SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016

 

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 No. 000-55005

 

 

Sunnyside Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland		46-3001280
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
56 Main Street, Irvington, New York		10533
(Address of Principal Executive Offices)		Zip Code

 

(914) 591-8000

(Registrant’s telephone number)

 

N/A

(Former name or former address, 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 requirements for the past 90 days.

YES x     NO ¨

 

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

YES x     NO ¨

 

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

 

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

 

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

YES ¨     NO x

 

As of May 10, 2016, 793,500 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

 

 

 

Sunnyside Bancorp, Inc.

Form 10-Q

 

Index

 

				Page
Part I. Financial Information
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Statements of Financial Condition as of March 31, 2016 (unaudited) and December 31, 2015		1
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited)		2
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016  and 2015 (unaudited)		3
		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016 (unaudited)		4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)		5
		Notes to Condensed Consolidated Financial Statements (unaudited)		6 – 22
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 – 25
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		25
Item 4.		Controls and Procedures		25
Part II. Other Information
Item 1.		Legal Proceedings		25
Item 1A.		Risk Factors		25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.		Defaults upon Senior Securities		25
Item 4.		Mine Safety Disclosures		26
Item 5.		Other Information		26
Item 6.		Exhibits		26
		Signature Page		27

 

 

Part I. — Financial Information

 

Item 1.

Financial Statements

 

SUNNYSIDE BANCORP, INC AND SUBSIDIARY

Condensed CONSOLIDATED Statements of Financial Condition

 

		March 31,				December 31,
		2016				2015
Assets
Cash and cash equivalents		$	9,573,630			$	3,326,660
Securities held to maturity, net; approximate fair value of $4,578,000 (March 31, 2016) and $4,859,000 (December 31, 2015)			4,444,863				4,736,273
Securities available for sale			28,598,429				30,750,302
Loans receivable, net			46,751,166				47,092,298
Premises and equipment, net			1,432,639				1,465,439
Federal Home Loan Bank of New York and other stock, at cost			339,120				204,120
Accrued interest receivable			337,019				332,474
Cash surrender value of life insurance			2,156,218				2,139,657
Deferred income taxes			1,104,317				1,231,696
Other assets			378,424				329,880
Total assets		$	95,115,825			$	91,608,799
Liabilities and Stockholders’  Equity
Liabilities:
Deposits		$	78,579,508			$	78,109,759
Advances from borrowers for taxes and insurance			543,936				628,645
Federal Home Loan Bank advances			3,000,000				-
Other liabilities			910,130				1,016,871
Total liabilities			83,033,574				79,755,275
Commitments and contingencies			-				-
Stockholders’ equity:
Serial preferred stock; par value $.01, 1,000,000 shares authorized, no shares issued			-				-
Common stock; par value $.01, 30,000,000 shares authorized and 793,500 shares issued			7,935				7,935
Additional paid-in capital			7,100,091				7,093,621
Unallocated common stock held by the Employee Stock Ownership Plan			(483,265	)			(488,818	)
Retained earnings			6,378,224				6,355,056
Accumulated other comprehensive (loss)			(920,734	)			(1,114,270	)
Total stockholders’ equity			12,082,251				11,853,524
Total liabilities and stockholders’ equity		$	95,115,825			$	91,608,799

 

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

 

 

Sunnyside BANCORP, INC AND SUBSIDIARY

Condensed CONSOLIDATED Statements of Operations

 

		Three Months Ended
		March 31,
		2016				2015
Interest and dividend income:
Loans		$	461,524			$	496,574
Investment securities			70,073				53,702
Mortgage-backed securities			130,243				130,283
Federal funds sold and other earning assets			1,352				1,766
Total interest and dividend income			663,192				682,325
Interest expense:
Deposits			85,459				87,771
Borrowings			4,213				272
Total interest expense			89,672				88,043
Net interest income			573,520				594,282
Provision for loan losses			-				37,000
Net interest income after provision for loan losses			573,520				557,282
Non-interest income:
Fees and service charges			25,076				28,261
Net gain on sale of securities			89,102				99,026
Income on bank owned life insurance			16,561				16,607
Total non-interest income			130,739				143,894
Non-Interest Expense:
Compensation and benefits			361,395				347,021
Occupancy and equipment, net			89,574				92,637
Data processing service fees			70,261				63,877
Professional fees			81,139				84,425
Federal deposit insurance premiums			15,679				14,644
Advertising and promotion			9,631				11,167
Other			49,243				49,870
Total non-interest expense			676,922				663,641
Income before income taxes			27,337				37,535
Income tax expense			4,169				8,110
Net income		$	23,168			$	29,425
Basic and diluted income per share		$	0.03			$	0.04
Weighted average shares outstanding, basic and diluted			744,988				742,767

 

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

 

 

Sunnyside BANCORP, INC AND SUBSIDIARY

CONDENSED CONSOLIDATED Statements of Comprehensive Income

 

		Three Months Ended
		March 31,
		2016				2015
Net income		$	23,168			$	29,425
Other comprehensive income, before tax:
Defined benefit pension plans:
Amortization of loss included in net periodic plan cost			20,675				20,475
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period			384,843				174,976
Reclassification adjustment for gains included in operations			(84,595	)			(99,026	)
Other comprehensive income, before tax			320,923				96,425
Income tax expense related to items of other comprehensive income			127,387				38,276
Other comprehensive income, net of tax			193,536				58,149
Comprehensive income		$	216,704			$	87,574

 

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

 

 

SUNNYSIDE BANCORP, INC AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

																		Accumulated
						Additional				Unallocated								Other
		Common				Paid-in				Common Stock				Retained				Comprehensive				Total
		Stock				Capital				Held by ESOP				Earnings				Income (Loss)				Equity
Balance at December 31, 2015		$	7,935			$	7,093,621			$	(488,818	)		$	6,355,056			$	(1,114,270	)		$	11,853,524
Net income for the three months ended March 31, 2016			-				-				-				23,168				-				23,168
ESOP shares allocated or committed to be released			-				957				5,553				-				-				6,510
Restricted stock awards earned			-				5,513				-				-				-				5,513
Other comprehensive income, net of tax			-				-				-				-				193,536				193,536
Balance at March 31, 2016		$	7,935			$	7,100,091			$	(483,265	)		$	6,378,224			$	(920,734	)		$	12,082,251

