Attached files

file filename
EX-31.1 - EX-31.1 - STEWARDSHIP FINANCIAL CORPex31-1.htm
EX-32.1 - EX-32.1 - STEWARDSHIP FINANCIAL CORPex32-1.htm
EX-31.2 - EX-31.2 - STEWARDSHIP FINANCIAL CORPex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2016

 

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

 

For the transition period from __________ to __________

 

Commission file number 1-33377

 

Stewardship Financial Corporation

(Exact name of registrant as specified in its charter)

 

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

 

(201) 444-7100

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of May 13, 2016 was 6,108,986.

 

 

Stewardship Financial Corporation

 

INDEX

 

  PAGE
  NUMBER
PART I  -  FINANCIAL INFORMATION  
   
ITEM 1  -   FINANCIAL STATEMENTS  
   
Consolidated Statements of Financial Condition at March 31, 2016 (Unaudited) and December 31, 2015 1
   
Consolidated Statements of Income for the Three Months ended March 31, 2016 and 2015 (Unaudited) 2
   
Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2016 and 2015 (Unaudited) 3
   
Consolidated Statement of Changes in Shareholders’ Equity for the Three Months ended March 31, 2016 and 2015 (Unaudited) 4
   
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2016 and 2015 (Unaudited) 5 - 6
   
Notes to Consolidated Financial Statements (Unaudited) 7 - 29
   
ITEM 2  -   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   30 - 39
   
ITEM 3 -    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 40
   
ITEM 4 -    CONTROLS AND PROCEDURES 40
   
PART II  -  OTHER INFORMATION  
   
ITEM 6 -    EXHIBITS 41
   
SIGNATURES 42
   
EXHIBIT INDEX 43

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

 

   March 31,   December 31, 
   2016   2015 
   (Unaudited)     
Assets          
Cash and due from banks  $13,012,000   $10,731,000 
Other interest-earning assets   307,000    179,000 
       Cash and cash equivalents   13,319,000    10,910,000 
           
Securities available-for-sale   97,637,000    93,354,000 
Securities held to maturity; estimated fair value of $63,447,000 (2016)          
    and $61,281,000 (2015)   62,427,000    60,738,000 
Federal Home Loan Bank of New York stock, at cost   2,608,000    2,608,000 
Loans held for sale   783,000    1,522,000 
Loans, net of allowance for loan losses of $8,540,000 (2016)          
    and $8,823,000 (2015)   519,407,000    517,556,000 
Premises and equipment, net   6,726,000    6,799,000 
Accrued interest receivable   2,017,000    1,967,000 
Other real estate owned, net   1,013,000    880,000 
Bank owned life insurance   14,212,000    14,111,000 
Other assets   6,508,000    7,443,000 
       Total assets  $726,657,000   $717,888,000 
           
Liabilities and Shareholders' equity          
           
Liabilities          
Deposits:          
    Noninterest-bearing  $154,201,000   $147,828,000 
    Interest-bearing   458,225,000    456,925,000 
        Total deposits   612,426,000    604,753,000 
           
Federal Home Loan Bank of New York advances   40,000,000    40,000,000 
Subordinated Debentures and Subordinated Notes   23,203,000    23,186,000 
Accrued interest payable   494,000    791,000 
Accrued expenses and other liabilities   1,342,000    1,585,000 
        Total liabilities   677,465,000    670,315,000 
           
           
Shareholders' equity          
Common stock, no par value; 10,000,000 shares authorized;          
    6,113,213 and 6,085,528 shares issued and outstanding          
    at March 31, 2016, and December 31, 2015, respectively   41,574,000    41,410,000 
Retained earnings   7,724,000    7,008,000 
Accumulated other comprehensive (loss), net   (106,000)   (845,000)
        Total Shareholders' equity   49,192,000    47,573,000 
           
        Total liabilities and Shareholders' equity  $726,657,000   $717,888,000 

 

See accompanying notes to consolidated financial statements.      

