requirements. The first requires an entity to disclose information about certain transactions that are economically similar to a repurchase agreement. The second disclosure increases the transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. This standard became effective in December 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.

 

Receivables – Troubled Debt Restructurings by Creditors (Topic 310-40) — Classification of Certain Government- Guaranteed Mortgage Loans Upon Foreclosure: In August 2014, the FASB issued ASU 2014-14. This guidance requires that, upon foreclosure, a government-guaranteed mortgage loan be transferred from loans to other receivables when all of the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of real estate is fixed, which is an attribute specific to VA loans. The amount of the separate other receivable shall be measured based on the amount of the loan balance, including interest, expected to be recovered from the guarantor. The standard became effective in December 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Guidance

 

Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB issued ASU 2014-09. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. The Company will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, with no early adoption permitted, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. The Company has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.

 

9
 

 

Presentation of Financial Statements – Going Concern (Subtopic 205-40) Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern: In August 2014, the FASB issued ASU 2014-15 which defines management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures in the notes to the financial statements. This standard will be effective for the first annual reporting period beginning after December 15, 2016 and interim periods thereafter.

 

Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs: In April 2015, the FASB issued ASU No. 2015-03. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

 

NOTE 2 – REGULATORY MATTERS

 

Effective January 17, 2012, the Bank entered into a written Formal Agreement (the “Agreement”) with the Office of the Comptroller of the Currency (the “OCC”). The Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain operational areas of the Bank, including the following:

 

·Restricts the Bank from declaring or paying any dividends or other capital distributions to the Company without prior written regulatory approval. This provision relates to upstreaming intercompany dividends or other capital distributions from the Bank to the Company.
·Provide prior written notice to the OCC before appointing an individual to serve as a senior executive officer or as a director of the Bank.
·Restricts the Bank from entering into, renewing, extending or revising any contractual arrangement relating to the compensation or benefits for any senior executive officer of the Bank, unless the Bank provides the OCC with prior written notice of the proposed transaction.
·Subjects the Bank to six month financial and operational examination review. The most recent examination occurred in the first quarter of 2015 and the examination report has not yet been received.

 

The Agreement and each of its provisions will remain in effect until these provisions are amended in writing by mutual consent or waived in writing by the OCC or terminated in writing by the OCC.

 

The OCC regulations require savings institutions to maintain minimum levels of regulatory capital. Effective June 4, 2013, the OCC imposed individual minimum capital requirements (“IMCRs”) on the Bank. The IMCRs require the Bank to maintain a Tier 1 leverage capital to adjusted total assets ratio of at least 9.00% and a total risk-based capital to risk-weighted assets ratio of at least 13.00%. Before the establishment of the IMCRs, the Bank had been operating under these capital parameters by self-imposing these capital levels as part of the capital plan the Bank was required to implement under the terms of the Agreement. The Bank exceeded the IMCRs at March 31, 2015, with a Tier 1 leverage ratio of 11.18% and a total risk-based capital ratio of 17.64%.

 

As a source of strength to its subsidiary bank, the Company had liquid assets of approximately $3.3 million at March 31, 2015, which the Company could contribute to the Bank if needed, to enhance the Bank’s capital levels. If the Company had contributed those assets to the Bank as of March 31, 2015, the Bank would have had a Tier 1 leverage ratio of approximately 11.86%.

 

10
 

 

On May 21, 2013, the Company entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Boston. Among other things, the MOU prohibits the Company from paying dividends, repurchasing its stock or making other capital distributions without prior written approval of the Federal Reserve Bank of Boston.

 

As a savings and loan holding company with consolidated assets of less than $1.0 billion the Company is not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. There is a five- year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements apply to savings and loan holding companies.

 

Effective January 1, 2015, Basel III implementation date for community banks, the applicable capital regulations have been revised to:

 

·Establish a new common equity Tier 1 minimum capital requirement (at 4.5% of risk-weighted assets);

 

·Increase the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets);

 

·Change what constitutes regulatory capital including the phasing out of certain components over a transition period;

 

·Amends the risk-weights of certain assets to better reflect credit risk and other risk exposures; and

 

·Phase in a “capital conservation buffer” requirement beginning January 1, 2016 at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. If a depository institution does not maintain the applicable “capital conservation buffer” in addition to its minimum risk-based capital requirements, the Basel III capital regulation may limit capital distributions and certain discretionary bonus payments.

 

For the Bank, the new common equity Tier 1 capital ratio is the same as its Tier 1 risk-based capital ratio because the Bank’s Tier 1 capital consists only of common equity. Furthermore, as of March 31, 2015, the Bank elected to exclude its accumulated other comprehensive income (which, for the Bank, primarily consists of unrealized gains and losses on available for sale investment securities) from its Tier 1 capital. This is consistent with its previous treatment of this item.

 

The following tables are summaries of the Company’s consolidated capital amounts and ratios and the Bank’s actual capital amounts and ratios as computed under the standards established by the Federal Deposit Insurance Act at March 31, 2015 and December 31, 2014.

 

At March 31, 2015  Adequately Capitalized Requirements   Individual Minimum Capital Requirements (3)   Actual 
(Dollars in thousands)  $   %   $   %   $   % 
The Company Consolidated                              
Tier 1  Leverage Capital (1)    N/A      N/A      N/A      N/A    $59,899    12.13%
Tier 1 Risk-Based Capital (2)    N/A      N/A      N/A      N/A     59,899    17.71%
Total Risk-Based Capital (2)    N/A     N/A     N/A     N/A    64,148    18.97%
                               
The Bank                              
Tier 1  Leverage Capital (1)  $19,826    4.00%  $44,609    9.00%  $55,415    11.18%
Common Equity Tier 1 (CET1) (2) (4)   15,217    4.50%           N/A      N/A     55,415    16.39%
Tier 1 Risk-Based Capital (2)   20,290    6.00%           N/A      N/A     55,415    16.39%
Total Risk-Based Capital (2)   27,053    8.00%   43,961    13.00%   59,663    17.64%

 

(1) Tier 1 capital to total assets.

(2) Tier 1 or total risk-based capital to risk-weighted assets.

(3) Effective June 4, 2013.

(4) New capital requirement under Basel III effective January 1, 2015.

 

11
 

 

At December 31, 2014  Adequately Capitalized Requirements   Individual Minimum Capital Requirements (3)   Actual 
(Dollars in thousands)  $   %   $   %   $   % 
The Company Consolidated                              
Tier 1  Leverage Capital (1)    N/A      N/A      N/A      N/A    $59,611    12.09%
Tier 1 Risk-Based Capital (2)    N/A      N/A      N/A      N/A     59,611    18.94%
Total Risk-Based Capital (2)    N/A     N/A     N/A     N/A    63,571    20.20%
                               
The Bank                              
Tier 1  Leverage Capital (1)  $19,796    4.00%  $44,541    9.00%  $55,090    11.13%
Tier 1 Risk-Based Capital (2)   12,658    4.00%           N/A      N/A     55,090    17.41%
Total Risk-Based Capital (2)   25,317    8.00%   41,139    13.00%   59,071    18.67%

 

(1) Tier 1 capital to total assets.

