NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Operations
The accompanying audited Consolidated Financial Statements include the accounts of FedFirst Financial Corporation (“FedFirst Financial” or the “Company”), a stock holding company established in 2010, whose wholly owned subsidiary is First Federal Savings Bank (“First Federal” or the “Bank”), a federally chartered stock savings bank, which owns FedFirst Exchange Corporation (“FFEC”). FFEC has an 80% controlling interest in Exchange Underwriters, Inc. (“Exchange Underwriters”). Exchange Underwriters is a full-service, independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products. All significant intercompany transactions have been eliminated.
First Federal operates as a community-oriented financial institution offering residential, multi-family and commercial mortgages, consumer loans and commercial business loans as well as a variety of deposit products for individuals and businesses from seven locations in southwestern Pennsylvania. First Federal conducts insurance brokerage activities through Exchange Underwriters. The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification (“ASC”) Topic 855,
Subsequent Events
, to be recognizable events.
Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment (“OTTI”), goodwill impairment, amortization of intangible assets, and the valuation of deferred tax assets.
Securities
The Company classifies securities at the time of purchase as either trading, available-for-sale or held-to-maturity. Securities that the Company has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are reported at amortized cost. Securities bought and held principally for the purpose of selling them in the near term are classified as securities for trading and reported at fair value with gains and losses included in earnings. The Company had no held-to-maturity or trading securities at December 31, 2013 or 2012. Securities not classified as held-to-maturity or trading securities are classified as securities available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (“OCI”). Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized and accreted using the level yield method. Net gain or loss on the sale of securities is based on the amortized cost of the specific security sold.
Other-Than-Temporary Impairment
The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes credit-related OTTI on debt securities in earnings while noncredit-related OTTI on debt securities not expected to be sold is recognized in accumulated OCI. The Company assesses whether the credit loss existed by considering whether (a) the Company has the intent to sell the security, (b) it is more likely than not that the Company will be required to sell the security before recovery, or (c) the Company does not expect to recover the entire amortized cost basis of the security. The Company can bifurcate the OTTI on securities not expected to be sold or where the entire amortized cost of the security is not expected to be recovered into the components representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss is recognized through earnings.
Corporate debt securities are evaluated for OTTI by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows involves the calculation of the present value of remaining cash flows compared to previously projected cash flows. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit-related OTTI exists on corporate debt securities.
Loans
The Company segments the loan portfolio based on loan types with related risk characteristics. The segments consist of real estate-mortgage, real estate-construction, consumer and commercial business loans. Real estate-mortgage includes the following classes: one- to four-family residential, multi-family, and commercial. One- to four-family and multi-family are subdivided into loans originated within our geographic lending area and loans purchased out-of-state. Real estate-construction includes the following classes: residential and commercial. Consumer includes the following classes: home equity and other, which is primarily composed of secured and unsecured consumer loans. Home equity is subdivided into loans with a loan-to-value ratio of 80% or less or greater than 80%. Loans are stated at the outstanding principal amount of the loans, net of premiums and discounts on loans purchased, deferred loan costs, loans in process, and the allowance for loan losses. Loans are originated with the intent to hold until maturity. Interest income on loans is accrued and credited to interest income as earned. Loans are generally placed on nonaccrual status at the earlier of when they become delinquent 90 days or more as to principal or interest or when it appears that principal or interest is uncollectible. Interest accrued prior to a loan being placed on nonaccrual status is subsequently reversed. Interest income on nonaccrual loans is recognized only in the period in which it is ultimately collected. Loans are returned to an accrual status when factors indicating doubtful collectability no longer exist.
Loan fees and direct costs of originating loans are deferred, and the net fee or cost is accreted or amortized to interest income as a yield adjustment over the contractual lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
A loan whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties is considered a troubled debt restructuring (“TDR”). TDRs typically result from our loss mitigation activities and could include rate reductions, principal forgiveness, forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. A restructuring for a borrower that is experiencing financial difficulties, but results in only a delay in payment that is insignificant is not considered a concession. Once a loan is classified as a TDR, the determination of income recognition is based on the status of the loan prior to classification. If a loan is in non-accrual status, then it will remain in that classification for a minimum of six consecutive months until uncertainty with respect to collectability no longer exists. Loans that are current at the time of classification will remain on an accrual basis and are monitored. If restructured contractual terms of a loan are not met, then the loan will be placed on nonaccrual status.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that in management’s judgment should be charged-off. Loan losses are charged against the allowance when management confirms collectability of a loan balance is not likely. Subsequent recoveries, if any, are credited to the allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, peer group information, 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, prevailing economic conditions and other factors related to the collectability of the loan portfolio. This evaluation is inherently subjective as it involves a high degree of judgment and requires estimates that are susceptible to significant revision as more information becomes available.
An allowance is established for loans that are individually evaluated and determined to be impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan may be placed on nonaccrual status due to payment delinquency or uncertain collectability, while not being classified as impaired. Factors considered by management in determining impairment include payment status, risk rating, and loan amount. Generally, management performs individual impairment assessments of substandard loan relationships of $250,000 or greater to determine the amount that may be uncollectible. The amount of impairment is determined by the difference between the present value of the expected cash flows related to the loan, using current interest rates and its recorded value, or, as a practical measure in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans less estimated selling costs. Impaired loans incur a charge-off when it is determined foreclosure is probable and the ultimate collectability is not likely.
Loans excluded from the individual impairment analysis are collectively evaluated by management to estimate losses inherent in those loans. Management determines historical loss experience for each group of loans with similar risk characteristics within the portfolio based on loss experience for loans in each group. Loan categories represent groups of loans with similar risk characteristics and may include types of loans by product, large credit exposures, concentrations, loan grade, or any other characteristic that causes a loan’s risk profile to be similar to another. We also consider qualitative or environmental factors that are likely to cause estimated credit losses associated with the bank’s existing portfolio to differ from historical loss experience, including changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; changes in experience, ability and depth of loan management; changes in the volume and severity of past due loans, non-accrual loans and adversely graded or classified loans; changes in the quality of the loan review system; changes in the value of underlying collateral for collateral dependent loans; existence of or changes in concentrations of credit; changes in economic or business conditions; and the effect of competition, legal and regulatory requirements on estimated credit losses.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized as special mention have potential weaknesses that may result in deterioration if uncorrected and not monitored. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. To determine the appropriate risk rating category, the borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency (“OCC”), as an integral part of its examination process, periodically reviews our allowance for loan losses. The OCC may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan Bank System
The Company is a member of the Federal Home Loan Bank System. As a member, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”). Deficiencies, if any, in the required investment at the end of any reporting period are purchased in the subsequent reporting period. The investment is carried at cost. No ready market exists for the stock, and it has no quoted market value. The Company may receive dividends on its FHLB capital stock, which are included in interest income and are recognized when declared.
Premises and Equipment
Land is carried at cost. Office properties and equipment are carried at cost less accumulated depreciation and amortization. Buildings and leasehold improvements are depreciated using the straight-line method using useful lives generally ranging from 10 to 40 years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives generally ranging from three to 10 years. Charges for maintenance and repairs are expensed as incurred.
Bank-Owned Life Insurance
The Company purchased insurance on the lives of certain executive officers and directors. The policies accumulate asset values to meet future liabilities, including the payment of employee benefits. Increases in the cash surrender value and proceeds upon the death of a key employee are recorded as noninterest income. The cash surrender value of bank-owned life insurance is recorded as an asset.