 

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

 

 

Sunnyside BANCORP, INC AND SUBSIDIARY

Condensed cONSOLIDATED StatementS of Cash Flows

 

		Three Months Ended
		March 31,
		2016				2015
Cash flows from operating activities:
Net income		$	23,168			$	29,425
Adjustments to reconcile net income (loss) to net cash  provided by (used in) operating activities:
Depreciation expense			37,373				39,431
Amortization of premiums and accretion of discounts, net			45,831				40,176
Amortization of deferred loan fees and costs, net			14,845				495
Net gain on sales of securities available for sale			(84,595	)			(99,026	)
Net gain on sales of securities held to maturity			(4,507	)			-
Provision for loan losses			-				37,000
(Increase) decrease in accrued interest receivable			(4,545	)			31,046
Increase in cash surrender value of life insurance			(16,561	)			(16,607	)
Net (increase) decrease in other assets			(48,552	)			64,850
Net increase (decrease) in other liabilities			(86,066	)			28,445
Amortization of stock compensation plans			12,023				5,553
Net cash (used in) provided by operating activities			(111,586	)			160,788
Cash flows from investing activities:
Purchases of securities available for sale			(10,319,838	)			(699,300	)
Purchases of securities held to maturity			-				-
Repayments and maturities of securities held to maturity			74,079				95,139
Repayments and maturities of securities available for sale			1,097,332				1,005,396
Proceeds from sales of securities held to maturity			221,569				-
Proceeds from sales/calls of securities available for sale			11,713,660				7,606,475
Loans purchased			-				(6,010,668	)
Loan originations, net of principal repayments			326,287				962,501
Purchases of premises and equipment			(4,573	)			(1,910	)
Purchase of Federal Home Loan Bank and other stock			(135,000	)			-
Net cash provided by investing activities			2,973,516				2,957,633
Cash flows from financing activities:
Net increase (decrease) in deposits			469,749				(779,210	)
Net decrease in advances from borrowers for taxes and insurance			(84,709	)			(67,827	)
Net increase in short-term borrowings			3,000,000				-
Net cash provided by (used in) financing activities			3,385,040				(847,037	)
Net increase in cash and cash equivalents			6,246,970				2,271,384
Cash and cash equivalents at beginning of period			3,326,660				3,719,882
Cash and cash equivalents at end of period		$	9,573,630			$	5,991,266
Supplemental Information:
Cash paid for:
Interest		$	85,458			$	87,729
Income taxes		$	15,000			$	15,000

 

 

Sunnyside BANCORP, INC AND SUBSIDIARY

Form 10-Q

 

Notes to Condensed Consolidated Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a description of the more significant policies used in the presentation of the accompanying consolidated financial statements of Sunnyside Bancorp, Inc. and Subsidiary, (collectively, the “Company”).

 

Principles of Consolidation

 

The consolidated financial statements are comprised of the accounts of Sunnyside Bancorp. Inc., and its wholly-owned subsidiary, Sunnyside Federal Savings and Loan Association of Irvington (“Sunnyside Federal” or the “Association”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Business

 

Sunnyside Federal is a community-oriented savings institution whose primary business is accepting deposits from customers within its market area (Westchester County, New York) and investing those funds in mortgage loans secured by one-to-four family residences and in mortgage-backed and other securities. To a significantly lesser extent, funds are invested in multi-family and commercial mortgage loans, commercial loans, and consumer loans. Customer deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation. As a federally-chartered savings association, Sunnyside Federal’s primary regulator is the Office of the Controller of the Currency (the “OCC”).

 

Basis of Financial Statement Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with instructions for Form 10-Q, and in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. However, such information presented reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of the Company’s management, necessary for a fair statement of results for the interim period.

 

The results of operations for the three months ended March 31, 2016, are not necessarily indicative of the results to be expected for the year ended December 31, 2016, or any other future interim period. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s annual report on Form 10-K.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, the Company considers all cash and amounts due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less to be cash equivalents.

 

Investment and Mortgage-Backed Securities

 

Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Securities classified as available-for-sale securities are reported at fair value, with unrealized holding gains or losses reported in a separate component of retained earnings. As of March 31, 2016 and December 31, 2015, the Company had no securities classified as held for trading.

 

The Company conducts a periodic review and evaluation of the securities portfolio to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. The evaluation of other-than-temporary impairment considers the duration and severity of the impairment, the Company’s intent and ability to hold the securities and assessments of the reason for the decline in value and the likelihood of a near-term recovery. If such a decline is deemed other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to income as a component of non-interest expense.

 

 

  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Premiums and discounts on securities are amortized by use of the level-yield method, over the life of the individual securities. Gain or loss on sales of securities is based upon the specific identification method.

 

Loans Receivable

 

Loans receivable are stated at unpaid principal balances less the allowance for loan losses and net deferred loan fees.

 

Recognition of interest on the accrual method is generally discontinued when interest or principal payments are ninety days or more in arrears, or when other factors indicate that the collection of such amounts is doubtful. At that time, a loan is placed on a nonaccrual status, and all previously accrued and uncollected interest is reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when factors indicating doubtful collectability no longer exist.

 

Allowance for Loan Losses

 

An allowance for loan losses is maintained at a level, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate. Management of the Company, in determining the provision for loan losses considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Company utilizes a two tier approach: (1) identification of problem loans and establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Company maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral, and financial condition of the borrowers. Specific loan losses are established for identified loans based on a review of such information and appraisals of the underlying collateral. General loan losses are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, and management's judgment. Although management believes that adequate specific and general loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may be necessary.