(2) Tier 1 or total risk-based capital to risk-weighted assets.

(3) Effective June 4, 2013.                        

 

As of March 31, 2015, the most recent regulatory notifications categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

 

Subsequent Events

 

The Board of Directors of the Bank was notified in writing, by a letter dated May 4, 2015, that the OCC terminated its written Formal Agreement with the Bank. In addition to the termination of the Agreement, the OCC notified the Bank that it no longer requires the Bank to maintain the IMCRs.

 

NOTE 3 – INVESTMENT SECURITIES

 

At March 31, 2015, the composition of the investment portfolio was:

 

   Amortized   Gross Unrealized   Fair 
(In thousands)  Cost Basis   Gains   Losses   Value 
Available-for-sale securities:                    
U.S. Government and agency obligations  $7,050   $23   $-   $7,073 
U.S. Government agency mortgage-backed securities   53,220    1,597    (44)   54,773 
U.S. Government agency collateralized mortgage obligations   7,147    121    (14)   7,254 
Obligations of state and municipal subdivisions   16,651    434    -    17,085 
                     
Total available-for-sale securities  $84,068   $2,175   $(58)  $86,185 

 

   Amortized   Gross Unrealized   Fair 
(In thousands)  Cost Basis   Gains   Losses   Value 
Held-to-maturity securities:                    
U.S. Government agency mortgage-backed securities  $12,454   $213   $(16)  $12,651 
                     
Total held-to-maturity securities  $12,454   $213   $(16)  $12,651 

 

12
 

 

At December 31, 2014, the composition of the investment portfolio was:

 

   Amortized   Gross Unrealized   Fair 
(In thousands)  Cost Basis   Gains   Losses   Value 
Available-for-sale securities:                    
U.S. Government and agency obligations  $5,000   $42   $-   $5,042 
U.S. Government agency mortgage-backed securities   51,904    1,332    (149)   53,087 
U.S. Government agency collateralized mortgage obligations   12,802    378    (1)   13,179 
Obligations of state and municipal subdivisions   5,920    310    -    6,230 
                     
Total available-for-sale securities  $75,626   $2,062   $(150)  $77,538 

 

   Amortized   Gross Unrealized   Fair 
(In thousands)  Cost Basis   Gains   Losses   Value 
Held-to-maturity securities:                    
U.S. Government agency mortgage-backed securities  $13,441   $212   $(20)  $13,633 
                     
Total held-to-maturity securities  $13,441   $212   $(20)  $13,633 

 

For the three months ended March 31, 2015 and March 31, 2014, the Company realized a gross gain on sales of investment securities of $416,000 and $158,000, respectively.

 

The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015, and December 31, 2014:

 

At March 31, 2015 (In thousands)  Less than 12 Months   12 Months or Greater   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss 
U.S. Government agency collateralized mortgage obligations  $5,216   $(14)  $-   $-   $5,216   $(14)
U.S. Government agency mortgage-backed securities   5,357    (14)   1,504    (30)   6,861    (44)
Total securities in unrealized loss position  $10,573   $(28)  $1,504   $(30)  $12,077   $(58)

 

At December 31, 2014 (In thousands)  Less than 12 Months   12 Months or Greater   Total 
   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss   Fair Value   Unrealized Loss 
U.S. Government agency collateralized mortgage obligations  $10,804   $(55)  $6,300   $(94)  $17,104   $(149)
U.S. Government agency mortgage-backed securities   1,351    (1)   -    -    1,351    (1)
Total securities in unrealized loss position  $12,155   $(56)  $6,300   $(94)  $18,455   $(150)

  

The amortized cost and fair value of securities at March 31, 2015 and December 31, 2014, by expected maturity, are set forth below. Actual maturities of mortgage-backed securities and collateralized mortgage obligations may differ from contractual maturities because the mortgages underlying the securities may be prepaid or called with or without call or prepayment penalties. Because these securities are not due at a single maturity date, the maturity information is not presented.

 

   Available-for-Sale   Held-to-Maturity 
At March 31, 2015  Amortized Cost   Fair Value   Amortized Cost   Fair Value 
   (In thousands) 
U.S. Government agency mortgage-backed securities  $53,220   $54,773   $12,454   $12,651 
U.S. Government agency collateralized mortgage obligations   7,147    7,254    -    - 
Subtotal   60,367    62,027    12,454    12,651 
Securities with fixed maturities:                    
Due in one year or less   -    -    -    - 
Due after one year through five years   -    -    -    - 
Due after five years through ten years   2,088    2,251    -    - 
Due after ten years   21,613    21,907    -    - 
Subtotal   23,701    24,158    -    - 
Total  $84,068   $86,185   $12,454   $12,651 

 

13
 

 

   Available-for-Sale   Held-to-Maturity 
At December 31, 2014  Amortized Cost   Fair Value   Amortized Cost   Fair Value 
   (In thousands) 
U.S. Government agency mortgage-backed securities  $51,904   $53,087   $13,441   $13,633 
U.S. Government agency collateralized mortgage obligations   12,802    13,179    -    - 
Subtotal   64,706    66,266    13,441    13,633 
Securities with fixed maturities:                    
Due in one year or less   -    -    -    - 
Due after one year through five years   -    -    -    - 
Due after five years through ten years   1,898    2,009    -    - 
Due after ten years   9,022    9,263    -    - 
Subtotal   10,920    11,272    -    - 
Total  $75,626   $77,538   $13,441   $13,633 

 

As of March 31, 2015 and December 31, 2014, securities with an amortized cost of $17.9 million and $18.4 million, respectively, and a fair value of $18.1 million and $18.9 million, respectively, were pledged as collateral to secure municipal deposits and repurchase agreements.

 

NOTE 4 – LOANS RECEIVABLE

 

A summary of loans receivable at March 31, 2015 and December 31, 2014 is as follows:

 

   March 31,   December 31, 
(In thousands)  2015   2014 
         
Real estate loans:          
One-to-four family  $177,874   $180,739 
Multi-family and commercial real estate   132,784    122,526 
Construction and land development   3,531    3,415 
Total real estate loans   314,189    306,680 
           
Commercial business loans   24,353    25,801 
Consumer loans:          
Home equity   30,068    28,700 
Other consumer   7,450    8,144 
Total consumer loans   37,518    36,844 
Total loans   376,060    369,325 
           
Less:          
Allowance for loan losses   5,951    6,023 
Deferred loan origination fees, net   45    43 
Loans receivable, net  $370,064   $363,259 

 

The Bank’s lending activities are conducted principally in the Naugatuck Valley area of Connecticut. The Bank’s investment in loans includes both adjustable and fixed rate loans.

 

Credit quality of financing receivables

 

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

 

14
 

 

The Company’s loan portfolio is segregated as follows:

 

One-to-four Family Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties and residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. The Company has experienced a significant decrease in foreclosures on its owner occupied loan portfolio over the past year. Foreclosures are at relatively low levels. Management believes this is due mainly to its conservative underwriting and lending strategies which do not allow for high risk loans such as “Option ARM,” “sub-prime” or “Alt-A” loans.