Goodwill
We recorded goodwill in connection with our acquisition of Exchange Underwriters. Goodwill is not amortized but is tested for impairment annually or more frequently if impairment indicators arise. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related operations that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. We estimate the fair values of the related operations using discounted cash flows. The forecasts of future cash flows are based on our best estimate of future revenues and operating costs, based primarily on contracts in effect, new accounts and cancellations and operating budgets. The impairment analysis requires management to make subjective judgments concerning how the acquired assets will perform in the future. Events and factors that may significantly affect the estimates include competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and industry and market trends. Changes in these forecasts could cause a reporting unit to either pass or fail the first step in the goodwill impairment model, which could significantly change the amount of impairment recorded. Our annual assessment of potential goodwill impairment was completed in the fourth quarter of 2013. Based on the results of the annual assessments, no impairment charge was deemed necessary for the years ended December 31, 2013 and 2012.
Intangible Assets
The Company determines the accounting for intangible assets based on their useful life. An intangible asset with a finite useful life is amortized, whereas an intangible asset with an indefinite useful life is not amortized. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The Company evaluates the remaining useful life of its intangible assets that are being amortized annually to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Real Estate Owned
When properties are acquired through foreclosure, they are transferred at estimated fair value less estimated selling costs, and any required write-downs are charged to the allowance for loan losses. Subsequently, such properties are carried at the lower of the adjusted cost or fair value less estimated selling costs. Estimated fair value of the property is generally based on an appraisal.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The provision for income taxes is the total of the current year income tax due or refundable and the change in the deferred tax assets and liabilities. Deferred tax assets and liabilities are the estimated future tax consequences attributable to differences between the financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized. Management believes, based upon current facts, that it is more likely than not there will be sufficient taxable income in future years to realize the deferred tax assets. The Company and its subsidiaries file a consolidated federal income tax return. The Company is no longer subject to a federal income tax examination for years prior to 2010. The Company had no uncertain tax positions at December 31, 2013 and 2012.
Investment in Affordable Housing Projects
The Company accounted for its limited partnership interests in affordable housing projects under the cost-recovery method. The Company received tax credits each year over a 10 year period. The investment was completely amortized at December 31, 2005.
At December 31, 2013 and 2012, there was approximately $619,000 and $954,000 of credits, respectively, that have not been utilized. The credits have been reflected as an asset and are available to be used to offset future taxes payable, with the credits expiring in years 2021 through 2025. Management believes based upon current facts that it is more likely than not there will be sufficient income in future years to be able to use the tax credits.
Fair Value of Financial Instruments
Fair values are determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy.
Repurchases of Common Stock
Repurchases of shares of FedFirst Financial’s common stock are recorded as a reduction of stockholders’ equity and the shares are retired upon purchase.
Earnings Per Share
Basic earnings per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed in a manner similar to basic earnings per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Common stock equivalents include restricted stock awards and stock options. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share until they are committed to be released.
Stock-Based Compensation
In 2006, FedFirst Financial Corporation’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”). The purpose of the Plan is to promote the Company’s success and enhance its value by linking the personal interests of its employees, officers, directors and directors emeritus to those of the Company’s stockholders, and by providing participants with an incentive for outstanding performance. All of the Company’s salaried employees, officers and directors are eligible to participate in the 2006 Plan. The 2006 Plan authorizes the granting of options to purchase shares of the Company’s stock, which may be non-statutory stock options or incentive stock options, and restricted stock which is subject to restrictions on transferability and subject to forfeiture. The 2006 Plan reserved an aggregate number of 214,787 shares of which 153,419 may be issued in connection with the exercise of stock options and 61,367 may be issued as restricted stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2011, the Company’s stockholders approved the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan’s details related to purpose, eligibility, and granting of shares are the same as noted above for the 2006 Plan. The 2011 Plan reserved an aggregate number of 204,218 shares of which 145,870 may be issued in connection with the exercise of stock options and 58,348 may be issued as restricted stock.
Awards are typically granted with a five year vesting period and a vesting rate of 20% per year. The contractual life of stock options is typically 10 years from the date of grant. The exercise price for options is the closing price on the date of grant. The Company recognizes expense associated with the awards over the vesting period. Unrecognized compensation cost related to nonvested stock-based compensation is recognized ratably over the remaining service period. The per share weighted-average fair value of stock options granted with an exercise price equal to the market value on the date of grant is calculated using the Black-Scholes-Merton option pricing model, using assumptions for expected life, expected dividend rate, risk-free interest rate, and an expected volatility. The Company uses the simplified method to determine the expected term because it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its shares have been publicly traded.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred. Total advertising expense was approximately $498,000 and $221,000 for the years ended December 31, 2013 and 2012, respectively.
Revenue Recognition of Insurance Commissions and Contingency Fees
Exchange Underwriters records insurance commission based on the method in which the policy is billed. For policies that Exchange Underwriters directly bills to policyholders, income is recorded when billed. For policies an insurance company directly bills to policyholders on behalf of Exchange Underwriters, income is recorded as payments are received. Commissions are recorded net of cancellations.
Exchange Underwriters also receives guaranteed supplemental payments and contingency fees that may be significant to its financial results. Guaranteed supplemental payments and contingency fees are dependent on several factors, which include, but are not limited to, eligible written premiums, earned premiums, incurred losses, and stop loss charges. Guaranteed supplemental payments are only accrued when insurance companies offer a lock-in provision and Exchange Underwriters agrees to a stipulated amount that typically includes a predetermined percentage adjusting the final payout calculations. Otherwise, contingency fees are recorded on a cash basis when received based on final calculations. Contingency fees are typically received in the first quarter of the year. Since insurance companies are not required to provide any estimates, the Company is not able to accrue contingency fees in the period earned as it does with guaranteed supplemental payments.
Reclassifications of Prior Year’s Statements
Certain previously reported items have been reclassified to conform to the current year’s classifications.
Recent Accounting Pronouncements
ASU 2013-02
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
.
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which requires entities to disclose additional information about reclassification adjustments including changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items reclassified out of AOCI. The ASU is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial condition and results of operation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2013-11
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
.
In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
, which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU is intended to eliminate diversity in practice resulting from a lack of guidance on this topic in current GAAP. Under the ASU, an entity generally must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this ASU is not expected to have a material impact on the Company’s financial condition and results of operation.
ASU 2014-04
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure
.
In January 2014, the FASB issued ASU 2014-04
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure
, to reduce diversity in practice by clarifying when an in substance repossession of foreclosure occurs, that is, when a creditor should be considered to have received physical possession of a residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify 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 the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or 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 the amount of foreclosed residential real estate property held by the creditor and 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. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial condition and results of operation.
The following table sets forth the amortized cost and fair value of securities available-for-sale at the dates indicated (dollars in thousands).
|
December 31, 2013
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal bonds
|
|
$
|
7,988
|
|
|
$
|
207
|
|
|
$
|
225
|
|
|
$
|
7,970
|
|
|
Mortgage-backed - GSEs
|
|
|
7,740
|
|
|
|
452
|
|
|
|
-
|
|
|
|
8,192
|
|
|
REMICs
|
|
|
6,946
|
|
|
|
98
|
|
|
|
25
|
|
|
|
7,019
|
|
|
Corporate debt
|
|
|
3,996
|
|
|
|
-
|
|
|
|
405
|
|
|
|
3,591
|
|
|
Total securities available-for-sale
|
|
$
|
26,670
|
|
|
$
|
757
|
|
|
$
|
655
|
|
|
$
|
26,772
|
|
|
December 31, 2012
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Municipal bonds
|
|
$
|
8,756
|
|
|
$
|
435
|
|
|
$
|
10
|
|
|
$
|
9,181
|
|
|
Mortgage-backed - GSEs
|
|
|
12,120
|
|
|
|
695
|
|
|
|
-
|
|
|
|
12,815
|
|
|
REMICs
|
|
|
18,345
|
|
|
|
355
|
|
|
|
-
|
|
|
|
18,700
|
|
|
Corporate debt
|
|
|
3,995
|
|
|
|
-
|
|
|
|
2,113
|
|
|
|
1,882
|
|
|
Equities
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
Total securities available-for-sale
|
|
$
|
43,220
|
|
|
$
|
1,485
|
|
|
$
|
2,123
|
|
|
$
|
42,582
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with an amortized cost and fair value of $8.4 million at December 31, 2013 and $12.8 million and $13.3 million, respectively, at December 31, 2012 were pledged to secure public deposits and repurchase agreements.