 

A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. An insignificant payment delay, which is defined as up to ninety days by the Company, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. The amount of loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied first to accrued interest receivable and then to principal.

 

Federal Home Loan Bank of New York stock

 

As a member of the Federal Home Loan Bank of New York (“FHLB”), the Company is required to acquire and hold shares of FHLB Class B stock. The holding requirement varies based on the Company’s activities, primarily its outstanding borrowings, with the FHLB. The investment in FHLB stock is carried at cost. The Company conducts a periodic review and evaluation of its FHLB stock to determine if any impairment exists.

 

Premises and Equipment

 

Premises and equipment are comprised of land, building, and furniture, fixtures, and equipment, at cost, less accumulated depreciation. Depreciation charges are computed on the straight-line method over the following estimated useful lives:

 

Building and improvements	5 to 40 years
Furniture, fixtures and equipment	2 to 10 years

 

 

  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Bank-Owned Life Insurance

 

Bank-owned life insurance (“BOLI”) is accounted for in accordance with FASB guidance. The cash surrender value of BOLI is recorded on the statement of financial condition as an asset and the change in the cash surrender value is recorded as non-interest income. The amount by which any death benefits received exceeds a policy’s cash surrender value is recorded in non-interest income at the time of receipt. A liability is also recorded on the statement of financial condition for postretirement death benefits provided by the split-dollar endorsement policy. A corresponding expense is recorded in non-interest expense for the accrual of benefits over the period during which employees provide services to earn the benefits.

 

Income Taxes

 

Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the tax return differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. The tax effect of these temporary differences is accounted as deferred taxes applicable to future periods. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized.

 

Employee Benefits

 

Defined Benefit Plans:

 

The accounting guidance related to retirement benefits requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize, in comprehensive income, changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. The accounting guidance requires that plan assets and benefit obligations be measured as of the date of the employer’s fiscal year-end statement of financial condition.

 

401(k) Plan:

 

The Company has a 401(k) plan covering substantially all employees. The Company matches 50% of the first 6% contributed by participants and recognizes expense as its contributions are made.

 

Employee Stock Ownership Plan:

 

The employee stock ownership plan (ESOP) is accounted for in accordance with the provisions of ASC 718-40, “Employers’ Accounting for Employee Stock Ownership Plans.” The funds borrowed by the ESOP from the Company to purchase the Company’s common stock are being repaid from the Association’s contributions over a period of up to 25 years. The Company’s common stock not yet allocated to participants is recorded as a reduction of stockholders’ equity at cost. Compensation expense for the ESOP is based on the market price of the Company’s stock and is recognized as shares are committed to be released to participants.

 

Equity Incentive Plan:

 

On July 17, 2014, the Board of Directors adopted the Sunnyside Bancorp, Inc. 2014 Equity Incentive Plan (the “Stock Incentive Plan”) which was approved by shareholders at the Company’s 2014 Annual Meeting of Shareholders held on September 16, 2014. Stock options and restricted stock may be granted to directors, officers and other employees of the Company. The maximum number of shares which may be issued upon exercise of the options under the plan cannot exceed 79,350 shares. The maximum number of shares of stock that may be issued as restricted stock awards cannot exceed 23,805.

 

 

   1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Employee Benefits (Cont’d)

 

Equity Incentive Plan (Cont’d):

 

The Stock Incentive Plan will remain in effect as long as any awards under it are outstanding; however, no awards may be granted under the Stock Incentive Plan on or after the 10-year anniversary of the effective date of the Stock Incentive Plan or July 17, 2024.

 

On June 16, 2015, the Company granted 10,500 shares of restricted stock to certain executive officers, with a grant date fair value of $10.50 per share. Twenty percent of the shares awarded vest annually. Management recognizes expense for the fair value of those awards on a straight line basis over the requisite service period. For the three months ended March 31, 2016 and March 31, 2015, the Company recognized approximately $5,500 and $0 in expense in regard to those restricted stock awards. Expected future expense relating to these non-vested restricted shares at March 31, 2016 is $93,700 over a weighted average period of 4.25 years. There were no stock options outstanding as of March 31, 2016.

 

Comprehensive Income

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, and the actuarial gains and losses of the pension plan, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

Concentration of Credit Risk and Interest-Rate Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, investment and mortgage-backed securities and loans. Cash and cash equivalents include amounts placed with highly rated financial institutions. Investment securities include securities backed by the U.S. Government and other highly rated instruments. The Company’s lending activity is primarily concentrated in loans collateralized by real estate in the State of New York. As a result, credit risk is broadly dependent on the real estate market and general economic conditions in the State.

 

The Company is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to make loans secured by real estate in the State of New York. The potential for interest-rate risk exists as a result of the shorter duration of the Company's interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Company's assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility.

 

Advertising Costs

 

It is the Company’s policy to expense advertising costs in the period in which they are incurred.

 

Earnings Per Share

 

Basic earnings per common share, or EPS, are computed by dividing net income by the weighted-average common shares outstanding during the year. The weighted-average common shares outstanding includes the weighted-average number of shares of common stock outstanding less the weighted average number of unallocated shares held by the ESOP and the unvested shares of restricted stock. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. Potential common shares related to stock options are determined using the treasury stock method.

 

Subsequent Events

 

The Company has evaluated all events subsequent to the balance sheet date of March 31, 2016 through the date of this report, and has determined that there are no subsequent events that require disclosure under FASB guidance.

 

 

   1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, “Compensation – Stock Compensation (Topic 718)”. The amendments in this ASU require a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 did not have a material impact on the operating results or financial condition of the Company.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the operating results or financial condition of the Company.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)”. This ASU eliminates extraordinary items from US GAAP and will align more closely with International Accounting Standards 1, “Presentation of Financial Statements”. The amendments in this ASU are effective beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 did not have a material impact on the operating results or financial condition of the Company.

