Item 2.
Management’s Discussion and Analysi
s of Financial Condition and Results of Operations
This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” and “believe,” “will,” “intends,” “will be” or “would.” These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These factors include general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, the ability of the Company or the Bank to effectively manage its growth, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.
Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and FHLB advances. The Company also generates non-interest income, primarily from fees and service charges and mortgage banking income. The Company’s non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.
Net income for the six months ended June 30, 2016 decreased $381,000 compared to the same period in 2015. The decrease in net income was primarily due to an increase in non-interest expense and an increase in the provision for loan losses partially offset by an increase in net interest and dividend income and an increase in non-interest income. Net interest and dividend income increased primarily due to an increase in average loans outstanding. The provision for loan losses totaled $74,000 for the six months ended June 30, 2016, compared to a $27,000 provision for loan losses during the same period in 2015 and the increase was primarily due to loan growth. Non-interest expenses increased $842,000, or 19.2%, to $5.2 million for the six months ended June 30, 2016, compared to $4.4 million for the six months ended June 30, 2015, primarily due to the cost associated with an increase in commercial lending support and regulatory compliance staff. Non-interest income increased $32,000, or 6.9%, primarily due to an increase in gain on sale of Small Business Administration (“SBA”) loans. We continued to maintain strong asset quality, as non-performing assets to total assets was 0.31% at June 30, 2016. We converted our Loan Production Office (“LPO”) in southern New Hampshire to a full service office in June 2016.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses and the valuation of our deferred tax assets.
Allowance for Loan Losses.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less costs to sell) 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 loss experience adjusted for qualitative factors. An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.
Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.
Loans secured by commercial real estate, multi-family and one- to four-family investment properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.
Income Taxes.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
Comparison of Financial Condition at June 30, 2016 and December 31, 2015
Total assets increased $3.4 million, or 1.14%, to $299.9 million at June 30, 2016 from $296.5 million at December 31, 2015. The increase was primarily due to an increase in loans, offset by a decrease in cash and cash equivalents.
Cash and cash equivalents decreased $2.1 million, or 27.1%, to $5.7 million at June 30, 2016 from $7.8 million at December 31, 2015. This decrease resulted from the timing of normal cash flows.
Loans, net of allowance for loan losses, increased $5.2 million, or 2.1%, to $259.2 million at June 30, 2016 from $254.0 million at December 31, 2015, due primarily to an increase in commercial loans and construction loans, partially offset by a decrease in residential mortgage loans. Despite the current competitive market, we have decided to maintain our historically high underwriting standards instead of relaxing these standards, and we have not reduced loan rates below levels at which we could not operate profitably. Commercial loans increased $6.8 million, or 5.2%, to $137.5 million at June 30, 2016 from $130.7 million at December 31, 2015, primarily due to a $9.4 million, or 14.0%, increase in commercial real estate loans. Construction loans increased by $2.2 million, or 10.9%, to $22.6 million at June 30, 2016 from $20.4 million at December 31, 2015, primarily due to a $1.1 million, or 18.1%, increase in non-residential construction loans and an $842,000, or 56.7%, increase in multi-family construction loans. The majority of our construction loans remain collateralized by residential real estate (69.0% at June 30, 2016 and 70.9% at December 31, 2015). One- to four-family residential mortgage loans decreased $2.8 million, or 3.2%, to $83.7 million at June 30, 2016 from $86.5 million at December 31, 2015, as a decrease in mortgage rates resulted in an increase in loan prepayments due to loan refinances out of the Bank. Home equity loans and lines of credit decreased $1.0 million, or 5.6%, to $17.2 million at June 30, 2016 from $18.3 million at December 31, 2015, primarily due to one loan payoff.
Our total securities portfolio increased $818,000, or 3.7%, to $23.0 million at June 30, 2016 from $22.1 million at December 31, 2015, due to the purchase of securities offset by principal payments received on mortgage-backed securities.
Deposits increased $25.2 million, or 12.1%, to $232.9 million at June 30, 2016 from $207.7 million at December 31, 2015. The increase in deposits was primarily due to an increase of $19.7 million, or 27.3%, in certificates of deposit, as promotional rates on 18 month and 30 month certificates were offered during most of the first quarter. Demand deposits increased $2.8 million, or 10.2%, and NOW accounts increased $2.4 million, or 7.9%. Management continues to focus on the generation of core checking accounts through use of the Haberfeld checking account acquisition program.
Total FHLB advances decreased $19.5 million, or 38.5%, to $31.1 million at June 30, 2016 compared to $50.6 million at December 31, 2015, primarily due to the inflow of deposits which were used to pay off maturing advances. Short-term advances decreased $18.0 million and long-term advances decreased $1.5 million during the six months ended June 30, 2016.
Stockholders’ equity increased $484,000, or 1.5%, to $32.4 million at June 30, 2016 from $31.9 million at December 31, 2015. The increase resulted primarily from net income of $232,000 for the six months ended June 30, 2016 and other comprehensive income, partially offset by dividend payments and stock repurchases. Other comprehensive income, net of taxes, of $240,000 reflects the change in net unrealized gains/losses, net of taxes, on securities available for sale from a net unrealized gain of $46,000 at December 31, 2015 to a net unrealized gain of $286,000 at June 30, 2016. Dividend payments totaled $170,000 for the six months ended June 30, 2016. We repurchased 3,818 shares at an average cost of $19.40 totaling $74,000 during the six months ended June 30, 2016.
Loan Portfolio Composition
.
The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated.
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At
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At
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June 30,
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December 31,
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2016
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2015
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Amount
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Percent
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Amount
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Percent
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(Dollars in thousands)
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Residential loans:
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One- to four-family
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$
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83,721
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32.04
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%
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$
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86,472
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33.78
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%
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Home equity loans and lines of credit
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17,238
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6.60
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18,263
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7.13
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Total residential mortgage loans
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100,959
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38.64
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104,735
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40.91
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Commercial loans:
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One- to four-family investment property
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12,386
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4.74
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15,255
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5.96
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Multi-family real estate
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28,988
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11.09
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30,709
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12.00
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Commercial real estate
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76,583
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29.31
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67,152
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26.23
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Commercial business
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19,555
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7.48
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17,548
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6.85
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Total commercial loans
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137,512
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52.62
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130,664
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51.04
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Construction loans:
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One- to four-family
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13,266
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5.08
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12,967
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5.07
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Multi-family
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2,328
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0.89
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1,486
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0.58
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Non-residential
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6,997
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2.68
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5,925
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2.31
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Total construction loans
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22,591
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8.65
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20,378
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7.96
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Consumer
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227
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0.09
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237
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0.09
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Total loans
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261,289
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100.00
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%
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256,014
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100.00
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%
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Other items:
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Net deferred loan costs
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415
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377
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Allowance for loan losses
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(2,483)
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(2,408)
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Total loans, net
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$
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259,221
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$
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253,983
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Asset Quality
. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Delinquent loans that are 90 days or more past due and/or on non-accrual status are generally considered non-performing assets.
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At June 30,
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At December 31,
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2016
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2015
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(Dollars in thousands)
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Non-accrual loans:
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Residential mortgage loans
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$
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932
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$
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776
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Commercial loans
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—
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—
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Construction loans
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—
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—
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Consumer
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—
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—
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Total non-accrual loans
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932
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776
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Non-performing restructured loans
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—
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—
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Total non-performing loans
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932
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776
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Other real estate owned
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—
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—
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Total non-performing assets
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$
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932
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$
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776
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Ratios:
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Non-performing loans to total loans
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0.36
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%
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0.30
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%
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Non-performing assets to total assets
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0.31
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%
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0.26
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%
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Allowance for loan losses to non-performing loans
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266.42
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%
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310.31
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%
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Total delinquent loans decreased $126,000, from $938,000 at December 31, 2015 to $812,000 at June 30, 2016, primarily in home equity loans and lines of credit.
Non-performing assets totaled $932,000 and $776,000 at June 30, 2016 and December 31, 2015, respectively. One of the non-performing assets totaling $157,000 at June 30, 2016 was a loan that was current in payments; however, it has been classified as non-performing until a consistent loan payment is established. Total non-performing assets represented 0.31% and 0.26% of total assets at June 30, 2016 and December 31, 2015, respectively.
Loans classified as substandard increased $1.0 million, to $2.9 million at June 30, 2016 from $1.9 million at December 31, 2015, primarily due to two loans, a commercial real estate loan and a commercial business loan, being downgraded from the special mention classification to substandard.
The allowance for loan losses increased $75,000 to $2.5 million at June 30, 2016 primarily due to the growth in the commercial loan portfolio. Loan charge-offs were $2,000 and recoveries were $3,000 for the six months ended June 30, 2016, as compared to loan charge-offs of $25,000 and recoveries of $3,000 for the same period in 2015. The allowance represented 0.95% of total loans at June 30, 2016 and 0.94% of total loans at December 31, 2015. At these levels, the allowance for loan losses as a percentage of non-performing loans was 266.42% at June 30, 2016 and 310.31% at December 31, 2015.
Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015
General
.
Net income decreased $211,000, or 58.1%, to $152,000 for the three months ended June 30, 2016, from $363,000 for the three months ended June 30, 2015. The decrease in net income was caused by an increase in non-interest expense, partially offset by increases in net interest and dividend income and in non-interest income.
Interest and Dividend Income.
Interest and dividend income increased $313,000, or 10.9%, to $3.2 million for the three months ended June 30, 2016, primarily due to an increase in interest income on loans. Interest income on loans increased $302,000, or 11.1%, to $3.0 million for the three months ended June 30, 2016, due to a $28.2 million, or 12.2%, increase in the average balance of loans, partially offset by a five basis point decrease in yield to 4.67% for the three months ended June 30, 2016 from 4.72% for the three months ended June 30, 2015.
Interest and dividend income on investment securities increased $8,000, or 5.5%, to $154,000 for the three months ended June 30, 2016 from $146,000 for the three months ended June 30, 2015, due to a $368,000, or 1.5%, increase in the average balance of investment securities and by a nine basis point increase in yield to 2.43% for the three months ended June 30, 2016 from 2.34% for the three months ended June 30, 2015.
Interest Expense.
Interest expense increased $196,000, or 48.0%, to $604,000 for the three months ended June 30, 2016 from $408,000 for the three months ended June 30, 2015. Interest expense on deposits increased $207,000, or 83.1%, to $456,000 for the three months ended June 30, 2016 from $249,000 for the three months ended June 30, 2015, due to an increase in the average balance of interest-bearing deposits of $36.7 million, or 22.2%, to $201.7 million for the three months ended June 30, 2016 from $165.0 million for the three months ended June 30, 2015 and an increase in the average rate we paid on interest-bearing deposits to 0.90% for the three months ended June 30, 2016 compared to 0.60% for the three months ended June 30, 2015. The increase in interest expense on deposits was primarily due to certificates of deposit, as promotional rates were offered during most of the first quarter of 2016. Interest expense on certificates of deposit increased $180,000, or 108.4%, to $346,000 for the three months ended June 30, 2016 from $166,000 for the three months ended June 30, 2015 due to an increase in the average balance in certificates of deposit of $30.9 million, or 51.2%, to $91.2 million for the three months ended June 30, 2016 from $60.3 million for the same period in 2015 and by an increase in the average rate we paid on certificates of deposit to 1.52% for the three months ended June 30, 2016 compared to 1.10% for the same period in 2015. Interest expense on money market deposits increased $24,000, or 39.3%, to $85,000 for the three months ended June 30, 2016 from $61,000 for the three months ended June 30, 2015 due to an increase in the average balance in money market deposits of $3.5 million, or 6.0%, to $61.7 million for the three months ended June 30, 2016 from $58.2 million for the same period in 2015 and by an increase in the average rate we paid on money market deposits to 0.55% for the three months ended June 30, 2016 compared to 0.42% for the same period in 2015.
Interest expense on FHLB advances decreased $11,000, or 6.9%, to $148,000 for the three months ended June 30, 2016 from $159,000 for the three months ended June 30, 2015. The decrease was primarily due to a $9.1 million, or 21.6%, decrease in the average outstanding balance of advances to $33.1 million for the three months ended June 30, 2016 from $42.2 million for the three months ended June 30, 2015, partially offset by the average rate we paid, which increased 28 basis points to 1.79% for the three months ended June 30, 2016 compared to 1.51% for the three months ended June 30, 2015. The average outstanding balance of long-term advances decreased $3.3 million, or 11.3%, to $26.1 million for the three months ended June 30, 2016 from $29.4 million for the three months ended June 30, 2015 and the average outstanding balance of short-term advances decreased $5.8 million, or 45.1%, to $7.0 million for the three months ended June 30, 2016 from $12.8 million for the same period in 2015, as we paid off advances with deposit increases. We expect the average balance of short-term FHLB advances to increase in the near term, as we fund current loan demand.
Net Interest and Dividend Income
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Net interest and dividend income increased $117,000, or 4.7%, to $2.6 million for the three months ended June 30, 2016 compared to $2.5 million for the three months ended June 30, 2015. The increase in net interest and dividend income was primarily the result of a $1.9 million, or 3.6%, increase in net average interest-earning assets to $55.2 million for the three months ended June 30, 2016, from $53.3 million for the same period in 2015. Our net interest margin may compress in the future due to competitive pricing in our market area and due to a rising interest rate environment.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several quantitative and qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic
and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. After an evaluation of these factors, we did not record a provision for loan losses for the three months ended June 30, 2016 and 2015. There were $2,000 in loan charge-offs and $2,000 in recoveries for the three months ended June 30, 2016, as compared to $24,000 in charge-offs and $2,000 in recoveries for the same period in 2015. The allowance for loan losses was $2.5 million, or 0.95%, of total loans and 266.42% of non-performing loans at June 30, 2016, compared to an allowance for loan losses of $2.4 million, or 0.94%, of total loans and 310.31% of non-performing loans at December 31, 2015. For additional information please refer to Note 6, Loans and Servicing.
Non-interest Income
.
Non-interest income increased $12,000, or 4.9%, to $255,000 for the three months ended June 30, 2016 from $243,000 for the three months ended June 30, 2015, primarily due to an increase in mortgage banking income, net, offset by a decrease in customer service fees. Mortgage banking income, net, increased $17,000, or 58.6%, to $46,000 for the three months ended June 30, 2016 from $29,000 for the three months ended June 30, 2015. The increase was primarily due to a higher level of residential loan origination volume. Income from customer service fees decreased $10,000, or 5.5%, to $171,000 for the three months ended June 30, 2016 from $181,000 for the three months ended June 30, 2015. The decrease was primarily from the Company’s commercial customer base.
Non-interest Expenses.
Non-interest expense increased $459,000, or 21.4%, to $2.6 million for the three months ended June 30, 2016, from $2.1 million for the three months ended June 30, 2015. Salaries and benefits expense increased $254,000, or 21.0%, primarily due to the costs associated with an increase in commercial lending support and regulatory compliance staff. Professional fees increased $148,000, or 123.3%, primarily due to the costs associated with enhancements to our regulatory compliance staff and compliance programs. Other general and administrative expenses increased $39,000, or 14.8%, due to recruitment fees associated with the commercial lending staff.
Income Tax Expense.
The income before income taxes of $244,000 resulted in income tax expense of $92,000 for the three months ended June 30, 2016, compared to income before income taxes of $574,000 resulting in an income tax expense of $211,000 for the three months ended June 30, 2015. The effective income tax rate was 37.7% for the three months ended June 30, 2016 compared to 36.8% for the three months ended June 30, 2015. The increase in the effective tax rate was primarily due to a tax credit program the Company participated in during the three months ended June 30, 2015.
Average Balance Sheet.
The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average annualized yields on its interest-earning assets and the average annualized costs of its interest-bearing liabilities. Average yields are calculated by dividing the annualized interest and dividend income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the annualized interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average annualized yields and costs include fees that are considered adjustments to such average yields and costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2)
|
|
$
|
259,696
|
|
$
|
3,035
|
|
4.67
|
%
|
$
|
231,517
|
|
$
|
2,733
|
|
4.72
|
%
|
|
Investment securities (1)
|
|
|
25,348
|
|
|
164
|
|
2.58
|
%
|
|
24,980
|
|
|
153
|
|
2.45
|
%
|
|
Short-term investments
|
|
|
4,971
|
|
|
5
|
|
0.40
|
%
|
|
4,106
|
|
|
2
|
|
0.19
|
%
|
|
Total interest-earning assets
|
|
|
290,015
|
|
|
3,204
|
|
4.42
|
%
|
|
260,603
|
|
|
2,888
|
|
4.43
|
%
|
|
Non-interest-earning assets
|
|
|
8,777
|
|
|
—
|
|
|
|
|
8,332
|
|
|
—
|
|
|
|
|
Total assets
|
|
$
|
298,792
|
|
|
3,204
|
|
|
|
$
|
268,935
|
|
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
16,179
|
|
|
1
|
|
0.02
|
%
|
$
|
15,187
|
|
|
1
|
|
0.03
|
%
|
|
NOW accounts
|
|
|
32,516
|
|
|
24
|
|
0.30
|
%
|
|
31,309
|
|
|
21
|
|
0.27
|
%
|
|
Money market accounts
|
|
|
61,751
|
|
|
85
|
|
0.55
|
%
|
|
58,231
|
|
|
61
