UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

x

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

 

For the quarterly period ended September 30, 2015

OR

¨

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

 

For the transition period from

To

 

Commission file number: 001-35221

 

State Investors Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Louisiana		27-5301129
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
1041 Veterans Boulevard Metairie, Louisiana		70005
(Address of Principal Executive Offices)		(Zip Code)

 

(504) 832-9400

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

 

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

x Yes            ¨ 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).

x Yes            ¨ 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

¨ Yes           x No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 13, 2015, 2,304,359 shares of the Registrant’s common stock were issued and outstanding.

 

 

 

STATE INVESTORS BANCORP, INC.

Form 10-Q

 

Table of Contents

 

		Page
PART I - FINANCIAL INFORMATION
Item 1 -	Financial Statements	1
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4 -	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1 -	Legal Proceedings	35
Item 1A -	Risk Factors	36
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3 -	Defaults Upon Senior Securities	36
Item 4 -	Mine Safety Disclosures	36
Item 5 -	Other Information	36
Item 6 -	Exhibits	37
Signatures		38

 

 

PART I

ITEM 1. FINANCIAL STATEMENTS

 

STATE INVESTORS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		September 30, 2015				December 31, 2014
		(Unaudited)
ASSETS
Cash – non-interest bearing		$	6,071			$	2,704
Cash – interest bearing			997				683
Federal funds sold			—				1,825
Cash and cash equivalents			7,068				5,212
Investment securities:
Available-for-sale			28,549				35,296
Held-to-maturity			201				249
Loans, net			200,048				218,206
Federal Home Loan Bank Stock			2,627				3,042
Accrued interest receivable			924				992
Premises and equipment, net			7,772				7,981
Other Real Estate, net			58				150
Deferred income taxes			386				315
Other assets			1,241				457
TOTAL ASSETS		$	248,874			$	271,900
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits		$	146,643			$	155,988
Advances from Federal Home Loan Bank			56,494				71,595
Advance payments by borrowers for taxes and insurance			1,317				976
Accrued interest payable			88				93
Other liabilities			1,463				1,215
TOTAL LIABILITIES			206,005				229,867
Stockholders’ Equity:
Preferred Stock, $.01 par value – 1,000,000 shares authorized; none issued			—				—
Common Stock, $.01 par value – 2,304,359 issued and outstanding at September 30, 2015; 2,909,500 issued and 2,308,019 outstanding at December 31, 2014			23				29
Additional Paid-in Capital			28,773				28,503
Treasury stock, none at September 30, 2015 and 601,481 shares at December 31, 2014			—				(8,580	)
Unallocated ESOP shares			(1,833	)			(1,920	)
Unallocated Recognition and Retention Plan (RRP) shares			(1,043	)			(1,205	)
Retained earnings – substantially restricted			16,544				24,682
Accumulated other comprehensive income			405				524
TOTAL STOCKHOLDERS’ EQUITY			42,869				42,033
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	248,874			$	271,900

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

STATE INVESTORS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(Unaudited)								(Unaudited)
INTEREST INCOME:
Interest and fees on loans		$	2,600			$	2,831			$	8,122			$	8,194
Interest on investment securities			105				109				335				334
Other interest and dividends			8				3				15				8
TOTAL INTEREST INCOME			2,713				2,943				8,472				8,536
INTEREST EXPENSE:
Interest on deposits			400				405				1,175				1,182
Interest on Federal Home Loan Bank advances			241				254				742				762
TOTAL INTEREST EXPENSE			641				659				1,917				1,944
NET INTEREST INCOME			2,072				2,284				6,555				6,592
PROVISION FOR LOAN LOSSES			50				50				150				150
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			2,022				2,234				6,405				6,442
NON-INTEREST INCOME:
Service charges and fees			44				57				136				156
Net gain (loss) on sale/write down of other real estate			2				(2	)			6				(4	)
TOTAL NON-INTEREST INCOME			46				55				142				152
NON-INTEREST EXPENSES:
Salaries and employee benefits			717				924				2,409				2,756
Occupancy expense			134				137				387				393
Data processing			162				164				439				428
Security			62				56				166				165
Deposit insurance premiums			38				37				114				116
Advertising			2				16				15				35
Professional fees			185				93				1,082				313
Taxes and licenses			60				62				205				196
Office supplies and postage			14				23				39				76
Service Charges			26				35				75				73
Other			166				202				567				637
TOTAL NON-INTEREST EXPENSES			1,566				1,749				5,498				5,188
INCOME BEFORE INCOME TAXES			502				540				1,049				1,406
INCOME TAX EXPENSE			197				196				537				570
NET INCOME		$	305			$	344			$	512			$	836
Earnings Per Common Share
Basic		$	0.13			$	0.15			$	0.22			$	0.36
Diluted		$	0.12			$	0.14			$	0.21			$	0.35

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

STATE INVESTORS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

		For the Three  Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
		(Unaudited)								(Unaudited)
Net income		$	305			$	344			$	512			$	836
Other Comprehensive Income (Loss):
Unrealized gains (losses) on investment securities			(24	)			(28	)			(182	)			116
Income tax effect			8				10				63				(39	)
OTHER COMPREHENSIVE INCOME (LOSS), net of taxes			(16	)			(18	)			(119	)			77
COMPREHENSIVE INCOME (LOSS)		$	289			$	326			$	393			$	913

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

STATE INVESTORS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

																										Accumulated
						Additional				Treasury				Unallocated				Unearned								Other				Total
		Common				Paid In				Stock				ESOP				RRP				Retained				Comprehensive				Stockholders’
		Stock				Capital				At Cost				Shares				Shares				Earnings				Income				Equity
		(Unaudited)
Balance at December 31, 2013		$	29			$	28,341			$	(7,279	)		$	(2,037	)		$	(1,361	)		$	23,415			$	458			$	41,566
Comprehensive Income:
Net Income			—				—				—				—				—				836				—				836
Other Comprehensive Income			—				—				—				—				—				—				77				77
RRP shares released for allocation			—				(62	)			—				—				156				—				—				94
ESOP shares released for allocation			—				68				—				88				—				—				—				156
Share based compensation cost			—				97				—				—				—				—				—				97
Treasury Stock acquired at cost, 69,715 shares			—				—				(1,299	)			—				—				—				—				(1,299	)
Balance at September 30, 2014		$	29			$	28,444			$	(8,578	)		$	(1,949	)		$	(1,205	)		$	24,251			$	535			$	41,527
Balance at December 31, 2014		$	29			$	28,503			$	(8,580	)		$	(1,920	)		$	(1,205	)		$	24,682			$	524			$	42,033
Comprehensive Income:
Net Income			—				—				—				—				—				512				—				512
Other Comprehensive Income			—				—				—				—				—				—				(119	)			(119	)
RRP  shares released for allocation			—				(12	)			—				—				162				—				—				150
ESOP shares released for allocation			—				96				—				87				—				—				—				183
Share based compensation cost			—				186				—				—				—				—				—				186
Treasury Stock acquired at cost, 3,660 shares			—				—				(76	)			—				—				—				—				(76	)
Reclassification of Treasury Stock per Louisiana Law			(6	)			—				8,656				—				—				(8,650	)			—				—
Balance at September 30, 2015		$	23			$	28,773			$	—			$	(1,833	)		$	(1,043	)		$	16,544			$	405			$	42,869

