sbbx-20150630

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

___________________

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June  30, 2015

 

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

For the transition period from ___________to ________

 

Commission File Number 0-29030

 

SUSSEX BANCORP

(Exact name of registrant as specified in its charter)   

 

 

 

 

New Jersey

22-3475473

 

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

 

 

100 Enterprise Drive, Suite 700,  Rockaway, NJ

07866

(Address of principal executive offices)

(Zip Code)

 

(844) 256-7328

(Registrant’s telephone number, including area code)

 

 

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     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     No

 

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

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

(Do not check if a smaller reporting company)   

 

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

 

As of August 6, 2015 there were 4,646,388 shares of common stock, no par value, outstanding.

 

 

 

 


 

 

 

 

SUSSEX BANCORP

FORM 10-Q

 

INDEX

 

 

 

 

 

FORWARD-LOOKING STATEMENTS 

i

PART I – FINANCIAL INFORMATION 

1

Item 1 - Financial Statements 

1

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 

24

Item 3 - Quantitative and Qualitative Disclosures about Market Risk 

34

Item 4 - Controls and Procedures 

34

PART II – OTHER INFORMATION 

35

Item 1 - Legal Proceedings 

35

Item 1A - Risk Factors 

35

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 

35

Item 3 - Defaults Upon Senior Securities 

35

Item 4 - Mine Safety Disclosures 

35

Item 5 - Other Information 

35

Item 6 - Exhibits 

35

 

 

 

 

 

 

 

 


 

 

 

FORWARD-LOOKING STATEMENTS

 

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Report on Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.”  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates.  These factors include, but are not limited to:

§

changes in the interest rate environment that reduce margins;

§

changes in the regulatory environment;

§

the highly competitive industry and market area in which we operate;

§

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

§

changes in business conditions and inflation;

§

changes in credit market conditions;

§

changes in the securities markets which affect investment management revenues;

§

increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments could adversely affect our financial condition;

§

changes in technology used in the banking business;

§

the soundness of other financial services institutions which may adversely affect our credit risk;

§

our controls and procedures may fail or be circumvented;

§

new lines of business or new products and services which may subject us to additional risks;

§

changes in key management personnel which may adversely impact our operations;

§

the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis;

§

severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and

§

other factors detailed from time to time in our filings with the SEC.

 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

 

i

 


 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

(Dollars in Thousands)

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

$

2,699 

 

$

2,953 

Interest-bearing deposits with other banks

 

4,074 

 

 

2,906 

Cash and cash equivalents

 

6,773 

 

 

5,859 

 

 

 

 

 

 

Interest bearing time deposits with other banks

 

100 

 

 

100 

Securities available for sale, at fair value

 

93,879 

 

 

77,976 

Securities held to maturity, at amortized cost (fair value of $6,132 and $6,190 at June 30, 2015 and December 31, 2014, respectively)

 

5,982 

 

 

6,006 

Federal Home Loan Bank Stock, at cost

 

3,624 

 

 

3,908 

 

 

 

 

 

 

Loans receivable, net of unearned income

 

479,069 

 

 

471,973 

Less:  allowance for loan losses

 

5,752 

 

 

5,641 

Net loans receivable

 

473,317 

 

 

466,332 

 

 

 

 

 

 

Foreclosed real estate

 

3,943 

 

 

4,449 

Premises and equipment, net

 

8,886 

 

 

8,650 

Accrued interest receivable

 

1,912 

 

 

1,796 

Goodwill

 

2,820 

 

 

2,820 

Bank-owned life insurance

 

12,368 

 

 

12,211 

Other assets

 

6,393 

 

 

5,808 

 

 

 

 

 

 

Total Assets

$

619,997 

 

$

595,915 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

$

90,490 

 

$

70,490 

Interest bearing

 

397,228 

 

 

387,780 

Total deposits

 

487,718 

 

 

458,270 

 

 

 

 

 

 

Short-term borrowings

 

7,200 

 

 

23,500 

Long-term borrowings

 

56,000 

 

 

46,000 

Accrued interest payable and other liabilities

 

4,513 

 

 

4,029 

Junior subordinated debentures

 

12,887 

 

 

12,887 

 

 

 

 

 

 

Total Liabilities

 

568,318 

 

 

544,686 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Preferred stock, no par value, 1,000,000 shares authorized; none issued

 

-

 

 

-

Common stock, no par value, 10,000,000 shares authorized; 4,705,630 and 4,673,789 shares issued and 4,646,388 and 4,662,606 shares outstanding at June 30, 2015 and December 31, 2014, respectively

 

35,738 

 

 

35,553 

Treasury stock, at cost; 59,242 and 11,183 shares at June 30, 2015 and December 31, 2014, respectively

 

(592)

 

 

(59)

Retained earnings                          

 

17,028 

 

 

15,566 

Accumulated other comprehensive (loss) income

 

(495)

 

 

169 

 

 

 

 

 

 

Total Stockholders' Equity

 

51,679 

 

 

51,229 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

619,997 

 

$

595,915 

See Notes to Unaudited Consolidated Financial Statements

 

 

1

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in thousands except per share data)

 

2015

 

 

2014

 

 

2015

 

 

2014

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Loans receivable, including fees

$

5,275 

 

$

4,800 

 

$

10,447 

 

$

9,423 

Securities:

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

302 

 

 

214 

 

 

569 

 

 

431 

Tax-exempt

 

221 

 

 

255 

 

 

429 

 

 

509 

Interest bearing deposits

 

 

 

 

 

 

 

Total Interest Income

 

5,801 

 

 

5,273 

 

 

11,452 

 

 

10,370 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

438 

 

 

415 

 

 

854 

 

 

805 

Borrowings

 

380 

 

 

361 

 

 

760 

 

 

709 

Junior subordinated debentures

 

54 

 

 

52 

 

 

107 

 

 

105 

Total Interest Expense

 

872 

 

 

828 

 

 

1,721 

 

 

1,619 

Net Interest Income

 

4,929 

 

 

4,445 

 

 

9,731 

 

 

8,751 

PROVISION FOR LOAN LOSSES

 

200 

 

 

400 

 

 

505 

 

 

853 

Net Interest Income after Provision for Loan Losses

 

4,729 

 

 

4,045 

 

 

9,226 

 

 

7,898 

OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

213 

 

 

265 

 

 

426 

 

 

529 

ATM and debit card fees

 

201 

 

 

185 

 

 

375 

 

 

352 

Bank-owned life insurance

 

79 

 

 

82 

 

 

157 

 

 

165 

Insurance commissions and fees

 

736 

 

 

696 

 

 

1,891 

 

 

1,669 

Investment brokerage fees

 

41 

 

 

37 

 

 

63 

 

 

68 

Net gain on sales of securities

 

88 

 

 

94 

 

 

256 

 

 

94 

Net gain on sale of premises and equipment

 

 

 

 -

 

 

 

 

 -

Other

 

135 

 

 

99 

 

 

226 

 

 

172 

Total Other Income

 

1,501 

 

 

1,458 

 

 

3,402 

 

 

3,049 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,789 

 

 

2,441 

 

 

5,569 

 

 

4,859 

Occupancy, net

 

443 

 

 

397 

 

 

920 

 

 

850 

Data processing

 

429 

 

 

432 

 

 

783 

 

 

812 

Furniture and equipment

 

214 

 

 

112 

 

 

424 

 

 

276 

Advertising and promotion

 

90 

 

 

78 

 

 

160 

 

 

122 

Professional fees

 

173 

 

 

211 

 

 

319 

 

 

364 

Director fees

 

147 

 

 

105 

 

 

313 

 

 

242 

FDIC assessment

 

124 

 

 

175 

 

 

248 

 

 

351 

Insurance

 

68 

 

 

72 

 

 

120 

 

 

148 

Stationary and supplies

 

49 

 

 

52 

 

 

105 

 

 

107 

Loan collection costs

 

59 

 

 

169 

 

 

156 

 

 

246 

Net expenses and write-downs related to foreclosed real estate

 

35 

 

 

161 

 

 

199 

 

 

261 

Other

 

302 

 

 

332 

 

 

676 

 

 

567 

Total Other Expenses

 

4,922 

 

 

4,737 

 

 

9,992 

 

 

9,205 

Income before Income Taxes

 

1,308 

 

 

766 

 

 

2,636 

 

 

1,742 

EXPENSE FOR INCOME TAXES

 

424 

 

 

159 

 

 

800 

 

 

457 

Net Income

 

884 

 

 

607 

 

 

1,836 

 

 

1,285 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities arising during the period

 

(1,166)

 

 

1,636 

 

 

(850)

 

 

3,353 

Reclassification adjustment for net gain on securities transactions included in net income

 

(88)

 

 

(94)

 

 

(256)

 

 

(94)

Income tax benefit (expense) related to items of other comprehensive income 

 

502 

 

 

(617)

 

 

442 

 

 

(1,304)

Other comprehensive (loss) income, net of income taxes

 

(752)

 

 

925 

 

 

(664)

 

 

1,955 

Comprehensive income

$

132 

 

$

1,532 

 

$

1,172 

 

$

3,240 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.19 

 

$

0.13 

 

$

0.40 

 

$

0.28 

Diluted

$

0.19 

 

$

0.13 

 

$

0.40 

 

$

0.28 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

2

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

Shares

 

 

Common

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

(Dollars in Thousands)

 

Outstanding

 

 

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2013

 

4,629,113 

 

$

35,249 

 

$

13,386 

 

$

(2,151)

 

$

(59)

 

$

46,425 

Net income

 

 -

 

 

 -

 

 

1,285 

 

 

 -

 

 

 -

 

 

1,285 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

1,955 

 

 

 -

 

 

1,955 

Restricted stock granted

 

36,043 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(300)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Compensation expense related to stock option and restricted stock grants

 

 -

 

 

156 

 

 

 -

 

 

 -

 

 

 -

 

 

156 

Dividends declared on common stock

 

 

 

 

 -

 

 

(140)

 

 

 -

 

 

 -

 

 

(140)

Balance June 30, 2014

 

4,664,856 

 

$

35,405 

 

$

14,531 

 

$

(196)

 

$

(59)

 

$

49,681 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2014

 

4,662,606 

 

$

35,553 

 

$

15,566 

 

$

169 

 

$

(59)

 

$

51,229 

Net income

 

 -

 

 

 -

 

 

1,836 

 

 

 -

 

 

 -

 

 

1,836 

Other comprehensive loss

 

 -

 

 

 -

 

 

 -

 

 

(664)

 

 

 -

 

 

(664)

Treasury shares purchased

 

(48,059)

 

 

 -

 

 

 -

 

 

 -

 

 

(533)

 

 

(533)

Restricted stock granted

 

31,841 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Compensation expense related to stock option and restricted stock grants

 

 -

 

 

185 

 

 

 -

 

 

 -

 

 

 -

 

 

185 

Dividends declared on common stock

 

 -

 

 

 -

 

 

(374)

 

 

 -

 

 

 -

 

 

(374)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2015

 

4,646,388 

 

$

35,738 

 

$

17,028 

 

$

(495)

 

$

(592)

 

$

51,679 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

3

 


 

 

 

 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six Months Ended June 30,

(Dollars in thousands)

 

2015

 

2014

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,836 

 

$

1,285 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

505 

 

 

853 

Depreciation and amortization

 

 

497 

 

 

326 

Net amortization of securities premiums and discounts

 

 

876 

 

 

924 

Net realized gain on sale of securities

 

 

(256)

 

 

(94)

Net realized gain on sale of premises and equipment

 

 

(8)

 

 

 -

Net realized gain on sale of foreclosed real estate

 

 

(36)

 

 

(5)

Write-downs of and provisions for foreclosed real estate

 

 

97 

 

 

110 

Deferred income tax benefit

 

 

(92)

 

 

(4)

Earnings on bank-owned life insurance

 

 

(157)

 

 

(165)

Compensation expense for stock options and stock awards

 

 