|
|
0.42
|
%
|
|
Certificates of deposit
|
|
|
91,225
|
|
|
346
|
|
1.52
|
%
|
|
60,316
|
|
|
166
|
|
1.10
|
%
|
|
Total interest-bearing deposits
|
|
|
201,671
|
|
|
456
|
|
0.90
|
%
|
|
165,043
|
|
|
249
|
|
0.60
|
%
|
|
FHLB advances
|
|
|
33,135
|
|
|
148
|
|
1.79
|
%
|
|
42,254
|
|
|
159
|
|
1.51
|
%
|
|
Total interest-bearing liabilities
|
|
|
234,806
|
|
|
604
|
|
1.03
|
%
|
|
207,297
|
|
|
408
|
|
0.79
|
%
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
29,562
|
|
|
|
|
|
|
|
27,323
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
3,340
|
|
|
|
|
|
|
|
4,108
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
267,708
|
|
|
|
|
|
|
|
238,728
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
31,084
|
|
|
|
|
|
|
|
30,207
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
298,792
|
|
|
|
|
|
|
$
|
268,935
|
|
|
|
|
|
|
|
Net interest-earning assets (3)
|
|
$
|
55,209
|
|
|
|
|
|
|
$
|
53,306
|
|
|
|
|
|
|
|
Fully tax-equivalent net interest income
|
|
|
|
|
|
2,600
|
|
|
|
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: tax-equivalent adjustments
|
|
|
|
|
|
(10)
|
|
|
|
|
|
|
|
(7)
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
2,590
|
|
|
|
|
|
|
$
|
2,473
|
|
|
|
|
Net interest rate spread (1)(4)
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
3.64
|
%
|
|
Net interest margin (1)(5)
|
|
|
|
|
|
|
|
3.59
|
%
|
|
|
|
|
|
|
3.81
|
%
|
|
Average of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
123.51
|
%
|
|
|
|
|
|
|
125.71
|
%
|
|
|
(1)
|
|
Interest and yield on investment securities, interest rate spread and net interest margin, are presented on a tax-equivalent basis. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income. For the three months ended June 30, 2016 and 2015 the yield on investment securities before tax-equivalent adjustments was 2.43% and 2.34%, respectively, and the yield on total interest-earning assets was 4.41% and 4.42%, respectively. Net interest rate spread before tax-equivalent adjustments for the three months ended June 30, 2016 and 2015 was 3.38% and 3.63%, respectively, while net interest margin before tax-equivalent adjustments was 3.57% and 3.80%, respectively.
|
|
|
(2)
|
|
Includes loans held for sale.
|
|
|
(3)
|
|
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
|
|
|
(4)
|
|
Net interest rate spread represents the difference between the tax-equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
(5)
|
|
Net interest margin represents net interest income (tax-equivalent basis) divided by average total interest-earning assets.
|
Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
|
|
|
Compared to the Three Months Ended
|
|
|
|
|
June 30, 2015
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
333
|
|
$
|
(31)
|
|
$
|
302
|
|
|
Investment securities (1)
|
|
|
2
|
|
|
9
|
|
|
11
|
|
|
Short-term investments
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
335
|
|
|
(19)
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
NOW accounts
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
Money market accounts
|
|
|
4
|
|
|
20
|
|
|
24
|
|
|
Certificates of deposit
|
|
|
85
|
|
|
95
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
90
|
|
|
117
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
(34)
|
|
|
23
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
56
|
|
|
140
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
279
|
|
$
|
(159)
|
|
$
|
120
|
|
|
|
(1)
|
|
Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $10,000 and $7,000 for the three months ended June 30, 2016 and 2015, respectively.
|
Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015
General
.
Net income decreased $381,000, or 62.2%, to $232,000 for the six months ended June 30, 2016, from $613,000 for the six months ended June 30, 2015. The decrease in net income was caused by increases in the provision for loan losses and non-interest expense, partially offset by increases in net interest and dividend income and in non-interest income.
Interest and Dividend Income.
Interest and dividend income increased $619,000, or 10.8%, to $6.4 million for the six months ended June 30, 2016, primarily due to an increase in interest income on loans. Interest income on loans increased $590,000, or 10.8%, to $6.0 million for the six months ended June 30, 2016, due to a $27.8 million, or 12.0%, increase in the average balance of loans, partially offset by a five basis point decrease in yield to 4.64% for the six months ended June 30, 2016 from 4.69% for the six months ended June 30, 2015.
Interest and dividend income on investment securities increased $22,000, or 7.7%, to $308,000 for the six months ended June 30, 2016 from $286,000 for the six months ended June 30, 2015, due to a $980,000, or 4.1% increase
in the average balance of investment securities and by an eight basis point increase in yield to 2.46% for the six months ended June 30, 2016 from 2.38% for the six months ended June 30, 2015.
Interest Expense.