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve current GAAP. The amendments in this ASU are effective beginning after December 15, 2016. The adoption of this guidance on January 1, 2016 did not have a material impact on the operating results or financial condition of the Company.

 

In January, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 for public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material impact on the operating results or financial condition of the Company.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this guidance on January 1, 2019 is not expected to have a material impact on the operating results or financial condition of the Company.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718):” Improvements to Employee Share-Based Payment Accounting”. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 for public entities. The adoption of this guidance on January 1, 2017 is not expected to have a material impact on the operating results or financial condition of the Company.

 

 

  2. MUTUAL TO STOCK CONVERSION AND LIQUIDATION ACCOUNT

 

On July 15, 2013, the Association completed its mutual-to-stock conversion, and the Company consummated its initial stock offering. The Company sold 793,500 shares of its common stock, including 55,545 shares purchased by the Association’s ESOP, at a price of $10.00 per share, in a subscription offering, for gross offering proceeds of $7,935,000. The cost of conversion and the stock offering were deferred and deducted from the proceeds of the offering. Conversion costs incurred totaled $845,000 resulting in net proceeds of $6.5 million after also deducting the shares acquired by the ESOP.

 

In accordance with applicable federal conversion regulations, at the time of the completion of our mutual-to-stock conversion, the Company established a liquidation account in the Association in an amount equal to the Association’s total retained earnings as of the latest balance sheet date in the final prospectus used in the Conversion.  Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Association, and only in such event.  This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any December 31 and will cease to exist if the account is closed.  The liquidation account will never be increased despite any increase after conversion in the related deposit balance.

 

The Company may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

 

  3. SECURITIES

 

		March 31, 2016
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Securities held to maturity:
U.S. government and agency obligations		$	2,000,000			$	47,036			$	-			$	2,047,036
State, county, and municipal obligations			816,088				18,998				-				835,086
Mortgage-backed securities			1,628,775				67,562				-				1,696,337
		$	4,444,863			$	133,596			$	-			$	4,578,459
Securities available for sale:
U.S. government and agency obligations		$	2,969,593			$	31,259			$	-			$	3,000,852
Mortgage-backed securities			25,566,605				90,219				59,247				25,597,577
		$	28,536,198			$	121,478			$	59,247			$	28,598,429

 

		December 31, 2015
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
Securities held to maturity:
U.S. government and agency obligations		$	2,000,000			$	49,394			$	-			$	2,049,394
State, county, and municipal obligations			816,364				15,255				571				831,048
Mortgage-backed securities			1,919,909				59,112				-				1,979,021
		$	4,736,273			$	123,761			$	571			$	4,859,463
Securities available for sale:
U.S. government and agency obligations		$	5,660,537			$	-			$	45,055			$	5,615,482
Mortgage-backed securities			25,327,782				54,108				247,070				25,134,820
		$	30,988,319			$	54,108			$	292,125			$	30,750,302

 

 

  3. SECURITIES (Cont’d)

 

Mortgage-backed securities consist of securities guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac, and the Small Business Administration with amortized costs of $1.9 million, $13.8 million, $8.0 million, and $3.4 million, respectively, at March 31, 2016 ($2.3 million, $11.5 million, $10.0 million, and $3.6 million, respectively, at December 31, 2015).

 

Proceeds from the sale of securities held to maturity amounted to $222,000 and $0 for the three months ended March 31, 2016 and 2015, respectively. Net gains of $4,500 were recognized on the sales for the three months ended March 31, 2016. The sale of the securities occurred after the Company had already collected a substantial portion (at least 85%) of the principal outstanding due to prepayments on the debt securities.

 

Proceeds from the sales and calls of securities available for sale amounted to $11,714,000 and $7,606,000 for the three months ended March 31, 2016 and 2015, respectively. Net gains of $84,600 and $99,000 were recognized on those sales for the three months ended March 31, 2016 and 2015, respectively.

 

The following is a summary of the amortized cost and fair value of securities at March 31, 2016 and December 31, 2015, by remaining period to contractual maturity. Actual maturities may differ from these amounts because certain debt security issuers have the right to call or redeem their obligations prior to contractual maturity. In addition, mortgage backed securities that amortize monthly are listed in the period the security is legally set to pay off in full.

 

		March 31, 2016
		Held to Maturity								Available for Sale
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Within one year		$	65,000			$	66,222			$	-			$	-
After one to five years			405,130				410,154				999,260				1,000,736
After five to ten years			-				-				4,552,292				4,565,574
After ten years			3,974,733				4,102,083				22,984,646				23,032,119
		$	4,444,863			$	4,578,459			$	28,536,198			$	28,598,429

 

		December 31, 2015
		Held to Maturity								Available for Sale
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Within one year		$	65,000			$	65,637			$	-			$	-
After one to five years			405,463				410,756				999,176				988,268
After five to ten years			-				-				6,646,014				6,592,105
After ten years			4,265,810				4,383,070				23,343,129				23,169,929
		$	4,736,273			$	4,859,463			$	30,988,319			$	30,750,302

 

 

  3. SECURITIES (Cont’d)

 

The following tables summarize the fair values and unrealized losses of securities with an unrealized loss at March 31, 2016 and December 31, 2015, segregated between securities that have been in an unrealized loss position for less than one year, or one year or longer, at the respective dates.