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

STATE INVESTORS BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine Months Ended September 30,
		2015				2014
		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	512			$	836
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			150				150
Depreciation and amortization			209				209
Amortization of securities			237				333
Stock dividend on FHLB stock			(8	)			(7	)
Deferred income tax benefit			(9	)			(78	)
Non-cash compensation			520				347
(Gain) Loss on sale of other real estate			(6	)			76
Changes in operating assets and liabilities:
Decrease in accrued interest receivable			68				2
Increase in other assets			(784	)			(33	)
Decrease in accrued interest payable			(5	)			—
Increase in other liabilities			248				538
NET CASH PROVIDED BY OPERATING ACTIVITIES			1,132				2,373
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans			17,950				(14,291	)
Proceeds from principal repayments of mortgage-backed securities			6,376				6,692
Purchases of mortgage-backed securities			—				(6,345	)
Proceeds from sales of FHLB stock			423				—
Purchase of FHLB stock			—				(375	)
Purchases of premises and equipment			—				(36	)
Proceeds from sale of foreclosed real estate			156				—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			24,905				(14,355	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit accounts			(9,345	)			(1,177	)
Increase in advances by borrowers for insurance and taxes			341				408
Advances from FHLB			28,000				30,337
Payments on advances from the FHLB			(43,101	)			(19,872	)
Purchase of Treasury Stock			(76	)			(1,299	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES			(24,181	)			8,397
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,856				(3,585	)
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD			5,212				8,734
CASH AND CASH EQUIVALENTS – END OF PERIOD		$	7,068			$	5,149
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest on deposits and borrowings		$	1,921			$	1,944
Income Taxes		$	385			$	411
Transfer from loans to other real estate		$	58			$	226
Change in unrealized (loss) gain on securities available for sale, before tax effect		$	(182	)		$	116

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1 – Basis of Presentation

 

On July 6, 2011, State-Investors Bank completed its conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank. In connection with the conversion, State-Investors Bank formed State Investors Bancorp, Inc., a Louisiana chartered corporation (the "Company" or "State Investors Bancorp"), which offered and sold 2,909,500 shares of its common stock at a price of $10.00 per share to eligible depositors and borrowers of the Bank. Upon completion of the conversion and the offering, all of State-Investors Bank's stock is owned by State Investors Bancorp. The Company raised proceeds of approximately $27.9 million, net of offering expenses, and contributed approximately 50% of the net proceeds to the Bank. All remaining proceeds were retained by State Investors Bancorp for future capital needs.

 

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the 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 fiscal year. For further information, please review the audited, consolidated financial statements of State Investors Bancorp for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K (File No. 001-35221).

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, State-Investors Bank. All significant intercompany balances and transactions between the Company and its wholly-owned subsidiary have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Loans

 

The Bank grants mortgage, commercial and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs on originated loans.

 

Loan origination and commitment fees are deferred and amortized as a yield adjustment over the contractual lives of the related loans using the interest method. Discounts on consumer loans are recognized over the contractual lives of the loans using the interest method.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 1 – Basis of Presentation (Continued)

 

Loans (Continued)

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Allowance for Loan Losses

 

The allowance for loan losses is maintained at a level which, in management’s judgment, is considered to be adequate to absorb credit losses inherent in the loan portfolio. The allowance for loan losses is based upon management’s review and evaluation of the loan portfolio.

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. For loans that are considered impaired, an allowance is established based on the discounted cash flows for collateral value or observable market price of the impaired loan. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 1 – Basis of Presentation (Continued)

 

Other Real Estate

 

Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell.

 

Earnings per Share

 

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares.

 

Stockholders’ Equity

 

On January 1, 2015, the Louisiana Business Corporation Act (the Act) became effective. Under the provisions of the Act, there is no concept of “Treasury Shares.” Rather, shares purchased by the Company constitute authorized but unissued shares. Under the Accounting Standards Codification (ASC 505-30, Treasury Stock), accounting for treasury stock shall conform to state law. Accordingly, the Company's Condensed Consolidated Statement of Financial Condition as of September 30, 2015 reflects this change. The cost of shares purchased by the Company has been allocated to Common Stock and Retained Earnings balances.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and was adopted by the Company as of January 1, 2015. The adoption of this update did not have significant impact on the Company’s consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 1 – Basis of Presentation (Continued)

 

Reclassifications

 

Certain reclassifications have been made to the 2014 financial statements to conform with the 2015 financial statement presentation. Such reclassifications had no effect on net income or retained earnings as previously reported.

 

Subsequent Events

 

The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

 

Note 2 – Investment Securities

 

A summary of the amortized cost and fair values of the investment securities is presented below:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
						(In thousands)
Mortgage-backed securities
September 30, 2015
Held-to-maturity:
GNMA Certificates		$	176			$	5			$	—			$	181
FNMA Certificates			19				1				—				20
FHLMC Certificates			6				—				—				6
Total held-to-maturity securities			201				6				—				207
Available-for-sale:
GNMA Certificates			27,936				613				—				28,549
Total securities		$	28,137			$	619			$	—			$	28,756
December 31, 2014
Held-to-maturity:
GNMA Certificates		$	211			$	6			$	—			$	217
FNMA Certificates			30				2				—				32
FHLMC Certificates			8				—				—				8
Total held-to-maturity securities			249				8				—				257
Available-for-sale:
GNMA Certificates			34,501				796				(1	)			35,296
Total securities		$	34,750			$	804			$	(1	)		$	35,553

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 2 – Investment Securities (Continued)

 

The amortized cost and fair values of the securities at September 30, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Held-to-Maturity								Available-for-Sale
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Mortgage-backed securities
September 30, 2015
Amounts maturing in:
One year or less		$	16			$	17			$	—			$	—
After one year through five years			185				190				27,733				28,342
After five years through ten years			—				—				203				207
After ten years			—				—				—				—
		$	201			$	207			$	27,936			$	28,549

 

There were no sales or calls of available-for-sale securities during the nine months ended September 30, 2015 or 2014.

 

Management evaluates securities for other-than-temporary impairment on a periodic and regular basis, as well as when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

 

Gross unrealized losses in investment securities at December 31, 2014, existing for continuous periods of less than 12 months and for continuous periods of 12 months or more are as follows. Due to the nature of the investments and current market prices, these unrealized losses are considered a temporary impairment of these securities. There were no gross unrealized losses on investment securities at September 30, 2015.

 

December 31, 2014		Less than 12 Months								12 Months or More								Totals
Security Description		Fair Value				Gross Unrealized (Loss)				Fair Value				Gross Unrealized (Loss)				Fair Value				Gross Unrealized (Loss)
(In thousands)
Mortgage-backed securities:
GNMA Certificates		$	581			$	(1	)		$	—			$	—			$	581			$	(1	)

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses

 

Loans receivable at September 30, 2015 and December 31, 2014, are summarized as follows:

 

		September 30, 2015				December 31, 2014
		(In thousands)
Real estate loans:
One-to-four family residential		$	123,534			$	137,036
Commercial real estate			53,391				57,487
Multi-family residential			6,450				7,271
Land			3,157				3,428
Residential construction			10,931				10,075
Total real estate loans			197,463				215,297
Other loans:
Home equity lines of credit			2,608				2,819
Consumer non-real estate loans			1,282				1,268
Commercial business loans			582				607
Total other loans			4,472				4,694
Total loans			201,935				219,991
Less:
Deferred loan fees			(340	)			(388	)
Allowance for loan losses			(1,547	)			(1,397	)
Net loans		$	200,048			$	218,206

 

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.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

The following tables set forth, for the nine months ended September 30, 2015 and year ended December 31, 2014, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. 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.