 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income

(Unaudited)

             

 

   Three Months Ended 
   March 31, 
   2016   2015 
Interest income:          
Loans  $5,652,000   $5,446,000 
Securities held to maturity:          
Taxable   270,000    213,000 
Nontaxable   103,000    130,000 
Securities available-for-sale:          
Taxable   377,000    362,000 
Nontaxable   6,000    6,000 
FHLB dividends   32,000    30,000 
Other interest-earning assets   9,000    7,000 
Total interest income   6,449,000    6,194,000 
           
Interest expense:          
Deposits   557,000    452,000 
FHLB-NY Borrowings   203,000    217,000 
Subordinated Debentures and Subordinated Notes   413,000    124,000 
Total interest expense   1,173,000    793,000 
Net interest income before provision for loan losses   5,276,000    5,401,000 
Provision for loan losses   (350,000)   (100,000)
Net interest income after provision for loan losses   5,626,000    5,501,000 
           
Noninterest income:          
Fees and service charges   529,000    479,000 
Bank owned life insurance   101,000    96,000 
Gain on calls and sales of securities, net   24,000    152,000 
Gain on sales of mortgage loans   18,000    10,000 
Gain on sale of other real estate owned       53,000 
Miscellaneous   147,000    128,000 
Total noninterest income   819,000    918,000 
           
Noninterest expenses:          
Salaries and employee benefits   2,715,000    2,708,000 
Occupancy, net   398,000    467,000 
Equipment   150,000    156,000 
Data processing   472,000    453,000 
Advertising   151,000    212,000 
FDIC insurance premium   106,000    113,000 
Charitable contributions   70,000    70,000 
Stationery and supplies   33,000    43,000 
Legal   44,000    88,000 
Bank-card related services   131,000    123,000 
Other real estate owned   74,000    86,000 
Miscellaneous   558,000    530,000 
Total noninterest expenses   4,902,000    5,049,000 
Income before income tax expense   1,543,000    1,370,000 
Income tax expense   552,000    453,000 
Net income   991,000    917,000 
Dividends on preferred stock       171,000 
Net income available to common shareholders  $991,000   $746,000 
           
Basic and diluted earnings per common share  $0.16   $0.12 
           
Weighted average number of basic and diluted common shares outstanding   6,092,351    6,045,683 

 

See accompanying notes to consolidated financial statements.        

2 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2016   2015 
         
Net income  $991,000   $917,000 
           
Other comprehensive income (loss), net of tax:          
Change in unrealized holding gains (losses) on          
securities available for sale   672,000    463,000 
Reclassification adjustment for gains in net income   (15,000)   (91,000)
Accretion of loss on securities reclassified to          
held to maturity   45,000    87,000 
Change in fair value of interest rate swap   37,000    34,000 
           
Total other comprehensive income   739,000    493,000 
           
Total comprehensive income  $1,730,000   $1,410,000 

 

See accompanying notes to consolidated financial statements.

3 

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Shareholders' Equity

(Unaudited)

 

   Three Months Ended March 31, 2016
               Accumulated   
               Other   
               Comprehensive   
   Preferred  Common Stock  Retained  Income   
   Stock  Shares  Amount  Earnings  (Loss), Net  Total
                   
Balance -- December 31, 2015  $    6,085,528   $41,410,000   $7,008,000   $(845,000)  $47,573,000 
Cash dividends declared on common stock               (122,000)       (122,000)
Payment of discount on dividend                              
    reinvestment plan           (1,000)           (1,000)
Common stock issued under dividend                              
    reinvestment plan       2,656    15,000            15,000 
Common stock issued under stock plans       1,761    10,000            10,000 
Issuance of restricted stock       34,332    198,000    (198,000)        
Amortization of restricted stock, net       (11,064)   (63,000)   45,000        (18,000)
Tax benefit from restricted stock vesting           5,000            5,000 
Net income               991,000        991,000 
Other comprehensive income                   739,000    739,000 
                               
Balance -- March 31, 2016  $    6,113,213   $41,574,000   $7,724,000   $(106,000)  $49,192,000 

 

   Three Months Ended March 31, 2015
               Accumulated   
               Other   
               Comprehensive   
   Preferred  Common Stock  Retained  Income   
   Stock  Shares  Amount  Earnings  (Loss), Net  Total
                   