185 

 

 

156 

(Increase) decrease in assets:

 

 

 

 

 

 

Accrued interest receivable

 

 

(116)

 

 

(56)

Other assets

 

 

(51)

 

 

605 

Increase in accrued interest payable and other liabilities

 

 

484 

 

 

957 

Net Cash Provided by Operating Activities

 

 

3,764 

 

 

4,892 

Cash Flows from Investing Activities

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

Purchases

 

 

(38,387)

 

 

(5)

Sales

 

 

16,462 

 

 

5,033 

Maturities, calls and principal repayments

 

 

4,309 

 

 

6,818 

Securities held to maturity:

 

 

 

 

 

 

Purchases

 

 

(716)

 

 

(577)

Maturities, calls and principal repayments

 

 

727 

 

 

572 

Net increase in loans

 

 

(8,660)

 

 

(37,072)

Proceeds from the sale of foreclosed real estate

 

 

1,615 

 

 

682 

Purchases of bank premises and equipment

 

 

(760)

 

 

(1,132)

Proceeds from the sale of premises and equipment

 

 

35 

 

 

 -

Decrease (increase) in Federal Home Loan Bank stock

 

 

284 

 

 

(255)

Net Cash Used in Investing Activities

 

 

(25,091)

 

 

(25,936)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net increase in deposits

 

 

29,448 

 

 

14,049 

(Decrease) increase in short-term borrowed funds

 

 

(16,300)

 

 

5,000 

Proceeds of long-term borrowings

 

 

15,000 

 

 

 -

Repayment of long-term borrowings

 

 

(5,000)

 

 

 -

Purchase of treasury stock

 

 

(533)

 

 

 -

Dividends paid

 

 

(374)

 

 

(140)

Net Cash Provided by Financing Activities

 

 

22,241 

 

 

18,909 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

914 

 

 

(2,135)

Cash and Cash Equivalents - Beginning

 

 

5,859 

 

 

13,246 

Cash and Cash Equivalents - Ending

 

$

6,773 

 

$

11,111 

 

 

 

 

 

 

 

Supplementary Cash Flows Information

 

 

 

 

 

 

Interest paid

 

$

1,700 

 

$

1,603 

Income taxes paid

 

$

712 

 

$

119 

 

 

 

 

 

 

 

Supplementary Schedule of Noncash Investing and Financing Activities

 

 

 

 

 

 

Foreclosed real estate acquired in settlement of loans

 

$

1,170 

 

$

715 

 

 

 

 

 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

4

 


 

NOTE 1    SUMMARY OF SIGNIFICANT ACOUNTING POLICIES

 

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Sussex Bancorp (“we,” “us, “our” or the “company”) and our wholly owned subsidiary Sussex Bank (the “Bank”).  The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth Properties Corp., PPD Holding Company, LLC, and Tri-State Insurance Agency, Inc. (“Tri-State”), a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey.  Tri-State’s operations are considered a separate segment for financial disclosure purposes.  All inter-company transactions and balances have been eliminated in consolidation.  The Bank operates eleven banking offices, eight located in Sussex County, New Jersey,  one located in Warren County, New Jersey,  one in Queens County, New York and one in Orange County, New York.

 

We are subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”).  The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to applicable limits.  The operations of the company and the Bank are subject to the supervision and regulation of the FRB, the FDIC and the New Jersey Department of Banking and Insurance (the “Department”) and the operations of Tri-State are subject to supervision and regulation by the Department.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the three and six month periods ended June  30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  

 

New Accounting Standards

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables - Troubled Debt Restructurings by Creditors.  This ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  For public entities, the guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014.  The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.   We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In June 2014, FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, to change the accounting for repurchase-to-maturity transactions and certain linked repurchase financings.  This will result in accounting for both types of arrangements as secured borrowings on the balance sheet, rather than sales.  Additionally, the ASU introduces new disclosures to (1) increase transparency about the types of collateral pledged in secured borrowing transactions and (2) enable users to better understand transactions in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. For public entities, the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. All other accounting and disclosure amendments in the ASU are effective for public business entities for the first interim or

5

 


 

annual period beginning after December 15, 2014. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force), to clarify that a performance target in a share-based compensation award that could be achieved after an employee completes the requisite service period should be treated as a performance condition that affects the vesting of the award.  As such, the performance target should not be reflected in estimating the grant-date fair value of the award. For all entities, the amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements

 

In April 2015, FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to clarify whether a hosting arrangement (e.g., cloud computing, software as a service, infrastructure as a service, etc.) contains a software license, and thus, whether it is to be accounted for by the customer similarly to other internal-use software.  Specifically, the amendments revise the scope of Subtopic 350-40 to include internal-use software accessed through a hosting arrangement only if both of the following criteria are met: (1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.  There is no significant penalty if the customer has the ability to take delivery of the software without incurring significant cost and the ability to use the software separately without significant loss of utility or value and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.  If both of the above criteria are present in a hosting arrangement, then the arrangement contains a software license and the customer should account for that element in accordance with Subtopic 350-40 (i.e., generally capitalize and subsequently amortize the cost of the license).  If both of the above criteria are not present, the customer should account for the arrangement as a service contract (i.e., expense fees as incurred).  The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016.  Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. 

 

6

 


 

NOTE 2 – SECURITIES

 

Available for Sale

 

The amortized cost and approximate fair value of securities available for sale as of June 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

(Dollars in thousands)

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

11,211 

 

$

56 

 

$

(24)

 

$

11,243 

State and political subdivisions

 

 

35,088 

 

 

46 

 

 

(1,000)

 

 

34,134 

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

48,397 

 

 

397 

 

 

(302)

 

 

48,492 

Equity securities-financial services industry and other

 

 

 

 

 

 

 -

 

 

10 

 

 

$

94,704 

 

$

501 

 

$

(1,326)

 

$

93,879 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

7,873 

 

$

17 

 

$

(32)

 

$

7,858 

State and political subdivisions

 

 

26,432 

 

 

158 

 

 

(206)

 

 

26,384 

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

43,382 

 

 

500 

 

 

(158)

 

 

43,724 

Equity securities-financial services industry and other

 

 

 

 

 

 

 -

 

 

10 

 

 

$

77,695 

 

$

677 

 

$

(396)

 

$

77,976 

 

Securities with a carrying value of approximately $29.3 million and $32.8 million at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes required or permitted by applicable laws and regulations.

 

The amortized cost and fair value of securities available for sale at June  30, 2015 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

(Dollars in thousands)

 

Cost

 

Value

 

 

 

 

 

 

 

Due in one year or less

 

$

 -

 

$

 -

Due after one year through five years

 

 

 -

 

 

 -

Due after five years through ten years

 

 

3,010 

 

 

2,966 

Due after ten years

 

 

32,078 

 

 

31,168 

Total bonds and obligations

 

 

35,088 

 

 

34,134 

U.S. government agencies

 

 

11,211 

 

 

11,243 

Mortgage-backed securities:

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

48,397 

 

 

48,492 

Equity securities-financial services industry and other

 

 

 

 

10 

Total available for sale securities

 

$

94,704 

 

$

93,879 

 

Gross realized gains on sales of securities available for sale were $88 thousand and $118 thousand for the three months ended June 30, 2015 and 2014, respectively.   There were no gross realized losses on sales of securities for the three months ended June 30, 2015.  Gross realized losses were $24 thousand for the three months ended June 30, 2014.

 

Gross realized gains on sales of securities were $304 thousand and $118 thousand and gross losses were $48 thousand and $24 thousand for the six months ended June 30, 2015 and 2014, respectively.

 

 

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Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at June  30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(Dollars in thousands)

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

 -

 

$

 -

 

$

2,691 

 

$

(24)

 

$

2,691 

 

$

(24)

State and political subdivisions

 

28,154 

 

 

(926)

 

 

1,818 

 

 

(74)

 

 

29,972 

 

 

(1,000)

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

21,900 

 

 

(297)

 

 

1,997 

 

 

(5)

 

 

23,897 

 

 

(302)

Total temporarily impaired securities

$

50,054 

 

$

(1,223)

 

$

6,506 

 

$

(103)

 

$

56,560 

 

$

(1,326)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

 -

 

$

 -

 

$

2,905 

 

$

(32)

 

$

2,905 

 

$

(32)

State and political subdivisions

 

7,603 

 

 

(112)

 

 

5,713 

 

 

(94)

 

 

13,316 

 

 

(206)

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

15,679 

 

 

(94)

 

 

3,432 

 

 

(64)

 

 

19,111 

 

 

(158)

Total temporarily impaired securities

$

23,282 

 

$

(206)

 

$

12,050 

 

$

(190)

 

$

35,332 

 

$

(396)

 

For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of June 30, 2015, we reviewed our available for sale securities portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security.  The intent and likelihood of sale of debt and equity securities are evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. 

 

U.S. Government Agencies 

At June  30, 2015 and December 31, 2014, the decline in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality.  At June  30, 2015, there were two securities with a fair value of $2.7 million that had an unrealized loss that amounted to $24 thousand.  As of June  30, 2015, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of the U.S. government agency securities at June 30, 2015 were deemed to be other-than-temporarily impaired (“OTTI”).

 

At December 31, 2014, there were two securities with a fair value of $2.9 million that had an unrealized loss that amounted to $32 thousand.

 

State and Political Subdivisions

At June 30, 2015 and December 31, 2014, the decline in fair value and the unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality.  At June 30, 2015,  there were 48 securities with a fair value of $30.0 million that had an unrealized loss that amounted to $1.0 million.  These securities typically have maturity dates greater than 10 years and the fair values are more sensitive to changes in market interest rates.  As of June 30, 2015,  we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of our state and political subdivision securities at June 30, 2015 were deemed to be OTTI.  

 

At December 31, 2014, there were 22 securities with a fair value of $13.3 million that had an unrealized loss that amounted to $206 thousand

 

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Mortgage-Backed Securities

At June 30, 2015 and December 31, 2014, the decline in fair value and the unrealized losses for our mortgage-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality.  At June 30, 2015, there were 13 securities with a fair value of $23.9 million that had an unrealized loss that amounted to $302 thousand.  As of June 30, 2015,  we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of our mortgage-backed securities at June 30, 2015 were deemed to be OTTI.  

 

At December 31, 2014, there were 13 securities with a fair value of $19.1 million that had an unrealized loss that amounted to $158 thousand. 

 

Equity Securities

Our marketable equity securities portfolio consists primarily of common stock of an entity in the insurance services industry.  At June 30, 2015, we did not have any securities in an unrealized loss position.    

 

At December 31, 2014,  we did not have any securities in an unrealized loss position.

 

We continue to closely monitor the performance of the securities we own as well as the impact from any further deterioration in the economy or in the banking industry that may adversely affect these securities. We will continue to evaluate them for other-than-temporary impairment, which could result in a future non-cash charge to earnings.

 

Held to Maturity Securities

 

The amortized cost and approximate fair value of securities held to maturity as of June 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

$

5,982 

 

$

160 

 

$

(10)

 

$

6,132 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

$

6,006 

 

$

189 

 

$

(5)

 

$

6,190 

 

The amortized cost and carrying value of securities held to maturity at June 30, 2015 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Fair

(Dollars in thousands)

 

Cost

 

 

Value

 

 

 

 

 

 

Due in one year or less

$

2,088 

 

$

2,088 

Due after one year through five years

 

 -

 

 

 -

Due after five years through ten years

 

2,841 

 

 

2,895 

Due after ten years

 

1,053 

 

 

1,149 

Total held to maturity securities

$

5,982 

 

$

6,132 

 

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Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of held to maturity securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual held to maturity securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(Dollars in thousands)

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  State and political subdivisions

$

799 

 

$

(10)

 

$

 -

 

$

 -

 

$

799 

 

$

(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  State and political subdivisions

$

 -

 

$

 -

 

$

811 

 

$

(5)

 

$

811 

 

$

(5)

 

For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of June 30, 2015, we reviewed our held to maturity securities portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security.  The intent and likelihood of sale of debt and equity securities are evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position.