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable for the Nine Months Ended September 30, 2015.

 

		Mortgage- Permanent- 1 to 4 Family				Mortgage- Permanent- Other				Mortgage- Construction				Commercial				Consumer				Total
		(In thousands)
Allowance for credit losses:
Beginning balance		$	518			$	835			$	26			$	3			$	15			$	1,397
Charge-offs			—				—				—				—				—				—
Recoveries			—				—				—				—				—				—
Provision			48				86				6				1				9				150
Ending balance		$	566			$	921			$	32			$	4			$	24			$	1,547
Ending balance evaluated for impairment:
Individually		$	—			$	—			$	—			$	—			$	—			$	—
Collectively		$	566			$	921			$	32			$	4			$	24			$	1,547
Loans receivable:
Ending balance		$	126,142			$	62,998			$	10,931			$	582			$	1,282			$	201,935
Ending balance evaluated for impairment:
Individually		$	1,445			$	1,510			$	—			$	—			$	—			$	2,955
Collectively		$	124,697			$	61,488			$	10,931			$	582			$	1,282			$	198,980

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable for the Year Ended December 31, 2014

 

		Mortgage- Permanent- 1 to 4 Family				Mortgage- Permanent- Other				Mortgage- Construction				Commercial				Consumer				Total
		(In thousands)
Allowance for credit losses:
Beginning balance		$	548			$	770			$	14			$	4			$	15			$	1,351
Charge-offs			(78	)			(76	)			—				—				—				(154	)
Recoveries			—				—				—				—				—				—
Provision			48				141				12				(1	)			—				200
Ending balance		$	518			$	835			$	26			$	3			$	15			$	1,397
Ending balance evaluated for impairment:
Individually		$	—			$	—			$	—			$	—			$	—			$	—
Collectively		$	518			$	835			$	26			$	3			$	15			$	1,397
Loans receivable:
Ending balance		$	139,855			$	68,186			$	10,075			$	607			$	1,268			$	219,991
Ending balance evaluated for impairment:
Individually		$	1,322			$	1,525			$	—			$	—			$	—			$	2,847
Collectively		$	138,533			$	66,661			$	10,075			$	607			$	1,268			$	217,144

 

Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

 

At September 30, 2015 and December 31, 2014, the credit quality indicators, disaggregated by class of loan, are presented in the following tables.

 

		September 30, 2015
		Pass				Special Mention				Substandard				Doubtful				Total
		(In thousands)
1 to 4 family residential		$	118,694			$	912			$	3,928			$	—			$	123,534
Commercial real estate			52,391				235				765				—				53,391
Multi-family residential			5,332				—				1,118				—				6,450
Land			3,157				—				—				—				3,157
Residential construction			10,931				—				—				—				10,931
Home equity lines of credit			2,573				35				—				—				2,608
Consumer non-real estate loans			1,282				—				—				—				1,282
Commercial business loans			582				—				—				—				582
Total Loans		$	194,942			$	1,182			$	5,811			$	—			$	201,935

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

		December 31, 2014
		Pass				Special Mention				Substandard				Doubtful				Total
		(In thousands)
One-to-four family residential		$	131,737			$	995			$	4,304			$	—			$	137,036
Commercial real estate			56,462				243				782				—				57,487
Multi-family residential			6,144				—				1,127				—				7,271
Land			3,428				—				—				—				3,428
Residential construction			10,075				—				—				—				10,075
Home equity lines of credit			2,784				35				—				—				2,819
Consumer non-real estate loans			1,268				—				—				—				1,268
Commercial business loans			607				—				—				—				607
Total Loans		$	212,505			$	1,273			$	6,213			$	—			$	219,991

 

The above classifications follow regulatory guidelines and can generally be described as follows:

 

·

Pass loans are of satisfactory quality.

 

·

Special mention loans have existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in collateral values.

 

·

Substandard loans have an existing specific and well defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due. Immediate corrective action is necessary.

 

·

Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

These classifications were the most current available as of September 30, 2015.

 

The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of September 30, 2015 and December 31, 2014:

 

Aged Analysis of Past Due Loans Receivable as of September 30, 2015 and December 31, 2014

 

	30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Recorded Investment Over 90 Days Past Due and Still Accruing
	(In thousands)
September 30, 2015
Mortgage Loans:
Permanent:
1 to 4 family	$	3,397			$	1,247			$	776			$	5,420			$	120,722			$	126,142			$	121
Multifamily		—				—				—				—				6,450				6,450				—
Commercial RE		572				—				4				576				52,815				53,391				4
Other		—				—				—				—				3,157				3,157				—
Construction-Residential		—				—				—				—				10,931				10,931				—
Nonmortgage Loans:
Commercial		—				55				—				55				527				582				—
Consumer		—				5				—				5				1,277				1,282				—
Total	$	3,969			$	1,307			$	780			$	6,056			$	195,879			$	201,935			$	125

 

	30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Recorded Investment Over 90 Days Past Due and Still Accruing
	(In thousands)
December 31, 2014
Mortgage Loans:
Permanent:
1 to 4 family	$	2,938			$	1,218			$	678			$	4,834			$	135,021			$	139,855			$	678
Multifamily		—				—				—				—				7,271				7,271				—
Commercial RE		243				—				—				243				57,244				57,487				—
Other		—				—				—				—				3,428				3,428				—
Construction-Residential		—				653				—				653				9,422				10,075				—
Nonmortgage Loans:
Commercial		—				—				213				213				394				607				213
Consumer		7				—				—				7				1,261				1,268				—
Total	$	3,188			$	1,871			$	891			$	5,950			$	214,041			$	219,991			$	891

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

Loan Receivables on Nonaccrual Status

 

		September 30, 2015				December 31, 2014
		(In thousands)
Mortgage Loans:
Permanent, Secured by
1 to 4 family		$	655			$	—
Multifamily			—				—
Total  Loans on Nonaccrual Status		$	655			$	—

 

A summary of the impaired loans by class of loans as of and for the nine months ended September 30, 2015 and year ended December 31, 2014, is as follows:

 

Impaired Loans as of and for the Nine Months Ended September 30, 2015

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In thousands)
With an allowance recorded:
Mortgage Loans
Permanent, Secured by
1-4 Family		$	—			$	—			$	—			$	—			$	—
Multifamily			—				—				—				—				—
Commercial RE			—				—				—				—				—
Other			—				—				—				—				—
Construction – Residential			—				—				—				—				—
Nonmortgage Loans
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	—			$	—			$	—			$	—			$	—
With no allowance recorded:
Mortgage Loans
Permanent, Secured by
1-4 Family		$	1,445			$	1,445			$	—			$	1,445			$	52
Multifamily			1,118				1,118				—				1,118				50
Commercial RE			392				392				—				392				9
Other			—				—				—				—				—
Construction – Residential
Nonmortgage Loans			—				—				—				—				—
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	2,955			$	2,955			$	—			$	2,955			$	111
Total Impaired Loans:
Mortgage Loans
Permanent		$	2,955			$	2,955			$	—			$	2,955			$	111
Construction			—				—				—				—				—
Nonmortgage Loans
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	2,955			$	2,955			$	—			$	2,955			$	111

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

Impaired Loans For the Year Ended December 31, 2014

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In thousands)
With an allowance recorded:
Mortgage Loans
Permanent, Secured by
1-4 Family		$	—			$	—			$	—			$	—			$	—
Multifamily			—				—				—				—				—
Commercial RE			—				—				—				—				—
Other			—				—				—				—				—
Construction – Residential			—				—				—				—				—
Nonmortgage Loans
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	—			$	—			$	—			$	—			$	—
With no allowance recorded:
Mortgage Loans
Permanent, Secured by
1-4 Family		$	1,322			$	1,322			$	—			$	1,322			$	72
Multifamily			1,127				1,127				—				1,127				69
Commercial RE			398				398				—				398				18
Other			—				—				—				—				—
Construction – Residential			—				—				—				—				—
Nonmortgage Loans
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	2,847			$	2,847			$	—			$	2,847			$	159
Total Impaired Loans:
Mortgage Loans
Permanent		$	2,847			$	2,847			$	—			$	2,847			$	159
Construction			—				—				—				—				—
Nonmortgage Loans
Commercial			—				—				—				—				—
Consumer			—				—				—				—				—
		$	2,847			$	2,847			$	—			$	2,847			$	159

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 3 - Loans and the Allowance for Loan Losses (Continued)

 

The following tables summarize information relative to the loan modifications as of September 30, 2015 and December 31, 2014. All of these loans are included in impaired loans as of September 30, 2015 and December 31, 2014.

 

Modifications as of September 30, 2015

 

		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(Dollars in thousands)
Troubled Debt Restructurings
Mortgage Loans:
Permanent			5			$	2,875			$	2,420
Construction			—				—				—
Nonmortgage Loans:
Commercial			—				—				—
Consumer			—				—				—
Total Loans			5			$	2,875			$	2,420

 

Modifications as of December 31, 2014

 

		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(Dollars in thousands)
Troubled Debt Restructurings
Mortgage Loans:
Permanent			5			$	2,875			$	2,446
Construction			—				—				—
Nonmortgage Loans:
Commercial			—				—				—
Consumer			—				—				—
Total Loans			5			$	2,875			$	2,446

 

None of the troubled debt restructurings defaulted subsequent to the restructuring through the date the financial statements were issued.

 

Note 4 – Deposits

 

Deposit account balances at September 30, 2015 and December 31, 2014 are summarized as follows:

 

		September 30, 2015				December 31, 2014
		(In thousands)
NOW accounts
Interest bearing		$	12,512			$	16,835
Non-interest bearing			9,094				9,487
Money Market funds			9,171				9,762
Savings			26,191				27,699
Certificates of deposit			89,675				92,205
		$	146,643			$	155,988

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 5 - Fair Values of Financial Instruments

 

Fair Value Disclosures

 

The Company groups its financial assets and liabilities measured at fair value in three levels. Fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

•

Level 1 — Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

 

•

Level 2 — Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market- corroborated inputs).

 

•

Level 3 — Includes unobservable inputs and should be used only when observable inputs are unavailable.

 

Recurring Basis

 

Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

 

The following tables present the balance of assets and liabilities measured on a recurring basis as of September 30, 2015 and December 31, 2014. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

 

						Fair Value at Reporting Date Using
		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
September 30, 2015
Available-for-sale:
Mortgage Backed Securities		$	28,549			$	—			$	28,549			$	—

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 5 - Fair Values of Financial Instruments (Continued)

 

Recurring Basis (Continued)

 

						Fair Value at Reporting Date Using
		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2014
Available-for-sale:
Mortgage Backed Securities		$	35,296			$	—			$	35,296			$	—

 

Nonrecurring Basis

 

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.

 

The fair value of the impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company records repossessed assets as Level 2.

 

						Fair Value at Reporting Date Using
		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
September 30, 2015
Assets:
Impaired Loans		$	2,955			$	—			$	2,955			$	—

 

						Fair Value at Reporting Date Using
		Fair Value				Quoted Prices in Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2014
Assets:
Impaired Loans		$	2,847			$	—			$	2,847			$	—

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 5 – Fair Values of Financial Instruments (Continued)

 

Financial Instruments

 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. In accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and Short-Term Investments — For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities — Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

Loans — The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.

 

Deposits — The fair value of demand deposits, savings account, and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

 

Borrowings — The fair value of FHLB advances is estimated using the rates currently offered in the market for advances of similar maturities.

 

Commitments to Extend Credit and Standby Letters of Credit — The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 5 – Fair Values of Financial Instruments (Continued)

 

Financial Instruments (Continued)

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of the Company’s entire holdings. Fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.

 

		Fair Value Measurements at September 30, 2015
		Carrying Amount				Total				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets:
Cash and Short-Term Investments		$	7,068			$	7,068			$	7,068			$	—			$	—
Investment Securities
Available-for-sale			28,459				28,549				—				28,459				—
Investment Securities
Held-to-maturity			201				207				—				207				—
Loans – Net			200,048				202,000				—				—				202,000
Financial Liabilities:
Deposits		$	146,643			$	140,000			$	—			$	—			$	140,000
FHLB Borrowings			56,494				58,000				—				58,000				—

 

		Fair Value Measurements at December 31, 2014
		Carrying Amount				Total				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets:
Cash and Short-Term Investments		$	5,212			$	5,212			$	5,212			$	—			$	—
Investment Securities
Available-for-sale			35,296				35,296				—				35,296				—
Investment Securities
Held-to-maturity			249				257				—				257				—
Loans – Net			218,206				222,000				—				—				222,000
Financial Liabilities:
Deposits		$	155,988			$	148,000			$	—			$	—			$	148,000
FHLB Borrowings			71,595				72,000				—				72,000				—

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 6 – Stock Compensation Plans

 

Employee Stock Ownership Plan

 

In connection with the mutual to stock conversion completed in the third quarter of fiscal 2011, effective July 1, 2011, the Company instituted an employee stock ownership plan. The State-Investors Bank Employee Stock Ownership Plan (“ESOP”) enables all eligible employees of the Bank to share in the growth of the Company through the acquisition of stock. Employees are generally eligible to participate in the ESOP after completion of one year of service and attaining the age of 21.

 

The ESOP purchased the statutory limit of eight percent of the shares sold in the initial public offering of the Company on July 6, 2011. This purchase was facilitated by a loan from the Company to the ESOP in the amount of $2.3 million. The loan is secured by a pledge of the ESOP shares. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. The corresponding note is being repaid in 80 quarterly debt service payments of $40,000 on the last business day of each quarter, beginning September 30, 2011, at the rate of 3.25%.