Balance -- December 31, 2014  $14,984,000    6,034,933   $41,125,000   $3,817,000   $(957,000)  $58,969,000 
Cash dividends declared on common stock               (121,000)       (121,000)
Payment of discount on dividend                              
    reinvestment plan           (1,000)           (1,000)
Cash dividends declared on preferred stock               (171,000)       (171,000)
Common stock issued under dividend                              
    reinvestment plan       2,970    15,000            15,000 
Common stock issued under stock plans       3,059    14,000            14,000 
Issuance of restricted stock       50,974    279,000    (279,000)        
Amortization of restricted stock, net       (7,062)   (38,000)   32,000        (6,000)
Tax benefit from restricted stock vesting           3,000            3,000 
Amortization of issuance costs   2,000            (2,000)        
Net income               917,000        917,000 
Other comprehensive income                   493,000    493,000 
                               
Balance -- March 31, 2015  $14,986,000    6,084,874   $41,397,000   $4,193,000   $(464,000)  $60,112,000 

 

See accompanying notes to consolidated financial statements.

4 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2016   2015 
Cash flows from operating activities:          
Net income  $991,000   $917,000 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   95,000    81,000 
Amortization of premiums and accretion of discounts, net   150,000    180,000 
Amortization of restricted stock   (18,000)   (6,000)
Amortization of subordinated debenture issuance costs   17,000     
Accretion (amortization) of deferred loan fees   8,000    10,000 
Provision for loan losses   (350,000)   (100,000)
Originations of mortgage loans held for sale   (1,058,000)   (1,328,000)
Proceeds from sale of mortgage loans   1,815,000    540,000 
Gain on sales of mortgage loans   (18,000)   (10,000)
Gain on calls and sales of securities   (24,000)   (152,000)
Gain on sale of other real estate owned       (53,000)
Deferred income tax (benefit) expense   228,000    (873,000)
Increase in accrued interest receivable   (50,000)   127,000 
Decrease in accrued interest payable   (297,000)   (2,000)
Earnings on bank owned life insurance   (101,000)   (96,000)
Decrease in other assets   294,000    906,000 
Decrease in other liabilities   (206,000)   (982,000)
Net cash provided by (used in) operating activities   1,476,000    (841,000)
           
Cash flows from investing activities:          
Purchase of securities available-for-sale   (8,409,000)   (27,000)
Proceeds from maturities and principal repayments on securities available-for-sale   3,039,000    3,163,000 
Proceeds from sales and calls on securities available-for-sale   2,050,000    27,845,000 
Purchase of securities held to maturity   (9,499,000)   (7,149,000)
Proceeds from maturities and principal repayments on securities held to maturity   1,516,000    3,429,000 
Proceeds from calls on securities held to maturity   6,340,000    3,100,000 
Sale of FHLB-NY stock       751,000 
Net increase in loans   (1,662,000)   (12,691,000)
Proceeds from sale of other real estate owned       1,041,000 
Additions to premises and equipment   (22,000)   (557,000)
Net cash provided by (used in) investing activities   (6,647,000)   18,905,000 
           
Cash flows from financing activities:          
Net increase in noninterest-bearing deposits   6,373,000    4,685,000 
Net increase in interest-bearing deposits   1,300,000    5,161,000 
Decrease in long term borrowings       (16,700,000)
Cash dividends paid on common stock   (122,000)   (121,000)
Cash dividends paid on preferred stock       (171,000)
Payment of discount on dividend reinvestment plan   (1,000)   (1,000)
Issuance of common stock for cash   25,000    29,000 
Tax benefit from restricted stock vesting   5,000    3,000 
Net cash provided by (used in) financing activities   7,580,000    (7,115,000)
           
Net increase in cash and cash equivalents   2,409,000    10,949,000 
Cash and cash equivalents - beginning   10,910,000    10,086,000 
Cash and cash equivalents - ending  $13,319,000   $21,035,000 

 

5 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

   Three Months Ended 
   March 31, 
   2016   2015 
Supplemental disclosures of cash flow information:          
Cash paid during the period for interest  $1,470,000   $795,000 
Cash paid during the period for income taxes  $39,000   $30,000 
Transfers from loans to other real estate owned  $153,000   $ 

 

See accompanying notes to consolidated financial statements.  