 

Multi-family and Commercial Real Estate Loans. As described above, this portfolio grouping has been further disaggregated into loans secured by:

 

·Investor owned one-to-four family and multi-family properties;

 

·Industrial and warehouse properties;

 

·Office buildings;

 

·Retail properties; and

 

·Special use properties.

 

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

 

Construction and Land Development Loans. This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the Company to greater risk of non-payment and loss. Additionally, economic factors such as the decline of property values may have an adverse affect on the ability of the borrower to sell the property.

 

Commercial Business Loans. This portfolio segment includes commercial business loans secured by real estate, assignments of corporate assets, and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

 

Real Estate Secured Consumer Loans. This portfolio segment includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type are written at a maximum of 75% of the appraised value of the property and we require that we have no lower than a second lien position on the property. These loans are written at a higher interest rate and a shorter term than mortgage loans. The Company has experienced a low level of foreclosure in this type of loan during recent periods. These loans can be affected by economic conditions and the values of the underlying properties.

 

Other Consumer Loans. This portfolio segment includes loans secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan may entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.

 

15
 

 

Credit Quality Indicators

 

The Company’s policies provide for the classification of loans into the following categories: pass (1 - 5); special mention (6); substandard-accruing (7); substandard-nonaccruing (8); doubtful (9); and loss (10). In June 2013, the Company added substandard-accruing as an additional risk grade to further delineate the Bank’s risk profile in the previous substandard category. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are considered adversely classified as substandard, doubtful or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible. The Company generally charges off loans or portions of loans as soon as they are considered to be uncollectible and of little value. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention. When loans are classified as special mention, substandard or doubtful, management focuses increased monitoring and attention on these loans in assessing the credit risk and specific allowance requirements for these loans.

 

The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of March 31, 2015 and December 31, 2014:

 

    Credit Risk Profile by Internally Assigned Grade:  
March 31, 2015   One-to-Four Family     Multi-Family and Commercial Real Estate     Construction and Land Development     Commercial Business Loans     Consumer Loans     Total  
(In thousands)                                    
Risk Rating:                                                
Pass   $ 174,397     $ 126,448     $ 2,069     $ 22,183     $ 36,982     $ 362,079  
Special Mention     725       3,893       819       615       206       6,258  
Substandard:                                                
- Accruing     19       1,477       -       799       143       2,438  
- Nonaccruing     2,733       966       643       756       187       5,285  
Subtotal - substandard     2,752       2,443       643       1,555       330       7,723  
Doubtful     -       -       -       -       -       -  
Total   $ 177,874     $ 132,784     $ 3,531     $ 24,353     $ 37,518     $ 376,060  

 

   Multi-Family and Commercial Real Estate 
   Credit Risk Profile by Internally Assigned Grade: 
March 31, 2015  Investor Owned One-to-Four family and multi-family   Industrial and Warehouse Properties   Office Buildings   Retail Properties   Special Use Properties   Total Multi-Family and Commercial Real Estate 
(In thousands)                        
Risk Rating:                              
Pass  $28,303   $23,260   $23,655   $17,157   $34,073   $126,448 
Special Mention   897    1,135    34    398    1,429    3,893 
Substandard:                              
- Accruing   249    -    98    148    982    1,477 
- Nonaccruing   389    21    546    -    10    966 
Subtotal - substandard   638    21    644    148    992    2,443 
Doubtful   -    -    -    -    -    - 
Total  $29,838   $24,416   $24,333   $17,703   $36,494   $132,784 

 

16
 

 

   Credit Risk Profile by Internally Assigned Grade: 
December 31, 2014  One-to-Four Family   Multi-Family and Commercial Real Estate   Construction and Land Development   Commercial Business Loans   Consumer Loans   Total 
(In thousands)                        
Risk Rating:                              
Pass  $177,598   $116,020   $1,835   $23,535   $36,348   $355,336 
Special Mention   731    4,040    853    707    207    6,538 
Substandard:                              
 - Accruing   19    1,498    -    755    74    2,346 
 - Nonaccruing   2,391    968    727    804    215    5,105 
Subtotal - substandard   2,410    2,466    727    1,559    289    7,451 
Doubtful   -    -    -    -    -    - 
Total  $180,739   $122,526   $3,415   $25,801   $36,844   $369,325 

  

   Multi-Family and Commercial Real Estate 
   Credit Risk Profile by Internally Assigned Grade: 
December 31, 2014  Investor Owned One-to-Four family and multi-family   Industrial and Warehouse Properties   Office Buildings   Retail Properties   Special Use Properties   Total Multi-Family and Commercial Real Estate 
(In thousands)                        
Risk Rating:                              
Pass  $23,793   $23,707   $23,503   $17,092   $27,925   $116,020 
Special Mention   1,027    1,145    319    104    1,445    4,040 
Substandard:                              
- Accruing   252    -    100    150    996    1,498 
- Nonaccruing   389    23    546    -    10    968 
Subtotal - substandard   641    23    646    150    1,006    2,466 
Doubtful   -    -    -    -    -    - 
Total  $25,461   $24,875   $24,468   $17,346   $30,376   $122,526 

 

Delinquencies

 

When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency and attempts to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company each month.

 

Loans, including troubled debt restructurings (“TDRs”), are automatically placed on nonaccrual status when payment of principal or interest is more than 90 days delinquent. Loans may also be placed on nonaccrual status if collection of principal or interest in full, or in part, is in doubt or if the loan has been restructured. When loans are placed on nonaccrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan’s payment status is current for a reasonable period of time (usually six consecutive months) to establish a reliable assessment of collectability.

 

17
 

 

The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of March 31, 2015 and December 31, 2014:

 

   Delinquencies 
                           Carrying 
           Greater               Amount > 
   31-60 Days   61-90 Days   Than   Total Past           90 Days and 
As of March 31, 2015   Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing 
(In thousands)                            
Real estate loans                                   
One-to-four family  $1,157   $159   $1,268   $2,584   $175,290   $177,874   $- 
Construction and land development   -    -    596    596    2,935    3,531    - 
Multi-family and commercial real estate:                                   
Investor owned one-to-four family and multi-family   -    -    389    389    29,449    29,838    - 
Industrial and Warehouse   -    -    -    -    24,416    24,416    - 
Office buildings   878    -    206    1,084    23,249    24,333    - 
Retail properties   148    -    -    148    17,555    17,703    - 
Special use properties   233    -    -    233    36,261    36,494    - 
Subtotal Multi-family and commercial real estate   1,259    -    595    1,854    130,930    132,784    - 
Commercial business loans   44    -    582    626    23,727    24,353    - 
Consumer loans:                                   
Home equity loans   231    98    77    406    29,662    30,068    - 
Other consumer loans   3    1    -    4    7,446    7,450    - 
Subtotal Consumer   234    99    77    410    37,108    37,518    - 
Total  $2,694   $258   $3,118   $6,070   $369,990   $376,060   $- 