 

The Company, at its discretion, may contribute to the ESOP, in the form of debt service. Cash dividends on the Company’s stock shall be used to either repay the loan, be distributed to the participants in the ESOP, or retained in the ESOP and reinvested in Company stock. Shares are released for allocation to ESOP participants based on principal and interest payments of the note. Compensation expense is recognized based on the number of shares allocated to ESOP participants each period and the average market price of the stock for the period.

 

ESOP compensation expense for the nine month periods ended September 30, 2015 and 2014, was $184,000 and $138,000, respectively.

 

Recognition and Retention Plan

 

In January 2012, the shareholders of State Investors Bancorp approved the adoption of the 2012 Recognition and Retention Plan (the “RRP”) and Trust Agreement. In order to fund the RRP, the RRP Trust acquired 116,380 shares of the Company’s stock in the open market at an average price of $12.73 per share. Pursuant to the RRP, 81,462 shares were granted to certain officers, employees and directors of the Company in January 2012, with 34,918 shares remaining available for future grant. The RRP share awards have vesting periods from five to seven years.

 

A summary of the status of the shares under the RRP as of September 30, 2015 and changes during the nine months ended September 30, 2015, is as follows:

 

		September 30, 2015
		Number of Shares				Weighted  Average Grant  Date Fair Value
Balance at the beginning of the year			52,278			$	11.82
Granted			—				—
Forfeited			—				—
Released			(11,101	)			11.82
Balance at the end of the period			41,177			$	11.82

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 6 – Stock Compensation Plans (Continued)

 

Recognition and Retention Plan (Continued)

 

The weighted average grant date fair value is the last sale price as quoted on the Nasdaq stock market on January 24, 2012. Compensation expense on the RRP shares granted is recognized ratably over the five to seven year vesting period in an amount which is equal to the fair value of the common stock at the date of grant. During the nine month periods ended September 30, 2015 and 2014, $244,000 and $123,000 in compensation expense was recognized, respectively. As of September 30, 2015, approximately $399,000 in additional compensation expense will be recognized over the remaining average service period of approximately 2.8 years. Under the terms of the RRP, any unvested RRP awards will become fully vested upon change in control, such as the proposed merger with First NBC, resulting in the full recognition of any unrecognized expense.

 

Stock Options

 

In January 2012, the shareholders of State Investors Bancorp approved the adoption of the 2012 Stock Option Plan (the “Option Plan”). The Option Plan authorizes the grant of stock options to officers, employees and directors of the Company to acquire 290,950 shares of common stock with an exercise price no less than the fair market value on the date of the grant. The Compensation Committee of the Board of Directors granted 216,755 stock options on January 24, 2012 to certain officers, employees and directors of the Company at an exercise price of $11.82 per share, equal to the fair market value of the common stock on the grant date. On January 24, 2014, the Compensation Committee granted 20,000 options to certain officers at an exercise price of $15.99 per share. The remaining 54,195 stock options are available for future grant. All incentive stock options issued under the Option Plan are intended to comply with the requirements of Section 422 of the Internal Revenue Code. Options will become vested and exercisable over a five to seven year period and are generally exercisable for a period of ten years after the grant date.

 

A summary of option activity under the Company’s Option Plan as of September 30, 2015 and changes during the nine months ended September 30, 2015 is as follows:

 

		September 30, 2015
		Number of Shares				Weighted Average Exercise Price				Weighted Average Grant Date Fair Value
Outstanding at the beginning of the year			221,626			$	12.17			$	3.29
Granted			—				—				—
Exercised			—				—				—
Forfeited			—				—				—
Outstanding at the end of the period			221,626				12.17			$	3.29
Exercisable at the end of the period			112,438			$	12.03			$	3.22

 

During the nine months ended September 30, 2015 and 2014, $93,000 and $83,000 in compensation expense was recognized, respectively. As of September 30, 2015, approximately $344,000 in additional compensation expense will be recognized over the remaining average service period of approximately 2.8 years. Under the terms of the Option Plan, any unvested options will become fully vested upon change in control, such as the proposed merger with First NBC, resulting in the full recognition of any unrecognized expense.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited)

 

Note 7 – Earning Per Share

 

Earnings per common share was computed based on the following:

 

		Nine Months ended September 30,
		2015				2014
		(In thousands, except per share data)
Numerator
Income applicable to common shares		$	512			$	836
Denominator
Weighted average common shares outstanding			2,305				2,334
Effect of dilutive securities			131				82
Weighted average common shares outstanding – assuming dilution			2,436				2,416
Earnings per common share		$	0.22			$	0.36
Earnings per common share - assuming dilution		$	0.21			$	0.35

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of State Investors Bancorp, Inc. (“State Investors Bancorp” or the “Company”) from December 31, 2014 to September 30, 2015 and on its results of operations during the quarter and nine months ended September 30, 2015 and 2014. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the financial statements and related notes appearing in Item 1.

 

To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or State-Investors Bank (the “Bank”), these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of the words “plan”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s or Bank’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. The Company does not intend to update these forward-looking statements.

 

The Company’s profitability depends primarily on net interest income, which is the difference between interest income earned on interest-earning assets, principally loans, and interest expense paid on interest-bearing liabilities, principally deposits. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. State Investors Bancorp’s profitability also depends, to a lesser extent, on interest-earning deposits in other institutions, non-interest income, borrowings from the Federal Home Loan Bank of Dallas, provisions for loan losses, non-interest expenses and federal income taxes. On December 30, 2014, State Investors Bancorp entered into a definitive Agreement and Plan of Reorganization with First NBC under which First NBC will acquire all outstanding shares of common stock of the Company in a cash-for-stock transaction. For further information on the Company’s proposed merger with First NBC, see Item 5 in Part II herein.

 

Critical Accounting Policies

 

In reviewing and understanding financial information for State Investors Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our financial statements. The accounting and financial reporting policies of State Investors Bancorp conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

Allowance for Loan Losses. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The allowance for loan losses is comprised of specific allowances and a general allowance. Specific provisions are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The allowance related to loans that are identified as impaired is based on discounted expected future cash flows using the loan's initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific provisions include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General allowances are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general allowance, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.

 

Our allowance levels may be impacted by changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the allowance levels. The allowance for loan losses is based on management's estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The allowance for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the allowance for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the allowance.

 

Other-Than-Temporary Impairment. We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer including any specific events that may influence the operations of the issuer, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. Inherent in this analysis is a certain amount of imprecision in the judgment used by management.

 

We recognize credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold is recognized in accumulated other comprehensive income. We assess whether the credit loss existed by considering whether (a) we have the intent to sell the security, (b) it is more likely than not that we will be required to sell the security before recovery, or (c) we do not expect to recover the entire amortized cost basis of the security. We may bifurcate the other-than-temporary impairment on securities not expected to be sold or where the entire amortized cost of the security is not expected to be recovered into the components representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss is recognized through earnings.

 

Corporate debt securities are evaluated for other-than-temporary impairment by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows involves the calculation of the present value of remaining cash flows compared to previously projected cash flows. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit-related other-than-temporary impairment exists on corporate debt securities.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income, we may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.

 

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

 

General. The Company’s total assets decreased by $23.0 million, to $248.9 million at September 30, 2015, compared to $271.9 million at December 31, 2014. For the nine months ended September 30, 2015, the decrease primarily reflects decreases in net loans receivable of $18.2 million, or 8.3%, a decrease in investment securities of $6.8 million, or 19.1%, a decrease in Federal Home Loan Bank stock of $415,000, or 13.6%, and $58,000 of other real estate owned at September 30, 2015, compared to $150,000 at December 31, 2014, partially offset by increases in cash and cash equivalents of $1.9 million, or 35.6%, other assets of $784,000, or 171.2%, and deferred income taxes of $71,000, or 22.5%.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $1.9 million, or 35.6%, from $5.2 million at December 31, 2014, to $7.1 million at September 30, 2015, primarily as a result of paydowns received on available for sale securities and principal payments received on loans receivable.

 

Loans Receivable, Net. Loans receivable, net, decreased by $18.2 million, or 8.3%, to $200.0 million at September 30, 2015, compared to $218.2 million at December 31, 2014. During the nine months ended September 30, 2015, our total loan originations and purchases amounted to $13.7 million and loan principal payments were $31.8 million. All of our loans are originated for portfolio. The decrease in loans receivable, net, was primarily due to decreases in one-to-four family residential loans of $13.5 million, commercial real estate loans of $4.1 million, multi-family residential loans of $821,000, land loans of $271,000, home equity lines of credit of $211,000 and commercial business loans of $25,000. These decreases were partially offset by increases of $856,000 in residential construction loans and $14,000 in consumer non-real estate loans.

 

Investment Securities. Investment and mortgage-backed securities amounted to $28.8 million at September 30, 2015, compared to $35.5 million at December 31, 2014, a decrease of $6.8 million, or 19.1%. The decrease in mortgage-backed securities at September 30, 2015, was due to paydowns received and unrealized losses on available-for-sale securities during the nine-month period.

 

Premises and Equipment, Net. Premises and equipment, net, decreased $209,000, to $7.8 million at September 30, 2015, compared to $8.0 million at December 31, 2014, primarily due to depreciation of fixed assets.

 

Total liabilities. Total liabilities decreased $23.9 million, at September 30, 2015, to $206.0 million compared to $229.9 million at December 31, 2014, primarily due to decreases of $15.1 million in advances from the Federal Home Loan Bank and $9.3 million in deposits. Deposits decreased $9.3 million, or 6.0%, to $146.6 million at September 30, 2015, compared to $156.0 million at December 31, 2014, primarily due to decreases of $4.3 million, or 25.7%, in interest bearing checking accounts, $2.5 million, or 2.7% in certificates of deposit, $1.5 million, or 5.4%, in savings accounts, $591,000, or 6.1% in money market accounts, and $393,000, or 4.1%, in non-interest bearing checking accounts.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

We had $56.5 million of advances from the Federal Home Loan Bank at September 30, 2015 compared to $71.6 million at December 31, 2014, a decrease of $15.1 million, or 21.1%. The decrease in Federal Home Loan Bank advances was due to the decrease in loans receivable.

 

Total Stockholders’ Equity. Total stockholders’ equity amounted to $42.9 million at September 30, 2015, compared to $42.0 million at December 31, 2014, an increase of $836,000, or 2.0%. The reason for the increase in our total stockholders’ equity was primarily due to $521,000 in stock benefit plan expenses and net income of $519,000, partially offset by a decrease in unrealized gain on securities available for sale of $119,000, net of the deferred tax effect, for the nine months ended September 30, 2015, and the purchase of $76,000 of shares under the Company’s stock repurchase program.

 

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2015 and 2014

 

General. The Company’s net income amounted to $305,000 for the three months ended September 30, 2015, a decrease of $39,000, or 11.3%, compared to net income of $344,000 for the three months ended September 30, 2014. This decrease was primarily due to a $230,000 or 7.8%, decrease in total interest income, a $9,000 or 16.4%, decrease in non-interest income, and a $1,000, or 0.5%, increase in the provision for income taxes, partially offset by a $183,000, or 10.5%, decrease in non-interest expense, and an $18,000, or 2.7%, decrease in total interest expense.

 

The Company’s net income amounted to $512,000 for the nine months ended September 30, 2015, a decrease of $324,000, compared to net income of $836,000 for the nine months ended September 30, 2014. This decrease was primarily due to an increase of $310,000, or 6.0% in non-interest expense, a decrease in total interest income of $64,000, or 0.8%, partially offset by a decrease of $33,000, or 5.8%, in the provision for income taxes and a decrease in total interest expense of $27,000, or 1.4%.

 

Net Interest Income. Net interest income amounted to $2.1 million and $2.3 million for the three months ended September 30, 2015, and 2014, respectively. The $212,000, or 9.3%, decrease was primarily due to a $230,000 decrease in total interest income as a result of an overall decrease in interest earnings assets partially offset by an $18,000 decrease in total interest expense. Interest paid on deposits and Federal Home Loan Bank advances decreased $5,000 and $13,000, respectively, for the three months ended September 30, 2015, compared to the prior year period.

 

Net interest income amounted to $6.6 million for both the nine months ended September 30, 2015 and 2014. The $37,000, or 0.6%, decrease was primarily due to a decrease of interest income of $64,000, partially offset by decreases in interest paid on Federal Home Loan Bank advances and deposits of $20,000 and $7,000, respectively, for the nine months ended September 30, 2015, compared to the prior year period.

 

The average interest rate spread was 3.25% and 3.38% for the three months ended September 30, 2015 and 2014, respectively. Average interest-earning assets to average interest-bearing liabilities increased from 119.85% for the three months ended September 30, 2014, to 122.05% for the three months ended September 30, 2015. The decrease in average interest rate spread reflects the 6 basis point decrease in the average yield on interest earning assets from 4.63% for the third quarter of 2014 to 4.57% for the third quarter of 2015 and by an eight basis point increase in the average rate paid on interest-bearing liabilities from 1.24% for the third quarter 2014 to 1.32% for the third quarter 2015. Net interest margin decreased 10 basis point from 3.59% to 3.49% for the three months ended September 30, 2014 and 2015, respectively.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

The average interest rate spread increased 2 basis points from 3.32% for the nine months ended September 30, 2014 to 3.34% for the nine months ended September 30, 2015, and average interest-earning assets decreased from $249.7 million to $246.5 million during the same periods. Average interest-earning assets to average interest bearing liabilities increased from 119.30% for the nine months ended September 30, 2014, to 120.36% for the nine months ended September 30, 2015. The increase in the average interest rate spread primarily reflects the two basis point increase in the average yield on interest earning assets from 4.56% for the nine months ended September 30, 2014, to 4.58% for the nine months ended September 30, 2015. The average rate paid on interest-bearing liabilities increased one basis point from 1.24% for the nine months ended September 30, 2014, to 1.25% for the nine months ended September 30, 2015. Net interest margin increased three basis points from 3.52% to 3.55% for the nine months ended September 30, 2014 and 2015, respectively.

 

Interest income decreased $230,000 or 7.8% to $2.7 million for the three months ended September 30, 2015 compared to $2.9 million for the third quarter of 2014. The decrease was primarily due to a $17.1 million decrease in average interest earning assets, partially offset by a 23 basis point increase in the average yield on mortgage backed securities from 1.19% for the third quarter in 2014 to 1.42% for the third quarter in 2015, and a 39 basis point increase in the average yield on other interest-earning assets from 0.24% for the third quarter of 2014 to 0.63% for the third quarter of 2015.

 

Interest income decreased by $64,000 or 0.8%, to $8.5 million for both the nine months ended September 30, 2015 and 2014. The decrease was primarily due to a $3.3 million decrease in average interest earning assets, partially offset by a 20 basis point increase in average yield on mortgage backed securities from 1.20% for the nine months ended September 30, 2014, to 1.40% for the nine months ended September 30, 2015.

 

Interest expense decreased by $18,000, or 2.7%, to $641,000 for the three months ended September 30, 2015, compared to $659,000 for the three months ended September 30, 2014, primarily as a result of a $17.9 million decrease in average interest bearing liabilities, partially offset by a 11 basis point increase in the average rate paid Federal Home Loan Bank advances combined with a seven basis point increase in the average cost of total deposits. The increase in the average rate paid on Federal Home Loan Bank advances is due to an increase in the cost of the advances. The increase in average rate of total deposits is due to an increase in the cost of certificates of deposit as lower cost certificates of deposit repriced at higher rates during the period.

 

Interest expense decreased by $27,000, or 1.4%, to $1.9 million for both the nine months ended September 30, 2015 and 2014, primarily as a result of a $4.5 million decrease in average interest-bearing liabilities, combined with a 13 basis point decrease in average cost on Federal Home Loan Bank advances, offset by a five basis point increase in the average rate paid on certificates of deposit accounts. The increase in average rate of total deposits is due to an increase in the cost of certificates of deposit as lower cost certificates of deposit repriced at higher rates during the period.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following tables show for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, the average interest rate spread and the net interest margin. As the Company owned no tax-exempt securities during the periods presented, no tax-equivalent yield adjustments were made. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

 

		Three Months Ended September 30,
		2015												2014
		Average Balance				Interest				Average Yield/Rate				Average Balance				Interest				Average Yield/Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)		$	202,710			$	2,600				5.13	%		$	212,993			$	2,831				5.32	%
Mortgage-backed securities			29,572				105				1.42	%			36,501				109				1.19	%
Other interest-earning assets			5,102				8				0.63	%			5,026				3				0.24	%
Total interest-earning assets			237,384				2,713				4.57	%			254,520				2,943				4.63	%
Non-interest-earning assets			15,275												15,427
Total assets		$	252,659											$	269,947
Interest-bearing liabilities:
Savings, NOW and money market accounts		$	45,840				20				0.17	%		$	53,393				24				0.18	%
Certificates of deposit			90,540				380				1.68	%			93,565				381				1.63	%
Total deposits			136,380				400				1.17	%			146,958				405				1.10	%
FHLB advances			58,117				241				1.66	%			65,410				254				1.55	%
Total interest-bearing liabilities			194,497				641				1.32	%			212,368				659				1.24	%
Non-interest-bearing liabilities			15,398												16,074
Total liabilities			209,895												228,442
Equity			42,764												41,505
Total liabilities and equity		$	252,659											$	269,947
Net interest-earning assets		$	42,887											$	42,152
Net interest income, average interest rate spread						$	2,072				3.25	%						$	2,284				3.38	%
Net interest margin(2)											3.49	%											3.59	%
Average interest earning assets to average interest bearing liabilities											122.05	%											119.85	%

 

(1)

Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

 

(2)

Equals net interest income divided by average interest-earning assets.

 

 

		Nine Months Ended September 30,
		2015												2014
		Average Balance				Interest				Average Yield/Rate				Average Balance				Interest				Average Yield/Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)		$	209,836			$	8,122				5.16	%		$	207,930			$	8,194				5.25	%
Mortgage-backed securities			31,924				335				1.40	%			36,976				334				1.20	%
Other interest-earning assets			4,692				15				0.43	%			4,800				8				0.22	%
Total interest-earning assets			246,452				8,472				4.58	%			249,706				8,536				4.56	%
Non-interest-earning assets			15,926												15,154
Total assets		$	262,378											$	264,860
Interest-bearing liabilities:
Savings, NOW and money market accounts		$	48,616				63				0.17	%		$	54,113				69				0.17	%
Certificates of deposit			90,551				1,112				1.64	%			93,163				1,113				1.59	%
Total deposits			139,167				1,175				1.13	%			147,276				1,182				1.07	%
FHLB advances			65,597				742				1.51	%			62,026				762				1.64	%
Total interest-bearing liabilities			204,764				1,917				1.25	%			209,302				1,944				1.24	%
Non-interest-bearing liabilities			15,142												14,250
Total liabilities			219,906												223,552
Equity			42,472												41,308
Total liabilities and equity		$	262,378											$	264,860
Net interest-earning assets		$	41,688											$	40,404
Net interest income, average interest rate spread						$	6,555				3.34	%						$	6,592				3.32	%
Net interest margin(2)											3.55	%											3.52	%
Average interest earning assets to average interest bearing liabilities											120.36	%											119.30	%

 

(1)

Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.

 

(2)

Equals net interest income divided by average interest-earning assets.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The allowance for loan losses is comprised of specific allowances and a general allowance.

 

Specific provisions are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The allowance related to loans that are identified as impaired is based on discounted expected future cash flows using the loan's initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific provisions include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General allowances are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general allowance, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.

 

Changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the allowance levels. The allowance for loan losses is based on management's estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The allowance for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the allowance for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the allowance.

 

During the nine months ended September 30, 2015, we made a provision of $150,000. To the best of management’s knowledge, the allowance is maintained at a level believed to cover all known and inherent losses in the loan portfolio, both probable and reasonable to estimate.

 

Non-Interest Income. Non-interest income, which includes fees and service charges, and gains or losses or write-downs on other real estate owned, was $46,000 for the three months ended September 30, 2015, a decrease of $9,000 compared to non-interest income of $55,000 for the three months ended September 30, 2014. The decrease was primarily due to service charges and fees of $44,000 for the three months ended September 30, 2015, a decrease of $13,000 compared to $57,000 for the three months ended September 30, 2014.

 

Non-interest income, which includes fees and service charges, and gains or losses or write-downs of other real estate owned, was $142,000 for the nine months ended September 30, 2015, a decrease of $10,000 compared to non-interest income of $152,000 for the nine months ended September 30, 2014. The decrease was primarily due to a $20,000 decrease in service charges and fees for the nine months ended September 30, 2015, partially offset by a gain of $6,000 on the sale of other real estate for the nine months ended September 30, 2015, compared to a $4,000 loss for the nine months ended September 30, 2014.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

Non-Interest Expense. Non-interest expense decreased by $183,000, or 10.5%, to $1.6 million for the three months ended September 30, 2015, from $1.8 million for the three months ended September 30, 2014. The decrease in non-interest expense was primarily due to a decrease in salaries and employee benefits expense of $207,000, or 22.4%, as well as decreases of $36,000, or 17.8%, in other non-interest expense, $14,000, or 87.5%, in advertising expense, $9,000, or 39.1%, in office supplies and postage expense, $9,000, or 25.7%, in bank service charge expense, $3,000, or 2.2%, in occupancy expense, $2,000, or 3.2%, in taxes and license expense, and $2,000, or 1.2%, in data processing expense, partially offset by an increase of $92,000, or 98.9%, in professional fees, an increase of $6,000, or 10.7%, in security expense, and an increase of $1,000, or 2.7%, in deposit insurance premiums.

 

Non-interest expense increased by $310,000, or 6.0%, to $5.5 million for the nine months ended September 30, 2015 from $5.2 million for the nine months ended September 30, 2014. The increase in non-interest expense was primarily due to an increase in professional fees of $769,000, or 245.7%, data processing expense of $11,000, or 2.6%, as well as increases of $9,000, or 4.6%, in taxes and license expense, $2,000, or 2.7%, bank service charge expense, and $1,000, or 0.6%, in security expense, partially offset by decreases of $347,000, or 12.6%, in salaries and employee benefits expense, $70,000 or 11.0% in other non-interest expense, $37,000 or 48.7% in office supplies and postage expense, $20,000 or 57.1% in advertising expense, $6,000 or 1.5% in occupancy expense, and $2,000 or 1.7% in deposit insurance premiums expense.

 

Income Tax Expense. The income tax expense amounted to $197,000 and $196,000 for the three months ended September 30, 2015 and 2014, respectively. Our effective federal tax rate was 39.2% and 36.3% for the three months ended September 30, 2015 and 2014, respectively.

 

The income tax expense amounted to $537,000 and $570,000 for the nine months ended September 30, 2015 and 2014, respectively. Our effective federal tax rate was 51.2% and 40.5% for the nine months ended September 30, 2015 and 2014, respectively.

 

Liquidity and Capital Resources

 

The Company maintains levels of liquid assets deemed adequate by management. The Company adjusts its liquidity levels to fund deposit outflows, repay its borrowings and to fund loan commitments. The Company also adjusts liquidity as appropriate to meet asset and liability management objectives.

 

The Company's primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements.

 

A significant portion of the Company's liquidity consists of interest bearing and non-interest earning deposits. The Company's primary sources of cash are principal repayments on loans and increases in deposit accounts. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Dallas, which provide an additional source of funds. At September 30, 2015, the Company had $56.5 million of advances from the Federal Home Loan Bank of Dallas and had $63.3 million in additional borrowing capacity. Additionally, at September 30, 2015, State-Investors Bank was a party to a Master Purchase Agreement with Second National Bankers Bank whereby State-Investors Bank may purchase Federal Funds from Second National Bankers Bank in an amount not to exceed $14.0 million. There were no amounts purchased under this agreement as of September 30, 2015.

 

 

At September 30, 2015, the Company had no outstanding loan commitments to originate loans. At September 30, 2015, certificates of deposit scheduled to mature in less than one year totaled $35.7 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In addition, in a rising interest rate environment, the cost of such deposits could be significantly higher upon renewal. The Company intends to utilize its liquidity to fund its lending activities.

 

At September 30, 2015, State-Investors Bank exceeded each of its capital requirements with tier 1 leverage, tier 1 risk-based, common equity tier 1 and total risk-based capital ratios of 15.1%, 24.7%, 24.7% and 25.6%, respectively. As a smaller savings and loan holding company, State Investors Bancorp is not currently subject to any regulatory capital requirements.

 

Impact of Inflation and Changing Prices

 

The financial statements and related financial data presented herein regarding the Company have been prepared in accordance with accounting principles generally accepted in the United States of America which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES.

 

Our management evaluated, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS.

 

There are no matters required to be reported under this item.

 

 

ITEM 1A – RISK FACTORS.

 

See “Risk Factors” on page 26 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 001-35221), which is incorporated herein by reference thereto.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

(a) Not applicable.

(b) Not applicable.

(c) Purchases of Equity Securities

 

The Company’s repurchases of its common stock made during the quarter ended September 30, 2015 are set forth in the table below:

 

Period		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (a)
July 1, 2015 – July 30, 2015			—			$	—				—				25,107
August 1, 2015 – August 31, 2015			—				—				—				25,107
September 1, 2015 – September 30, 2015			—				—				—				25,107
Total			—			$	—				—				25,107

 

Note to this table:

 

(a)

On November 22, 2013, the Company announced by a Form 8-K filed with the Securities and Exchange Commission a fourth repurchase program to repurchase up to 118,100 shares, or approximately 5.0% of the Company’s outstanding shares of common stock. The repurchase program does not have an expiration date.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES.

 

There are no matters required to be reported under this item.

 

ITEM 4 – MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION.

 

On December 30, 2014, the Company and First NBC Bank Holding Company (“First NBC”) entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) pursuant to which the Company will merge with and into First NBC (the “Merger”). Promptly following consummation of the Merger, it is expected that the Bank will merge with and into First NBC Bank (the “Bank Merger”). The Merger is expected to close on or about November 30, 2015.

 

Under the terms of the Merger Agreement, upon consummation of the Merger, shareholders of the Company will receive $21.25 for each share of the Company’s common stock they own. The Merger Agreement also provides that all options to purchase Company stock which are outstanding and unexercised immediately prior to the closing under the Company’s Option Plan shall be cancelled and converted into the right to receive cash in the amount of $21.25 minus the exercise price of the option.

 

 

On August 27, 2015, First NBC and the Company entered into an amendment to the Merger Agreement (the “Agreement”). Among other things, the Amendment (i) extended the expiration date of the Merger Agreement from August 30, 2015 to December 31, 2015, (ii) increased the merger consideration by an amount equal to 5.0% per annum, calculated on a daily basis, to reflect the additional time subsequent to August 30, 2015 required to complete the merger, and (iii) provided for a termination fee of $250,000 payable to the Company under certain conditions if the merger is not completed by December 31, 2015.

 

The Merger Agreement contains (a) customary representations and warranties of the Company and First NBC, including, among others, with respect to corporate organization, capitalization, corporate authority, third party and governmental consents and approvals, financial statements, and compliance with applicable laws, (b) covenants of the Company to conduct its business in the ordinary course until the Merger is completed; and (c) covenants of the Company and First NBC not to take certain actions. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, any alternative transactions.

 

Consummation of the Merger is subject to certain conditions, including, among others, approval of the Merger by shareholders of the Company, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, and absence of a material adverse effect.

 

The Merger Agreement also contains certain termination rights for the Company and First NBC, as the case may be, applicable upon the occurrence or non-occurrence of certain events. If the Merger is not consummated under certain circumstances, the Company has agreed to pay First NBC a termination fee of $1.75 million.

 

ITEM 6 – EXHIBITS.

 

List of exhibits: (filed herewith unless otherwise noted)

 

No.		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
32.1		Section 1350 Certification
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document.

 

 

SIGNATURES

 

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

 

	STATE INVESTORS BANCORP, INC.
Date:  November 16, 2015	By:	/s/ Anthony S. Sciortino
		Anthony S. Sciortino
		President and Chief Executive Officer
Date:  November 16, 2015	By:	/s/ Daniel M. McGowan
		Daniel M. McGowan
		Chief Financial Officer