6 

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2016

(Unaudited)

 

 

Note 1. Summary of Significant Accounting Policies

 

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 24, 2016 (the “2015 Annual Report”).

 

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results which may be expected for the entire year.

 

Principles of consolidation

 

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

 

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

 

Material estimates

 

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

 

Adoption of New Accounting Standards

 

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

 

7 

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires 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. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years, including interim periods, beginning after December 15, 2017. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Corporation intends to adopt the accounting standard during the first quarter of 2018, and is currently evaluating the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The objective of this ASU is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the Update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in ASU 2016-09 are effective for fiscal years, including interim periods, beginning after December 15, 2016. Early adoption of ASU 2016-09 is permitted. The Corporation is currently assessing the impact that the adoption of the guidance will have on the Corporation's consolidated financial statements.

8 

 

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

 

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

 

   March 31, 2016 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $35,238,000   $141,000   $73,000   $35,306,000 
Obligations of state and political                    
  subdivisions   1,409,000    17,000        1,426,000 
Mortgage-backed securities - residential   44,850,000    443,000    77,000    45,216,000 
Asset-backed securities (a)   9,767,000        197,000    9,570,000 
Corporate debt   2,500,000    10,000    91,000    2,419,000 
                     
Total debt securities   93,764,000    611,000    438,000    93,937,000 
Other equity investments   3,806,000        106,000    3,700,000 
   $97,570,000   $611,000   $544,000   $97,637,000 

 

   December 31, 2015 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                     
U.S. government-sponsored agencies  $31,266,000   $81,000   $393,000   $30,954,000 
Obligations of state and political                    
  subdivisions   1,409,000    2,000    1,000    1,410,000 
Mortgage-backed securities - residential   45,520,000    213,000    496,000    45,237,000 
Asset-backed securities (a)   9,877,000        176,000    9,701,000 
Corporate debt   2,500,000        81,000    2,419,000 
                     
Total debt securities   90,572,000    296,000    1,147,000    89,721,000 
Other equity investments   3,778,000        145,000    3,633,000 
   $94,350,000   $296,000   $1,292,000   $93,354,000 

 

(a) Collateralized by student loans

 

Cash proceeds realized from sales and calls of securities available-for-sale for the three months ended March 31, 2016 were $2,050,000. For the three months ended March 31, 2015, cash proceeds realized from sales and calls of securities available-for-sale were $27,845,000. There were no gross gains and no gross losses realized on sales or calls during the three months ended March 31, 2016. There were gross gains totaling $213,000 and gross losses totaling $61,000 realized on sales and calls during the three months ended March 31, 2015.

9 

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

 

   March 31, 2016 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $999,000   $12,000   $   $1,011,000 
U.S. government-sponsored agencies   18,684,000    153,000        18,837,000 
Obligations of state and political                    
  subdivisions   10,698,000    218,000        10,916,000 
Mortgage-backed securities - residential   32,046,000    650,000    13,000    32,683,000 
   $62,427,000   $1,033,000   $13,000   $63,447,000 

 

   December 31, 2015 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $999,000   $   $11,000   $988,000 
U.S. government-sponsored agencies   15,109,000    132,000    24,000    15,217,000 
Obligations of state and political                    
  subdivisions   11,219,000    268,000        11,487,000 
Mortgage-backed securities - residential   33,411,000    295,000    117,000    33,589,000 
   $60,738,000   $695,000   $152,000   $61,281,000 

 

Cash proceeds realized from calls of securities held to maturity for the three months ended March 31, 2016 were $6,340,000. Cash proceeds realized from calls of securities held to maturity for the three months ended March 31, 2015 were $3,100,000.

There were gross gains totaling $24,000 and no gross losses realized on calls during the three months ended March 31, 2016. There were no gross gains and no gross losses realized on calls during the three months ended March 31, 2015.