 

At June 30, 2015 and December 31, 2014, the decline in fair value and the unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality.  At June 30, 2015, there were two securities with a fair value of $799 thousand that had an unrealized loss that amounted to $10 thousand.  These securities typically have maturity dates greater than 10 years and the fair values are more sensitive to changes in market interest rates.  As of June 30, 2015,  we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of our state and political subdivision securities at June 30, 2015 were deemed to be OTTI.

 

At December 31, 2014, there were two securities with a fair value of $811 thousand that had an unrealized loss that amounted to $5 thousand. 

 

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NOTE 3 – LOANS

 

The composition of net loans receivable at June 30, 2015 and December 31, 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial

$

17,900 

 

$

20,549 

Construction

 

11,341 

 

 

12,379 

Commercial real estate

 

328,909 

 

 

326,370 

Residential real estate

 

120,126 

 

 

111,498 

Consumer and other

 

1,247 

 

 

1,665 

Total loans receivable

 

479,523 

 

 

472,461 

Unearned net loan origination fees

 

(454)

 

 

(488)

Allowance for loan losses

 

(5,752)

 

 

(5,641)

Net loans receivable

$

473,317 

 

$

466,332 

 

Mortgage loans serviced for others are not included in the accompanying balance sheets.  The total amount of loans serviced for the benefit of others was approximately $465 thousand and $475 thousand at June 30, 2015 and December 31, 2014, respectively. Mortgage servicing rights were immaterial at June 30, 2015 and December 31, 2014.

 

NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

 

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three and six months ended June 30, 2015 and 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

Commercial

 

Residential

 

Consumer

 

 

 

 

 

and

 

 

 

 

Real

 

Real

 

and

 

 

 

 

(Dollars in thousands)

Industrial

 

Construction

 

Estate

 

Estate

 

Other

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

138 

 

$

388 

 

$

3,787 

 

$

841 

 

$

88 

 

$

521 

 

$

5,763 

Charge-offs

 

 -

 

 

 -

 

 

(235)

 

 

 -

 

 

(4)

 

 

 -

 

 

(239)

Recoveries

 

 

 

 -

 

 

24 

 

 

 

 

 

 

 -

 

 

28 

Provision

 

(53)

 

 

(111)

 

 

37 

 

 

56 

 

 

 -

 

 

271 

 

 

200 

Ending balance

$

86 

 

$

277 

 

$

3,613 

 

$

898 

 

$

86 

 

$

792 

 

$

5,752 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

289 

 

 

315 

 

 

3,687 

 

 

862 

 

 

19 

 

 

265 

 

$

5,437 

Charge-offs

 

(1)

 

 

 -

 

 

 -

 

 

 

 

(9)

 

 

 -

 

 

(9)

Recoveries

 

 

 

 -

 

 

17 

 

 

 

 

 

 

 -

 

 

26 

Provision

 

(34)

 

 

39 

 

 

46 

 

 

(29)

 

 

 -

 

 

378 

 

 

400 

Ending balance

$

257 

 

$

354 

 

$

3,750 

 

$

837 

 

$

13 

 

$

643 

 

$

5,854 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

231 

 

$

383 

 

$

3,491 

 

$

903 

 

$

19 

 

$

614 

 

$

5,641 

Charge-offs

 

(19)

 

 

 -

 

 

(423)

 

 

 -

 

 

(11)

 

 

 -

 

 

(453)

Recoveries

 

 

 

 -

 

 

36 

 

 

13 

 

 

 

 

 -

 

 

59 

Provision

 

(131)

 

 

(106)

 

 

509 

 

 

(18)

 

 

73 

 

 

178 

 

 

505 

Ending balance

$

86 

 

$

277 

 

$

3,613 

 

$

898 

 

$

86 

 

$

792 

 

$

5,752 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

222 

 

 

308 

 

$

3,399 

 

$

941 

 

$

16 

 

$

535 

 

$

5,421 

Charge-offs

 

(1)

 

 

 -

 

 

(358)

 

 

(85)

 

 

(22)

 

 

 -

 

 

(466)

Recoveries

 

15 

 

 

 -

 

 

21 

 

 

 

 

 

 

 -

 

 

46 

Provision

 

21 

 

 

46 

 

 

688 

 

 

(23)

 

 

13 

 

 

108 

 

 

853 

Ending balance

$

257 

 

$

354 

 

$

3,750 

 

$

837 

 

$

13 

 

$

643 

 

$

5,854 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 


 

The following table presents the balance of the allowance of loan losses and loans receivable by class at June 30, 2015 and December 31, 2014 disaggregated on the basis of our impairment methodology.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

Loans Receivable

 

 

 

 

Balance

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Related to

 

Related to

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

Collectively

 

 

 

 

Individually

 

Collectively

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

Evaluated for

 

Evaluated for

(Dollars in thousands)

Balance

 

Impairment

 

Impairment

 

Balance

 

Impairment

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

86 

 

$

 -

 

$

86 

 

$

17,900 

 

$

20 

 

$

17,880 

Construction

 

277 

 

 

 -

 

 

277 

 

 

11,341 

 

 

 -

 

 

11,341 

Commercial real estate

 

3,613 

 

 

261 

 

 

3,352 

 

 

328,909 

 

 

4,569 

 

 

324,340 

Residential real estate

 

898 

 

 

147 

 

 

751 

 

 

120,126 

 

 

1,898 

 

 

118,228 

Consumer and other loans

 

86 

 

 

73 

 

 

13 

 

 

1,247 

 

 

138 

 

 

1,109 

Unallocated

 

792 

 

 

-

 

 

 -

 

 

 -

 

 

-

 

 

-

Total

$

5,752 

 

$

481 

 

$

4,479 

 

$

479,523 

 

$

6,625 

 

$

472,898 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

231 

 

$

51 

 

$

180 

 

$

20,549 

 

$

94 

 

$

20,455 

Construction

 

383 

 

 

 -

 

 

383 

 

 

12,379 

 

 

                    -

 

 

12,379 

Commercial real estate

 

3,491 

 

 

136 

 

 

3,355 

 

 

326,370 

 

 

5,105 

 

 

321,265 

Residential real estate

 

903 

 

 

101 

 

 

802 

 

 

111,498 

 

 

2,314 

 

 

109,184 

Consumer and other loans

 

19 

 

 

 -

 

 

19 

 

 

1,665 

 

 

 -

 

 

1,665 

Unallocated

 

614 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

$

5,641 

 

$

288 

 

$

4,739 

 

$

472,461 

 

$

7,513 

 

$

464,948 

 

An age analysis of loans receivable, which were past due as of June 30, 2015 and December 31, 2014, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

Total

 

> 90 Days

 

30-59 Days

 

60-89 days

 

Than

 

Total Past

 

 

 

 

Financing

 

and

(Dollars in thousands)

Past Due

 

Past Due

 

90 Days (a)

 

Due

 

Current

 

Receivables

 

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

 -

 

$

 -

 

$

20 

 

$

20 

 

$

17,880 

 

$

17,900 

 

$

 -

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11,341 

 

 

11,341 

 

 

 -

Commercial real estate

 

1,165 

 

 

560 

 

 

3,413 

 

 

5,138 

 

 

323,771 

 

 

328,909 

 

 

 -

Residential real estate

 

417 

 

 

109 

 

 

1,493 

 

 

2,019 

 

 

118,107 

 

 

120,126 

 

 

10 

Consumer and other

 

 

 

 

 

138 

 

 

145 

 

 

1,102 

 

 

1,247 

 

 

 -

Total

$

1,588 

 

$

670 

 

$

5,064 

 

$

7,322 

 

$

472,201 

 

$

479,523 

 

$

10 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

 

$

 -

 

$

94 

 

$

103 

 

$

20,446 

 

$

20,549 

 

$

 -

Construction

 

1,354 

 

 

 -

 

 

 -

 

 

1,354 

 

 

11,025 

 

 

12,379 

 

 

 -

Commercial real estate

 

2,395 

 

 

1,209 

 

 

3,936 

 

 

7,540 

 

 

318,830 

 

 

326,370 

 

 

 -

Residential real estate

 

555 

 

 

108 

 

 

1,978 

 

 

2,641 

 

 

108,857 

 

 

111,498 

 

 

85 

Consumer and other

 

 

 

 -

 

 

 

 

 

 

1,659 

 

 

1,665 

 

 

 -

Total

$

4,318 

 

$

1,317 

 

$

6,009 

 

$

11,644 

 

$

460,817 

 

$

472,461 

 

$

85 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.

 

12

 


 

Loans for which the accrual of interest has been discontinued at June 30, 2015 and December 31, 2014 were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial

$

20 

 

$

94 

Commercial real estate

 

3,413 

 

 

3,936 

Residential real estate

 

1,483 

 

 

1,893 

Consumer and other

 

138 

 

 

Total

$

5,054 

 

$

5,924 

 

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type.  The credit review process includes the independent evaluation of the loan officer, and assigned risk ratings by the Chief Credit Officer and a third party loan review company.  Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans.  It is management’s and the Board of Directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system.  Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

 

Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets.  The classification system is as follows:    

 

·

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation.  We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower. 

 

·

Special Mention:  This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

 

·

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments.  The weaknesses require close supervision by management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected.  Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due.  Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

 

·

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured.  The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

 

·

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted.  Such loans are fully charged off.

13

 


 

The following tables illustrate our corporate credit risk profile by creditworthiness category as of June 30, 2015 and December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

17,873 

 

$

 

$

20 

 

$

 -

 

$

17,900 

Construction

 

11,341 

 

 

 -

 

 

 -

 

 

 -

 

 

11,341 

Commercial real estate

 

315,473 

 

 

8,088 

 

 

5,348 

 

 

 -

 

 

328,909 

Residential real estate

 

117,335 

 

 

759 

 

 

2,032 

 

 

 -

 

 

120,126 

Consumer and other

 

1,109 

 

 

 -

 

 

138 

 

 

 -

 

 

1,247 

 

$

463,131 

 

$

8,854 

 

$

7,538 

 

$

 -

 

$

479,523 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

20,446 

 

$

 

$

94 

 

$

 -

 

$

20,549 

Construction

 

12,379 

 

 

 -

 

 

 -

 

 

 -

 

 

12,379 

Commercial real estate

 

312,172 

 

 

8,257 

 

 

5,941 

 

 

 -

 

 

326,370 

Residential real estate

 

108,587 

 

 

457 

 

 

2,454 

 

 

 -

 

 

111,498 

Consumer and other

 

1,527 

 

 

138 

 

 

 -

 

 

 -

 

 

1,665 

 

$

455,111 

 

$

8,861 

 

$

8,489 

 

$

 -

 

$

472,461 

 

The following table reflects information about our impaired loans by class as of June 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

December 31, 2014

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

Recorded

 

Principal

 

Related

 

 

Recorded

 

Principal

 

Related

(Dollars in thousands)

Investment

 

Balance

 

Allowance

 

 

Investment

 

Balance

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

20 

 

$

20 

 

$

 -

 

 

$

 -

 

$

 -

 

$

 -

Commercial real estate

 

1,523 

 

 

1,523 

 

 

 -

 

 

 

3,167 

 

 

3,736 

 

 

 -

Residential real estate

 

1,208 

 

 

1,211 

 

 

 -

 

 

 

1,829 

 

 

1,835 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 -

 

 

 -

 

 

 -

 

 

 

94 

 

 

94 

 

 

51 

Commercial real estate

 

3,046 

 

 

3,167 

 

 

261 

 

 

 

1,938 

 

 

1,938 

 

 

136 

Residential real estate

 

690 

 

 

697 

 

 

147 

 

 

 

485 

 

 

489 

 

 

101 

Consumer and other

 

138 

 

 

138 

 

 

73 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

20 

 

 

20 

 

 

 -

 

 

 

94 

 

 

94 

 