Interest expense increased $371,000, or 46.0%, to $1.2 million for the six months ended June 30, 2016 from $807,000 for the six months ended June 30, 2015. Interest expense on deposits increased $382,000, or 78.8%, to $867,000 for the six months ended June 30, 2016 from $485,000 for the six months ended June 30, 2015, due to an increase in the average balance of interest-bearing deposits of $35.9 million, or 22.2%, to $197.8 million for the six months ended June 30, 2016 from $161.9 million for the six months ended June 30, 2015 and an increase in the average rate we paid on interest-bearing deposits to 0.88% for the six months ended June 30, 2016 compared to 0.60% for the six months ended June 30, 2015. The increase in interest expense on deposits was primarily due to certificates of deposit, as promotional rates were offered during most of the first quarter of 2016. Interest expense on certificates of deposit increased $317,000, or 94.6%, to $652,000 for the six months ended June 30, 2016 from $335,000 for the six months ended June 30, 2015 due to an increase in the average balance in certificates of deposit of $27.2 million, or 45.3%, to $87.3 million for the six months ended June 30, 2016 from $60.1 million for the same period in 2015 and by an increase in the average rate we paid on certificates of deposit to 1.49% for the six months ended June 30, 2016 compared to 1.12% for the same period in 2015. Interest expense on money market deposits increased $57,000, or 52.3%, to $166,000 for the six months ended June 30, 2016 from $109,000 for the six months ended June 30, 2015 due to an increase in the average balance in money market deposits of $5.5 million, or 9.9%, to $61.5 million for the six months ended June 30, 2016 from $56.0 million for the same period in 2015 and by an increase in the average rate we paid on money market deposits to 0.54% for the six months ended June 30, 2016 compared to 0.39% for the same period in 2015.
Interest expense on FHLB advances decreased $11,000, or 3.4%, to $311,000 for the six months ended June 30, 2016 from $322,000 for the six months ended June 30, 2015. The decrease was primarily due an $8.6 million, or 18.3%, decrease in the average outstanding balance of advances to $38.4 million for the six months ended June 30, 2016 from $47.0 million for the six months ended June 30, 2015, partially offset by the average rate we paid, which increased 25 basis points to 1.62% for the six months ended June 30, 2016 compared to 1.37% for the six months ended June 30, 2015. The average outstanding balance of long-term advances decreased $2.5 million, or 8.6%, to $26.6 million for the six months ended June 30, 2016 from $29.1 million for the six months ended June 30, 2015 and the average outstanding balance of short-term advances decreased $6.1 million, or 34.1%, to $11.8 million for the six months ended June 30, 2016 from $17.9 million for the same period in 2015, as we paid off advances with deposit increases. We expect the average balance of short-term FHLB advances to increase in the near term, as we fund current loan demand.
Net Interest and Dividend Income
.
Net interest and dividend income increased $248,000, or 5.0%, to $5.2 million for the six months ended June 30, 2016 compared to $4.9 million for the six months ended June 30, 2015. The increase in net interest and dividend income was primarily the result of a $2.2 million, or 4.3%, increase in net average interest-earning assets to $54.5 million for the six months ended June 30, 2016, from $52.3 million for the same period in 2015. Our net interest margin may compress in the future due to competitive pricing in our market area and due to a rising interest rate environment.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several quantitative and qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. After an evaluation of these factors, we recorded a provision for loan losses of $74,000 for the six months ended June 30, 2016, compared to a provision for loan losses of $27,000 for the six months ended June 30, 2015. There were $2,000 in charge-offs and $3,000 in recoveries for the six months ended June 30, 2016, as compared to $25,000 in charge-offs and $3,000 in recoveries for the same period in 2015. The allowance for loan losses was $2.5 million, or 0.95%, of total loans and 266.42% of non-performing loans at June 30, 2016, compared to an allowance for loan losses of $2.4 million, or 0.94%, of total loans and 310.31% of non-performing loans at December 31, 2015. For additional information please refer to Note 6, Loans and Servicing.
Non-interest Income
.
Non-interest income increased $32,000, or 6.9%, to $497,000 for the six months ended June 30, 2016 from $465,000 for the six months ended June 30, 2015, primarily due to an increase in gain on sale of SBA loans and customer service fees. The gain on sale of SBA loans was $15,000 for the six months ended June 30, 2016, compared to no gains during the same period in 2015. Income from customer service fees increased $5,000, or 1.4%, to $355,000 for the six months ended June 30, 2016 from $350,000 for the six months ended June 30, 2015. The increase was primarily from the Company’s commercial customer base. Mortgage banking income, net increased $4,000, or 7.8%, to $55,000 for the six months ended June 30, 2016 from $51,000 for the six months ended June 30, 2015. The increase was primarily due to an increased level of residential loan volume.