 

   Delinquencies 
                           Carrying 
           Greater               Amount > 
   31-60 Days   61-90 Days   Than   Total Past           90 Days and 
As of December 31, 2014  Past Due   Past Due   90 Days   Due   Current   Total Loans   Accruing 
(In thousands)                            
Real estate loans                                   
One-to-four family  $349   $153   $1,594   $2,096   $178,643   $180,739   $- 
Construction and land development   -    -    726    726    2,689    3,415    - 
Multi-family and commercial real estate:                                   
Investor owned one-to-four family and multi-family   -    -    389    389    25,072    25,461    - 
Industrial and Warehouse   -    -    -    -    24,875    24,875    - 
Office buildings   -    -    206    206    24,262    24,468    - 
Retail properties   -    -    -    -    17,346    17,346    - 
Special use properties   -    -    -    -    30,376    30,376    - 
Subtotal Multi-family and commercial real estate   -    -    595    595    121,931    122,526    - 
Commercial business loans   972    -    703    1,675    24,126    25,801    - 
Consumer loans:                                   
Home equity loans   222    97    28    347    28,353    28,700    - 
Other consumer loans   6    -    -    6    8,138    8,144    - 
Subtotal Consumer   228    97    28    353    36,491    36,844    - 
Total  $1,549   $250   $3,646   $5,445   $363,880   $369,325   $- 

 

18
 

 

Impaired loans and nonperforming assets

 

The following table sets forth certain information with respect to our nonperforming assets as of March 31, 2015 and December 31, 2014:

 

    March 31,     December 31,  
    2015     2014  
Nonperforming Assets   (Dollars in thousands)  
Nonaccrual loans:                
One-to-four family   $ 1,644     $ 1,414  
Multi-family and commercial real estate     371       375  
Construction and land development     643       726  
Commercial business loans     756       804  
Consumer loans     187       187  
Total     3,601       3,506  
Troubled debt restructurings - non-accrual     1,684       1,600  
Subtotal nonperforming loans     5,285       5,106  
Foreclosed real estate     100       335  
Total nonperforming assets   $ 5,385     $ 5,441  
                 
Total nonperforming loans to total loans     1.41 %     1.38 %
                 
Total nonperforming loans to total assets     1.04 %     1.03 %
                 
Total nonperforming assets to total assets     1.06 %     1.10 %

 

Nonperforming loans (defined as nonaccrual loans and nonperforming TDRs) totaled $5.3 million at March 31, 2015 compared to $5.1 million at December 31, 2014, an increase of $179,000, or 3.5%. The amount of income that was contractually due but not recognized on nonperforming loans totaled $62,000 and $61,000 for the three months ended March 31, 2015 and March 31, 2014, respectively.

 

At March 31, 2015, the Company had 34 loans on nonaccrual status of which 19 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability. 

 

At December 31, 2014, the Company had 34 loans on nonaccrual status of which 17 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

 

The Company accounts for impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the Company will not collect all the amounts due under the contractual terms of the loan. All impaired loans are individually evaluated for impairment at least quarterly. As a result of this impairment evaluation, the Company provides a specific reserve for, or charges off, that portion of the asset that is deemed uncollectible.

 

19
 

 

The following tables summarize impaired loans by portfolio segment as of March 31, 2015 and December 31, 2014:

 

As of March 31, 2015  Recorded Investment with No Specific Valuation Allowance   Recorded Investment with Specific Valuation Allowance   Total Recorded Investment   Unpaid Contractual Principal Balance   Related Specific Valuation Allowance 
   (In thousands) 
Real estate loans                         
One-to-four family  $2,901   $1,534   $4,435   $4,772   $62 
Construction and land development   643    -    643    940    - 
Multi-family and commercial real estate:                         
Investor owned one-to-four family and                         
multi-family properties   389    -    389    395    - 
Industrial and warehouse properties   21    -    21    26    - 
Office buildings   546    -    546    750    - 
Retail properties   -    -    -    -    - 
Special use properties   10    -    10    24   - 
Subtotal   966    -    966    1,195    - 
Commercial business loans   740    185    925    987    3 
Consumer loans   328    132    460    490    5 
Total impaired loans  $5,578   $1,851   $7,429   $8,384   $70 

 

As of December 31, 2014  Recorded Investment with No Specific Valuation Allowance   Recorded Investment with Specific Valuation Allowance   Total Recorded Investment   Unpaid Contractual Principal Balance   Related Specific Valuation Allowance 
   (In thousands) 
Real estate loans                         
One-to-four family  $2,793   $1,536   $4,329   $4,555   $59 
Construction and land development   685    -    685    1,022    - 
Multi-family and commercial real estate:                         
Investor owned one-to-four family and                         
multi-family properties   389    -    389    395    - 
Industrial and warehouse properties   22    -    22    28    - 
Office buildings   546    -    546    750    - 
Retail properties   -    -    -    -    - 
Special use properties   10    -    10    24    - 
Subtotal   967    -    967    1,197    - 
Commercial business loans   759    192    951    1,042    4 
Consumer loans   385    133    518    521    9 
Total impaired loans  $5,589   $1,861   $7,450   $8,337   $72 

 

In the above table, the unpaid contractual principal balance represents the aggregate amounts legally owed to the Bank under the terms of the borrowers’ loan agreements. The recorded investment amounts shown above represent the unpaid contractual principal balance owed to the Bank less any amounts paid by borrowers on nonaccrual loans which were recognized as principal curtailments. On those nonaccrual loans accounted for under the cost recovery method, the Bank applies any borrower payments first against the principal balance of the loan and once the entire principal balance has been recovered, any subsequent payments are recognized as interest income.

 

20
 

 

The following table relates to interest income recognized by segment of impaired loans for the three months ended March 31, 2015 and 2014:

 

   Three Months Ended March 31,  
   2015   2014 
   Average Recorded Investments   Interest Income Recognized   Average Recorded Investments   Interest Income Recognized 
Real estate loans  (In thousands) 
One-to four-family  $4,329   $36   $6,896   $53 
Construction   685    -    1,715    1 
Multi-family and commercial real estate   967    -    3,479    17 
Commercial business loans   951    3    1,931    22 
Consumer loans   476    4    539    5 
Total  $7,408   $43   $14,560   $98 

 

Interest payments received on nonaccrual loans are accounted for on the cash-basis method or the cost recovery method until qualifying for return to accrual status. Under the cost recovery method, the interest payment is applied to the principal balance of the loan. The table above shows the interest income recognized on nonaccrual loans and on performing TDR loans using the cash-basis method. For the three month periods ended March 31, 2015 and 2014, the amount of interest payments applied to principal under the cost recovery method was $9,000 and $61,000, respectively.

 

Troubled Debt Restructured Loans

 

A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment, whether on accrual or nonaccrual status.