 

51 

Commercial real estate

 

4,569 

 

 

4,690 

 

 

261 

 

 

 

5,105 

 

 

5,674 

 

 

136 

Residential real estate

 

1,898 

 

 

1,908 

 

 

147 

 

 

 

2,314 

 

 

2,324 

 

 

101 

Consumer and other

 

138 

 

 

138 

 

 

73 

 

 

 

 -

 

 

 -

 

 

 -

 

$

6,625 

 

$

6,756 

 

$

481 

 

 

$

7,513 

 

$

8,092 

 

$

288 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 


 

 

The following table presents the average recorded investment and income recognized for the three and six months ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2015

 

For the Three Months Ended June 30, 2014

 

Average

 

Interest

 

Average

 

Interest

 

Recorded

 

Income

 

Recorded

 

Income

(Dollars in thousands)

Investment

 

Recognized

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

20 

 

$

 -

 

$

 -

 

$

 -

Commercial real estate

 

1,937 

 

 

10 

 

 

4,321 

 

 

10 

Residential real estate

 

1,321 

 

 

 

 

1,683 

 

 

Total impaired loans without a related allowance

 

3,278 

 

 

12 

 

 

6,004 

 

 

19 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

3,319 

 

 

 

 

5,298 

 

 

 -

Residential real estate

 

616 

 

 

 

 

678 

 

 

Consumer and other

 

92 

 

 

 -

 

 

 

 

 -

Total impaired loans with an allowance

 

4,027 

 

 

11 

 

 

5,977 

 

 

Total impaired loans

$

7,305 

 

$

23 

 

$

11,981 

 

$

22 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2015

 

For the Six Months Ended June 30, 2014

 

Average

 

Interest

 

Average

 

Interest

 

Recorded

 

Income

 

Recorded

 

Income

(Dollars in thousands)

Investment

 

Recognized

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

13 

 

$

 -

 

$

 -

 

$

 -

Commercial real estate

 

2,347 

 

 

15 

 

 

5,372 

 

 

18 

Residential real estate

 

1,490 

 

 

 

 

1,792 

 

 

29 

Total impaired loans without a related allowance

 

3,850 

 

 

18 

 

 

7,164 

 

 

47 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

32 

 

 

 -

 

 

 -

 

 

 -

Commercial real estate

 

2,859 

 

 

16 

 

 

4,672 

 

 

Residential real estate

 

572 

 

 

 

 

747 

 

 

Consumer and other

 

92 

 

 

 -

 

 

 

 

 -

Total impaired loans with an allowance

 

3,555 

 

 

22 

 

 

5,420 

 

 

Total impaired loans

$

7,405 

 

$

40 

 

$

12,584 

 

$

55 

 

We recognize interest income on performing impaired loans as payments are received.  On non-performing impaired loans we do not recognize interest income as all payments are recorded as a reduction of principal on such loans.    

 

Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection.  The concessions rarely result in the forgiveness of principal or accrued interest.  In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans.  Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

 

15

 


 

The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial Real Estate

 

Residential Real Estate

 

Total

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

Performing

$

1,156 

 

$

415 

 

$

1,571 

Non-performing

 

1,836 

 

 

223 

 

 

2,059 

Total

$

2,992 

 

$

638 

 

$

3,630 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

Performing

$

1,169 

 

$

421 

 

$

1,590 

Non-performing

 

2,730 

 

 

224 

 

 

2,954 

Total

$

3,899 

 

$

645 

 

$

4,544 

 

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote.  As of June 30, 2015, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

 

There were no troubled debt restructurings that occurred during the three and six months ended June 30, 2015 and 2014

 

 

There were no troubled debt restructurings for which there was a payment default within twelve months following the date of the restructuring for the three and six months ended June 30, 2015 and 2014.

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of June 30, 2015, we held foreclosed residential real estate properties with a carrying value of $242 thousand as a result of obtaining physical possession. In addition, as of June 30, 2015, we had consumer loans with a carrying value of $1.2 million collateralized by residential real estate property for which formal foreclosure proceedings were in process.

 

NOTE 5 – EARNINGS PER SHARE 

 

Basic earnings per share are calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares (unvested restricted stock grants and stock options) had been issued, as well as any adjustment to income that would result from the assumed issuance of potential common shares that may be issued by us. Potential common shares related to stock options are determined using the treasury stock method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Three Months Ended June 30, 2014

(In thousands, except share and

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share

per share data)

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings applicable to common stockholders

$

884 

 

4,563,073 

 

$

0.19 

 

$

607 

 

4,540,318 

 

$

0.13 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested stock awards

 

-

 

31,901 

 

 

 

 

 

 -

 

36,832 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders and assumed conversions

$

884 

 

4,594,974 

 

$

0.19 

 

$

607 

 

4,577,150 

 

$

0.13 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 


 

 

Six Months Ended June 30, 2015

 

Six Months Ended June 30, 2014

(In thousands, except share and

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share

per share data)

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings applicable to common stockholders

$

1,836 

 

4,567,091 

 

$

0.40 

 

$

1,285 

 

4,533,451 

 

$

0.28 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested stock awards

 

-

 

29,986 

 

 

 

 

 

-

 

35,654 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders and assumed conversions

$

1,836 

 

4,597,077 

 

$

0.40 

 

$

1,285 

 

4,569,105 

 

$

0.28 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were 57,423 and 7,000 shares of unvested restricted stock awards and options outstanding during the three months ended June  30,  2015 and 2014, respectively, which were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.  There were 83,714 and 36,043 shares of unvested restricted stock awards and options outstanding during the six months ended June 30, 2015 and 2014, respectively, which were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive

 

NOTE 6OTHER COMPREHENSIVE  (LOSS) 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, 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.

 

The components of other comprehensive income, both before tax and net of tax, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Three Months Ended June 30, 2014

 

Before Tax

 

Tax Effect

 

Net of Tax

 

Before Tax

 

Tax Effect

 

Net of Tax

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities

$

(1,166)

 

$

(467)

 

$

(699)

 

$

1,636 

 

$

655 

 

$

981 

Reclassification adjustment for net gains on securities transactions included in net income

 

(88)

 

 

(35)

 

 

(53)

 

 

(94)

 

 

(38)

 

 

(56)

Total other comprehensive (loss) income

$

(1,254)

 

$

(502)

 

$

(752)

 

$

1,542 

 

$

617 

 

$

925 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

Six Months Ended June 30, 2014

 

Before Tax

 

Tax Effect

 

Net of Tax

 

Before Tax

 

Tax Effect

 

Net of Tax

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities

$

(850)

 

$

(340)

 

$

(510)

 

$

3,353 

 

$

1,342 

 

$

2,011 

Reclassification adjustment for net gains on securities transactions included in net income

 

(256)

 

 

(102)

 

 

(154)

 

 

(94)

 

 

(38)

 

 

(56)

Total other comprehensive (loss) income

$

(1,106)

 

$

(442)

 

$

(664)

 

$

3,259 

 

$

1,304 

 

$

1,955 

 

 

 

 

 

17

 


 

NOTE 7 – SEGMENT INFORMATION

 

Our insurance agency operations are managed separately from the traditional banking and related financial services that we also offer.  The insurance agency operation provides commercial, individual, and group benefit plans and personal coverage.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Three Months Ended June 30, 2014

 

Banking and

 

 

 

 

 

 

 

Banking and

 

 

 

 

 

 

 

Financial

 

Insurance

 

 

 

 

Financial

 

Insurance

 

 

 

 

Services

 

Services

 

Total

 

Services

 

Services

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income from external sources

$

4,929 

 

$

 -

 

$

4,929 

 

$

4,444 

 

$

 

$

4,445 

Other income from external sources

 

758 

 

 

743 

 

 

1,501 

 

 

760 

 

 

698 

 

 

1,458 

Depreciation and amortization

 

247 

 

 

 

 

254 

 

 

157 

 

 

 

 

163 

Income before income taxes

 

1,280 

 

 

28 

 

 

1,308 

 

 

724 

 

 

42 

 

 

766 

Income tax expense (1)

 

413 

 

 

11 

 

 

424 

 

 

143 

 

 

16 

 

 

159 

Total assets

 

615,302 

 

 

4,695 

 

 

619,997 

 

 

552,065 

 

 

5,108 

 

 

557,173 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

Six Months Ended June 30, 2014

 

Banking and

 

 

 

 

 

 

 

Banking and

 

 

 

 

 

 

 

Financial

 

Insurance

 

 

 

 

Financial

 

Insurance

 

 

 

 

Services

 

Services

 

Total

 

Services

 

Services

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income from external sources

$

9,731 

 

$

 -

 

$

9,731 

 

$

8,749 

 

$

 

$

8,751 

Other income from external sources

 

1,501 

 

 

1,901 

 

 

3,402 

 

 

1,366 

 

 

1,683 

 

 

3,049 

Depreciation and amortization

 

486 

 

 

11 

 

 

497 

 

 

315 

 

 

11 

 

 

326 

Income before income taxes

 

2,208 

 

 

428 

 

 

2,636 

 

 

1,346 

 

 

396 

 

 

1,742 

Income tax expense (1)

 

629 

 

 

171 

 

 

800 

 

 

299 

 

 

158 

 

 

457 

Total assets

 

615,302 

 

 

4,695 

 

 

619,997 

 

 

552,065 

 

 

5,108 

 

 

557,173 

 

 

(1) Insurance Services calculated at statutory tax rate of 40%

 

NOTE 8   STOCK-BASED COMPENSATION 

 

We currently have stock-based compensation plans in place for our directors, officers, employees, consultants and advisors.  Under the terms of these plans we may grant restricted shares and stock options for the purchase of our common stock.  The stock-based compensation is granted under terms determined by our Compensation Committee.  Our standard stock option grants have a maximum term of 10 years, generally vest over periods ranging between one and four years, and are granted with an exercise price equal to the fair market value of the common stock on the date of grant.  Restricted stock is valued at the market value of the common stock on the date of grant and generally vests over periods of two to seven years.  All dividends paid on restricted stock, whether vested or unvested, are paid to the shareholder.

 

18

 


 

Information regarding our stock option plans for the six months ended June  30, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

Weighted

 

 

 

 

 

 

 

 

Exercise

 

Average

 

 

Aggregate

 

 

Number of

 

 

Price per

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Share

 

Term

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, beginning of year

 

46,525 

 

$

10.63 

 

 

 

 

 

Options granted

 

15,985 

 

 

10.25 

 

 

 

 

 

Options expired

 

(3,817)

 

 

13.39 

 

 

 

 

 

Options outstanding, end of quarter

 

58,693 

 

$

10.35 

 

8.4 

 

$

103,653 

Options exercisable, end of quarter

 

6,708 

 

$

12.63 

 

 -

 

$

 -

Option price range at end of quarter

 

$9.97 to $12.63

 

 

 

 

 

 

 

 

Option price of exercisable shares

 

$
12.63 

 

 

 

 

 

 

 

 

 

The following table summarizes information about stock option assumptions:

 

 

 

 

 

 

June 30, 2015

 

 

 

Expected dividend yield

 

1.56% 

Expected volatility

 

34.32% 

Risk-free interest rate

 

1.37% 

Expected option life

 

10.0 Years

 

During the three months ended June 30, 2015, we expensed $9 thousand in stock-based compensation under stock option awards.  There was no stock-based compensation expensed under stock option awards during the three months ended June  30, 2014.

 

During the six months ended June  30, 2015, we expensed $18 thousand in stock-based compensation under stock option awards.  There was no stock-based compensation expensed under stock option awards during the six months ended June  30, 2014.

 

The weighted average grant date fair value of options granted during the six months ended June  30,  2015 was $3.56 per share. Expected future expense relating to the unvested options outstanding as of June 30,  2015 is $170 thousand over a weighted average period of 4.4 years. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.