 

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

 

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

 

10 

 

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

 

   March 31, 2016 
   Amortized   Fair 
   Cost   Value 
         
Available-for-sale          
Within one year  $501,000   $502,000 
After one year, but within five years   10,780,000    10,785,000 
After five years, but within ten years   21,516,000    21,566,000 
After ten years   6,350,000    6,298,000 
Mortgage-backed securities - residential   44,850,000    45,216,000 
Asset-backed securities   9,767,000    9,570,000 
Total  $93,764,000   $93,937,000 
           
Held to maturity          
Within one year  $3,128,000   $3,162,000 
After one year, but within five years   9,071,000    9,290,000 
After five years, but within ten years   17,232,000    17,316,000 
After ten years   950,000    996,000 
Mortgage-backed securities - residential   32,046,000    32,683,000 
Total  $62,427,000   $63,447,000 

 

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at March 31, 2016 and December 31, 2015, and if the unrealized loss position was continuous for the twelve months prior to March 31, 2016 and December 31, 2015.

11 

Available-for-Sale                        
March 31, 2016  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. government-                              
  sponsored agencies  $5,477,000   $(21,000)  $6,298,000   $(52,000)  $11,775,000   $(73,000)
Obligations of state and                              
  political subdivisions                        
Mortgage-backed                              
  securities - residential   5,448,000    (2,000)   8,220,000    (75,000)   13,668,000    (77,000)
Asset-backed securities   6,658,000    (82,000)   2,912,000    (115,000)   9,570,000    (197,000)
Corporate debt           1,409,000    (91,000)   1,409,000    (91,000)
Other equity investments           3,640,000    (106,000)   3,640,000    (106,000)
     Total temporarily                              
          impaired securities  $17,583,000   $(105,000)  $22,479,000   $(439,000)  $40,062,000   $(544,000)
                               

 

December 31, 2015  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. government-                              
  sponsored agencies  $18,396,000   $(183,000)  $7,296,000   $(210,000)  $25,692,000   $(393,000)
Obligations of state and                              
  political subdivisions   984,000    (1,000)           984,000    (1,000)
Mortgage-backed                              
  securities - residential   8,599,000    (69,000)   16,278,000    (427,000)   24,877,000    (496,000)
Asset-backed securities   6,791,000    (56,000)   2,910,000    (120,000)   9,701,000    (176,000)
Corporate debt           1,419,000    (81,000)   1,419,000    (81,000)
Other equity investments           3,573,000    (145,000)   3,573,000    (145,000)
     Total temporarily                              
          impaired securities  $34,770,000   $(309,000)  $31,476,000   $(983,000)  $66,246,000   $(1,292,000)
                               

 

Held to Maturity                        
March 31, 2016  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. Treasury  $   $   $   $   $   $ 
U.S. government-                              
  sponsored agencies                        
Mortgage-backed                              
  securities - residential   1,578,000    (9,000)   1,025,000    (4,000)   2,603,000    (13,000)
     Total temporarily                              
          impaired securities  $1,578,000   $(9,000)  $1,025,000   $(4,000)  $2,603,000   $(13,000)
                               

 

December 31, 2015  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. Treasury  $988,000   $(11,000)  $   $   $988,000   $(11,000)
U.S. government-                              
  sponsored agencies   4,955,000    (24,000)           4,955,000    (24,000)
Mortgage-backed                              
  securities - residential   15,183,000    (90,000)   1,066,000    (27,000)   16,249,000    (117,000)
     Total temporarily                              
          impaired securities  $21,126,000   $(125,000)  $1,066,000   $(27,000)  $22,192,000   $(152,000)

 

 

Other-Than-Temporary-Impairment

 

At March 31, 2016, there were available-for-sale investments comprising three U.S. government-sponsored agency securities, nine mortgage-backed securities, one asset-backed security, two corporate debt securities, and one other equity investments security in a continuous loss position for twelve months or longer. There were held to maturity investments consisting of two mortgage-backed securities in a continuous loss position for twelve months or longer at March 31, 2016. Management has assessed the securities that were in an unrealized loss position at March 31, 2016 and December 31, 2015 and has determined that any decline in fair value below amortized cost primarily relates to changes in interest rates and market spreads and was temporary.