There were no sales of securities available-for-sale for the year ended December 31, 2013 and 2012.
The amortized cost and fair value of securities at December 31, 2013 by contractual maturity were as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties (dollars in thousands).
|
|
|
Cost
|
|
|
Value
|
|
|
Due in less than one year
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Due from one to five years
|
|
|
2,106
|
|
|
|
2,314
|
|
|
Due from five to ten years
|
|
|
6,482
|
|
|
|
6,501
|
|
|
Due after ten years
|
|
|
18,081
|
|
|
|
17,956
|
|
|
Total
|
|
$
|
26,670
|
|
|
$
|
26,772
|
|
The following table presents gross unrealized losses and fair value of securities aggregated by category and length of time that individual securities have been in a continuous loss position at the dates indicated (dollars in thousands).
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
December 31, 2013
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Municipal Bonds
|
|
|
2
|
|
|
$
|
4,147
|
|
|
$
|
142
|
|
|
|
1
|
|
|
$
|
1,058
|
|
|
$
|
83
|
|
|
|
3
|
|
|
$
|
5,205
|
|
|
$
|
225
|
|
|
REMICs
|
|
|
3
|
|
|
|
2,532
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
2,532
|
|
|
|
25
|
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3,591
|
|
|
|
405
|
|
|
|
3
|
|
|
|
3,591
|
|
|
|
405
|
|
|
Total securities temporarily impaired
|
|
|
5
|
|
|
$
|
6,679
|
|
|
$
|
167
|
|
|
|
4
|
|
|
$
|
4,649
|
|
|
$
|
488
|
|
|
|
9
|
|
|
$
|
11,328
|
|
|
$
|
655
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
December 31, 2012
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Municipal Bonds
|
|
|
1
|
|
|
$
|
1,151
|
|
|
$
|
10
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
1,151
|
|
|
$
|
10
|
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1,882
|
|
|
|
2,113
|
|
|
|
3
|
|
|
|
1,882
|
|
|
|
2,113
|
|
|
Total securities temporarily impaired
|
|
|
1
|
|
|
$
|
1,151
|
|
|
$
|
10
|
|
|
|
3
|
|
|
$
|
1,882
|
|
|
$
|
2,113
|
|
|
|
4
|
|
|
$
|
3,033
|
|
|
$
|
2,123
|
|
The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer including any specific events that may influence the operations of the issuer, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market.
Municipal bonds—
At December 31, 2013, the Company had two municipal bonds with an unrealized loss of $142,000 in an unrealized loss position of less than 12 months and one municipal bond with an unrealized loss of $83,000 in an unrealized loss position of 12 months or more. An evaluation was performed on each bond. For the two bonds in an unrealized loss position of less than 12 months, there were no events to indicate deterioration in credit with unchanged, investment grade credit ratings. The Company believes the unrealized loss on these two bonds is due to market conditions, specifically rising interest rates impacting the value of the bonds. For the bond in an unrealized loss position of 12 months or more, the credit rating was initially downgraded in 2012 primarily due to budgetary challenges and more recently in July 2013 primarily due to accreditation concerns; however the credit rating remains investment grade and the strong income indicators of the economic base and sound financial policies and practices of the municipality, and the municipality’s ability to levy a property tax that is sufficient to be used for bond payment are expected to allow it to repay debt and meet its contractual obligations. Therefore, the Company believes the unrealized loss of this bond is due to changes in market conditions. The Company does not intend to sell the bonds and it is more likely than not that the Company will not be required to sell the bonds before recovery. The Company expects to recover the entire amortized cost basis and concluded that there was no OTTI on these bonds at December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporate debt—
At December 31, 2013, the Company had three securities consisting of two pools of corporate debt obligations (“CDOs”) collateralized by the trust preferred securities of insurance companies that were in an unrealized loss position for 12 months or greater at an amount of $405,000. These securities were downgraded from their original rating issuance to below investment grade in 2009 after purchase. The lack of liquidity in the market for this type of security, credit rating downgrades and market uncertainties are factors contributing to the unrealized losses on these securities.
The following table provides additional information related to the Company’s CDOs at December 31, 2013 (dollars in thousands):
|
Pool
|
Class
|
|
Tranche
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
S&P Rating
|
|
Current
Number of
Insurance
Companies
|
|
|
Total
Collateral
|
|
|
Current
Deferrals
and
Defaults
|
|
|
Performing
Collateral
|
|
|
Additional
Immediate
Deferrals/
Defaults
Before
Causing an
Interest
Shortfall (a)
|
|
|
Additional
Immediate
Deferrals/
Defaults
Before
Causing a
Break in
Yield (b)
|
|
|
I-PreTSL I
|
Mezzanine
|
|
|
B-3
|
|
|
$
|
1,500
|
|
|
$
|
1,281
|
|
|
$
|
(219
|
)
|
CCC-
|
|
|
16
|
|
|
$
|
188,300
|
|
|
$
|
32,500
|
|
|
$
|
155,800
|
|
|
$
|
102,460
|
|
|
$
|
45,500
|
|
|
I-PreTSL II
|
Mezzanine
|
|
|
B-3
|
|
|
|
2,496
|
|
|
|
2,310
|
|
|
|
(186
|
)
|
BB+
|
|
|
23
|
|
|
|
305,500
|
|
|
|
24,500
|
|
|
|
281,000
|
|
|
|
175,947
|
|
|
|
112,000
|
|
|
|
|
|
|
|
|
|
$
|
3,996
|
|
|
$
|
3,591
|
|
|
$
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
A temporary interest shortfall is caused by an amount of deferrals/defaults high enough such that there is insufficient cash flow available to pay current interest on the given tranche or by breaching the principal coverage test of the tranche immediately senior to the given tranche. Amounts presented represent additional deferrals/defaults beyond those currently existing that must occur before the security would experience an interest shortfall.
|
|
|
(b)
|
A break in yield for a given tranche means that deferrals/defaults have reached such a level that the tranche would not receive all of its contractual cash flows (principal and interest) by maturity (so not just a temporary interest shortfall, but an actual loss in yield on the investment). In other words, the magnitude of the defaults/deferrals has depleted all of the credit enhancement (excess interest and over-collateralization) beneath the given tranche. Amounts presented represent additional deferrals/defaults beyond those currently existing that must occur before the security would experience a break in yield.