 

The summary of changes in unvested restricted stock awards for the six months ended June  30, 2015, is as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

Number of

 

 

Grant Date

 

 

Shares

 

 

Fair Value

 

 

 

 

 

 

Unvested restricted stock, beginning of year

 

112,545 

 

$

6.06 

Granted

 

31,841 

 

 

10.48 

Vested

 

(48,269)

 

 

5.97 

Unvested restricted stock, end of period

 

96,117 

 

$

7.57 

 

During the three months ended June 30, 2015 and 2014, we expensed $85 thousand and $76 thousand, respectively, in stock-based compensation under restricted stock awards. During the six months ended June 30, 2015 and 2014, we expensed $167 thousand and $156 thousand, respectively, in stock-based compensation under restricted stock awards.

 

At June  30, 2015, unrecognized compensation expense for unvested restricted stock was $602 thousand, which is expected to be recognized over an average period of 1.9 years. 

 

NOTE 9 – GUARANTEES

 

We do not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit.  Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third

19

 


 

party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Generally, we hold collateral and/or personal guarantees supporting these commitments.  As of June  30, 2015, we  had $754 thousand of outstanding letters of credit.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The amount of the liability as of June  30, 2015, for guarantees under standby letters of credit issued is not material.

 

NOTE 10   FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Management uses its best judgment in estimating the fair value of our financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have realized in a sale transaction on the dates indicated.  The fair value amounts have been measured as of their respective period ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

 

In accordance with U.S. GAAP, we use a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value.  The three broad levels defined by the hierarchy are as follows:

 

·

Level I - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

·

Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these asset and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

·

Level III - Assets and liabilities that have little to no pricing observability as of reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following table summarizes the fair value of our financial assets measured on a recurring basis by the above pricing observability levels as of June  30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

Fair

 

for Identical

 

Observable

 

Unobservable

 

Value

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Measurements

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

11,243 

 

$

 -

 

$

11,243 

 

$

 -

State and political subdivisions

 

34,134 

 

 

 -

 

 

34,134 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

48,492 

 

 

 -

 

 

48,492 

 

 

 -

Equity securities-financial services industry and other

 

10 

 

 

10 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

7,858 

 

$

 -

 

$

7,858 

 

$

 -

State and political subdivisions

 

26,384 

 

 

 -

 

 

26,384 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

43,724 

 

 

 -

 

 

43,724 

 

 

 -

Equity securities-financial services industry and other

 

10 

 

 

10 

 

 

                      -

 

 

 -

 

20

 


 

Our available for sale and held to maturity securities portfolios contain investments, which were all rated within our investment policy guidelines at time of purchase, and upon review of the entire portfolio all securities are marketable and have observable pricing inputs.

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June  30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

Fair

 

for Identical

 

Observable

 

Unobservable

 

Value

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Measurements

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

  Impaired loans

$

1,420 

 

$

 -

 

$

 -

 

$

1,420 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

  Impaired loans

$

1,087 

 

$

 -

 

$

 -

 

$

1,087 

  Foreclosed real estate

 

761 

 

 

 -

 

 

 -

 

 

761 

 

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which Level III inputs were used to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Qualitative Information about Level III Fair Value Measurements

 

Fair

 

 

 

 

 

Range

 

Value

 

Valuation

 

Unobservable

 

(Weighted

(Dollars in thousands)

Estimate

 

Techniques

 

Input

 

Average)

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

Impaired loans

$

1,420 

 

Appraisal of

 

Appraisal

 

0% to -79.5% 

 

 

 

 

collateral 

 

adjustments (1)

 

(-10.6%)

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

Impaired loans

$

1,087 

 

Appraisal of

 

Appraisal

 

0% to -67.9% 

 

 

 

 

collateral 

 

adjustments (1)

 

(-7.8%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

761 

 

Appraisal of

 

Selling

 

 

 

 

 

 

collateral 

 

expenses (1)

 

-7.0% (-7.0%)

 

 

 

 

 

 

 

 

 

(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling expenses.  The range and weighted average of selling expenses and other appraisal adjustments are presented as a percentage of the appraisal.

 

The following information should not be interpreted as an estimate of the fair value of the entire company since a fair value calculation is only provided for a limited portion of our assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair value of our financial instruments at June 30, 2015 and December 31, 2014:  

 

Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair value.

 

Deposits (Carried at Cost): Fair value for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.  We generally purchase amounts below the insured limit, limiting the amount of credit risk on these time deposits.  

 

21

 


 

Securities: The fair value of securities, available for sale (carried at fair value) and securities held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level I), or matrix pricing (Level II), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level III).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level III measurements.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level III investments.

 

Federal Home Loan Bank Stock (Carried at Cost):  The carrying amount of restricted investment in bank stock approximates fair value and considers the limited marketability of such securities.

 

Loans Receivable (Carried at Cost): The fair values of non-impaired loans are estimated using discounted cash flow analyses, using the market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Impaired Loans (Carried at Lower of Cost or Fair Value): Fair value of impaired loans is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included in Level III fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value of impaired loans  totaled  $1.4 million and $1.1 million at June  30, 2015 and December 31, 2014, respectively.  These balances consist of loans that were written down or required additional reserves during the periods ended June  30, 2015 and December 31, 2014, respectively.    

 

Deposit Liabilities (Carried at Cost): The fair values disclosed for demand, savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. 

 

Borrowings (Carried at Cost): Fair values of Federal Home Loan Bank (“FHLB”) advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. 

 

Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. 

 

Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued interest receivable and payable approximate its fair value.

 

Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for our off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. 

 

22

 


 

The fair values of our financial instruments at June  30, 2015 and December 31, 2014, were as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

June 30, 2015

 

for Identical

 

Observable

 

Unobservable

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Amount

 

Value

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

6,773 

 

$

6,773 

 

$

6,773 

 

$

 -

 

$

 -

Time deposits with other banks

 

100 

 

 

100 

 

 

 -

 

 

100 

 

 

 -

Securities available for sale

 

93,879 

 

 

93,879 

 

 

10 

 

 

93,869 

 

 

 -

Securities held to maturity

 

5,982 

 

 

6,132 

 

 

 -

 

 

6,132 

 

 

 -

Federal Home Loan Bank stock

 

3,624 

 

 

3,624 

 

 

 -

 

 

3,624 

 

 

 -

Loans receivable, net of allowance

 

473,317 

 

 

469,428 

 

 

 -

 

 

 -

 

 

469,428 

Accrued interest receivable

 

1,912 

 

 

1,912 

 

 

 -

 

 

1,912 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

369,578 

 

 

369,578 

 

 

 -

 

 

369,578 

 

 

 -

Time deposits

 

118,140 

 

 

117,997 

 

 

 -

 

 

117,997 

 

 

 -

Short-term borrowings

 

7,200 

 

 

7,200 

 

 

7,200 

 

 

 -

 

 

 -

Long-term borrowings

 

56,000 

 

 

57,414 

 

 

 -

 

 

57,414 

 

 

 -

Junior subordinated debentures

 

12,887 

 

 

8,700 

 

 

 -

 

 

8,700 

 

 

 -

Accrued interest payable

 

264 

 

 

264 

 

 

 -

 

 

264 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

December 31, 2014

 

for Identical

 

Observable

 

Unobservable

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Amount

 

Value

 

(Level I)

 

(Level II)

 

(Level III)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,859 

 

$

5,859 

 

$

5,859 

 

$

 -

 

$

 -

Time deposits with other banks

 

100 

 

 

100 

 

 

 -

 

 

100 

 

 

 -

Securities available for sale

 

77,976 

 

 

77,976 

 

 

10 

 

 

77,966 

 

 

 -

Securities held to maturity

 

6,006 

 

 

6,190 

 

 

 -

 

 

6,190 

 

 

 -

Federal Home Loan Bank stock

 

3,908 

 

 

3,908 

 

 

 -

 

 

3,908 

 

 

 -

Loans receivable, net of allowance

 

466,332 

 

 

462,984 

 

 

 -

 

 

 -

 

 

462,984 

Accrued interest receivable

 

1,796 

 

 

1,796 

 

 

 -

 

 

1,796 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

351,653 

 

 

351,653 

 

 

 -

 

 

351,653 

 

 

 -

Time deposits

 

106,617 

 

 

107,011 

 

 

 -

 

 

107,011 

 

 

 -

Short-term borrowings

 

23,500 

 

 

23,500 

 

 

23,500 

 

 

 -

 

 

 -

Long-term borrowings

 

46,000 

 

 

47,766 

 

 

 -

 

 

47,766 

 

 

 -

Junior subordinated debentures

 

12,887 

 

 

9,361 

 

 

 -

 

 

9,361 

 

 

 -

Accrued interest payable

 

243 

 

 

243 

 

 

 -

 

 

243 

 

 

 -

 

 

 

 

 

 

23

 


 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

MANAGEMENT STRATEGY

 

We are a community-oriented financial institution serving northern New Jersey, northeastern Pennsylvania, New York City, New York and Orange County, New York.  While offering traditional community bank loan and deposit products and services, we obtain non-interest income through our insurance brokerage operations and the sale of non-deposit products. 

 

We continue to focus on strengthening our core operating performance by improving our net interest income and margin by closely monitoring our yield on earning assets and adjusting the rates offered on deposit products.  We have been focused on building for the future and strengthening our core operating results within our risk management framework. 

 

CRITICAL ACCOUNTING POLICIES

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Actual results could differ from those estimates.

 

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions.  There have been no material changes to our critical accounting policies during the six months ended June 30, 2015.  For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2014 Annual Report on Form 10-K.

24

 


 

COMPARISION OF OPERATING RESULTS FOR THREE MONTHS ENDED JUNE  30, 2015 AND 2014

 

Overview -  For the quarter ended June  30,  2015, we reported net income of $884 thousand, or $0.19 per basic and diluted share, as compared to net income of $607 thousand, or $0.13 per basic and diluted share, for the same period last year.  This increase equates to a 46.2% increase in net income per diluted common share for the quarter ended June 30, 2015, as compared to the same period last year. The improvement for the second quarter of 2015 was driven by increased interest income related to loan growth and a 59.7% decline in credit quality costs (provision for loan losses, loan collection costs and expenses and write-downs related to foreclosed real estate) as a result of improved credit quality as NPAs (excluding performing troubled debt restructured loans) fell to 1.45% of total assets at June 30, 2015 from 2.34% at June 30, 2014.    The increase in net income for the quarter ended June 30, 2015 was primarily due to an increase in net interest income of $484 thousand and a decline in the provision for loan losses of $200 thousand.  The aforementioned were partially offset by increases in non-interest expenses of $185 thousand and income tax expense of $265 thousand.

Comparative Average Balances and Average Interest Rates - The following table presents, on a fully tax equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the three month periods ended June  30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

(Dollars in thousands)

2015

 

2014

 

 

 Average

 

 

 

 

Average

 

 

 Average

 

 

 

 

Average

Earning Assets:

 

Balance

 

 

Interest

 

Rate (2)

 

 

Balance

 

 

Interest

 

Rate (2)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt (3)

$

33,406 

 

$

331 

 

3.97% 

 

$

33,764 

 

$

384 

 

4.56% 

Taxable

 

64,261 

 

 

302 

 

1.88% 

 

 

62,775 

 

 

214 

 

1.37% 

Total securities

 

97,667 

 

 

633 

 

2.60% 

 

 

96,539 

 

 

598 

 

2.48% 

Total loans receivable (1) (4)

 

475,855 

 

 

5,275 

 

4.45% 

 

 

420,506 

 

 

4,800 

 

4.58% 

Other interest-earning assets

 

8,844 

 

 

 

0.14% 

 

 

7,368 

 

 

 

0.22% 

Total earning assets

 

582,366 

 

$

5,911 

 

4.07% 

 

$

524,413 

 

$

5,402 

 

4.13% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest earning assets

 

37,693 

 

 

 

 

 

 

 

37,675 

 

 

 

 

 

Allowance for loan losses

 

(5,738)

 

 

 

 

 

 

 

(5,653)

 

 

 

 

 

Total Assets

$

614,321 

 

 

 

 

 

 

 

556,435 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sources of Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

$

128,397 

 

$

55 

 

0.17% 

 

$

115,065 

 

$

43 

 

0.15% 

Money market

 

15,935 

 

 

 

0.20% 

 

 

11,146 

 

 

 

0.14% 

Savings

 

140,994 

 

 

71 

 

0.20% 

 

 

144,942 

 

 

74 

 

0.20% 

Time

 

118,520 

 

 

304 

 

1.03% 

 

 

108,133 

 

 

294 

 

1.09% 

Total interest bearing deposits

 

403,846 

 

 

438 

 

0.44% 

 

 

379,286 

 

 

415 

 

0.44% 

Borrowed funds

 

57,249 

 

 

380 

 

2.66% 

 

 

49,244 

 

 

361 

 

2.94% 

Junior subordinated debentures

 

12,887 

 

 

54 

 

1.68% 

 

 

12,887 

 

 

52 

 

1.62% 

Total interest bearing liabilities

 

473,982 

 

$

872 

 

0.74% 

 

$

441,417 

 

$

828 

 

0.75% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

83,808 

 

 

 

 

 

 

 

63,239 

 

 

 

 

 

Other liabilities

 

4,245 

 

 

 

 

 

 

 

2,713 

 

 

 

 

 

Total non-interest bearing liabilities

 

88,053 

 

 

 

 

 

 

 

65,952 

 

 

 

 

 

Stockholders' equity

 

52,286 

 

 

 

 

 

 

 

49,066 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

614,321 

 

 

 

 

 

 

$

556,435 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income and Margin(5)

 

 

 

 

5,039 

 

3.47% 

 

 

 

 

 

4,574 

 

3.50% 

Tax-equivalent basis adjustment            

 

 

 

 

(110)

 

 

 

 

 

 

 

(129)

 

 

Net Interest Income

 

 

 

$

4,929 

 

 

 

 

 

 

$

4,445 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes loan fee income.

(2) Average rates on securities are calculated on amortized costs.

(3) Full tax equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance.

(4) Loans outstanding include non-accrual loans.

(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets.

 

 

 

25

 


 

Net Interest Income – Net interest income is the difference between interest and fees on loans and other interest-earning assets and interest paid on interest-bearing liabilities.  Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities that support those assets, as well as changing interest rates when differences exist in repricing dates of assets and liabilities.

 

Net interest income on a fully tax equivalent basis increased $465 thousand, or 10.2%, to $5.0 million for the second quarter of 2015, as compared to $4.6 million for the same period in 2014.  The increase in net interest income was largely due to a $58.0 million, or 11.1%, increase in average interest earning assets, principally loans receivable, which increased $55.3 million, or 13.2%.  The Company’s net interest margin was 3.47% and 3.50% for the second quarter of 2015 and 2014, respectively.

Interest Income – Our total interest income, on a fully tax equivalent basis, increased $509 thousand, or 9.4%, to $5.9 million for the quarter ended June 30, 2015, as compared to the same period last year.  The increase was due to higher average earning assets, which increased $58.0 million for the quarter ended June 30, 2015, as compared to the same period in 2014

 

Our total interest income earned on loans receivable increased $475 thousand, or 9.9%, to $5.3 million for the second quarter of 2015, as compared to the same period in 2014.  The increase was driven by an increase in average balance of loans receivable of $55.3 million, or 13.2%, for the three months ended June 30, 2015, as compared to the same period last year.  The increase in interest income earned on loans receivable was partially offset by a 13 basis point decline in the average yield to 4.45% for the quarter ended June 30, 2015, as compared to the same period in 2014

 

Our total interest income earned on securities, on a fully tax equivalent basis, increased $35 thousand, to $633 thousand for the quarter ended June 30, 2015 from $598 thousand for the same period in 2014.  This  increase was largely due to an increase of 12 basis points in the average yield to 2.60% for the quarter ended June 30, 2015, as compared to the same period last year. 

 

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets decreased $1 thousand for the second quarter of 2015, as compared to the same period in 2014, due to an 8 basis point decline in the average yield to 0.14%, as compared to 0.22% in the same period in 2014.  The average balances in other interest-earning assets increased $1.5 million to $8.8 million in the second quarter of 2015 from $7.4 million during the second quarter a year earlier. 

 

Interest Expense – Our interest expense for the three months ended June 30, 2015 increased $44 thousand, or 5.3%, to $872 thousand from $828 thousand for the same period in 2014.  The increase was principally due to higher average balances in interest-bearing liabilities, which increased $32.6 million, or 7.4%, to $474.0 million for the second quarter of 2015 from $441.4 million for the same period in 2014.

 

Our interest expense on deposits increased $23 thousand, or 5.5%, for the quarter ended June 30, 2015, as compared to the same period last year.  The increase was largely attributed to the increase in the average balance of total interest bearing deposits, which increased $24.6 million during the second quarter of 2015, as compared to the same period in 2014.    

 

Our interest expense on borrowed funds increased $19 thousand, or 5.3%, for the quarter ended June 30, 2015, as compared to the same period last year.  The increase was largely attributed to the average balance of borrowed funds increasing  $8.2 million during the second quarter of 2015, as compared to the same period in 2014.    

 

Provision for Loan Losses – Provision for loan losses decreased $200 thousand, or 50.0%, to $200 thousand for the second quarter of 2015, as compared to $400 thousand for the same period in 2014.  The decrease in the provision for loan losses for the quarter ended June 30, 2015 was largely attributed to the resolution of problem loans.  The provision for loan losses reflects management’s judgment concerning the risks inherent in our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods.  Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary. 

 

Non-Interest Income – We reported an increase in non-interest income of $43 thousand, or 2.9%, to $1.5 million for the second quarter of 2015, as compared to the same period last year.  For the second quarter of 2015, insurance commissions and fees and other income increased $40 thousand and $36 thousand, respectively, as compared to the same period in 2014.  The increases were partially offset by a decline in service fees on deposit accounts of $52 thousand for the second quarter of 2015, as compared to the same period in 2014

Non-Interest Expense – Our non-interest expenses increased $185 thousand, or 3.9%, to $4.9 million for the second quarter of 2015, as compared to the same period last year.  The increase for the second quarter of 2015, as compared to the same period in 2014, was largely due to increases in salaries and employee benefits of $348 thousand and furniture and equipment expenses of $102 thousand, which were partially offset by decreases in expenses and write-downs

26

 


 

related to foreclosed real estate of $126 thousand, loan collection costs of $110 thousand and FDIC fees of $51 thousand.    

The increases for the quarter ended June 30, 2015, as compared to the same period in 2014, in salaries and employee benefits expense were due in part to an increase in personnel to support our growth initiative in new markets, including the opening of our Astoria branch in the first quarter of 2015, additional staffing for business development and a temporary increase in staffing costs related to the development of a digital banking division.  The increases for the quarter ended June 30, 2015, as compared to the same period in2014, in furniture and equipment expenses were mostly related to costs associated with our new core application system, which was implemented in the third quarter of 2014.  The decreases in expenses and write-downs related to foreclosed real estate and loan collections costs are mostly due to the improvement in credit quality.  The decrease in FDIC fees is a result of the improvement in our financial and credit quality performance.

Income Taxes –  Our income tax expense, which includes both federal and state tax expenses, was $424 thousand for the three months ended June 30, 2015, compared to $159 thousand for the three months ended June 30, 2014.  Our effective tax rate was 32.4% and 20.8% for the quarter ended June 30, 2015 and 2014, respectively.  The increased effective tax rate was the result of a smaller percentage of our pre-tax income resulting from tax exempt sources.

 

27

 


 

COMPARISION OF OPERATING RESULTS FOR SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

Overview -  For the six months ended June 30, 2015, we reported net income of $1.8 million, or $0.40 per basic and diluted share, as compared to net income of $1.3 million, or $0.28 per basic and diluted share, for the same period last year.  The increase in net income for the six months ended June 30, 2015 was largely due to increases in net interest income of $980 thousand and non-interest income of $353 thousand, which were partially offset by increases in non-interest expenses of $787 thousand and income tax expense of $343 thousand. 

Comparative Average Balances and Average Interest Rates - The following table presents, on a fully tax equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the six month periods ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

(Dollars in thousands)

2015

 

2014

 

 Average

 

 

 

 

Average

 

 Average

 

 

 

 

Average

Earning Assets:

Balance

 

 

Interest (1)

 

Rate (2)

 

Balance

 

Interest (1)

 

Rate (2)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt (3)

$

32,378 

 

$

643 

 

4.00% 

 

$

33,747 

 

$

767 

 

4.58% 

Taxable

 

60,827 

 

 

569 

 

1.89% 

 

 

65,119 

 

 

431 

 

1.33% 

Total securities

 

93,205 

 

 

1,212 

 

2.62% 

 

 

98,866 

 

 

1,198 

 

2.44% 

Total loans receivable (4)

 

473,376 

 

 

10,447 

 

4.45% 

 

 

411,681 

 

 

9,423 

 

4.62% 

Other interest-earning assets

 

7,985 

 

 

 

0.18% 

 

 

6,399 

 

 

 

0.22% 

Total earning assets

 

574,566 

 

$

11,666 

 

4.09% 

 

 

516,946 

 

$

10,628 

 

4.15% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest earning assets

 

37,979 

 

 

 

 

 

 

 

36,647 

 

 

 

 

 

Allowance for loan losses

 

(5,740)

 

 

 

 

 

 

 

(5,651)

 

 

 

 

 

Total Assets

$

606,805 

 

 

 

 

 

 

$

547,942 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sources of Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

$

128,279 

 

$

105 

 

0.17% 

 

$

115,361 

 

$

82 

 

0.14% 

Money market

 

15,227 

 

 

13 

 

0.17% 

 

 

11,855 

 

 

 

0.14% 

Savings

 

140,747 

 

 

142 

 

0.20% 

 

 

145,509 

 

 

149 

 

0.21% 

Time

 

115,311 

 

 

594 

 

1.04% 

 

 

103,557 

 

 

566 

 

1.10% 

Total interest bearing deposits

 

399,564 

 

 

854 

 

0.43% 

 

 

376,282 

 

 

805 

 

0.43% 

Borrowed funds

 

60,464 

 

 

760 

 

2.53% 

 

 

47,741 

 

 

709 

 

2.99% 

Junior subordinated debentures

 

12,887 

 

 

107 

 

1.67% 

 

 

12,887 

 

 

105 

 

1.64% 

Total interest bearing liabilities

 

472,915 

 

$

1,721 

 

0.73% 

 

 

436,910 

 

$

1,619 

 

0.75% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

77,785 

 

 

 

 

 

 

 

60,405 

 

 

 

 

 

Other liabilities

 

3,923 

 

 

 

 

 

 

 

2,458 

 

 

 

 

 

Total non-interest bearing liabilities

 

81,708 

 

 

 

 

 

 

 

62,863 

 

 

 

 

 

Stockholders' equity

 

52,182 

 

 

 

 

 

 

 

48,169 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

606,805 

 

 

 

 

 

 

$

547,942 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income and Margin(5)

 

 

 

$

9,945 

 

3.49% 

 

 

 

 

$

9,009 

 

3.51% 

Tax-equivalent basis adjustment            

 

 

 

 

(214)

 

 

 

 

 

 

 

(258)

 

 

Net Interest Income

 

 

 

$

9,731 

 

 

 

 

 

 

$

8,751 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes loan fee income.

(2) Average rates on securities are calculated on amortized costs.

(3) Full tax equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance.

(4) Loans outstanding include non-accrual loans.

(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets.