 

12 

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

 

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

 

Note 3. Loans and Allowance for Loan Losses

 

At March 31, 2016 and December 31, 2015, respectively, the loan portfolio consisted of the following:

 

   March 31,   December 31, 
   2016   2015 
         
Commercial:          
Secured by real estate  $40,148,000   $37,993,000 
Other   28,780,000    26,867,000 
Commercial real estate   334,478,000    334,489,000 
Commercial construction   4,944,000    4,609,000 
Residential real estate   79,563,000    82,955,000 
Consumer:          
Secured by real estate   28,981,000    29,224,000 
Other   555,000    580,000 
Government Guaranteed Loans - guaranteed portion   10,460,000    9,626,000 
Other   102,000    134,000 
Total gross loans   528,011,000    526,477,000 
           
Less: Deferred loan costs (fees), net   64,000    98,000 
Allowance for loan losses   8,540,000    8,823,000 
    8,604,000    8,921,000 
           
Loans, net  $519,407,000   $517,556,000 

 

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

 

At March 31, 2016 and December 31, 2015, loan participations sold by the Corporation to other lending institutions totaled approximately $8,390,000 and $8,527,000, respectively. These amounts are not included in the totals presented above.

 

13 

 

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

 

   For the three months ended March 31, 2016 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,698,000   $(16,000)  $(2,000)  $40,000   $3,720,000 
Commercial real estate   4,660,000    (275,000)       28,000    4,413,000 
Commercial construction   114,000    (2,000)           112,000 
Residential real estate   109,000    (3,000)           106,000 
Consumer   118,000            1,000    119,000 
Other loans   3,000    (2,000)           1,000 
Unallocated   121,000    (52,000)           69,000 
Total  $8,823,000   $(350,000)  $(2,000)  $69,000   $8,540,000 

 

 

   For the three months ended March 31, 2015 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,704,000   $162,000   $(271,000)  $108,000   $3,703,000 
Commercial real estate   5,017,000    72,000        27,000    5,116,000 
Commercial construction   150,000    (277,000)       233,000    106,000 
Residential real estate   142,000    4,000            146,000 
Consumer   189,000    (39,000)       1,000    151,000 
Other loans   2,000    (2,000)            
Unallocated   398,000    (20,000)           378,000 
Total  $9,602,000   $(100,000)  $(271,000)  $369,000   $9,600,000 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2016 and December 31, 2015.

14 

   March 31, 2016 
       Commercial   Commercial   Residential       Government   Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Guaranteed   Loans   Unallocated   Total 
                                     
Allowance for loan                                             
  losses:                                             
  Ending allowance                                             
    balance attributable                                             
    to loans                                             
                                              
    Individually                                             
     evaluated for                                             
     impairment  $71,000   $730,000   $   $   $   $   $   $   $801,000 
                                              
    Collectively                                             
     evaluated for                                             
     impairment   3,649,000    3,683,000    112,000    106,000    119,000        1,000    69,000    7,739,000 
Total ending                                             
  allowance                                             
  balance  $3,720,000   $4,413,000   $112,000   $106,000   $119,000   $   $1,000   $69,000   $8,540,000 
                                              
Loans:                                             
    Loans                                             
     individually                                             
     evaluated for                                             
     impairment  $2,846,000   $8,890,000   $   $   $84,000   $   $   $   $11,820,000 
                                              
    Loans                                             
     collectively                                             
     evaluated for                                             
     impairment   66,082,000    325,588,000    4,944,000    79,563,000    29,452,000    10,460,000    102,000        516,191,000 
Total ending                                             
  loan balance  $68,928,000   $334,478,000   $4,944,000   $79,563,000   $29,536,000   $10,460,000   $102,000   $   $528,011,000 

 

15 

   December 31, 2015 
       Commercial   Commercial   Residential       Gov't   Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Guaranteed   Loans   Unallocated   Total 
                                     