Non-interest Expenses.
Non-interest expense increased $842,000, or 19.2%, to $5.2 million for the six months ended June 30, 2016, from $4.4 million for the six months ended June 30, 2015. Salaries and benefits expense increased $437,000, or 17.9%, primarily due to the costs associated with an increase in commercial lending support and regulatory compliance staff. Data processing expenses increased $56,000, or 17.2%, primarily due to one-time implementation fees of $66,000 expensed during the six months ended June 30, 2016. Professional fees increased $317,000, or 131.0%, primarily due to the costs associated with enhancements to our regulatory compliance staff and compliance programs.
Income Tax Expense.
The income before income taxes of $364,000 resulted in income tax expense of $132,000 for the six months ended June 30, 2016, compared to income before income taxes of $973,000 resulting in an income tax expense of $360,000 for the six months ended June 30, 2015. The effective income tax rate was 36.2% for the six months ended June 30, 2016 compared to 37.0% for the six months ended June 30, 2015. The decrease in the effective tax rate was primarily due to a decrease in taxable income as a percentage of total income.
Average Balance Sheet.
The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest and dividend income produced by the average balance of interest-bearing assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2)
|
|
$
|
260,200
|
|
$
|
6,038
|
|
4.64
|
%
|
$
|
232,362
|
|
$
|
5,448
|
|
4.69
|
%
|
|
Investment securities (1)
|
|
|
25,003
|
|
|
327
|
|
2.62
|
%
|
|
24,023
|
|
|
301
|
|
2.51
|
%
|
|
Short-term investments
|
|
|
5,503
|
|
|
11
|
|
0.40
|
%
|
|
4,805
|
|
|
4
|
|
0.17
|
%
|
|
Total interest-earning assets
|
|
|
290,706
|
|
|
6,376
|
|
4.39
|
%
|
|
261,190
|
|
|
5,753
|
|
4.41
|
%
|
|
Non-interest-earning assets
|
|
|
9,000
|
|
|
—
|
|
|
|
|
8,390
|
|
|
—
|
|
|
|
|
Total assets
|
|
$
|
299,706
|
|
|
6,376
|
|
|
|
$
|
269,580
|
|
|
5,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
15,950
|
|
|
2
|
|
0.03
|
%
|
$
|
14,899
|
|
|
2
|
|
0.03
|
%
|
|
NOW accounts
|
|
|
33,119
|
|
|
47
|
|
0.28
|
%
|
|
30,988
|
|
|
39
|
|
0.25
|
%
|
|
Money market accounts
|
|
|
61,512
|
|
|
166
|
|
0.54
|
%
|
|
55,992
|
|
|
109
|
|
0.39
|
%
|
|
Certificates of deposit
|
|
|
87,253
|
|
|
652
|
|
1.49
|
%
|
|
60,050
|
|
|
335
|
|
1.12
|
%
|
|
Total interest-bearing deposits
|
|
|
197,834
|
|
|
867
|
|
0.88
|
%
|
|
161,929
|
|
|
485
|
|
0.60
|
%
|
|
FHLB advances
|
|
|
38,373
|
|
|
311
|
|
1.62
|
%
|
|
46,992
|
|
|
322
|
|
1.37
|
%
|
|
Total interest-bearing liabilities
|
|
|
236,207
|
|
|
1,178
|
|
1.00
|
%
|
|
208,921
|
|
|
807
|
|
0.77
|
%
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
28,736
|
|
|
|
|
|
|
|
26,907
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
3,699
|
|
|
|
|
|
|
|
3,583
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
268,642
|
|
|
|
|
|
|
|
239,411
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
31,064
|
|
|
|
|
|
|
|
30,169
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
299,706
|
|
|
|
|
|
|
$
|
269,580
|
|
|
|
|
|
|
|
Net interest-earning assets (3)
|
|
$
|
54,499
|
|
|
|
|
|
|
$
|
52,269
|
|
|
|
|
|
|
|
Fully tax-equivalent net interest income
|
|
|
|
|
|
5,198
|
|
|
|
|
|
|
|
4,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: tax-equivalent adjustments
|
|
|
|
|
|
(19)
|
|
|
|
|
|
|
|
(15)
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
5,179
|
|
|
|
|
|
|
$
|
4,931
|
|
|
|
|
Net interest rate spread (1)(4)
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
3.64
|
%
|
|
Net interest margin (1)(5)
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
3.79
|
%
|
|
Average of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
123.07
|
%
|
|
|
|
|
|
|
125.02
|
%
|
|
|
(1)
|
|
Interest and yield on investment securities, interest rate spread and net interest margin, are presented on a tax-equivalent basis. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income. For the six months ended June 30, 2016 and 2015 the yield on investment securities before tax-equivalent adjustments was 2.46% and 2.38%, respectively, and the yield on total interest-earning assets was 4.37% and 4.39%, respectively. Net interest rate spread before tax-equivalent adjustments for the six months ended June 30, 2016 and 2015 was 3.37% and 3.62%, respectively, while net interest margin before tax-equivalent adjustments was 3.56% and 3.78%, respectively.
|
|
|
(2)
|
|
Includes loans held for sale.
|
|
|
(3)
|
|
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
|
|
|
(4)
|
|
Net interest rate spread represents the difference between the tax-equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
(5)
|
|
Net interest margin represents net interest income (tax-equivalent basis) divided by average total interest-earning assets.
|
Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
|
|
Compared to the Six Months Ended
|
|
|
|
|
June 30, 2015
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
653
|
|
$
|
(63)
|
|
$
|
590
|
|
|
Investment securities (1)
|
|
|
12
|
|
|
14
|
|
|
26
|
|
|
Short-term investments
|
|
|
1
|
|
|
6
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
666
|
|
|
(43)
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
NOW accounts
|
|
|
3
|
|
|
5
|
|
|
8
|
|
|
Money market accounts
|
|
|
11
|
|
|
46
|
|
|
57
|
|
|
Certificates of deposit
|
|
|
152
|
|
|
165
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
166
|
|
|
216
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
(59)
|
|
|
48
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
107
|
|
|
264
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
559
|
|
$
|
(307)
|
|
$
|
252
|
|
|
|
(1)
|
|
Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $19,000 and $15,000 for the six months ended June 30, 2016 and 2015, respectively.
|
Liquidity Management
.
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities. The excess cash and cash equivalent balances are expected to be used to fund increases in loans and securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2016, cash and cash equivalents totaled $5.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $19.9
million at June 30, 2016. Our policies also allow for access to the wholesale funds market for up to 40.0% of total assets, or $120.0 million. At June 30, 2016, we had $31.1 million in FHLB advances outstanding, $30.2 million in certificates of deposit obtained through a listing service and $3.3 million in brokered certificates of deposit, allowing the Company access to an additional $55.3 million in wholesale funds based on policy guidelines.
At June 30, 2016 we had $11.3 million in loan commitments outstanding. In addition to commitments to originate loans, we had $44.2 million in unadvanced funds to borrowers.
At June 30, 2016 we had $2.0 million in outstanding irrevocable stand-by letters of credit. These letters of credit, which have terms of twelve months, collateralize specific municipal deposits. The fair value of these letters of credit approximate contract values based on the nature of the fee arrangements with the FHLB.
Certificates of deposit due within one year of June 30, 2016 totaled $33.0 million, or 14.2% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit or other wholesale funding options. Depending on market conditions, we may be required to pay higher rates on such deposits than we currently pay on the certificates of deposit due on or before June 30, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB and other wholesale market sources.
Our primary investing activities are the origination and purchase of loans and the purchase of securities. During the six months ended June 30, 2016, we originated $42.5 million in loans, purchased $4.3 million of residential loans and purchased $4.5 million of investment securities. We expect to purchase additional residential mortgages to replace recent residential loan prepayments.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in total deposits of $25.2 million for the six months ended June 30, 2016. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. FHLB advances decreased $19.5 million during the six months ended June 30, 2016 due to deposit growth. FHLB advances have primarily been used to fund loan demand and deposit outflows. We sold $210,000 of SBA loans and $247,000 of residential mortgages during the six months ended June 30, 2016.
Capital Management.
Effective January 1, 2015 (with a phase-in period of two to five years for certain components), the Bank became subject to new capital regulations adopted by the OCC and other federal bank regulatory agencies that implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. Among other things, the regulations established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The regulations also require unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The regulations limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The regulations also implement the Dodd-Frank Act’s directive to apply to savings and loan holding companies consolidated capital requirements that are not less stringent than those applicable to their subsidiary institutions. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.
At June 30, 2016, Georgetown Bank met each of its capital requirements and was considered “well-capitalized”, and also met each of its capital requirements on a fully phased-in basis.
Off-Balance Sheet Arrangements.
For the six months ended June 30, 2016, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3.
Quantitative and Qualitative Disclosures About Market Ris
k
Not applicable to smaller reporting companies.
Item 4.
Controls and Procedure
s
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