 

Net Interest Income – Net interest income, on a fully tax equivalent basis, increased $936 thousand, or 10.4%, to $9.9 million for the first six months of 2015, as compared to $9.0 million for the same period in 2014.  The increase in net interest income was largely due to a $57.6 million, or 11.1%, increase in average interest earning assets, principally loans receivable, which increased $61.7 million, or 15.0%, and was partially offset by a decrease in the average balance on the securities portfolio of $5.7 million, or 5.7%.  The Company’s net interest margin was 3.49% and 3.51% for the first six months of 2015 and 2014, respectively.

 

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Interest Income – Our total interest income, on a fully tax equivalent basis, increased $1.0 million, or 9.8%, to $11.7 million for the six months ended June 30, 2015, as compared to the same period last year.  The increase was due to higher average earning assets, which increased $57.6 million for the six months ended June 30, 2015, as compared to the same period in 2014. 

 

Our total interest income earned on loans receivable increased $1.0 million, or 10.9%, to $10.4 million for the first six months of 2015, as compared to the same period in 2014.  The increase was driven by an increase in average balance of loans receivable of $61.7 million, or 15.0%, for the six months ended June 30, 2015, as compared to the same period last year.  The increase in interest income earned on loans receivable was partially offset by a 17 basis point decline in the average yield to 4.45% for the six months ended June 30, 2015, as compared to the same period in 2014. 

 

Our total interest income earned on securities, on a fully tax equivalent basis, increased $14 thousand to $1.2 million for the six months ended June 30, 2015 from $1.2 million for the same period in 2014.  This increase was largely due to an 18 basis point increase in the average yield to 2.62% for the six months ended June 30, 2015, as compared to the same period last year. 

 

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets remained flat for the first six months of 2015, as compared to the same period in 2014.  The average balances in other interest-earning assets increased $1.6 million to $8.0 million in the first six months of 2015 from $6.4 million during the first six months a year earlier.  The increase in the average balance was offset by a 4 basis point decline in the average yield to 0.18% for the six months ended June 30, 2015, as compared to the same period in 2014.    

 

Interest Expense – Our interest expense for the six months ended June 30, 2015 increased $102 thousand, or 6.3%, to $1.7 million from $1.6 million for the same period in 2014.  The increase was principally due to higher average balances in interest-bearing liabilities, which increased $36.0 million, or 8.2%, to $472.9 million for the first six months of 2015 from $436.9 million for the same period in 2014.

 

Our interest expense on deposits increased $49 thousand, or 6.1%, for the six months ended June 30, 2015, as compared to the same period last year.  The increase was largely attributed to the increase in the average balance of total interest bearing deposits, which increased $23.3  million during the first six months of 2015, as compared to the same period in 2014.    

 

Our interest expense on borrowed funds increased $51 thousand, or 7.2%, for the six months ended June 30, 2015, as compared to the same period last year.  The increase was largely attributed to the average balance of borrowed funds increasing  $12.7 million during the first six months of 2015, as compared to the same period in 2014. 

 

Provision for Loan Losses – Provision for loan losses decreased $348 thousand, or 40.8%, to $505 thousand for the first six months of 2015, as compared to $853 thousand for the same period in 2014.    The decrease in the provision for loan losses for the six months ended June 30, 2015 was largely attributed to the resolution of problem loans.  The provision for loan losses reflects management’s judgment concerning the risks inherent in our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods.  Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary. 

 

Non-Interest Income – We reported an increase in non-interest income of $353 thousand, or 11.6%, to $3.4 million for the first six months of 2015 as compared to the same period last year.  The increase in non-interest income was largely due to increases in insurance commissions and fees and gains on securities transactions of $222 thousand and $162 thousand, respectively, which were partially offset by a decrease in service fees on deposit accounts of $103 thousand for the first six months of 2015, as compared to the same period in 2014.

Non-Interest Expense – Our non-interest expenses increased $787 thousand, or 8.5%, to $10.0 million for the first six months of 2015, as compared to the same period last year.  The increase for the first six months of 2015, as compared to the same period in 2014, was largely due to increases in salaries and employee benefits of $710 thousand, furniture and equipment expenses of $148 thousand and other expenses of $109 thousand, which were partially offset by decreases in FDIC fees of $103 thousand, loan collection costs of $90 thousand and expenses and write-downs related to foreclosed real estate of $62 thousand. 

The increases for the six months ended June 30, 2015, as compared to the same period in 2014, in salaries and employee benefits expense were due in part to an increase in personnel to support our growth initiative in new markets, including the opening of our Astoria branch in the first quarter of 2015, additional staffing for business development and a temporary increase in staffing costs related to the development of a digital banking division.  The increases for the  six months ended June 30, 2015, as compared to the same period in 2014, in furniture and equipment expenses were mostly related to costs associated with our new core application system, which was implemented in the third quarter of 2014.    The decreases in expenses and write-downs related to foreclosed real estate and loan collections costs are mostly due to

29

 


 

the improvement in credit quality.  The decrease in FDIC fees is a result of the improvement in our financial and credit quality performance.

Income Taxes –  Our income tax expense, which includes both federal and state tax expenses, was $800 thousand for the six months ended June 30, 2015, compared to $457 thousand for the six months ended June 30, 2014.  Our effective tax rate was 30.4% and 26.2% for the six months ended June 30, 2015 and 2014, respectively. The increased effective tax rate was the result of a smaller percentage of our pre-tax income resulting from tax exempt sources.

 

COMPARISION OF FINANCIAL CONDITION AT JUNE 30, 2015 TO DECEMBER 31, 2014

 

Total Assets – At June 30, 2015, our total assets were $620.0 million, an increase of $24.1 million, or 4.0%, as compared to total assets of $595.9 million at December 31, 2014.  The increase in total assets was largely driven by growth in the securities portfolio of $15.9 million, or 18.9% and loans receivable, net of unearned income, of $7.1 million, or 1.5%.    

 

Cash and Cash Equivalents – Our cash and cash equivalents increased by $914 thousand to $6.8 million at June 30, 2015, or 1.1% of total assets, from $5.9 million, or 1.0%,  of total assets, at December 31, 2014.    

 

Securities Portfolio – At June 30, 2015, the securities portfolio, which includes available for sale and held to maturity securities, was $99.9 million, compared to $84.0 million at December 31, 2014. Available for sale securities were $93.9 million at June 30, 2015, compared to $78.0 million at December 31, 2014. The available for sale securities are held primarily for liquidity, interest rate risk management and profitability. Accordingly, our investment policy is to invest in securities with low credit risk, such as U.S. government agency obligations, state and political obligations and mortgage-backed securities. Held to maturity securities were $6.0 million at June 30, 2015 and $6.0 million at December 31, 2014.

 

Net unrealized losses in the available for sale securities portfolio were $825 thousand at June 30, 2015. Net unrealized gains in the available for sale securities portfolio were $281 thousand at December 31, 2014. 

 

We conduct a regular assessment of our investment securities to determine whether any securities are OTTI.  Further detail of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 2 –  Securities to our unaudited consolidated financial statements.

 

The unrealized losses in our securities portfolio are mostly driven by changes in spreads and market interest rates.  All of our debt and equity securities in an unrealized loss position have been evaluated for other-than-temporary impairment as of June  30, 2015 and we do not consider any security OTTI.  We evaluated the prospects of the issuers in relation to the severity and the duration of the unrealized losses.  In addition, we do not intend to sell, and it is more likely than not that we will not have to sell, any of our securities before recovery of their cost basis. 

 

Other investments totaled $3.6 million at June 30, 2015, as compared to $3.9 million at December 31, 2014,  which consisted primarily of FHLB stock. We also held $100 thousand in time deposits with other financial institutions at June 30, 2015 and December 31, 2014

 

Loans – The loan portfolio comprises our largest class of earning assets.    Total loans receivable, net of unearned income, increased $7.1 million, or 1.5%, to $479.1 million at June 30, 2015, as compared to $472.0 million at December 31, 2014.  During the first six months of 2015, we had $52.9 million in loan production, which was largely offset by $19.8 million in loan prepayments, an increase in commercial line of credit pay downs and the sale of $18.1 million in loan participations to mitigate concentration risk.

 

The following table summarizes the composition of our gross loan portfolio by type:

 

 

 

 

 

 

 

(Dollars in thousands)

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial loans

$

17,900 

 

$

20,549 

Construction

 

11,341 

 

 

12,379 

Commercial real estate

 

328,909 

 

 

326,370 

Residential real estate

 

120,126 

 

 

111,498 

Consumer and other

 

1,247 

 

 

1,665 

Total gross loans

$

479,523 

 

$

472,461 

 

Loan and Asset Quality – Our overall credit quality continued to improve through June 30, 2015, as our total problem assets, which is composed of foreclosed real estate, criticized assets and classified assets, were down 7.1% from December 31, 2014, and the ratio of NPAs to total assets improved to 1.71% at June 30, 2015 from 2.02% at December 31, 2014

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NPAs, which include non-accrual loans, loans 90 days past due and still accruing, troubled debt restructured loans currently performing in accordance with renegotiated terms and foreclosed real estate, decreased $1.5 million, or 12.2%, to $10.6 million at June 30, 2015, as compared to $12.0 million at December 31, 2014.  Non-accrual loans decreased $870 thousand, or 14.7%, to $5.1 million at June 30, 2015, as compared to $5.9 million at December 31, 2014.  The top five non-accrual loan relationships total $3.1 million, which equates to 61.3% of total non-accrual loans and 29.3% of total NPAs at June 30, 2015.  The remaining non-accrual loans at June 30, 2015 have an average loan balance of $85 thousand.  Loans past due 30 to 89 days decreased $3.4 million, or 59.9%, to $2.3 million at June 30, 2015, as compared to $5.6 million at December 31, 2014. 

 

We continue to actively market our foreclosed real estate properties, which decreased $506 thousand to $3.9 million at June 30, 2015, as compared to $4.4 million at December 31, 2014.  The decrease was primarily due to the sale of $1.6 million in foreclosed real estate properties and write-downs of $97 thousand during 2015, which were partially offset by $1.2 million in new foreclosed real estate properties.  At June 30, 2015, our foreclosed real estate properties had an average carrying value of approximately $303 thousand per property. 

 

The allowance for loan losses increased $111 thousand, or 2.0%, to $5.8 million, or 1.20% of total loans, at June 30, 2015, compared to $5.6 million, or 1.20% of total loans, at December 31, 2014. We recorded $505 thousand in provision for loan losses, which was partially offset by $394 thousand in net charge-offs for the six months ended June 30, 2015. The allowance for loan losses as a percentage of non-accrual loans increased to 113.8% at June 30, 2015 from 95.2% at December 31, 2014.

 

Management continues to monitor our asset quality and believes that the NPAs are adequately collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses.  However, given the uncertainty of the current real estate market, additional provisions for losses may be deemed necessary in future periods.  The following table provides information regarding risk elements in the loan portfolio at each of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Non-accrual loans

$

5,054 

 

$

$
5,924 

Non-accrual loans to total loans

 

1.05% 

 

 

1.26% 

Non-performing assets

$

10,578 

 

$

$
12,048 

Non-performing assets to total assets

 

1.71% 

 

 

2.02% 

Allowance for loan losses as a % of non-accrual loans

 

113.81% 

 

 

95.22% 

Allowance for loan losses to total loans

 

1.20% 

 

 

1.20% 

A loan is considered impaired, in accordance with the impairment accounting guidance, when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Total impaired loans at June 30, 2015 were $6.6 million and at December 31, 2014 were $7.5 million.  Impaired loans measured at fair value on a non-recurring basis increased to $1.4 million on June 30, 2015 from $1.1 million at December 31, 2014.   These balances consist of loans that were written down or required additional reserves during the periods ended June 30, 2015 and December 31, 2014, respectively.  Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.  Not all impaired loans and restructured loans are on non-accrual, and therefore not all are considered non-performing loans.  Restructured loans still accruing totaled $1.6 million at June 30, 2015 and December 31, 2014.

 

We also continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans which cause management to have serious concerns as to the ability of such borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on non-accrual status. As of June 30, 2015,  we had five loan relationships totaling $1.6 million that we deemed potential problem loans. Management is actively monitoring these loans.