Allowance for                                             
loan losses:                                             
 Ending                                             
  Allowance                                             
  balance                                             
  attributable                                             
  to loans                                             
                                              
   Individually                                             
    evaluated                                             
    for                                             
    impairment  $81,000   $638,000   $   $   $   $   $   $   $719,000 
                                              
   Collectively                                             
    evaluated                                             
    for                                             
    impairment   3,617,000    4,022,000    114,000    109,000    118,000        3,000    121,000    8,104,000 
                                              
Total ending                                             
  allowance                                             
  balance  $3,698,000   $4,660,000   $114,000   $109,000   $118,000   $   $3,000   $121,000   $8,823,000 
                                              
Loans:                                             
   Loans                                             
    individually                                             
    evaluated                                             
    for                                             
    impairment  $3,348,000   $8,113,000   $   $   $84,000   $   $   $   $11,545,000 
                                              
   Loans                                             
    collectively                                             
    evaluated                                             
    for                                             
    impairment   61,512,000    326,376,000    4,609,000    82,955,000    29,720,000    9,626,000    134,000        514,932,000 
                                              
Total ending                                             
  Loan balance  $64,860,000   $334,489,000   $4,609,000   $82,955,000   $29,804,000   $9,626,000   $134,000   $   $526,477,000 

 

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

 

   March 31,   December 31, 
   2016   2015 
         
Commercial:          
Secured by real estate  $917,000   $1,300,000 
Other   13,000    14,000 
Commercial real estate   1,290,000    484,000 
Consumer:          
Secured by real estate   84,000    84,000 
           
Total nonaccrual loans  $2,304,000   $1,882,000 

 

At March 31, 2016 and December 31, 2015, there were no loans that were past due 90 days and still accruing.

 

16 

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

 

   At and for the three months ended March 31, 2016
   Unpaid     Allowance for  Average  Interest
   Principal  Recorded  Loan Losses  Recorded  Income
   Balance  Investment  Allocated  Investment  Recognized
                
With no related allowance recorded:                         
Commercial:                         
Secured by real estate  $2,839,000   $2,348,000        $2,539,000   $24,000 
Other                69,000     
Commercial real estate   3,124,000    3,143,000         3,013,000    30,000 
Consumer:                         
Secured by real estate   84,000    84,000         84,000     
                          
With an allowance recorded:                         
Commercial:                         
Secured by real estate   193,000    193,000   $69,000    251,000    2,000 
Other   305,000    305,000    2,000    240,000    5,000 
Commercial real estate   5,750,000    5,747,000    730,000    5,487,000    57,000 
                          
   $12,295,000   $11,820,000   $801,000   $11,683,000   $118,000 

 

During the three months ended March 31, 2016, no interest income was recognized on a cash basis.

 

   At and for the year ended December 31, 2015
   Unpaid     Allowance for  Average  Interest
   Principal  Recorded  Loan Losses  Recorded  Income
   Balance  Investment  Allocated  Investment  Recognized
                
With no related allowance recorded:                         
Commercial:                         
Secured by real estate  $3,244,000   $2,729,000        $3,683,000   $156,000 
Other   137,000    137,000         61,000    2,000 
Commercial real estate   3,245,000    2,885,000         2,890,000    121,000 
Commercial construction                215,000     
Residential real estate                74,000     
Consumer:                         
Secured by real estate   84,000    84,000         226,000     
                          
With an allowance recorded:                         
Commercial:                         
Secured by real estate   390,000    308,000   $80,000    405,000    14,000 
Other   174,000    174,000    1,000    463,000    31,000 
Commercial real estate   5,228,000    5,228,000    638,000    5,534,000    211,000 
                          
   $12,502,000   $11,545,000   $719,000   $13,551,000   $535,000 

 

During the year ended December 31, 2015, no interest income was recognized on a cash basis.

17 

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2016 and December 31, 2015. Nonaccrual loans are included in the disclosure by payment status.

 

   March 31, 2016 
           Greater than       Loans     
   30-59 Days   60-89 Days   90 Days   Total   Not     
   Past Due   Past Due   Past Due   Past Due   Past Due   Total 
                         
Commercial: