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EX-31.1 - EX-31.1 - STEWARDSHIP FINANCIAL CORPex31-1.htm
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EX-32.1 - EX-32.1 - STEWARDSHIP FINANCIAL CORPex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

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

 

For the transition period from __________ to __________

 

Commission file number 1-33377

 

Stewardship Financial Corporation

(Exact name of registrant as specified in its charter)

 

New Jersey 22-3351447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
630 Godwin Avenue, Midland Park,  NJ 07432
(Address of principal executive offices) (Zip Code)

 

(201) 444-7100

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x          No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x           No o

 

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

 

Large accelerated filer o   Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company x

 

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

 

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of November 9, 2015 was 6,079,986.

 

 

Stewardship Financial Corporation

 

INDEX

 

  PAGE
  NUMBER
PART I  -  FINANCIAL INFORMATION  
   
ITEM 1  -   FINANCIAL STATEMENTS  
   
Consolidated Statements of Financial Condition at September 30, 2015 (Unaudited) and December 31, 2014 1
   
Consolidated Statements of Income for the Three and Nine Months ended September 30, 2015 and 2014 (Unaudited) 2
   
Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2015 and 2014 (Unaudited) 3
   
Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2015 and 2014 (Unaudited) 4
   
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014 (Unaudited) 5 - 6
   
Notes to Consolidated Financial Statements (Unaudited) 7 - 30
   
ITEM 2  -   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31 - 43
   
ITEM 3 -    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44
   
ITEM 4 -    CONTROLS AND PROCEDURES 44
   
PART II  -  OTHER INFORMATION  
   
ITEM 6 -    EXHIBITS 45
   
SIGNATURES 46
   
EXHIBIT INDEX 47

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

 

   September 30,   December 31, 
   2015   2014 
   (Unaudited)     
Assets          
           
Cash and due from banks  $15,825,000   $9,849,000 
Other interest-earning assets   200,000    237,000 
       Cash and cash equivalents   16,025,000    10,086,000 
           
Securities available for sale   86,994,000    124,918,000 
Securities held to maturity; estimated fair value of $61,380,000 (at          
    September 30, 2015) and $56,233,000 (at December 31, 2014)   60,252,000    55,097,000 
FHLB-NY stock, at cost   3,035,000    3,777,000 
Mortgage loans held for sale   1,570,000     
Loans, net of allowance for loan losses of $8,805,000 (at September 30, 2015)          
    and $9,602,000 (at December 31, 2014)   509,270,000    467,699,000 
Premises and equipment, net   6,883,000    6,577,000 
Accrued interest receivable   1,861,000    1,994,000 
Other real estate owned, net   587,000    1,308,000 
Bank owned life insurance   14,008,000    13,708,000 
Other assets   7,164,000    8,387,000 
       Total assets  $707,649,000   $693,551,000 
           
Liabilities and shareholders' equity          
           
Liabilities          
Deposits:          
    Noninterest-bearing  $151,078,000   $136,721,000 
    Interest-bearing   434,790,000    419,755,000 
        Total deposits   585,868,000    556,476,000 
           
Federal Home Loan Bank of New York advances   49,500,000    66,700,000 
Subordinated debentures and subordinated notes   23,176,000    7,217,000 
Accrued interest payable   487,000    308,000 
Accrued expenses and other liabilities   1,600,000    3,881,000 
        Total liabilities   660,631,000    634,582,000 
           
Commitments and contingencies        
           
Shareholders' equity          
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares          
    issued and outstanding at December 31, 2014.          
    Liquidation preference of $15,000,000       14,984,000 
Common stock, no par value; 10,000,000 shares authorized;          
    6,093,282 and 6,034,933 shares issued and outstanding          
    at September 30, 2015 and December 31, 2014, respectively   41,444,000    41,125,000 
Retained earnings   5,959,000    3,817,000 
Accumulated other comprehensive loss, net   (385,000)   (957,000)
        Total shareholders' equity   47,018,000    58,969,000 
           
        Total liabilities and shareholders' equity  $707,649,000   $693,551,000 

 

See notes to unaudited consolidated financial statements.  

 

1 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Interest income:                
Loans  $5,689,000   $5,125,000   $16,758,000   $15,478,000 
Securities held to maturity                    
Taxable   243,000    193,000    683,000    374,000 
Non-taxable   114,000    154,000    363,000    501,000 
Securities available for sale                    
Taxable   320,000    565,000    1,024,000    1,940,000 
Non-taxable   6,000    6,000    18,000    18,000 
FHLB dividends   30,000    22,000    93,000    71,000 
Other interest-earning assets   10,000    4,000    27,000    18,000 
Total interest income   6,412,000    6,069,000    18,966,000    18,400,000 
                     
Interest expense:                    
Deposits   545,000    433,000    1,503,000    1,352,000 
Repurchase agreements       72,000        254,000 
FHLB-NY borrowing   213,000    159,000    640,000    457,000 
Subordinated debentures and subordinated notes   235,000    127,000    485,000    377,000 
Total interest expense   993,000    791,000    2,628,000    2,440,000 
                     
Net interest income before provision for loan losses   5,419,000    5,278,000    16,338,000    15,960,000 
Provision for loan losses   (400,000)   250,000    (1,100,000)   250,000 
Net interest income after provision for loan losses   5,819,000    5,028,000    17,438,000    15,710,000 
                     
Noninterest income:                    
Fees and service charges   541,000    510,000    1,577,000    1,435,000 
Bank owned life insurance   103,000    100,000    300,000    302,000 
Gain on calls and sales of securities           152,000     
Gain on sales of mortgage loans   52,000    32,000    117,000    46,000 
Loss on sale of loans               (241,000)
Gain on sale of other real estate owned           53,000    54,000 
Miscellaneous   142,000    122,000    439,000    374,000 
Total noninterest income   838,000    764,000    2,638,000    1,970,000 
                     
Noninterest expenses:                    
Salaries and employee benefits   2,785,000    2,624,000    8,181,000    7,859,000 
Occupancy, net   427,000    439,000    1,317,000    1,514,000 
Equipment   175,000    167,000    496,000    530,000 
Data processing   468,000    433,000    1,380,000    1,255,000 
Advertising   195,000    288,000    665,000    629,000 
FDIC insurance premium   87,000    133,000    317,000    477,000 
Charitable contributions   90,000    45,000    230,000    135,000 
Miscellaneous   898,000    860,000    2,693,000    2,790,000 
Total noninterest expenses   5,125,000    4,989,000    15,279,000    15,189,000 
Income before income tax expense   1,532,000    803,000    4,797,000    2,491,000 
Income tax expense   532,000    251,000    1,658,000    707,000 
Net income   1,000,000    552,000    3,139,000    1,784,000 
Dividends on preferred stock   114,000    170,000    456,000    512,000 
Net income available to common shareholders  $886,000   $382,000   $2,683,000   $1,272,000 
                     
Basic and diluted earnings per common share  $0.15   $0.06   $0.44   $0.21 
                     
Weighted average number of basic and diluted                    
    common shares outstanding   6,091,627    6,026,848    6,074,763    5,994,800 

 

See notes to unaudited consolidated financial statements.

2 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Net income  $1,000,000   $552,000   $3,139,000   $1,784,000 
                     
Other comprehensive income (loss), net of tax:                    
Change in unrealized holding gains (losses) on                    
securities available for sale   265,000    (187,000)   403,000    2,473,000 
Reclassification adjustment for gains in net income           (91,000)    
Loss on securities reclassifed from available for                    
sale to held to maturity               (457,000)
Accretion of loss on securities reclassified to                    
held to maturity   29,000    36,000    150,000    47,000 
Change in fair value of interest rate swap   39,000    44,000    110,000    112,000 
                     
Total other comprehensive income (loss)   333,000    (107,000)   572,000    2,175,000 
                     
Total comprehensive income  $1,333,000   $445,000   $3,711,000   $3,959,000 

 

See notes to unaudited consolidated financial statements.

3 

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Shareholders' Equity

(Unaudited)

 

   Nine Months Ended September 30, 2015 
                   Accumulated     
                   Other     
   Preferred   Common Stock   Retained   Comprehensive     
   Stock   Shares   Amount   Earnings   Income, Net   Total 
                         
Balance -- December 31, 2014  $14,984,000    6,034,933   $41,125,000   $3,817,000   $(957,000)  $58,969,000 
Cash dividends paid on common stock               (364,000)       (364,000)
Payment of discount on dividend                              
    reinvestment plan           (2,000)           (2,000)
Cash dividends declared on preferred stock               (456,000)       (456,000)
Common stock issued under dividend                              
    reinvestment plan       8,204    44,000            44,000 
Common stock issued under stock plans       6,233    33,000            33,000 
Issuance of restricted stock       50,974    279,000    (279,000)        
Amortization of restricted stock, net       (7,062)   (38,000)   118,000        80,000 
Tax benefit from restricted stock vesting           3,000            3,000 
Amortization of issuance costs   16,000            (16,000)        
Repurchase of SBLF preferred stock   (15,000,000)                   (15,000,000)
Net income               3,139,000        3,139,000 
Other comprehensive income                   572,000    572,000 
                               
Balance -- September 30, 2015  $    6,093,282   $41,444,000   $5,959,000   $(385,000)  $47,018,000 
                               

 

   Nine Months Ended September 30, 2014 
                   Accumulated     
                   Other     
   Preferred   Common Stock   Retained   Comprehensive     
   Stock   Shares   Amount   Earnings   Income, Net   Total 
                         
Balance -- December 31, 2013  $14,974,000    5,943,767   $40,690,000   $1,905,000   $(3,790,000)  $53,779,000 
Cash dividends paid on common stock               (179,000)       (179,000)
Payment of discount on dividend                              
    reinvestment plan           (1,000)           (1,000)
Cash dividends declared on preferred stock               (512,000)       (512,000)
Common stock issued under dividend                              
    reinvestment plan       5,097    23,000            23,000 
Common stock issued under stock plans       30,776    141,000            141,000 
Issuance of restricted stock       49,661    249,000    (249,000)        
Amortization of restricted stock               48,000        48,000 
Amortization of issuance costs   7,000            (7,000)        
Net income               1,784,000        1,784,000 
Other comprehensive income                   2,175,000    2,175,000 
                               
Balance -- September 30, 2014  $14,981,000    6,029,301   $41,102,000   $2,790,000   $(1,615,000)  $57,258,000 

 

See notes to unaudited consolidated financial statements.

4 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Cash flows from operating activities:          
Net income  $3,139,000   $1,784,000 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   290,000    320,000 
Amortization of premiums and accretion of discounts, net   514,000    725,000 
Amortization of restricted stock   80,000    48,000 
Amortization of subordinated debenture issuance costs   6,000     
Accretion (amortization) of deferred loan fees   66,000    37,000 
Provision for loan losses   (1,100,000)   250,000 
Originations of mortgage loans held for sale   (9,037,000)   (3,346,000)
Proceeds from sale of mortgage loans   7,584,000    3,028,000 
Proceeds from sale of loans       2,559,000 
Gain on sales of mortgage loans   (117,000)   (46,000)
Loss on sale of loans       241,000 
Gain on calls and sales of securities   (152,000)    
Gain on sale of other real estate owned   (53,000)   (54,000)
Deferred income tax expense   331,000    (154,000)
Decrease in accrued interest receivable   133,000    214,000 
Increase (decrease) in accrued interest payable   179,000    (127,000)
Earnings on bank owned life insurance   (300,000)   (302,000)
Decrease in other assets   718,000    907,000 
Decrease in other liabilities   (2,172,000)   1,785,000 
Net cash provided by operating activities   109,000    7,869,000 
           
Cash flows from investing activities:          
Purchase of securities available-for-sale   (85,000)   (7,835,000)
Proceeds from maturities and principal repayments on securities available-for-sale   9,451,000    14,086,000 
Proceeds from sales and calls on securities available-for-sale   28,845,000    1,000,000 
Purchase of securities held to maturity   (18,462,000)   (8,799,000)
Proceeds from maturities and principal repayments on securities held to maturity   7,397,000    6,083,000 
Proceeds from calls on securities held to maturity   6,000,000     
Sale (purchase) of FHLB-NY stock   742,000    (749,000)
Net increase in loans   (41,014,000)   (11,187,000)
Proceeds from sale of other real estate owned   1,149,000    594,000 
Additions to premises and equipment   (596,000)   (1,109,000)
Net cash used in investing activities   (6,573,000)   (7,916,000)
           
Cash flows from financing activities:          
Net increase in noninterest-bearing deposits   14,357,000    6,780,000 
Net increase (decrease) in interest-bearing deposits   15,035,000    (27,360,000)
Net increase in long term borrowings       5,000,000 
Repurchase of SBLF preferred stock   (15,000,000)    
Proceeds from issuance of subordinated notes   15,953,000     
Net increase in securities sold under agreements to repurchase       (7,200,000)
Net increase (decrease) in short term borrowings   (17,200,000)   16,800,000 
Cash dividends paid on common stock   (364,000)   (179,000)
Cash dividends paid on preferred stock   (456,000)   (512,000)
Payment of discount on dividend reinvestment plan   (2,000)   (1,000)
Issuance of common stock   77,000    164,000 
Tax benefit from restricted stock vesting   3,000     
Net cash provided by (used in) financing activities   12,403,000    (6,508,000)
           
Net increase (decrease) in cash and cash equivalents   5,939,000    (6,555,000)
Cash and cash equivalents - beginning   10,086,000    17,405,000 
Cash and cash equivalents - ending  $16,025,000   $10,850,000 

 

5 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited) 

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Supplemental disclosures of cash flow information:        
Cash paid during the period for interest  $2,449,000   $2,567,000 
Cash paid during the period for income taxes   1,736,000    183,000 
Reclassification of securities available-for-sale to held to maturity       24,022,000 
Transfers from loans to other real estate owned   477,000    2,267,000 

 

See notes to unaudited consolidated financial statements.

6 

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

 

Note 1. Summary of Significant Accounting Policies

 

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 27, 2015 (the “2014 Annual Report”).

 

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of the results which may be expected for the entire year.

 

Principles of consolidation

 

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain amounts included in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.

 

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.

 

Material estimates

 

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and deferred income taxes. Management believes the Corporation’s policies with respect to the methodology for the determination of the allowance for loan losses and the evaluation of deferred income taxes involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.

 

Adoption of New Accounting Standards

 

In January 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This ASU applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The amendments in this update clarify when an in substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in ASU 2014-04 are effective for fiscal years, including interim periods, beginning after December 15, 2014. The adoption of the amendments in this standard did not have a material impact on the Corporation’s consolidated financial statements.

 

7 

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs.” This ASU is part of the FASB’s initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in ASU 2015-03 are effective for fiscal years, including interim periods, beginning after December 15, 2015. Early adoption of ASU 2015-03 is permitted for financial statements that have not been previously issued. The adoption of the amendments in this standard are not expected to have a material impact on the Corporation’s consolidated financial statements.