 

Loan modifications are generally granted at the request of the individual borrower and may include concessions such as reduction in interest rates, changes in payments, maturity date extensions, or debt forgiveness/forbearance. TDRs are loans for which the original contractual terms of the loans have been modified and both of the following conditions exist: (i) the restructuring constitutes a concession (including reduction of interest rates or extension of maturity dates); and (ii) the borrower is either experiencing financial difficulties or absent such concessions, it is probable the borrower would experience financial difficulty complying with the original terms of the loan. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company’s loan modifications are determined on a case-by-case basis in connection with ongoing loan collection processes.

 

The recorded investment balance of performing and nonperforming TDRs as of March 31, 2015 and December 31, 2014 are as follows:

 

(In thousands)  As of March 31, 2015   As of December 31, 2014 
Aggregate recorded investment of impaired loans performing under          
terms modified through a troubled debt restructuring:          
Performing (1)  $2,981   $2,549 
Nonperforming (2)   768    1,256 
Total  $3,749   $3,805 

 

(1)Of the $2,981,000 in TDRs which were performing under the modified terms of their agreements at March 31, 2015, there were $967,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of the $967,000 performing TDRs and the $717,000 nonperforming TDRs on nonaccrual status at March 31, 2015 equal the $1,684,000 in TDRs that were on nonaccrual status at March 31, 2015.

 

Of the $2,549,000 in TDRs which were performing under the modified terms of their agreements at December 31, 2014, there were $2,164,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of the $385,000 performing TDRs and the $1,215,000 nonperforming TDRs on nonaccrual status at December 31, 2014 equal the $1,600,000 in TDRs that were on nonaccrual status at December 31, 2014.

 

21
 

 

(2)Of the $768,000 in TDRs that were not performing under the modified terms of their agreements at March 31, 2015, all of these loans, except for two loans in the amount of $52,000, were on nonaccrual status.

 

All of the $1,256,000 in TDRs which were not performing under the modified terms of their agreements at December 31, 2014, except for one loan in the amount of $40,000, were on nonaccrual status.

 

There were no concessions granted during the three months ended March 31, 2015.

 

As illustrated in the table below, during the three months ended March 31, 2014, the following concessions were made on five loans totaling $248,000 (measured as a percentage of loan balances on TDRs):

 

·Deferral of principal payments for 48.4% (1 loan for $120,000);
·Reduced interest rate for 12.1% (3 loans for $30,000); and
·Extension of payment terms for 39.5% (1 loan for $98,000).

 

In cases where there was more than one concession granted, the modification was classified by the more dominant concession.

 

The following tables present a breakdown of the type of concessions made by loan class during the three months ended March 31, 2014:

 

   For the Three Months Ended March 31, 2014 
(Dollars in thousands)  Number of Loans   Pre-Modification Recorded Investment   Post-Modification Recorded Investment   % 
Below market interest rate:                    
Commercial business loans   3   $30   $30    12.1%
Subtotal   3    30    30    12.1%
                     
Extended payment terms:                    
Commercial business loans   1    98    98    39.5%
Subtotal   1    98    98    39.5%
                     
Principal payments deferred:                    
Real estate loans:                    
One-to-four family   1    120    120    48.4%
Subtotal   1    120    120    48.4%
                     
Grand Totals   5   $248   $248    100.0%

 

The majority of the Bank’s TDRs are a result of principal payment deferrals to troubled credits which have already been adversely classified. The Bank grants such consessions to reassess the borrower’s financial status and to develop a plan for repayment. These modifications did not have a material effect on the Company or the Bank.

 

The financial effects of each modification will vary based on the specific restructure. For some of the Bank’s TDRs, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the terms are consistent with the market, the Bank might not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank might not collect all the principal and interest based on the original contractual terms. The Bank applies its procedures for placing TDRs on accrual or nonaccrual status using the same general guidance as for loans. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as for other impaired loans.

 

22
 

 

There were no TDRs that had been modified during the previous twelve months ended March 31, 2015 that subsequently defaulted or were charged off during the three months ended March 31, 2015.

 

Allowance for Loan Losses

 

The allowance for loan losses (“ALLL”) is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio.

 

The allowance for loan losses is established through a provision for loan losses charged to operations. Management periodically reviews the allowance for loan losses in order to identify those known and inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process begins with an individual evaluation of loans that are considered impaired. For these loans, an allowance is established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral.

 

All other loans are segregated into segments based on similar risk factors. Each of these groups is then evaluated based on several factors to estimate credit losses. Management will determine for each category of loans with similar risk characteristics the historical loss rate. Historical loss rates provide a reasonable starting point for the Bank’s analysis; however, this analysis and loss trends do not form a sufficient basis, by themselves, to determine the appropriate level of the loan loss allowance. Management also considers qualitative and environmental factors for each loan segment that are likely to impact, directly or indirectly, the inherent loss exposure of the loan portfolio. These factors include but are not limited to: changes in the amount and severity of delinquencies, non-accrual and adversely classified loans; changes in local, regional, and national economic conditions that will affect the collectability of the portfolio; changes in the nature and volume of loans in the portfolio; changes in concentrations of credit, lending area, industry concentrations, or types of borrowers; changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests; and loan quality trends. As of June 30, 2013, management added factors to more granularly assess loan quality trends, specifically, the changes and the trend in charge-offs and recoveries, changes in volume of Watch and Special Mention loans and the changes in the quality of the Bank’s loan review system. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an appropriate level of loan loss allowance.

 

The determination of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The OCC, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

 

The allowance generally consists of specific (or allocated) and general components. The specific component relates to loans that are recognized as impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value, if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

 

The ALLL balance decreased from $6.02 million at December 31, 2014 to $5.95 million at March 31, 2015, a decrease of $72,000, or 1.2%. The decrease was primarily the result of net charge-offs of $72,000 in the three months ended March 31, 2015. The decrease in the ALLL was consistent with the stability shown in the Bank’s asset quality trends during this three month period. The Bank’s nonperforming loans increased $179,000, or 3.5%, for the three months ended March 31, 2015. The Bank’s adversely classified loans increased $272,000, or 3.7%, for the three months ended March 31, 2015.

 

The Company continues to monitor and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

 

The following tables set forth the balance of and transactions in the allowance for loan losses at March 31, 2015, December 31, 2014 and March 31, 2014, by portfolio segment, disaggregated by impairment methodology, which is then further segregated by loans evaluated for impairment individually and collectively.

 

23
 

 

As of and for the Three Months  One-to-Four Family   Multi-Family and Commercial Real Estate   Construction and Land Development   Commercial Business Loans   Consumer Loans   Total 
Ended March 31, 2015                        
(In thousands)                        
Allowance for loan losses:                              
Beginning balance  $1,633   $3,097   $414   $592   $287   $6,023 
Provision for loan losses   (198)   143    84    (94)   65    - 
Charge-offs   (15)   -    -    (9)   (91)   (115)
Recoveries   -    -    16    26    1    43 
Balance at March 31, 2015  $1,420   $3,240   $514   $515   $262   $5,951 
Allowance related to loans:                              
Individually evaluated for impairment  $62   $-   $-   $3   $5   $70 
Collectively evaluated for impairment   1,358    3,240    514    512    257    5,881 
Total allowance  $1,420   $3,240   $514   $515   $262   $5,951 
                               
Ending loan balance individually evaluated for impairment  $4,435   $966   $643   $925   $460   $7,429 
Ending loan balance collectively evaluated for impairment   173,439    131,818    2,888    23,428    37,058    368,631 
Total loans  $177,874   $132,784   $3,531   $24,353   $37,518   $376,060 

 

    Multi-Family and Commercial Real Estate  
As of and for the Three Months   Investor One-to-Four Family and Multi-Family     Industrial and Warehouse Properties     Office Buildings     Retail Properties     Special Use Properties     Total Multi-Family and Commercial Real Estate  
Ended March 31, 2015                                    
(In thousands)                              
Allowance for loan losses:                                                
Beginning balance   $ 509     $ 597     $ 352     $ 548     $ 1,091     $ 3,097  
Provision for loan losses     (66 )     (8 )     (7 )     31       193       143  
Charge-offs     -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -  
Balance at March 31, 2015   $ 443   $ 589     $ 345     $ 579     $ 1,284     $ 3,240  
Allowance related to loans:                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     443       589       345       579       1,284       3,240  
Total allowance   $ 443     $ 589     $ 345     $ 579     $ 1,284     $ 3,240  
                                                 
Ending loan balance individually evaluated for impairment   $ 389     $ 21     $ 546     $ -     $ 10     $ 966  
Ending loan balance collectively evaluated for impairment     29,449       24,395       23,787       17,703       36,484       131,818  
Total loans   $ 29,838     $ 24,416     $ 24,333     $ 17,703     $ 36,494     $ 132,784  

 

24
 

 

As of and for the Three Months  One-to-Four Family   Multi-Family and Commercial Real Estate   Construction and Land Development   Commercial Business Loans   Consumer Loans   Total 
Ended March 31, 2014                        
(In thousands)                        
Allowance for loan losses:                              
Beginning balance  $1,849   $5,097   $1,118   $1,443   $384   $9,891 
Provision for loan losses   117    177    84    (309)   (69)   - 
Charge-offs   (32)   (12)   (102)   (36)   (2)   (184)
Recoveries   -    -    15    57    86    158 
Balance at March 31, 2014  $1,934   $5,262   $1,115   $1,155   $399   $9,865 
Allowance related to loans:                              
Individually evaluated for impairment  $49   $12   $21   $88   $46   $216 
Collectively evaluated for impairment   1,885    5,250    1,094    1,067    353    9,649 
Total allowance  $1,934   $5,262   $1,115   $1,155   $399   $9,865 
                               
Ending loan balance individually evaluated for impairment  $6,790   $2,872   $1,584   $1,283   $499   $13,028 
Ending loan balance collectively evaluated for impairment   177,741    119,457    3,944    22,967    32,700    356,809 
Total loans  $184,531   $122,329   $5,528   $24,250   $33,199   $369,837 

 

   Multi-Family and Commercial Real Estate 
As of and for the Three Months  Investor One-to-Four Family and Multi-Family   Industrial and Warehouse Properties   Office Buildings   Retail Properties   Special Use Properties   Total Multi-Family and Commercial Real Estate 
Ended March 31, 2014                        
(In thousands)                        
Allowance for loan losses:                              
Beginning balance  $515   $1,034   $563   $856   $2,129   $5,097 
Provision for loan losses   (59)   32    23    217    (36)   177 
Charge-offs   -    -    -    -    (12)   (12)
Recoveries   -    -    -    -    -    - 
Segment ending balance as of March 31, 2014  $456   $1,066   $586   $1,073   $2,081   $5,262 
Allowance related to loans:                              
Individually evaluated for impairment  $-   $-   $-   $12   $-   $12 
Collectively evaluated for impairment   456    1,066    586    1,061    2,081    5,250 
Total allowance  $456   $1,066   $586   $1,073   $2,081   $5,262 
                               
Ending loan balance individually evaluated for impairment  $1,154   $29   $206   $377   $1,106   $2,872 
Ending loan balance collectively evaluated for impairment   15,875    29,596    20,725    22,906    30,355    119,457 
Total loans  $17,029   $29,625   $20,931   $23,283   $31,461   $122,329 

 

As of and for the Year  One-to-Four Family   Multi-Family and Commercial Real Estate   Construction and Land Development   Commercial Business Loans   Consumer Loans   Total 
Ended December 31, 2014                        
(In thousands)                        
Allowance related to loans:                              
Individually evaluated for impairment  $59   $-   $-   $4   $9   $72 
Collectively evaluated for impairment   1,574    3,097    414    588    278    5,951 
Total allowance  $1,633   $3,097   $414   $592   $287   $6,023 
                               
Ending loan balance individually evaluated for impairment  $4,223   $969   $726   $978   $492   $7,388 
Ending loan balance collectively evaluated for impairment   176,516    121,557    2,689    24,823    36,352    361,937 
Total loans  $180,739   $122,526   $3,415   $25,801   $36,844   $369,325 

 

25
 

 

   Multi-Family and Commercial Real Estate 
As of and for the Year  Investor One-to-Four Family and Multi-Family   Industrial and Warehouse Properties   Office Buildings   Retail Properties   Special Use Properties   Total Multi-Family and Commercial Real Estate 
Ended December 31, 2014                        
(In thousands)                        
Allowance related to loans:                              
Individually evaluated for impairment  $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   509    597    352    548    1,091    3,097 
Total allowance  $509   $597   $352   $548   $1,091   $3,097 
                               
Ending loan balance individually evaluated for impairment  $389   $23   $546   $-   $11   $969 
Ending loan balance collectively evaluated for impairment   25,072    24,852    23,922    17,346    30,365    121,557 
Total loans  $25,461   $24,875   $24,468   $17,346   $30,376   $122,526 

 

The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

 

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.

 

Although we believe that we use the best information available to determine the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

NOTE 5 - MORTGAGE BANKING ACTIVITY

 

Mortgage banking includes three components: (1) the origination of residential mortgage loans for sale in the secondary market, (2) the servicing of mortgage loans sold to investors, and (3) the sale of mortgage servicing rights.

 

The following represents the Company’s noninterest income derived from these activities:

 

   For the Three Months
Ended March 31,
 
(In thousands)  2015   2014 
Gain on sales of mortgage loans  $217   $143 
Mortgage servicing income   1    5 
Gain on sale of mortgage servicing rights   -    - 
Total  $218   $148 

 

The Bank originates government sponsored residential mortgage loans which are sold servicing released. The Bank also originates conventional residential mortgage loans for its portfolio and for sale, both on a servicing rights retained and released basis. The decrease in the Bank’s mortgage servicing income for the three month period ended March 31, 2015 compared to the same period in 2014 is due to the sale of mortgage servicing rights detailed below and was the result of the Bank selling most of their loans on the secondary market on a servicing released basis.

 

As of August 29, 2014, the Company sold its mortgage servicing rights with a book value of approximately $948,000 relating to loans previously sold to and serviced for Federal Home Loan Mortgage Company (“Freddie Mac”) of approximately $134.8 million to another financial institution. This transaction closed on September 18, 2014 with a servicing transfer date of October 16, 2014 and satisfied all of the criteria to be accounted for as a sale of financial assets. The Company may have potential repurchase exposure on these underlying mortgage loans based on investor demands related to facts and circumstances which may have pre-dated this transaction. The investor has not exercised any repurchase obligations at March 31, 2015.

 

26
 

 

NOTE 6 – FORECLOSED REAL ESTATE

 

Changes in foreclosed real estate during the three months ended March 31, 2015 and March 31, 2014 are as follows:

 

   For the Three Months Ended March 31, 
(In thousands)  2015   2014 
Beginning balance  $335   $1,846 
Additions   -    338 
Proceeds from dispositions   (236)   (978)
Gain (loss) on sales   1    (65)
Writedowns   -    (27)
Balance at end of period  $100   $1,114 

 

At March 31, 2015, the Bank held three properties consisting of two single family residences and one unimproved parcel zoned as residential. At March 31, 2015 and at December 31, 2014, the Bank had $4.8 million and $3.2 million in loans in process of foreclosure, respectively.

 

The Company records the gain (loss) on sale of foreclosed real estate in the expenses on foreclosed properties, net category along with expenses for acquiring and maintaining foreclosed real estate properties.

 

NOTE 7 – DEPOSITS

 

A summary of deposits at March 31, 2015 and December 31, 2014 consisted of the following:

 

   March 31, 2015   December 31, 2014 
(Dollars in thousands)  Amount   Percent   Amount   Percent 
Noninterest bearing demand deposits  $70,413    18.6%  $68,957    18.5%
Interest bearing deposits                    
Now accounts and money market accounts   52,669    13.9%   50,738    13.6%
Savings accounts   109,635    28.9%   108,488    29.0%
Certificates of deposit   146,267    38.6%   145,276    38.9%
Total interest bearing deposits   308,571    81.4%   304,502    81.5%
Total deposits  $378,984    100.0%  $373,459    100.0%

 

Scheduled maturities of certificates of deposit are as follows:

 

(In thousands)  At March 31, 2015   At December 31, 2014 
Through twelve months  $55,207   $56,895 
Twelve months through three years   53,634    55,962 
Over three years   37,426    32,419 
   $146,267   $145,276 

 

The aggregate amount of individual certificate of deposit accounts of $100,000 or more at March 31, 2015 and December 31, 2014 was $62.8 million and $60.7 million, respectively. Deposits up to $250,000 are federally insured through the Federal Deposit Insurance Corporation (“FDIC”). The aggregate amount of individual certificate of deposit accounts of $250,000 or more at March 31, 2015 and December 31, 2014 was $15.3 million and $13.2 million, respectively.

 

27
 

 

NOTE 8 – FHLB ADVANCES

 

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At March 31, 2015, the Bank had the ability to borrow up to $106.7 million from the FHLB. This borrowing capacity is based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

 

The following table presents certain information regarding our FHLB advances during the periods or at the dates indicated.

 

   At March 31, 2015   At December 31, 2014 
       Weighted        Weighted  
   Amount   Average   Amount   Average 
(Dollars in thousands)  Due   Cost   Due   Cost 
Year of maturity: (1)                
2015  $9,818    0.55%  $6,792    0.73%
2016   16,375    0.85%   16,068    0.85%
2017   22,713    1.56%   21,021    1.59%
2018   7,723    2.53%   5,743    2.90%
2019   3,371    2.61%   3,420    2.59%
2020 - 2024   1,579    1.26%   383    0.18%
2025 - 2028   335    -    335    - 
                     
Total FHLB advances  $61,914    1.37%  $53,762    1.43%

 

    (1) Amount due includes scheduled principal payments on amortizing advances.

 

The Bank is required to maintain an investment in capital stock of the FHLB in an amount that is based on a percentage of its outstanding residential first mortgage loans. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation persists; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to its operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.

 

NOTE 9 – OTHER BORROWED FUNDS

 

The Bank utilized securities sold under agreements to repurchase to accommodate its customers’ needs to invest funds short term and as a source of borrowings. During 2014, the Bank changed product types in order to make it more advantageous for these customers to be in a deposit product. At March 31, 2015 and December 31, 2014, there were no customers utilizing securities sold under agreement to repurchase as an investment.

 

The Bank maintains a credit facility with the Federal Reserve Bank of Boston for which certain assets are pledged to secure such borrowings. As of March 31, 2015 and December 31, 2014, there were no borrowings outstanding under this facility. In addition, the Federal Reserve Bank of Boston, as one of the Bank’s correspondent banks, requires the Bank to pledge at least $1 million in loans and/or investment securities for potential daylight overdraft exposure. At March 31, 2015 and December 31, 2014, the Bank had $7.3 million and $7.4 million, respectively, in commercial real estate loans pledged with the Federal Reserve Bank of Boston.

 

28
 

 

At March 31, 2015, the Bank had reserve requirements with the Federal Reserve Bank of Boston amounting to $2.4 million. The Bank’s $2.4 million in vault cash was sufficient to meet these reserve requirements.

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

Income (Loss) Per Share

 

Basic net income (loss) per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed in a manner similar to basic net income (loss) per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. For the three months ended March 31, 2015, anti-dilutive options excluded from the calculations totaled 95,718 options (with an exercise price of $11.12 per share), and 3,392 options (with an exercise price of $12.51 per share). For the three months ended March 31, 2014, anti-dilutive options excluded from the calculations totaled 102,996 options (with an exercise price of $11.12 per share) and 4,290 options (with an exercise price of $12.51 per share), respectively. Unreleased common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating either basic or diluted net income per common share.

 

   Three Months Ended 
   March 31, 
   2015   2014 
     
Net income (loss) ($000s omitted)  $263   $(809)
           
Weighted-average common shares outstanding:          
Basic   6,679,360    6,675,457 
Diluted   6,703,254    6,675,457 
           
Earnings (loss) per common share;          
Basic  $0.04   $(0.12)
Diluted  $0.04   $(0.12)

 

Dividends

 

The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. Due to current regulatory restrictions, the Company is not allowed to pay dividends to the Company’s shareholders and the Bank is not allowed to pay dividends to the Company.

 

NOTE 11 – STOCK BASED COMPENSATION

 

Both stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant. The Company records stock-based compensation expense related to outstanding stock options and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. Stock options expire ten years after the date of the grant.

 

(a)Stock Option Awards

 

29
 

 

Stock option awards have been granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock options and restricted stock awards are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis.

 

A summary of the status of outstanding stock options at March 31, 2015 and changes therein was as follows:

 

   2015 
   Number of Shares   Weighted Average Exercise Price 
Options outstanding at the beginning of year   209,808   $9.36 
Granted   162,566    8.60 
Forfeited   (698)   11.12 
Exercised   -    - 
Expired   -    - 
Options outstanding at March 31, 2015   371,676   $9.02 
           
Options exercisable at March 31, 2015   99,110   $11.17 
           
Weighted-average fair value of options granted during the year       $2.61 

  

The exercise price and weighted average remaining contractual life in years for all options outstanding at March 31, 2015 are detailed below.

 

Outstanding as of March 31, 2015   Exercise Price   Weighted Average Remaining Contractual Life
 (in years)
 
 95,718   $11.12    0.3 
 3,392   $12.51    2.0 
 110,000   $7.74    9.2 
 162,566   $8.60    9.8 
 371,676           

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.

 

In determining the expected volatility of the options, the Company utilized the historical volatility of other similar companies during a period of time equal to the expected life of the options because the Company’s common shares have been publicly traded for a period less than the expected life of the options.

 

The Company assumed no dividend payments would be made during the expected contractual term of the option period.

 

The Company determined the expected contractual term of the options to be 6.5 years using the simplified method under SEC’s Staff Accounting Bulletin No. 110 due to the Company not having sufficient historical data to provide a reasonable basis for estimation.

 

The risk-free rate utilized for this calculation was based upon the U.S. Treasury yield curve in effect at the date of the options grant.

 

30
 

 

Assumptions used to determine the weighted average fair value of the stock options granted were as follows:

 

   Grant Date 
   May 27, 2014   January 31, 2015 
Dividend yield   0.00%   0.00%
Expected volatility   28.42%   26.76%
Risk-free rate   1.95%   1.49%
Expected life in years   6.5    6.5 
           
Weighted-average fair value of options at grant date  $2.55   $2.61 

 

(b)Restricted Stock Awards

 

The following table summarizes the restricted stock awards outstanding for the year ended December 31, 2014 and the three months ended March 31, 2015:

 

   Number of Shares   Weighted Average Fair Value on Grant Date 
Nonvested at January 1, 2014   -   $- 
Granted   4,114    8.01 
Vested   -    - 
Forefeited   -    - 
Nonvested at December 31, 2014   4,114    8.01 
Granted   -    - 
Vested   -    - 
Forefeited   -    - 
Nonvested at March 31, 2015   4,114   $8.01 
           
Weighted average remaining contractual life in years        9.7 

 

The fair value of restricted stock awards is measured based on the number of shares granted and the closing market price of the Company’s common stock on the date of grant. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is zero based on historical data and other factors.

 

The Company recorded stock-based compensation expense of $26,500 and zero for the three months ended March 31, 2015 and 2014, respectively, in connection with the stock options and restricted stock awards. At March 31, 2015 the Company has unrecognized option expense of $640,800 to be recognized over the remaining vesting period of the options. The Company has unrecognized compensation expense related to non-vested restricted stock awards of $31,000 to be recognized over the remaining vesting period of the restricted stock awards.

 

NOTE 12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The contractual amounts of commitments to extend credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults, and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis.

 

The Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral that it deems necessary.

 

31
 

 

Financial instruments whose contractual amounts represent credit risk at March 31, 2015 and December 31, 2014 were as follows:

 

   March 31,   December 31, 
(In thousands)  2015   2014 
Commitments to extend credit:          
Commercial real estate loan committments  $33,580   $30,254 
Unused home equity lines of credit   19,010    19,084 
Commercial and industrial loan commitments   14,147    12,587 
Amounts due on other commitments   9,170    7,257 
Commercial letters of credit   563    588 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include residential and commercial property, deposits and securities.

 

NOTE 13 – FAIR VALUE

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below:

 

Cash and cash equivalents—The carrying amounts for cash and due from banks and federal funds sold approximate fair value because of the short maturities of those investments. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.

 

Available for sale and held to maturity securitiesWhere quoted prices are available in an active market, the securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include mutual funds. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and the securities are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds, U.S. government agency mortgage-backed securities and private label collateralized mortgage obligations. Available for sale securities are recorded at fair value on a recurring basis and held to maturity securities are only disclosed at fair value.

 

Loans held for sale—The carrying amounts of these assets approximate fair value because these loans, are generally sold through forward sales (either already contracted or soon to be executed at the recording date). The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 2 within the fair value hierarchy.

 

Loans receivableFor variable rate loans that reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the loan portfolio. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated period end market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the loan portfolio. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a Level 3 measurement.

 

Accrued interest receivable—The carrying amount approximates fair value. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.

 

32
 

 

Mortgage servicing assetsThe fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company does not record these assets at fair value on a recurring basis. Servicing assets are classified as Level 2 within the fair value hierarchy. These assets were sold during the third quarter of 2014 and are not included on the Company’s balance sheet as of March 31, 2015.

 

Federal Home Loan Bank stock The Bank is a member of the FHLB and is required to maintain an investment in capital stock of the FHLB. The carrying amount is a reasonable estimate of fair value. The Company does not record this asset at fair value on a recurring basis. Based on redemption provisions, the stock of the FHLB has no quoted market value and is carried at cost. FHLB stock is classified as Level 3 within the fair value hierarchy.

 

Foreclosed real estate— Foreclosed real estate represents real estate acquired through or in lieu of foreclosure and which are recorded at fair value on a nonrecurring basis. Fair value is based upon appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies the fair value measurement as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the fair value measurement as Level 3. The Company classified these assets as Level 3 within the fair value hierarchy.

 

Deposit liabilitiesThe fair value of demand deposits, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered by market participants for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities of such deposits. The Company does not record deposits at fair value on a recurring basis. Demand deposits, savings and money market deposits are classified as Level 1 within the fair value hierarchy. Certificates of deposit are classified as Level 2 within the fair value hierarchy.

 

Borrowed funds—The fair value of FHLB advances and other borrowed funds (repurchase agreements) are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company does not record this liability at fair value on a recurring basis. FHLB advances and other borrowings are classified as Level 2 within the fair value hierarchy.

 

Accrued interest payable—The carrying amounts approximates fair value. The Company does not record the liability at fair value on a recurring basis. This liability is classified as Level 1 within the fair value hierarchy.

 

Mortgagors’ escrow accounts—The carrying amount approximates fair value. The Company does not record this liability at fair value on a recurring basis. This liability is classified as Level 2 within the fair value hierarchy.

 

33
 

 

The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of March 31, 2015 and December 31, 2014:

 

      March 31, 2015   December 31, 2014 
  

Fair Value

   Carrying     Fair     Carrying     Fair  
(In thousands)  Hierarchy Level   Value     Value     Value     Value  
                    
Financial Assets                       
Cash and cash equivalents  Level 1  $7,779   $7,779   $10,940   $10,940 
Investment securities, available-for-sale  Level 2   86,185    86,185    77,538    77,538 
Investment securities, held-to-maturity  Level 2   12,454    12,651    13,441    13,633 
Loans held for sale  Level 2   2,209    2,209    1,062    1,062 
Loans receivable, net:                       
Performing  Level 2   362,705    368,526    355,943    359,687 
Impaired  Level 3   7,359    7,359    7,316    7,316 
Accrued interest receivable  Level 1   1,660    1,660    1,599    1,599 
FHLB Stock  Level 3   4,548    4,548    4,548    4,548 
Financial Liabilities