 

		March 31, 2016
		Under One Year								One Year or More
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss
Securities held to maturity:
State, county, and municipal obligations		$	-			$	-			$	-			$	-
Securities available for sale:
U.S. government and agency obligations			-				-				-				-
Mortgage-backed securities			7,577,236				15,905				3,149,529				43,342
			7,577,236				15,905				3,149,529				43,342
Total		$	7,577,236			$	15,905			$	3,149,529			$	43,342

 

		December 31, 2015
		Under One Year								One Year or More
						Gross								Gross
		Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss
Securities held to maturity:
State, county, and municipal obligations		$	204,986			$	571			$	-			$	-
Securities available for sale:
U.S. government and agency obligations			4,627,215				34,146				988,267				10,909
Mortgage-backed securities			16,181,086				128,104				3,983,918				118,966
			20,808,301				162,250				4,972,185				129,875
Total		$	21,013,287			$	162,821			$	4,972,185			$	129,875

 

The unrealized losses are primarily due to changes in market interest rates subsequent to purchase. At March 31, 2016, a total of 11 securities were in an unrealized loss position (40 at December 31, 2015). The Company generally purchases securities issued by Government Sponsored Enterprises (GSE). Accordingly, it is expected that the GSE securities would not be settled at a price less than the Company’s amortized cost basis. The Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 and December 31, 2015 since the decline in market value is attributable to changes in interest rates and not credit quality and the Company has the intent and ability to hold these investments until there is a full recovery of the unrealized loss, which may be at maturity.

 

 

  4. LOANS RECEIVABLE, NET

 

		March 31,				December 31,
		2016				2015
Mortgage loans:
Residential 1-4 family		$	27,426,534			$	29,156,224
Commercial and multi-family			14,448,919				13,816,059
Home equity lines of credit			398,874				407,764
			42,274,327				43,380,047
Other loans:
Secured by savings accounts			8,164				18,201
Student			2,700,139				1,932,791
Commercial			2,209,235				2,171,795
			4,917,538				4,122,787
Total loans			47,191,865				47,502,834
Less:
Deferred loan fees (costs), net			(22,544	)			(52,707	)
Allowance for loan losses			463,243				463,243
			440,699				410,536
		$	46,751,166			$	47,092,298

 

In the ordinary course of business, the Company makes loans to its directors, executive officers, and their associates (related parties) on the same terms as those prevailing at the time of origination for comparable loans with other borrowers. The unpaid principal balances of related party loans were approximately $167,000 and $169,000 at March 31, 2016 and December 31, 2015, respectively.

 

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

 

		Three Months Ended
		March 31,
		2016				2015
Balance at beginning of period		$	463,243			$	396,055
Provision for loan losses			-				37,000
Balance at end of period		$	463,243			$	433,055

 

 

  4.  LOANS RECEIVABLE, NET (Cont’d)

 

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. There are no specific allowances as of March 31, 2016 and December 31, 2015. The general component covers pools of loans by loan class not considered impaired, as well as smaller balance homogeneous loans, such as one-to-four family real estate, home equity lines of credit and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include:

 

1.

Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

 

2.

National, regional, and local economic and business conditions including the value of underlying collateral for collateral dependent loans.

 

3.

Nature and volume of the portfolio and terms of loans.

 

4.

Experience, ability, and depth of lending management and staff and the quality of the Company’s loan review system.

 

5.

Volume and severity of past due, classified and nonaccrual loans.

 

6.

Existence and effect of any concentrations of credit and changes in the level of such concentrations.

 

7.

Effect of external factors, such as competition and legal and regulatory requirements.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of pass, special mention, substandard, doubtful and loss.

 

Loan classifications are defined as follows:

 

•

Pass — These loans are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

 

•

Special Mention — These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects.

 

•

Substandard — These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

•

Doubtful — These loans have all the weaknesses inherent in a loan classified substandard with the added characteristic that the weaknesses make the full recovery of our principal balance highly questionable and improbable on the basis of currently known facts, conditions, and values. The likelihood of a loss on an asset or portion of an asset classified as doubtful is high. Its classification as Loss is not appropriate, however, because pending events are expected to materially affect the amount of loss.

 

 

  4.  LOANS RECEIVABLE, NET (Cont’d)

 

•

Loss — These loans are considered uncollectible and of such little value that a charge-off is warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery will occur.

 

One of the primary methods the Company uses as an indicator of the credit quality of their portfolio is the regulatory classification system. The following table reflects the credit quality indicators by portfolio segment and class, at the dates indicated:

 

		March 31, 2016
		Mortgage Loans
						Commercial								Commercial
		Residential				Real Estate and								and
		1-4 Family				Multi-Family				Home Equity				Other				Total
		(In thousands)
Pass		$	26,732			$	13,342			$	375			$	4,917			$	45,366
Special Mention			406				1,107				24				-				1,537
Substandard			289				-				-				-				289
Total		$	27,427			$	14,449			$	399			$	4,917			$	47,192

 

		December 31, 2015
		Mortgage Loans
						Commercial								Commercial
		Residential				Real Estate and								and
		1-4 Family				Multi-Family				Home Equity				Other				Total
		(In thousands)
Pass		$	28,458			$	12,676			$	383			$	4,123			$	45,640
Special Mention			409				1,140				25				-				1,574
Substandard			289				-				-				-				289
Total		$	29,156			$	13,816			$	408			$	4,123			$	47,503

 

The following table provides information about loan delinquencies at the dates indicated:

 

		March 31, 2016
																										90 Days
																										or More
		30-59				60-89				90 Days																Past Due
		Days				Days				or More				Total				Current				Total				and
		Past Due				Past Due				Past Due				Past Due				Loans				Loans				Accruing
		(In thousands)
Residential 1-4 family		$	-			$	277			$	289			$	566			$	26,861				27,427			$	-
Commercial real estate and multi-family			-				-				716				716				13,733				14,449				-
Home equity lines of credit			-				24				-				24				375				399				-
Other loans			-				-				-				-				4,917				4,917				-
		$	-			$	301			$	1,005			$	1,306			$	45,886			$	47,192			$	-

 

 

  4.  LOANS RECEIVABLE, NET (Cont’d)

 

		December 31, 2015
																										90 Days
																										or More
		30-59				60-89				90 Days																Past Due
		Days				Days				or More				Total				Current				Total				and
		Past Due				Past Due				Past Due				Past Due				Loans				Loans				Accruing
		(In thousands)
Residential 1-4 family		$	-			$	279			$	289			$	568			$	28,588			$	29,156			$	-
Commercial real estate and multi-family			-				737				-				737				13,079				13,816				-
Home equity lines of credit			-				25				-				25				383				408				-
Other loans			-				-				-				-				4,123				4,123				-
		$	-			$	1,041			$	289			$	1,330			$	46,173			$	47,503			$	-

 

There were no troubled debt restructured loans at March 31, 2016 or December 31, 2015.