|
These securities are evaluated for OTTI by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows involves the calculation of the present value of remaining cash flows compared to previously projected cash flows. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit-related OTTI exists. Additionally, reports are reviewed that provide information for the amount of deferral/defaults that would have to occur to prevent the tranche from collecting contractual cash flows (principal and interest). None of these securities are projecting a cash flow disruption, nor have any of these securities experienced a cash flow disruption. The Company also reviewed each of the issues’ collateral participants, including their financial condition, ratings provided by A. M. Best (for insurance companies), and adverse conditions specifically related to industry or geographic area. This information did not suggest additional deferrals or defaults in the future that would result in the securities not receiving all of their contractual cash flows. Based on the analysis performed and the fact that the Company does not expect to sell these securities, and because it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis, the Company concluded that there was no OTTI on these securities at December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2013, the OCC adopted final regulations implementing section 619 of the Dodd-Frank Wall Street Reform and Protection Act, commonly known as the “Volcker Rule”, which restricts the ability of a banking entity to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund (referred to as a “covered fund”). A banking entity must divest its holding in covered funds by July 15, 2015. A covered fund is defined to include any issuer that would be an investment company under the Investment Company Act of 1940, but relies on the exemption for funds sold to fewer than 100 investors or the exemption for funds sold only to qualified purchasers. An issuer that could rely on a different exemption from the definition of investment company under the Investment Company Act would not be considered a covered fund, and therefore would not be subject to the Volcker Rule. In particular, the federal banking regulators have noted that some issuers of CDOs may qualify for exemption under Investment Company Act Rule 3a-7, which exempts non-managed fixed income funds from the definition of investment company. Therefore, if the issuer meets the requirements of Rule 3a-7, the CDOs will not be subject to the Volcker Rule. Based on our review, the CDOs held by the Bank as of December 31, 2013 satisfy all conditions for relying on the exemption under Investment Company Act Rule 3a-7, and therefore are not considered a covered fund that require divesture by July 15, 2015.
The CDOs were in an unrealized loss position of $405,000 at December 31, 2013.
Other Securities
– This category may include mortgage-backed securities and REMICS. At December 31, 2013, the Company had three REMIC securities that were issued and backed by a Government-Sponsored Enterprise (“FNMA” and “FHLMC”) with an unrealized loss of $25,000. The securities were in an unrealized loss position for less than 12 months. The Company believes the unrealized loss of the securities is due to changes in market interest rates or changes in market conditions as there was no indication that the issuers were having financial difficulties. The Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before their recovery. The Company expects to recover the entire amortized cost basis of the securities and concluded that there was no OTTI at December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the composition of the Company’s loan portfolio at the dates indicated (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Real estate - mortgage:
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
|
|
|
|
|
Originated
|
|
$
|
104,870
|
|
|
$
|
110,754
|
|
|
Purchased
|
|
|
6,888
|
|
|
|
10,188
|
|
|
Total one- to four-family residential
|
|
|
111,758
|
|
|
|
120,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
7,083
|
|
|
|
11,101
|
|
|
Purchased
|
|
|
3,768
|
|
|
|
4,226
|
|
|
Total multi-family
|
|
|
10,851
|
|
|
|
15,327
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
61,889
|
|
|
|
45,504
|
|
|
Total real estate - mortgage
|
|
|
184,498
|
|
|
|
181,773
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,337
|
|
|
|
1,931
|
|
|
Commercial
|
|
|
15,979
|
|
|
|
5,231
|
|
|
Total real estate - construction
|
|
|
19,316
|
|
|
|
7,162
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Home equity:
|
|
|
|
|
|
|
|
|
|
Loan-to-value ratio of 80% or less
|
|
|
47,543
|
|
|
|
41,537
|
|
|
Loan-to-value ratio of greater than 80%
|
|
|
9,247
|
|
|
|
7,841
|
|
|
Total home equity
|
|
|
56,790
|
|
|
|
49,378
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,666
|
|
|
|
1,923
|
|
|
Total consumer
|
|
|
58,456
|
|
|
|
51,301
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
20,023
|
|
|
|
15,055
|
|
|
Total loans
|
|
$
|
282,293
|
|
|
$
|
255,291
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium on loans purchased
|
|
|
93
|
|
|
|
106
|
|
|
Net deferred loan costs
|
|
|
351
|
|
|
|
450
|
|
|
Loans in process
|
|
|
(10,617
|
)
|
|
|
(3,431
|
)
|
|
Allowance for loan losses
|
|
|
(3,308
|
)
|
|
|
(2,886
|
)
|
|
Loans, net
|
|
$
|
268,812
|
|
|
$
|
249,530
|
|
Loans to Executive Officers and Directors.
The Bank has made loans to executive officers and directors in the ordinary course of business under the same terms and conditions, including interest rates and collateral, as those prevailing for comparable transaction with other customers and did not, in the opinion of management, involve more than normal credit risk. The following table sets forth the changes to loans to executive officers and directors at the dates indicated (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Balance, beginning of year
|
|
$
|
3,919
|
|
|
$
|
2,758
|
|
|
Additions
|
|
|
134
|
|
|
|
1,821
|
|
|
Repayments
|
|
|
(138
|
)
|
|
|
(626
|
)
|
|
Loans in process
|
|
|
-
|
|
|
|
(34
|
)
|
|
Balance, end of year
|
|
$
|
3,915
|
|
|
$
|
3,919
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Delinquencies.
The following table provides information about delinquencies in our loan portfolio at the dates indicated (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
|
|
30-59
Due
|
|
|
60-89
Due
|
|
|
Due
|
|
|
30-59
Due
|
|
|
60-89
Due
|
|
|
Due
|
|
|
Real estate - mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
$
|
1,012
|
|
|
$
|
427
|
|
|
$
|
627
|
|
|
$
|
1,052
|
|
|
$
|
138
|
|
|
$
|
281
|
|
|
Purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
595
|
|
|
Total one-to four-family residential
|
|
|
1,012
|
|
|
|
427
|
|
|
|
934
|
|
|
|
1,052
|
|
|
|
138
|
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
30
|
|
|
|
-
|
|
|
|
493
|
|
|
|
456
|
|
|
|
-
|
|
|
|
74
|
|
|
Total real estate - mortgage
|
|
|
1,042
|
|
|
|
427
|
|
|
|
1,427
|
|
|
|
1,508
|
|
|
|
138
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
715
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan-to-value ratio of 80% or less
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
510
|
|
|
|
-
|
|
|
|
-
|
|
|
Loan-to-value ratio of greater than 80%
|
|
|
144
|
|
|
|
158
|
|
|
|
30
|
|
|
|
406
|
|
|
|
36
|
|
|
|
-
|
|
|
Total home equity
|
|
|
145
|
|
|
|
158
|
|
|
|
30
|
|
|
|
916
|
|
|
|
36
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
Total consumer
|
|
|
145
|
|
|
|
161
|
|
|
|
30
|
|
|
|
921
|
|
|
|
36
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
Total delinquencies
|
|
$
|
1,902
|
|
|
$
|
588
|
|
|
$
|
1,457
|
|
|
$
|
2,437
|
|
|
$
|
174
|
|
|
$
|
950
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonperforming Assets.
The following table provides information with respect to our nonperforming assets at the dates indicated (dollars in thousands).
|
December 31,
|
|
Contracts
|
|
|
2013
|
|
|
Contracts
|
|
|
2012
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
4
|
|
|
$
|
1,595
|
|
|
|
2
|
|
|
$
|
1,269
|
|
|
Purchased
|
|
|
4
|
|
|
|
307
|
|
|
|
5
|
|
|
|
763
|
|
|
Total one- to four-family residential
|
|
|
8
|
|
|
|
1,902
|
|
|
|
7
|
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
493
|
|
|
|
2
|
|
|
|
172
|
|
|
Total real estate - mortgage
|
|
|
10
|
|
|
|
2,395
|
|
|
|
9
|
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-to-value ratio
of greater than 80%)
|
|
|
1
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
Total nonaccrual loans
|
|
|
11
|
|
|
|
2,425
|
|
|
|
9
|
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total nonaccrual loans and accruing loans past due 90 days or more
|
|
|
11
|
|
|
|
2,425
|
|
|
|
9
|
|
|
|
2,204
|
|
|
Real estate owned
|
|
|
1
|
|
|
|
126
|
|
|
|
2
|
|
|
|
146
|
|
|
Total nonperforming assets
|
|
|
12
|
|
|
$
|
2,551
|
|
|
|
11
|
|
|
$
|
2,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In nonaccrual status
|
|
|
1
|
|
|
$
|
968
|
|
|
|
3
|
|
|
$
|
1,254
|
|
|
Performing under modifed terms
|
|
|
8
|
|
|
|
2,358
|
|
|
|
7
|
|
|
|
1,501
|
|
|
Total troubled debt restructurings
|
|
|
9
|
|
|
$
|
3,326
|
|
|
|
10
|
|
|
$
|
2,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
|
|
|
|
0.86
|
%
|
|
|
|
|
|
|
0.86
|
%
|
|
Total nonperforming assets to total assets
|
|
|
|
|
|
|
0.80
|
|
|
|
|
|
|
|
0.74
|
|
Total nonperforming assets and troubled debt restructurings
performing under modified terms to total assets
(1)
|
|
|
|
|
|
|
1.54
|
|
|
|
|
|
|
|
1.21
|
|
|
(1)
|
Troubled debt restructurings in nonaccrual status are included in nonperforming assets.
|
Troubled Debt Restructurings.
Loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties are considered TDRs. TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The concessions granted for the TDRs in our portfolio primarily consist of, but are not limited to, capitalization of principal and interest due, reverting from payment of principal and interest to interest-only, or extending a maturity date through a signed forbearance agreement. Certain TDRs were placed in nonaccrual status at the time of restructure and will remain in that classification for a minimum of six consecutive months until uncertainty with respect to collectability no longer exists. Loans that were current at the time of classification remained on an accrual basis and are monitored to ensure restructured contractual terms are met.
TDRs are typically evaluated for any possible impairment similar to other impaired loans based on the current fair value of the collateral, less selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance for loan losses. In periods subsequent to modification, we continue to evaluate all TDRs for any additional impairment and will adjust any specific allowances accordingly.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide information related loans modified as TDRs during the periods indicated (dollars in thousands). The pre-modification outstanding recorded investment represents the balance outstanding when the loan was determined to be a TDR. The post-modification outstanding recorded investment represents the outstanding balance at period end.
|
|
|
Status
|
|
|
Modified Terms
|
|
|
December 31, 2013
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Allowance
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Allowance
|
|
|
Real estate - mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
653
|
|
|
|
653
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-to-value ratio
of 80% or less)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
373
|
|
|
|
273
|
|
|
|
-
|
|
|
Total troubled debt restructurings
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2
|
|
|
$
|
1,026
|
|
|
$
|
926
|
|
|
$
|
-
|
|
|
|
|
Status
|
|
|
Modified Terms
|
|
|
December 31, 2012
|
|
Contracts
|
|
|
Investment
|
|
|
|
|
|
Specific
Allowance
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Allowance
|
|
|
Real estate - mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
1
|
|
|
$
|
993
|
|
|
$
|
988
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Purchased
|
|
|
1
|
|
|
|
168
|
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total one- to four-family residential
|
|
|
2
|
|
|
|
1,161
|
|
|
|
1,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
9
|
|
|
|
9
|
|
|
|
-
|
|
|
Total troubled debt restructurings
|
|
|
2
|
|
|
$
|
1,161
|
|
|
$
|
1,156
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
-
|
|
During the year ended December 31, 2013, one commercial real estate loan TDR with a balance of $76,000 and one other consumer loan TDR with a balance of $7,000 were paid off. In addition, one purchased residential loan with a balance of $166,000 was charged-off. During the year ended December 31, 2012, one commercial real estate loan TDR with a balance of $66,000 was paid off.
Impaired Loans.
The following tables summarize information in regards to impaired loans by loan portfolio class at the dates indicated (dollars in thousands).
|
December 31, 2013
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
Impaired loans with no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family originated residential
|
|
$
|
1,505
|
|
|
$
|
1,505
|
|
|
$
|
-
|
|
|
$
|
1,515
|
|
|
$
|
65
|
|
|
Commercial real estate
|
|
|
2,705
|
|
|
|
2,705
|
|
|
|
-
|
|
|
|
2,742
|
|
|
|
149
|
|
|
Home equity (loan-to-value ratio of 80% or less)
|
|
|
405
|
|
|
|
405
|
|
|
|
-
|
|
|
|
409
|
|
|
|
10
|
|
|
Total impaired loans
|
|
$
|
4,615
|
|
|
$
|
4,615
|
|
|
$
|
-
|
|
|
$
|
4,666
|
|
|
$
|
224
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
December 31, 2012
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
Impaired loans with no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family originated residential
|
|
$
|
1,528
|
|
|
$
|
1,528
|
|
|
$
|
-
|
|
|
$
|
1,625
|
|
|
$
|
16
|
|
|
One- to four-family purchased residential
|
|
|
309
|
|
|
|
509
|
|
|
|
-
|
|
|
|
411
|
|
|
|
2
|
|
|
Commercial real estate
|
|
|
2,571
|
|
|
|
2,683
|
|
|
|
-
|
|
|
|
2,799
|
|
|
|
168
|
|
|
Home equity (loan-to-value ratio of 80% or less)
|
|
|
136
|
|
|
|
136
|
|
|
|
-
|
|
|
|
138
|
|
|
|
9
|
|
|
Other consumer
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
Total impaired loans
|
|
$
|
4,552
|
|
|
$
|
4,864
|
|
|
$
|
-
|
|
|
$
|
4,983
|
|
|
$
|
195
|
|
Allowance for loan losses.
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a valuation allowance on impaired loans; and (2) a valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
Allowance on Impaired Loans.
We establish an allowance for loans that are individually evaluated and determined to be impaired. The amount of impairment is determined by the difference between the present value of the expected cash flows related to the loan, using current interest rates and its recorded value, or, as a practical measure in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans less estimated selling costs. At December 31, 2013, there were seven loan relationships that were individually evaluated for impairment, of which five were considered TDRs. At December 31, 2012, there were seven loan relationships that were individually evaluated for impairment, of which four were considered TDRs. TDR and impaired loan information and any related specific allowances were previously summarized in the
“Troubled Debt Restructurings”
and
“Impaired Loans”
sections.
Allowance on the Remainder of the Loan Portfolio.
We establish an allowance for loans that are not determined to be impaired. Management determines historical loss experience for each group of loans with similar risk characteristics within the portfolio based on loss experience for loans in each group. Loan categories will represent groups of loans with similar risk characteristics and may include types of loans categorized by product, large credit exposures, concentrations, loan grade, or any other characteristic that causes a loan’s risk profile to be similar to another. We utilize previous years’ net charge-off experience by loan category as a basis in determining loss projections. In addition, there are two categories of loans considered to be higher risk concentrations that are evaluated separately when calculating the allowance for loan losses:
|
|
·
|
Loans purchased in the secondary market.
Prior to 2006, pools of multi-family and one- to four-family residential mortgage loans located in areas outside of our primary geographic lending area in southwestern Pennsylvania were acquired in the secondary market. Although these loans were underwritten to our lending standards, they are considered higher risk given our unfamiliarity with the geographic areas where the properties are located and ability to timely identify problem loans through servicer correspondence.
|
|
|
·
|
Home equity loans with a loan-to-value ratio greater than 80%.
These loans are considered higher risk given the pressure on property values and reduced credit alternatives available to leveraged borrowers.
|
We also consider qualitative or environmental factors that are likely to cause estimated credit losses associated with the bank’s existing portfolio to differ from historical loss experience. Our qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in our loan portfolio and economy. In 2013, the qualitative factors were adjusted by applying factors to commercial construction loans to ensure potential losses are captured as disbursements are occurring. Our historical loss experience is typically updated on an annual basis when another complete year of loss history is available. At December 31, 2013, we adjusted our historical loss data by utilizing the three most recent years of loss history and periods where we did not experience any losses were excluded from determining the historical average loss for each loan class. It was determined that the most recent three years of loss history represented the most relevant data. At December 31, 2012, we utilized six years of loss history and, generally, periods where we did not experience any losses were excluded from determining the historical average loss for each loan class.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions in the allowance for loan losses during 2013 are summarized as follows (dollars in thousands):
|
|
|
Real estate - mortgage
|
|
|
Real estate-construction
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to-value ratio of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
greater
|
|
|
Other
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
or less)
|
|
|
than 80%)
|
|
|
Consumer
|
|
|
business
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balance
|
|
$
|
104,870
|
|
|
$
|
6,888
|
|
|
$
|
7,083
|
|
|
$
|
3,768
|
|
|
$
|
61,889
|
|
|
$
|
3,337
|
|
|
$
|
15,979
|
|
|
$
|
47,543
|
|
|
$
|
9,247
|
|
|
$
|
1,666
|
|
|
$
|
20,023
|
|
|
|
|
|
$
|
282,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
466
|
|
|
$
|
372
|
|
|
$
|
33
|
|
|
$
|
102
|
|
|
$
|
802
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
434
|
|
|
$
|
246
|
|
|
$
|
19
|
|
|
$
|
245
|
|
|
$
|
156
|
|
|
$
|
2,886
|
|
|
Charge-offs
|
|
|
(12
|
)
|
|
|
(199
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(121
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(345
|
)
|
|
Recoveries
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
Provision
|
|
|
(35
|
)
|
|
|
113
|
|
|
|
81
|
|
|
|
(68
|
)
|
|
|
214
|
|
|
|
3
|
|
|
|
95
|
|
|
|
41
|
|
|
|
141
|
|
|
|
2
|
|
|
|
187
|
|
|
|
(34
|
)
|
|
|
740
|
|
|
December 31, 2013
|
|
$
|
432
|
|
|
$
|
286
|
|
|
$
|
114
|
|
|
$
|
34
|
|
|
$
|
1,025
|
|
|
$
|
6
|
|
|
$
|
103
|
|
|
$
|
475
|
|
|
$
|
268
|
|
|
$
|
11
|
|
|
$
|
432
|
|
|
$
|
122
|
|
|
$
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated
on historical loss
experience
|
|
$
|
113
|
|
|
$
|
143
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30
|
|
|
$
|
89
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
$
|
-
|
|
|
$
|
454
|
|
Collectively evaluated
on qualitative
factors
|
|
|
319
|
|
|
|
143
|
|
|
|
114
|
|
|
|
34
|
|
|
|
971
|
|
|
|
6
|
|
|
|
103
|
|
|
|
445
|
|
|
|
179
|
|
|
|
5
|
|
|
|
413
|
|
|
|
-
|
|
|
|
2,732
|
|
|
Unallocated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
for loan losses
|
|
$
|
432
|
|
|
$
|
286
|
|
|
$
|
114
|
|
|
$
|
34
|
|
|
$
|
1,025
|
|
|
$
|
6
|
|
|
$
|
103
|
|
|
$
|
475
|
|
|
$
|
268
|
|
|
$
|
11
|
|
|
$
|
432
|
|
|
$
|
122
|
|
|
$
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Allowance
|
|
|
13.1
|
%
|
|
|
8.6
|
%
|
|
|
3.4
|
%
|
|
|
1.0
|
%
|
|
|
31.0
|
%
|
|
|
0.2
|
%
|
|
|
3.1
|
%
|
|
|
14.4
|
%
|
|
|
8.1
|
%
|
|
|
0.3
|
%
|
|
|
13.1
|
%
|
|
|
3.7
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Loans
(1)
|
|
|
37.1
|
%
|
|
|
2.4
|
%
|
|
|
2.5
|
%
|
|
|
1.3
|
%
|
|
|
21.9
|
%
|
|
|
1.2
|
%
|
|
|
5.7
|
%
|
|
|
16.9
|
%
|
|
|
3.3
|
%
|
|
|
0.6
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
100.0
|
%
|
(1) Represents percentage of loans in each category to total loans
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions in the allowance for loan losses during 2012 are summarized as follows (dollars in thousands):
|
|
|
Real estate - mortgage
|
|
|
Real estate-construction
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to-value ratio of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
greater
|
|
|
Other
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
or less)
|
|
|
than 80%)
|
|
|
Consumer
|
|
|
business
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Balance
|
|
$
|
110,754
|
|
|
$
|
10,188
|
|
|
$
|
11,101
|
|
|
$
|
4,226
|
|
|
$
|
45,504
|
|
|
$
|
1,931
|
|
|
$
|
5,231
|
|
|
$
|
41,537
|
|
|
$
|
7,841
|
|
|
$
|
1,923
|
|
|
$
|
15,055
|
|
|
|
|
|
$
|
255,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
534
|
|
|
$
|
465
|
|
|
$
|
39
|
|
|
$
|
124
|
|
|
$
|
858
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
379
|
|
|
$
|
267
|
|
|
$
|
24
|
|
|
$
|
242
|
|
|
$
|
148
|
|
|
$
|
3,098
|
|
|
Charge-offs
|
|
|
(136
|
)
|
|
|
(309
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
(1
|
)
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
(543
|
)
|
|
Recoveries
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
Provision
|
|
|
61
|
|
|
|
216
|
|
|
|
(6
|
)
|
|
|
(22
|
)
|
|
|
(24
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
45
|
|
|
|
25
|
|
|
|
(4
|
)
|
|
|
18
|
|
|
|
8
|
|
|
|
310
|
|
|
December 31, 2012
|
|
$
|
466
|
|
|
$
|
372
|
|
|
$
|
33
|
|
|
$
|
102
|
|
|
$
|
802
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
434
|
|
|
$
|
246
|
|
|
$
|
19
|
|
|
$
|
245
|
|
|
$
|
156
|
|
|
$
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively evaluated
on historical loss
experience
|
|
$
|
138
|
|
|
$
|
166
|
|
|
$
|
-
|
|
|
$
|
64
|
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
61
|
|
|
$
|
97
|
|
|
$
|
14
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
638
|
|
Collectively evaluated
on qualitative
factors
|
|
|
328
|
|
|
|
206
|
|
|
|
33
|
|
|
|
38
|
|
|
|
712
|
|
|
|
3
|
|
|
|
8
|
|
|
|
373
|
|
|
|
149
|
|
|
|
5
|
|
|
|
237
|
|
|
|
-
|
|
|
|
2,092
|
|
|
Unallocated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
for loan losses
|
|
$
|
466
|
|
|
$
|
372
|
|
|
$
|
33
|
|
|
$
|
102
|
|
|
$
|
802
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
434
|
|
|
$
|
246
|
|
|
$
|
19
|
|
|
$
|
245
|
|
|
$
|
156
|
|
|
$
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Allowance
|
|
|
16.1
|
%
|
|
|
12.9
|
%
|
|
|
1.2
|
%
|
|
|
3.5
|
%
|
|
|
27.8
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
15.0
|
%
|
|
|
8.5
|
%
|
|
|
0.7
|
%
|
|
|
8.5
|
%
|
|
|
5.4
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Loans
(1)
|
|
|
43.4
|
%
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
1.7
|
%
|
|
|
17.8
|
%
|
|
|
0.8
|
%
|
|
|
2.0
|
%
|
|
|
16.3
|
%
|
|
|
3.0
|
%
|
|
|
0.8
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
100.0
|
%
|
(1) Represents percentage of loans in each category to total loans
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Information.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are four classifications for problem assets: special mention, substandard, doubtful and loss. The following table presents the classes of the loan portfolio and shows our credit risk profile by internally assigned risk rating at the dates indicated (dollars in thousands).
|
|
|
Real estate - mortgage
|
|
|
Real estate-construction
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to-value ratio of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
greater
|
|
|
Other
|
|
|
Commercial
|
|
|
Total
|
|
|
December 31, 2013
|
|
(originated)
|
|
|
(purchased)
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
or less)
|
|
|
than 80%)
|
|
|
Consumer
|
|
|
business
|
|
|
loans
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
103,275
|
|
|
$
|
6,581
|
|
|
$
|
5,231
|
|
|
$
|
3,768
|
|
|
$
|
58,311
|
|
|
$
|
3,337
|
|
|
$
|
15,979
|
|
|
$
|
46,934
|
|
|
$
|
9,217
|
|
|
$
|
1,666
|
|
|
$
|
17,964
|
|
|
$
|
272,263
|
|
|
Special Mention
|
|
|
-
|
|
|
|
-
|
|
|
|
1,852
|
|
|
|
-
|
|
|
|
676
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,059
|
|
|
|
4,587
|
|
|
Substandard
|
|
|
1,595
|
|
|
|
307
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,902
|
|
|
|
-
|
|
|
|
-
|
|
|
|
609
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,443
|
|
|
Total
|
|
$
|
104,870
|
|
|
$
|
6,888
|
|
|
$
|
7,083
|
|
|
$
|
3,768
|
|
|
$
|
61,889
|
|
|
$
|
3,337
|
|
|
$
|
15,979
|
|
|
$
|
47,543
|
|
|
$
|
9,247
|
|
|
$
|
1,666
|
|
|
$
|
20,023
|
|
|
$
|
282,293
|
|
|
|
|
Real estate - mortgage
|
|
|
Real estate-construction
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity (loan-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to-value ratio of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
80%
|
|
|
greater
|
|
|
Other
|
|
|
Commercial
|
|
|
Total
|
|
|
December 31, 2012
|
|
(originated)
|
|
|
(purchased)
|
|
|
(originated)
|
|
|
(purchased)
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
or less)
|
|
|
than 80%)
|
|
|
Consumer
|
|
|
business
|
|
|
loans
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
109,226
|
|
|
$
|
9,425
|
|
|
$
|
11,101
|
|
|
$
|
4,226
|
|
|
$
|
42,243
|
|
|
$
|
1,931
|
|
|
$
|
5,231
|
|
|
$
|
41,401
|
|
|
$
|
7,841
|
|
|
$
|
1,915
|
|
|
$
|
14,990
|
|
|
$
|
249,530
|
|
|
Special Mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
443
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
508
|
|
|
Substandard
|
|
|
1,528
|
|
|
|
763
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,818
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
5,253
|
|
|
Total
|
|
$
|
110,754
|
|
|
$
|
10,188
|
|
|
$
|
11,101
|
|
|
$
|
4,226
|
|
|
$
|
45,504
|
|
|
$
|
1,931
|
|
|
$
|
5,231
|
|
|
$
|
41,537
|
|
|
$
|
7,841
|
|
|
$
|
1,923
|
|
|
$
|
15,055
|
|
|
$
|
255,291
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
Premises and Equipment
|
Premises and equipment are summarized by major classifications as follows (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Land and land improvements
|
|
$
|
576
|
|
|
$
|
522
|
|
|
Buildings and leasehold improvements
|
|
|
4,471
|
|
|
|
4,287
|
|
|
Furniture, fixtures and equipment
|
|
|
4,232
|
|
|
|
4,109
|
|
|
Total, at cost
|
|
|
9,279
|
|
|
|
8,918
|
|
|
Less: accumulated depreciation
|
|
|
7,427
|
|
|
|
7,121
|
|
|
Premises and equipment, net
|
|
$
|
1,852
|
|
|
$
|
1,797
|
|
Depreciation expense was approximately $306,000 and $372,000 for the years ended December 31, 2013 and 2012, respectively.
Deposits are summarized as follows (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
27,247
|
|
|
$
|
23,987
|
|
|
Interest-bearing demand deposits
|
|
|
30,733
|
|
|
|
17,878
|
|
|
Savings accounts
|
|
|
24,415
|
|
|
|
24,271
|
|
|
Money market accounts
|
|
|
48,746
|
|
|
|
55,047
|
|
|
Certificates of deposit
|
|
|
88,091
|
|
|
|
92,874
|
|
|
Total deposits
|
|
$
|
219,232
|
|
|
$
|
214,057
|
|
Interest expense by deposit category was as follows (dollars in thousands).
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Interest-bearing demand deposits
|
|
$
|
23
|
|
|
$
|
20
|
|
|
Savings accounts
|
|
|
12
|
|
|
|
39
|
|
|
Money market accounts
|
|
|
77
|
|
|
|
227
|
|
|
Certificates of deposit
|
|
|
1,307
|
|
|
|
1,722
|
|
|
Total interest expense
|
|
$
|
1,419
|
|
|
$
|
2,008
|
|
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 totaled $34.2 million and $31.5 million at December 31, 2013 and 2012, respectively. Generally deposits in excess of $250,000 are not federally insured.
Scheduled maturities of certificates of deposit were as follows (dollars in thousands):
|
December 31,
|
|
2013
|
|
|
|
|
|
2012
|
|
|
2014
|
|
$
|
46,567
|
|
|
2013
|
|
|
$
|
41,248
|
|
|
2015
|
|
|
11,385
|
|
|
2014
|
|
|
|
16,716
|
|
|
2016
|
|
|
8,351
|
|
|
2015
|
|
|
|
7,922
|
|
|
2017
|
|
|
3,618
|
|
|
2016
|
|
|
|
7,140
|
|
|
2018
|
|
|
7,009
|
|
|
2017
|
|
|
|
3,551
|
|
|
Thereafter
|
|
|
11,161
|
|
|
Thereafter
|
|
|
|
16,297
|
|
|
Total
|
|
$
|
88,091
|
|
|
Total
|
|
|
$
|
92,874
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We utilize borrowings as a supplemental source of funds for loans and securities. The primary sources of borrowings are FHLB advances and, to a limited extent, repurchase agreements. At December 31, 2013 and 2012, we had $45.9 million and $49.1 million of borrowings, respectively, of which $42.9 million and $46.1 million, respectively, were FHLB advances and $3.0 million were repurchase agreements. At December 31, 2013 and 2012, our FHLB advances consisted of fixed rate advances.
In 2010, the Company modified a $12.0 million convertible select advance into a new five year fixed rate FHLB advance. The debt modification resulted in an $864,000 prepayment penalty which is deferred and amortized in future periods on a straight-line basis over the life of the new borrowing. The Company concluded that the revised terms constituted a debt modification rather than a debt extinguishment because the change in the present value of cash flows of the new borrowing changed by less than 10% compared to the present value of the remaining cash flows of the old borrowing.