 

Note 2. Securities – Available-for-Sale and Held to Maturity

 

The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

   September 30, 2015 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $23,110,000   $106,000   $155,000   $23,061,000 
Obligations of state and political                    
  subdivisions   1,412,000    4,000    9,000    1,407,000 
Mortgage-backed securities - residential   45,982,000    437,000    269,000    46,150,000 
Asset-backed securities (a)   9,876,000        137,000    9,739,000 
Corporate debt   3,001,000    4,000    8,000    2,997,000 
                     
Total debt securities   83,381,000    551,000    578,000    83,354,000 
Other equity investments   3,750,000        110,000    3,640,000 
   $87,131,000   $551,000   $688,000   $86,994,000 

 

   December 31, 2014 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $30,701,000   $94,000   $521,000   $30,274,000 
Obligations of state and political                    
  subdivisions   1,420,000    2,000    22,000    1,400,000 
Mortgage-backed securities - residential   76,894,000    521,000    672,000    76,743,000 
Asset-backed securities (a)   9,874,000    57,000    16,000    9,915,000 
Corporate debt   2,998,000    6,000    7,000    2,997,000 
                     
Total debt securities   121,887,000    680,000    1,238,000    121,329,000 
Other equity investments   3,664,000        75,000    3,589,000 
   $125,551,000   $680,000   $1,313,000   $124,918,000 

 

(a) Collateralized by student loans

 

Cash proceeds realized from sales and calls of securities available-for-sale for the three and nine months ended September 30, 2015 were $1,000,000 and $28,845,000, respectively. For the three and nine months ended September 30, 2014, cash proceeds realized from sales and calls of securities available-for-sale were $1,000,000. While there were no gross gains and no gross losses realized on sales or calls during the three months ended September 30, 2015, gross gains and gross losses realized on sales and calls during the nine months ended September 30, 2015 totaled $213,000 and $61,000, respectively. There were no gross gains and no gross losses realized on sales or calls during the three and nine months ended September 30, 2014.

8 

The following is a summary of the held to maturity securities and related gross unrealized gains and losses:

 

   September 30, 2015 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $998,000   $5,000   $   $1,003,000 
U.S. government-sponsored agencies   12,601,000    228,000        12,829,000 
Obligations of state and political                    
  subdivisions   11,871,000    341,000        12,212,000 
Mortgage-backed securities - residential   34,782,000    580,000    26,000    35,336,000 
   $60,252,000   $1,154,000   $26,000   $61,380,000 

 

   December 31, 2014 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $   $   $   $ 
U.S. government-sponsored agencies   11,962,000    177,000        12,139,000 
Obligations of state and political                    
  subdivisions   15,636,000    514,000        16,150,000 
Mortgage-backed securities - residential   27,499,000    511,000    66,000    27,944,000 
   $55,097,000   $1,202,000   $66,000   $56,233,000 

 

Cash proceeds realized from calls of securities held to maturity for the three and nine months ended September 30, 2015 were $900,000 and $6,000,000, respectively. There were no cash proceeds realized from calls of securities held to maturity for the three and nine months ended September 30, 2014. There were no gross gains and no gross losses realized on calls during the three and nine months ended September 30, 2015 or 2014.

 

Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.

 

Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from the contractual maturities.

 

9 

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.

  

   September 30, 2015 
   Amortized   Fair 
   Cost   Value 
         
Available-for-sale          
Within one year  $500,000   $500,000 
After one year, but within five years   12,987,000   12,988,000 
After five years, but within ten years   6,792,000    6,878,000 
After ten years   7,244,000    7,099,000 
Mortgage-backed securities - residential   45,982,000    46,150,000 
Asset-backed securities   9,876,000    9,739,000 
Total  $83,381,000   $83,354,000 
           
Held to maturity          
Within one year  $3,100,000   $3,159,000 
After one year, but within five years   12,446,000    12,743,000 
After five years, but within ten years   8,979,000    9,161,000 
After ten years   945,000    981,000 
Mortgage-backed securities - residential   34,782,000    35,336,000 
Total  $60,252,000   $61,380,000 

 

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at September 30, 2015 and December 31, 2014, and if the unrealized loss position was continuous for the twelve months prior to September 30, 2015 and December 31, 2014.