 

The following is a summary of loans, by loan type, on which the accrual of income has been discontinued and loans that are contractually past due 90 days or more but have not been classified as non-accrual at the dates indicated:

 

		March 31,				December 31,
		2016				2015
		(In thousands)
Residential 1-4 family		$	289			$	289
Commercial real estate and multi-family			716				-
Home equity lines of credit			-				-
Other loans			-				-
Total non-accrual loans			1,005				289
Accruing loans delinquent 90 days or more			-				-
Total non-performing loans		$	1,005			$	289

 

The total amount of interest income on non-accrual loans that would have been recognized if interest on all such loans had been recorded based upon original contract terms amounted to approximately $11,900 and $6,000 for the three months ended March 31, 2016 and 2015, respectively. The total amount of interest income recognized on non-accrual loans amounted to approximately $0 and $2,500 during the three months ended March 31, 2016 and 2015, respectively.

 

The following tables present the activity in the allowance for loan losses by loan type for the periods indicated:

 

		Three Months Ended
		March 31, 2016
		Mortgage Loans
						Commercial
		Residential				and				Home Equity
		1-4 Family				Multi-Family				LOC				Other				Unallocated				Total
		(In thousands)
Beginning balance		$	315			$	130			$	3			$	15			$	-			$	463
Provision for loan losses			(14	)			3				1				8				2				-
Ending Balance		$	301			$	133			$	4			$	23			$	2			$	463

 

 

  4.  LOANS RECEIVABLE, NET (Cont’d)

 

		Three Months Ended
		March 31, 2015
		Mortgage Loans
						Commercial
		Residential				and				Home Equity
		1-4 Family				Multi-Family				LOC				Other				Unallocated				Total
		(In thousands)
Beginning balance		$	258			$	91			$	3			$	32			$	12			$	396
Provision for loan losses			29				20				-				(6	)			(6	)			37
Ending Balance		$	287			$	111			$	3			$	26			$	6			$	433

 

  5.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss included in equity are as follows:

 

		March 31,				December 31,
		2016				2015
Unrealized net loss on pension plan		$	(1,589,060	)		$	(1,609,735	)
Unrealized gain (loss) on securities available for sale			62,231				(238,017	)
Accumulated other comprehensive loss before taxes			(1,526,829	)			(1,847,752	)
Tax effect			606,095				733,482
Accumulated other comprehensive loss		$	(920,734	)		$	(1,114,270	)

 

6.  REGULATORY CAPITAL

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. As of March 31, 2016 and December 31, 2015, the Association exceeded all capital adequacy requirements to which it was subject (see tables below).

 

On January 1, 2015, the final rules implementing the Basel Committee on Banking Supervision capital guidelines for banking organizations (Basel III) regulatory capital framework and related Dodd-Frank Act changes became effective for the Association. These rules supersede the federal banking agencies’ general risk-based capital rules (Basel I). Full compliance with all of the final rule's requirements is phased in over a multi-year transition period ending on January 1, 2019. Basel III revised minimum capital requirements and adjusted prompt corrective action thresholds. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Association. The rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0 percent to 6.0 percent, required a minimum ratio of total capital to risk-weighted assets of 8.0 percent, and required a minimum leverage ratio of 4.0 percent. A new capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This conservation buffer will be phased in beginning January 1, 2016 at 0.625 percent of risk-weighted

 

  

6.  REGULATORY CAPITAL (Cont’d)

 

assets and increase each subsequent year by an additional 0.625 percent until reaching its final level of 2.5 percent of risk-weighted assets on January 1, 2019. The final rule also revised the definition and calculation of Tier 1 capital, total capital and risk-weighted assets.

 

The following table presents the Association’s actual capital positions and ratios at the dates indicated:

 

																		To be Well
																		Capitalized Under
										Minimum Capital								Prompt Corrective
		Actual								Requirements								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
March 31, 2016
Total Risked-based Capital		$	12,137				26.58	%		$	3,939				8.625	%		$	4,567				10.00	%
Common Equity Tier 1 Capital			11,674				25.56	%			2,341				5.125	%			2,968				6.50	%
Tier 1 Risk-based Capital			11,674				25.56	%			3,026				6.625	%			3,654				8.00	%
Tier 1 Leverage Capital			11,674				12.45	%			3,752				4.000	%			4,690				5.00	%
December 31, 2015
Total Risked-based Capital		$	12,201				30.41	%		$	3,210				8.000	%		$	4,012				10.00	%
Common Equity Tier 1 Capital			11,738				29.25	%			1,805				4.500	%			2,608				6.50	%
Tier 1 Risk-based Capital			11,738				29.25	%			2,407				6.000	%			3,210				8.00	%
Tier 1 Leverage Capital			11,738				12.92	%			3,634				4.000	%			4,542				5.00	%

 

  7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES

 

A.  Fair Value Measurements

 

The Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair values.

 

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company did not have any liabilities that were measured at fair value at March 31, 2016 and December 31, 2015. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as foreclosed real estate owned and certain impaired loans. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

 

 

7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

A.  Fair Value Measurements (Cont’d)

 

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

 

•

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

 

•

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

 

•

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company bases its fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. ASC Topic 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Assets that are measured on a recurring basis are limited to the available-for-sale securities portfolio. The available-for-sale portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Substantially all of the available-for-sale portfolio consists of investment securities issued by government-sponsored enterprises. The fair values for substantially all of these securities are obtained from an independent securities broker. Based on the nature of the securities, the securities broker provides the Company with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in the portfolio.