 

Further detail of the credit quality of the loan portfolio is included in Note 4 –  Allowance for Loan Losses and Credit Quality of Financing Receivables to our unaudited consolidated financial statements.

 

Allowance for Loan Losses – The allowance for loan losses consists of general, allocated and unallocated components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience and expected losses derived from our internal risk rating process.  The unallocated component covers the potential for other adjustments that may be made to the allowance for pools of loans after an

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assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 

 

Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the reserve is reasonable and adequate for each of the periods presented.

 

At June 30, 2015, the total allowance for loan losses increased $111 thousand, or 2.0%, to $5.8 million, as compared to $5.6 million at December 31, 2014.  The components of this increase were a provision for loan losses of $505 thousand and net charge-offs totaling $394 thousand in the six months ended June 30, 2015.  The provision also reflects the continued weakness in current real estate values in our market area and reduced cash flows to support the repayment of loans.  The allowance for loan losses as a percentage of total loans was 1.20% at June 30, 2015 and December 31, 2014

 

The table below presents information regarding our provision and allowance for loan losses for the six months ended June 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

June 30, 2015

 

June 30, 2014

 

 

 

 

 

 

Balance, beginning of period

$

5,641 

 

$

5,421 

Provision

 

505 

 

 

853 

Charge-offs

 

(453)

 

 

(466)

Recoveries

 

59 

 

 

46 

Balance, end of period

$

5,752 

 

$

5,854 

 

The table below presents details concerning the allocation of the allowance for loan losses to the various categories for each of the periods presented.  The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur.  The total allowance is available to absorb losses from any category of loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

 

Percentage of

 

 

 

 

Percentage of

 

 

 

 

Loans In Each

 

 

 

 

Loans In Each

 

 

 

 

Category To

 

 

 

 

Category To

(Dollars in thousands)

Amount

 

Gross Loans

 

 

Amount

 

Gross Loans

Commercial and industrial

$

86 

 

3.7% 

 

$

231 

 

4.3% 

Construction

 

277 

 

2.4% 

 

 

383 

 

2.6% 

Commercial real estate

 

3,613 

 

68.6% 

 

 

3,491 

 

69.1% 

Residential real estate

 

898 

 

25.1% 

 

 

903 

 

23.6% 

Consumer and other loans

 

86 

 

0.3% 

 

 

19 

 

0.4% 

Unallocated

 

792 

 

0.0% 

 

 

614 

 

-

Total

$

5,752 

 

100.0% 

 

$

5,641 

 

100.0% 

 

Bank-Owned Life Insurance (BOLI)  –  Our BOLI carrying value amounted to $12.4 million at June 30, 2015 and $12.2 million at December 31, 2014.

 

Goodwill and Other Intangibles – Goodwill represents the excess of the purchase price over the fair market value of net assets acquired.  At June 30, 2015 and December 31, 2014, we had recorded goodwill totaling $2.8 million, primarily as a result of the acquisition of Tri-State in 2001.  In accordance with U.S. GAAP, goodwill is not amortized, but evaluated at least annually for impairment.  Any impairment of goodwill results in a charge to income.  We periodically assess whether events and changes in circumstances indicate that the carrying amounts of goodwill and intangible assets may be impaired.  The estimated fair value of the reporting segment exceeded its book value; therefore, no write-down of goodwill was required.  The goodwill related to the insurance agency is not deductible for tax purposes.

 

Deposits – Our total deposits increased $29.4 million, or 6.4%, to $487.7 million at June 30, 2015, from $458.3 million at December 31, 2014.  The increase in deposits was due to increases in both non-interest bearing deposits of $20.0 million, or 28.4%, and interest bearing deposits of $9.4 million, or 2.4%, for June 30, 2015, as compared to December 31, 2014.  Included in the aforementioned increase is $18.7 million in new deposits with a cost of under 0.50% attributed to our newest branch in Astoria, New York, which opened in mid-March of 2015.

 

Borrowings – Borrowings consist of short-term and long-term advances from the FHLB.  The advances are secured under terms of a blanket collateral agreement by a pledge of qualifying mortgage loans.  We had $63.2 million and 

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$69.5 million in borrowings, at a weighted average interest rate of 2.42% at June 30, 2015 and 2.13% at December 31, 2014.  The long-term borrowings at June 30, 2015 consisted of $45.0 million of fixed rate advances and $11.0 million of advances with quarterly convertible options that allow the FHLB to change the note rate to a then current market rate.    

 

Junior Subordinated Debentures – On June 28, 2007, Sussex Capital Trust II (the “Trust”), a Delaware statutory business trust and our non-consolidated wholly owned subsidiary, issued $12.5 million of variable rate capital trust pass-through securities to investors.  The Trust purchased $12.9 million of variable rate junior subordinated deferrable interest debentures from us.  The debentures are the sole asset of the Trust.  The terms of the junior subordinated debentures are the same as the terms of the capital securities.  We have also fully and unconditionally guaranteed the obligations of the Trust under the capital securities.  The interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly.  The rate at June 30, 2015, was 1.73%.  The capital securities are currently redeemable by us at par in whole or in part.  The capital securities must be redeemed upon final maturity of the subordinated debentures on September 15, 2037.  The proceeds of these trust preferred securities, which have been contributed to the Bank, are included in the Bank’s capital ratio calculations and treated as Tier I capital.

 

In accordance with FASB ASC 810, Consolidations, our wholly owned subsidiary, the Trust, is not included in our consolidated financial statements.

 

Equity  Stockholders’ equity, inclusive of accumulated other comprehensive income, net of income taxes, was $51.7 million at June 30, 2015, an increase of $450 thousand when compared to December 31, 2014.  The increase was largely due to net income for the six months ended June 30, 2015. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

A fundamental component of our business strategy is to manage liquidity to ensure the availability of sufficient resources to meet all financial obligations and to finance prospective business opportunities. Liquidity management is critical to our stability. Our liquidity position over any given period of time is a product of our operating, financing and investing activities. The extent of such activities is often shaped by such external factors as competition for deposits and loan demand.

 

Traditionally, financing for our loans and investments is derived primarily from deposits, along with interest and principal payments on loans and investments.  At June 30, 2015, total deposits amounted to $487.7 million, an increase of $29.4 million, or 6.4%, from December 31, 2014. At June 30, 2015 and December 31, 2014, advances from FHLB and subordinated debentures totaled $76.1 million and $82.4 million, respectively, and represented 12.3% and 13.8% of total assets, respectively. 

 

Loan production continued to be our principal investing activity. Total loans receivable, net of unearned income, at June 30, 2015, amounted to $479.1 million, an increase of $7.1 million, or 1.5%, compared to December 31, 2014.

 

Our most liquid assets are cash and due from banks and federal funds sold.  At June 30, 2015, the total of such assets amounted to $6.8 million, or 1.1%, of total assets, compared to $5.9 million, or 1.0%, of total assets at December 31, 2014. Another significant liquidity source is our available for sale securities portfolio.  At June 30, 2015, available for sale securities amounted to $93.9 million, compared to $78.0 million at December 31, 2014.

 

In addition to the aforementioned sources of liquidity, we have available various other sources of liquidity, including federal funds purchased from other banks and the FRB discount window.  The Bank also has the capacity to borrow an additional $74.6 million through its membership in the FHLB and $10.0 million at Atlantic Community Bankers Bank at June 30, 2015.  Management believes that our sources of funds are sufficient to meet our present funding requirements.

 

The Bank’s regulators have implemented risk based guidelines that require banks to maintain Tier I capital as a percentage of risk-adjusted assets of 4.0% and Tier II capital as a percentage of risk-adjusted assets of 8.0% at a minimum.  At June 30, 2015, the Bank’s Tier I,  Tier II and Common Equity Tier I capital ratios were 12.72%, 13.93% and 12.72%, respectively.  In addition to the risk-based guidelines, the Bank’s regulators require that banks which meet the regulators’ highest performance and operational standards maintain a minimum leverage ratio (Tier I capital as a percentage of tangible assets) of 4.0%.  As of June 30, 2015, the Bank had a leverage ratio of 9.85%.  The Bank’s risk based and leverage ratios are in excess of those required to be considered “well-capitalized” under FDIC regulations.

 

The FRB also imposes similar capital requirements on bank holding companies with consolidated assets of $500 million or more. Under FRB reporting requirements, a bank holding company that reaches $500 million or more in total consolidated assets as of June 30 of the preceding year must begin reporting its consolidated capital beginning in March of the following year.  The Bank began reporting its consolidated capital in March 2013.

 

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We have no investment or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources, except for the trust preferred securities of the Trust.  We are not aware of any known trends or any known demands, commitments, events or uncertainties, which would result in any material increase or decrease in liquidity.  Management believes that any amounts actually drawn upon can be funded in the normal course of operations.

 

Off-Balance Sheet Arrangements – Our consolidated financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business.  These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  These unused commitments, at June 30, 2015,  totaled $75.7 million and consisted of $28.0 million in commitments to grant commercial real estate, construction and land development loans, $20.4 million in home equity lines of credit, $26.5 million in other unused commitments and $754 thousand in letters of credit.  These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to us.  Management believes that any amounts actually drawn upon can be funded in the normal course of operations.

 

Item 3 - Quantitative and Qualitative Disclosures about Market Risk 

 

Not applicable.

 

Item 4 - Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

Item 1 - Legal Proceedings 

 

We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business.   Management believes that such proceedings are, in the aggregate, immaterial to our financial condition and results of operations.

 

Item 1A - Risk Factors

 

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2014 Annual Report on Form 10-K.  There are no material changes in the risk factors relevant to our operations.

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information with respect to any purchase of shares of our common stock made by or on behalf of us or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three months ended June  30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

Total Number

 

Number of

 

 

 

 

 

 

 

of Shares

 

Shares that

 

 

 

 

 

 

 

Purchased as

 

May Yet Be

 

 

Total Number

 

 

 

 

Part of Publicly

 

Purchased

 

 

of Shares

 

 

Average Price

 

Announced

 

Under the

Period

 

Purchased

 

 

Paid per Share

 

Program

 

Program(1)

 

 

 

 

 

 

 

 

 

 

April 1, 2015 through April 30, 2015

 

 -

 

 

 -

 

 -

 

213,682 

May 1, 2015 through May 31, 2015

 

17,682 

 

 

11.52 

 

17,682 

 

196,000 

June 1, 2015 through June 30, 2015

 

10,927 

 

 

11.52 

 

10,927 

 

185,073 

Total

 

28,609 

 

$

11.52 

 

28,609 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) On February 25, 2015, the Board of Directors authorized a stock repurchase program, under which we may repurchase up to 233,000 shares.  The stock repurchase program expires on February 26, 2016, unless completed sooner or otherwise extended.

 

There were no sales by us of unregistered securities during the three months ended June 30, 2015.

 

 

Item 3 - Defaults Upon Senior Securities

 

Not applicable.

 

Item 4 - Mine Safety Disclosures

 

Not applicable.

 

Item 5 - Other Information

 

Not applicable.

 

Item 6 - Exhibits 

 

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

Date: August 12, 2015

 

SUSSEX BANCORP

 

 

 

 

 

 

 

By:

/s/ Steven M. Fusco

 

 

Steven M. Fusco

 

 

Chief Financial Officer and Senior Executive Vice President

 

 

(Principal Financial and Accounting Officer)

 

 

 

 

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EXHIBIT INDEX

 

 

 

Exhibit

Number 

Description

*

 

3.1

Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on 10-Q filed with the SEC on August 15, 2011).

3.2

Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on June 3, 2014).

4.1

Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-1 filed with the SEC on June 3, 2013).

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1*      

Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer.

101

Financial statements from the Quarterly Report on Form 10-Q of Sussex Bancorp for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income and Comprehensive Income; (iii) the Consolidated Statements of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows and (v) Notes to Unaudited Consolidated Financial Statements.

_______________________________

*  Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. 

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