 

10 

Available-for-Sale                        
September 30, 2015  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. government-                              
  sponsored agencies  $2,080,000   $(3,000)  $9,592,000   $(152,000)  $11,672,000   $(155,000)
Obligations of state and                              
  political subdivisions   999,000    (9,000)           999,000    (9,000)
Mortgage-backed                              
  securities - residential   2,058,000    (7,000)   17,122,000    (262,000)   19,180,000    (269,000)
Asset-backed securities   9,738,000    (137,000)           9,738,000    (137,000)
Corporate debt           1,492,000    (8,000)   1,492,000    (8,000)
Other equity investments           3,580,000    (110,000)   3,580,000    (110,000)
     Total temporarily                              
          impaired securities  $14,875,000   $(156,000)  $31,786,000   $(532,000)  $46,661,000   $(688,000)
                               

 

December 31, 2014  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. government-                              
  sponsored agencies  $   $   $23,750,000   $(521,000)  $23,750,000   $(521,000)
Obligations of state and                              
  political subdivisions           992,000    (22,000)   992,000    (22,000)
Mortgage-backed                              
  securities - residential   5,985,000    (22,000)   30,445,000    (650,000)   36,430,000    (672,000)
Asset-backed securities   3,022,000    (16,000)           3,022,000    (16,000)
Corporate debt           1,494,000    (7,000)   1,494,000    (7,000)
Other equity investments           3,529,000    (75,000)   3,529,000    (75,000)
     Total temporarily                              
          impaired securities  $9,007,000   $(38,000)  $60,210,000   $(1,275,000)  $69,217,000   $(1,313,000)
                               

 

Held to Maturity                        
September 30, 2015  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Mortgage-backed                              
  securities - residential  $2,067,000   $(5,000)  $1,129,000   $(21,000)  $3,196,000   $(26,000)
     Total temporarily                              
          impaired securities  $2,067,000   $(5,000)  $1,129,000   $(21,000)  $3,196,000   $(26,000)
                               

 

December 31, 2014  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Mortgage-backed                              
  securities - residential  $8,788,000   $(66,000)  $   $   $8,788,000   $(66,000)
     Total temporarily                              
          impaired securities  $8,788,000   $(66,000)  $   $   $8,788,000   $(66,000)

 

 

Other-Than-Temporary-Impairment

 

At September 30, 2015, there were available-for-sale investments comprising seven U.S. government-sponsored agency securities, seventeen mortgage-backed securities, two corporate debt securities, and an other equity investments security in a continuous loss position for twelve months or longer. There were held to maturity investments consisting of two mortgage-backed securities in a continuous loss position for twelve months or longer at September 30, 2015. Management has assessed the securities that were in an unrealized loss position at September 30, 2015 and December 31, 2014 and has determined that any decline in fair value below amortized cost primarily relate to changes in interest rates and market spreads and was temporary.

 

11 

In making this determination management considered the following factors in estimating the cash flows expected to be collected from the security: the period of time the securities were in an unrealized loss position; the percentage decline in comparison to the securities’ amortized cost; any adverse conditions specifically related to the security, an industry or a geographic area; the rating or changes to the rating by a credit rating agency; the financial condition of the issuer and guarantor and any recoveries or additional declines in fair value subsequent to the balance sheet date. Management expects to collect all amounts contractually due and none of the debt securities can be prepaid at less than the par values.

 

Management does not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.

 

Note 3. Loans and Allowance for Loan Losses

 

At September 30, 2015 and December 31, 2014, respectively, the loan portfolio consisted of the following:

 

   September 30,   December 31, 
   2015   2014 
         
Commercial:          
Secured by real estate  $41,225,000   $46,545,000 
Other   25,874,000    29,307,000 
Commercial real estate   328,500,000    286,063,000 
Commercial construction   2,653,000    4,215,000 
Residential real estate   81,414,000    77,836,000 
Consumer:          
Secured by real estate   28,750,000    27,319,000 
Other   637,000    939,000 
Government Guaranteed Loans - guaranteed portion   8,944,000    5,000,000 
Other   171,000    96,000 
  Total gross loans   518,168,000    477,320,000 
           
Less:  Deferred loan fees, net of costs   93,000    19,000 
Allowance for loan losses   8,805,000    9,602,000 
    8,898,000    9,621,000 
           
Loans, net  $509,270,000   $467,699,000 

  

The Corporation has purchased the guaranteed portion of several government guaranteed loans. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these government guaranteed loans.

 

At September 30, 2015 and December 31, 2014, loan participations sold by the Corporation to other lending institutions totaled approximately $8,663,000 and $12,948,000, respectively. These amounts are not included in the totals presented above.

 

12 

 

Activity in the allowance for loan losses is summarized as follows:

 

   For the three months ended September 30, 2015 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,317,000   $(360,000)  $(323,000)  $194,000   $2,828,000 
Commercial real estate   5,289,000    148,000        23,000    5,460,000 
Commercial construction   14,000    (15,000)       12,000    11,000 
Residential real estate   140,000    (2,000)           138,000 
Consumer   139,000    12,000        1,000    152,000 
Other loans   3,000    1,000    (1,000)       3,000 
Unallocated   397,000    (184,000)           213,000 
Total  $9,299,000   $(400,000)  $(324,000)  $230,000   $8,805,000 

 

 

   For the nine months ended September 30, 2015 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,704,000   $(701,000)  $(595,000)  $420,000   $2,828,000 
Commercial real estate   5,017,000    319,000        124,000    5,460,000 
Commercial construction   150,000    (492,000)       353,000    11,000 
Residential real estate   142,000    (4,000)           138,000 
Consumer   189,000    (40,000)       3,000    152,000 
Other loans   2,000    3,000    (2,000)       3,000 
Unallocated   398,000    (185,000)           213,000 
Total  $9,602,000   $(1,100,000)  $(597,000)  $900,000   $8,805,000 

 

 

   For the three months ended September 30, 2014 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,068,000   $94,000   $(76,000)  $23,000   $3,109,000 
Commercial real estate   5,448,000    559,000    (3,000)   75,000    6,079,000 
Commercial construction   120,000    54,000            174,000 
Residential real estate   452,000    (121,000)           331,000 
Consumer   259,000    (33,000)       1,000    227,000 
Other loans       1,000    (1,000)        
Unallocated   478,000    (304,000)           174,000 
Total  $9,825,000   $250,000   $(80,000)  $99,000   $10,094,000 

 

13 

   For the nine months ended September 30, 2014 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,373,000   $(156,000)  $(259,000)  $151,000   $3,109,000 
Commercial real estate   5,665,000    363,000    (89,000)   140,000    6,079,000 
Commercial construction   117,000    57,000            174,000 
Residential real estate   460,000    (121,000)   (8,000)       331,000 
Consumer   288,000    (56,000)   (6,000)   1,000    227,000 
Other loans   3,000    (2,000)   (1,000)        
Unallocated   9,000    165,000            174,000 
Total  $9,915,000   $250,000   $(363,000)  $292,000   $10,094,000 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2015 and December 31, 2014.

 

   September 30, 2015 
       Commercial   Commercial   Residential       Government   Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Guaranteed   Loans   Unallocated   Total 
                                     
Allowance for loan                                             
  losses:                                             
  Ending allowance                                             
    balance attributable                                             
    to loans                                             
                                              
    Individually                                             
     evaluated for                                             
     impairment  $72,000   $658,000   $   $   $   $   $   $   $730,000 
                                              
    Collectively                                             
     evaluated for                                             
     impairment   2,756,000    4,802,000    11,000    138,000    152,000        3,000    213,000    8,075,000 
Total ending                                             
  allowance                                             
  balance  $2,828,000   $5,460,000   $11,000   $138,000   $152,000   $   $3,000   $213,000   $8,805,000 
                                              
Loans:                                             
    Loans                                             
     individually                                             
     evaluated for                                             
     impairment  $3,985,000   $8,153,000   $250,000   $89,000   $200,000   $   $   $   $12,677,000 
                                              
    Loans                                             
     collectively                                             
     evaluated for                                             
     impairment   63,114,000    320,347,000    2,403,000    81,325,000    29,187,000    8,944,000    171,000        505,491,000 
Total ending                                             
  loan balance  $67,099,000   $328,500,000   $2,653,000   $81,414,000   $29,387,000   $8,944,000   $171,000   $   $518,168,000 

 

14 

   December 31, 2014 
       Commercial   Commercial   Residential       Government   Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Guaranteed   Loans   Unallocated   Total 
                                     
Allowance for loan                                             
  losses:                                             
  Ending allowance                                             
    balance attributable                                             
    to loans                                             
                                              
    Individually                                             
     evaluated for                                             
     impairment  $223,000   $697,000   $   $   $   $   $   $   $920,000 
                                              
    Collectively                                             
     evaluated for                                             
     impairment   3,481,000    4,320,000    150,000    142,000    189,000        2,000    398,000    8,682,000 
Total ending                                             
  allowance                                             
  balance  $3,704,000   $5,017,000   $150,000   $142,000   $189,000   $   $2,000   $398,000   $9,602,000 
                                              
Loans:                                             
    Loans                                             
     individually                                             
     evaluated for                                             
     impairment  $6,042,000   $8,913,000   $288,000   $96,000   $326,000   $   $   $   $15,665,000 
                                              
    Loans                                             
     collectively                                             
     evaluated for                                             
     impairment   69,810,000    277,150,000    3,927,000    77,740,000    27,932,000    5,000,000    96,000        461,655,000 
Total ending                                             
  loan balance  $75,852,000   $286,063,000   $4,215,000   $77,836,000   $28,258,000   $5,000,000   $96,000   $   $477,320,000 

 

The following table presents the recorded investment in nonaccrual loans at the dates indicated:

 

   September 30,   December 31, 
   2015   2014 
         
Commercial:        
Secured by real estate  $1,775,000   $1,923,000 
Other   14,000     
Commercial real estate   496,000    1,284,000 
Residential real estate   89,000    96,000 
Consumer:          
Secured by real estate   200,000    325,000 
           
Total nonaccrual loans  $2,574,000   $3,628,000 

 

At September 30, 2015 and December 31, 2014, there were no loans that were past due 90 days and still accruing.

 

15 

The following table presents loans individually evaluated for impairment by class of loan at and for the periods indicated:

 

   At and for the nine months ended September 30, 2015 
   Unpaid       Allowance for   Average   Interest 
   Principal   Recorded   Loan Losses   Recorded   Income 
   Balance   Investment   Allocated   Investment   Recognized 
                     
With no related allowance recorded:                         
Commercial:                         
Secured by real estate  $3,662,000   $3,246,000        $3,921,000   $133,000 
Other                42,000    2,000 
Commercial real estate   3,705,000    2,566,000         2,890,000    91,000 
Commercial construction   289,000    250,000         269,000     
Residential real estate   129,000    89,000         93,000     
Consumer:                         
Secured by real estate   200,000    200,000         262,000     
                          
With an allowance recorded:                         
Commercial:                         
Secured by real estate   402,000    310,000   $71,000    430,000    11,000 
Other   429,000    429,000    1,000    535,000    24,000 
Commercial real estate   5,596,000    5,587,000    658,000    5,610,000    154,000 
                          
   $14,412,000   $12,677,000   $730,000   $14,052,000   $415,000 

 

During the nine months ended September 30, 2015, no interest income was recognized on a cash basis.

 

   At and for the year ended December 31, 2014 
   Unpaid       Allowance for   Average   Interest 
   Principal