 

The following table provides the level of valuation assumptions used to determine the carrying value of assets measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015:

 

						Fair Value Measurements at December 31,
						Quoted Prices in Active				Significant Other				Significant
		Carrying				Markets for Identical				Observable Inputs				Unobservable Inputs
Description		Value				(Level 1)				(Level 2)				(Level 3)
March 31, 2016:
Securities available for sale		$	28,598,429			$	-			$	28,598,429			$	-
December 31, 2015:
Securities available for sale		$	30,750,302			$	-			$	30,750,302			$	-

 

There were no assets measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2015.

 

B.  Fair Value Disclosures 

 

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein.

 

Cash and Cash Equivalents

 

For cash and due from banks and federal funds sold, the carrying amount approximates the fair value (Level 1).

 

Securities

 

The fair value of securities is estimated based on bid quotations received from securities dealers, if available (Level 1). If a quoted market price was not available, fair value was estimated using quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued (Level 2).

 

  

  7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

B.  Fair Value Disclosures (Cont’d)

 

FHLB Stock

 

The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock, and the Company is required to maintain a minimum balance based upon the unpaid principal of home mortgage loans (Level 2).

 

Loans Receivable

 

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, commercial, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories (Level 3).

 

Deposits

 

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and NOW and money market accounts, is equal to the amount payable on demand (Level 1). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with similar remaining maturities (Level 2).

 

Short-Term Borrowings

 

The carrying amounts of federal funds purchased, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 1).

 

Long-Term Borrowings

 

The fair value of long-term borrowings is estimated using discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements (Level 2).

 

Off-Balance-Sheet Instruments

 

In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. Their fair value would approximate fees currently charged to enter into similar agreements.

 

The carrying values and estimated fair values of financial instruments are as follows (in thousands):

 

		March 31, 2016								December 31, 2015
		Carrying				Estimated				Carrying				Estimated
		Value				Fair Value				Value				Fair Value
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	9,574			$	9,574			$	3,327			$	3,327
Securities held to maturity			4,445				4,578				4,736				4,859
Securities available for sale			28,598				28,598				30,750				30,750
Loans receivable			46,751				47,859				47,092				47,543
FHLB and other stock, at cost			339				339				204				204
Accrued interest receivable			337				337				332				332
Financial liabilities:
Deposits			78,580				78,693				78,110				78,266
FHLB Advances			3,000				3,000				-				-

 

  

  7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Cont’d)

 

B.  Fair Value Disclosures (Cont’d)

 

The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were offered for sale.

 

In addition, the fair value estimates were based on existing on-and-off balance sheet financial instruments without attempting to value the anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses have a significant effect on fair value estimates and have not been considered in any of the estimates.

 

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. The lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

 

Item 2.

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

 

General

 

Management’s discussion and analysis of the financial condition and results of operations at and for the three months ended March 31, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·

statements of our goals, intentions and expectations;

 

·

statements regarding our business plans, prospects, growth and operating strategies;

 

·

statements regarding the quality of our loan and investment portfolios; and

 

·

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·

competition among depository and other financial institutions;

 

·

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

  

·

adverse changes in the securities markets;

 

·

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·

our ability to enter new markets successfully and capitalize on growth opportunities;

 

·

our ability to successfully integrate de novo or acquired branches, if any;

 

·

our ability to execute on our business strategy to increase commercial real estate and multi-family lending and commercial lending, including implementing an SBA lending program;

 

·

changes in consumer spending, borrowing and savings habits;

 

·

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·

changes in our organization, compensation and benefit plans; and

 

·

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Company’s Form 10-K for the year 2015.

 

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

 

Total assets increased $3.5 million, or 3.8%, to $95.1 million at March 31, 2016 from $91.6 million at December 31, 2015. The increase was primarily due to higher cash balances partly offset by decreases in investments and loans. Cash balances increased $6.2 million which was partly offset by decreases in investments and loans of $2.4 million and $341,000, respectively.

 

Cash and cash equivalents increased $6.2 million, or 188% to $9.6 million at March 31, 2016 from $3.3 million at December 31, 2015, as cash was received from the sale and calls of securities at the end of the quarter. This cash is expected to be reinvested as well as fund loan growth. Securities available for sale decreased $2.2 million, or 7.0%, to $28.6 million at March 31, 2016 from $30.8 million at December 31, 2015, and securities held to maturity decreased $291,000 or 6.2% to $4.4 million at March 31, 2016 from $4.7 million at December 31, 2015. The decrease in investment securities was due to sales, calls and principal pay downs.

 

Net loans receivable decreased $341,000, or 0.7%, to $46.8 million at March 31, 2016 from $47.1 million at December 31, 2015. The decrease in loans receivable was primarily due refinancing activity and normal amortization partly offset by new loan originations.

 

At March 31, 2016, our investment in bank-owned life insurance increased $17,000 to $2.2 million from $2.1 million at December 31, 2015. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, and we have not made any additional contributions to our bank-owned life insurance since 2002.

 

Other assets, consisting primarily of accrued interest receivable, prepaid FDIC insurance premiums, refundable income taxes and an annuity contract for a former director increased $49,000, or14.7%, to $378,000 from $330,000 at December 31, 2015 primarily due to an increase in prepaid assets.

 

Total deposits increased $470,000, or 0.6%, to $78.6 million at March 31, 2016 from $78.1 million at December 31, 2015. The increase resulted primarily from increases in non-interest bearing checking of $468,000 or

 

  

12.8% and personal savings accounts of $374,000 or 1.3% partly offset by a decrease in certificates of deposit of $347,000 or 1.2%.

 

Borrowings increased $3.0 million at March 31, 2016, compared to $0 at December 31, 2015. The borrowings were used to fund investment and loan originations. At March 31, 2016, we had the ability to borrow an additional $25.5 million or 30 percent of the Association’s assets in FHLB advances and $2.0 million on a Fed Funds line of credit with Atlantic Central Bankers Bank.

 

Total equity increased to $12.1 million at March 31, 2016 from $11.9 million at December 31, 2015 resulting primarily from a decrease in other comprehensive loss of $194,000 and net income of $23,000 for the first three months of 2016.

 

Comparison of Results of Operations for the Quarters Ended March 31, 2016 and March 31, 2015

 

General. We recorded net income of $23,000 for the quarter ended March 31, 2016 compared to $29,000 for the quarter ended March 31, 2015. The decrease in net income was primarily due to decreases in net interest income and non-interest income partly offset by decreases in the provision for loan losses and an increase in non-interest expense.

 

Net Interest Income. Net interest income decreased $21,000, or 3.5%, to $574,000 for the quarter ended March 31, 2016 from $594,000 for the quarter ended March 31, 2015. The decrease resulted primarily from a decrease of $19,000 in interest and dividend income and a $2,000 increase in interest expense. The average yield on our loans decreased 42 basis points, the average yield on our investment securities increased 50 basis points and the average yield on mortgage-backed securities increased one basis point during the quarter ended March 31, 2016 compared to the same quarter in 2015. Our net interest rate spread decreased 15 basis points to 2.65% for the quarter ended March 31, 2016 from 2.80% for the quarter ended March 31, 2015 and our net interest margin decreased 15 basis points to 2.70% for the 2016 quarter from 2.85% for the 2015 period. Average interest-earning assets increased $900,000, or 1.05%, to $85.5 million for the quarter ended March 31, 2016 from $84.6 million for the first quarter of 2015.

 

Interest and Dividend Income. Interest and dividend income decreased $19,000 to $663,000 for the quarter ended March 31, 2016 from $682,000 for the quarter ended March 31, 2015. The decrease resulted primarily from a decrease of $35,000 in interest income on loans partly offset by a $16,000 increase in interest income on investment securities.

 

Interest income on loans decreased $35,000, or 7.1%, to $462,000 for the quarter ended March 31, 2016 from $497,000 for the quarter ended March 31, 2015. The decrease resulted primarily from a 42 basis point decrease in yield partly offset by an increase in the average balance of loans from $46.0 million for the quarter ended March 31, 2015 to $46.8 million for the quarter ended March 31, 2016.

 

Interest and dividend income on investment securities increased $16,000 primarily due to a $700,000 increase in average balances from $9.0 million for the quarter ended March 31, 2015 to $9.7 million for the quarter ended March 31, 2016 and an increase of 50 basis points in yield. Interest and dividend income on mortgage backed securities remained relatively unchanged.

 

Interest Expense. Interest expense, consisting primarily of the cost of interest-bearing deposits, increased $1,600, or 1.9%, to $90,000 for the quarter ended March 31, 2016 from $88,000 for the quarter ended March 31, 2015.  The increase was primarily due to an increase of $4,000 in interest expense on borrowings partly offset by lower interest expense on certificates of deposit. The cost of interest-bearing deposits at March 31, 2016 remained relatively unchanged at 0.46% compared to 0.48% for the quarter ended March 31, 2015. Average interest-bearing liabilities increased $1.6 million, or 2.2% to $77.3 million for the quarter ended March 31, 2016 from $75.6 million for the quarter ended March 31, 2015. The average balance of borrowings increased $2.1 million. The average balance of higher cost interest-bearing certificates of deposit decreased $1.6 million while the average balance of lower-cost NOW, money market and savings accounts increased $1.1 million for the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015.  

 

Provision for Loan Losses. We establish provisions for loan losses that are charged to operations in order to maintain the allowance for loan losses at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio both probable and reasonable to estimate at each reporting date. There was a $0 provision for loan losses recorded for the quarter ended March 31, 2016 and a $37,000 provision recorded for the quarter ended March 31, 2015. There were no charge offs or recoveries during the quarters ended March 31, 2016 and March 31, 2015.

 

  

Noninterest Income. Noninterest income decreased $13,000 to $131,000 for the quarter ended March 31, 2016 from $144,000 for the quarter ended March 31, 2015. The decrease was primarily due to a decrease in security gains and fees and service charges of $10,000 and $3,000, respectively.

 

Noninterest Expense. Noninterest expense increased $13,000, or 2.0%, to $677,000 for the quarter ended March 31, 2016 from $664,000 for the quarter ended March 31, 2015. The increase was primarily due to higher compensation and benefits and data processing expenses of $14,000 and $6,000, respectively, partly offset by decreases in occupancy and equipment expense and professional fees of $3,000 and $3,000 respectively.

 

Compensation and benefits expense increased $14,000 primarily due to the addition of staff in the second quarter of 2015. Data processing service fees increased $6,000, or 10.0% as a result of higher costs for new and existing product support. Occupancy and equipment decreased $3,000, or 3.3%, to $90,000 for the quarter ended March 31, 2016 from $93,000 for the quarter ended March 31, 2015, as a result of lower infrastructure and depreciation expenses. Professional fees decreased $3,000, or 3.9% primarily as a result of lower legal fees and other professional services.

 

Income Tax Expense. We recorded income tax expense of $4,000 for the quarter ended March 31, 2016 and $8,000 for the quarter ended March 31, 2015. Income tax expense is calculated based on pre-tax income adjusted for permanent book to tax differences, such as non-taxable interest income on municipal securities and income on bank owned life insurance.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable, as the Registrant is a smaller reporting company.

 

Item 4.

Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2016, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II — Other Information

 

Item 1.

Legal Proceedings

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

 

Item 1A.

Risk Factors

 

Not applicable, as the Registrant is a smaller reporting company.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

There were no sales of unregistered securities during the period covered by this Report.

 

(b)

Not applicable.

 

(c)

There were no issuer repurchases of securities during the period covered by this Report.

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

  

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation 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.

 

Date:  May 11, 2016		/s/ Timothy D. Sullivan
		Timothy D. Sullivan
		President and Chief Executive Officer
		/s/ Edward J. Lipkus
		Edward J. Lipkus
		Vice President, Chief Financial Officer, and
		Treasurer