The following table sets forth borrowings based on their stated maturities and weighted average rates at December 31, 2013 and 2012 (dollars in thousands).
|
|
|
Average Rate
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Due in one year or less
|
|
|
1.81
|
%
|
|
|
1.52
|
%
|
|
$
|
33,860
|
|
|
$
|
19,120
|
|
|
Due in one to two years
|
|
|
3.82
|
|
|
|
3.41
|
|
|
|
12,000
|
|
|
|
18,000
|
|
|
Due in two to three years
|
|
|
-
|
|
|
|
3.82
|
|
|
|
-
|
|
|
|
12,000
|
|
|
Advances
|
|
|
2.34
|
%
|
|
|
2.77
|
%
|
|
$
|
45,860
|
|
|
$
|
49,120
|
|
|
Less: deferred premium on modification
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
(442
|
)
|
|
Total advances
|
|
|
|
|
|
|
|
|
|
$
|
45,591
|
|
|
$
|
48,678
|
|
Advances from the FHLB are secured by the Bank’s stock in the FHLB and a blanket lien on the Bank’s qualifying loans. Securities with an amortized cost of $3.0 million and fair value of $3.2 million at December 31, 2013 compared to $4.4 million and $4.5 million at December 31, 2012, respectively, were pledged to adequately secure the repurchase agreements.
The maximum remaining borrowing capacity at the FHLB at December 31, 2013 and 2012 was approximately $105.4 million and $114.5 million, respectively. The advances are subject to restrictions or penalties in the event of prepayment. The Bank also has the ability to borrow from the Federal Reserve based upon eligible collateral and has two unsecured discretionary lines of credit totaling $13.0 million.
The following table sets forth basic and diluted earnings per common share at December 31, 2013 and 2012.
|
Years Ended December 31,
|
|
2013
|
|
|
2012
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,235
|
|
|
$
|
2,255
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,405,295
|
|
|
|
2,799,765
|
|
|
Effect of dilutive stock options and awards
|
|
|
43,957
|
|
|
|
3,336
|
|
|
Diluted
|
|
|
2,449,252
|
|
|
|
2,803,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.93
|
|
|
$
|
0.81
|
|
|
Diluted
|
|
|
0.91
|
|
|
|
0.80
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The dilutive effect on average shares outstanding is the result of stock options outstanding. As of December 31, 2013 and 2012, options to purchase 139,036 and 218,017 shares of common stock, respectively, at a weighted average exercise price of $19.95 and $16.39 per share, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.
The Company leases certain properties under operating leases expiring in various years through 2017. Lease expense was $176,000 and $177,000 for the years ended December 31, 2013 and 2012, respectively.
Minimum future rental payments under noncancelable operating leases are as follows (dollars in thousands). In January 2014, the Company exercised its option to extend a lease at one of its properties. This extension is reflected in the below table.
|
December 31,
|
|
2013
|
|
|
2014
|
|
$
|
178
|
|
|
2015
|
|
|
178
|
|
|
2016
|
|
|
128
|
|
|
2017
|
|
|
56
|
|
|
2018
|
|
|
11
|
|
|
Thereafter
|
|
|
7
|
|
|
Total
|
|
$
|
558
|
|
|
9.
|
Other Comprehensive Income (Loss)
|
The following table sets forth the tax effects allocated to each component of the Company’s other comprehensive income (loss) at the dates indicated (dollars in thousands).
|
December 31, 2013
|
|
Expense
|
|
|
Expense
|
|
|
Expense
|
|
|
Other comprehensive gain:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available-for-sale,
|
|
$
|
740
|
|
|
$
|
290
|
|
|
$
|
450
|
|
|
December 31, 2012
|
|
(Benefit)
|
|
|
(Benefit)
|
|
|
(Benefit)
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available-for-sale,
|
|
$
|
(364
|
)
|
|
$
|
(143
|
)
|
|
$
|
(221
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between actual income tax expense and the amount computed by applying the federal statutory income tax rate of 34% to income before income tax expenses were reconciled as follows (dollars in thousands).
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Computed income tax expense
|
|
$
|
1,163
|
|
|
$
|
1,192
|
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
State taxes (net of federal benefit)
|
|
|
90
|
|
|
|
279
|
|
|
Nontaxable BOLI income
|
|
|
(83
|
)
|
|
|
(98
|
)
|
|
Stock-based compensation (ISOs)
|
|
|
32
|
|
|
|
22
|
|
|
Tax exempt interest income
|
|
|
(82
|
)
|
|
|
(172
|
)
|
|
Other, net
|
|
|
66
|
|
|
|
28
|
|
|
Actual income tax expense
|
|
$
|
1,186
|
|
|
$
|
1,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.9
|
%
|
|
|
35.4
|
%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as follows (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,125
|
|
|
$
|
981
|
|
|
Investments in affordable housing projects
|
|
|
62
|
|
|
|
74
|
|
|
Postretirement benefits
|
|
|
73
|
|
|
|
80
|
|
|
Net operating loss carryforwards - federal
|
|
|
-
|
|
|
|
186
|
|
|
Tax credit carryforwards
|
|
|
755
|
|
|
|
1,014
|
|
|
Depreciation and amortization
|
|
|
21
|
|
|
|
-
|
|
|
Stock-based compensation (NSOs)
|
|
|
193
|
|
|
|
140
|
|
|
Net unrealized loss on securities available-for-sale
|
|
|
-
|
|
|
|
250
|
|
|
Other deferred tax assets
|
|
|
48
|
|
|
|
3
|
|
|
Total deferred tax assets
|
|
|
2,277
|
|
|
|
2,728
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
(119
|
)
|
|
|
(153
|
)
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(31
|
)
|
|
Net unrealized gain on securities available-for-sale
|
|
|
(40
|
)
|
|
|
-
|
|
|
Other deferred tax liabilities
|
|
|
-
|
|
|
|
(33
|
)
|
|
Total deferred tax liabilities
|
|
|
(159
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,118
|
|
|
$
|
2,511
|
|
The tax credit carryforwards expiring in 2022 through 2025 are available to offset future taxes payable. The Company determined that it was not required to establish a valuation allowance for deferred tax assets since it is more likely than not that the deferred tax assets will be realized through future taxable income and future reversals of existing taxable temporary differences. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Income tax expense is summarized as follows (dollars in thousands).
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Current
|
|
$
|
1,083
|
|
|
$
|
524
|
|
|
Deferred
|
|
|
103
|
|
|
|
727
|
|
|
Total income tax expense
|
|
$
|
1,186
|
|
|
$
|
1,251
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Generally, a savings association is considered to be “undercapitalized” if it has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4%. At December 31, 2013 and 2012, the Bank met all capital adequacy requirements to which it is subject and notifications from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would change the Bank’s categorization. The following table sets forth the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized (dollars in thousands).
|
|
|
Actual
|
|
|
Purposes
|
|
|
Corrective Action
|
|
December 31, 2013
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
47,346
|
|
|
|
21.84
|
%
|
|
$
|
17,341
|
|
|
|
8.00
|
%
|
|
$
|
21,676
|
|
|
|
10.00
|
%
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
44,629
|
|
|
|
20.59
|
|
|
|
8,670
|
|
|
|
4.00
|
|
|
|
13,006
|
|
|
|
6.00
|
|
|
Tier 1 capital (to adjusted total assets)
|
|
|
44,629
|
|
|
|
14.06
|
|
|
|
12,697
|
|
|
|
4.00
|
|
|
|
15,872
|
|
|
|
5.00
|
|
|
Tangible capital (to tangible assets)
|
|
|
44,629
|
|
|
|
14.06
|
|
|
|
4,761
|
|
|
|
1.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
December 31, 2012
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
47,011
|
|
|
|
23.81
|
%
|
|
$
|
15,758
|
|
|
|
8.00
|
%
|
|
$
|
19,748
|
|
|
|
10.00
|
%
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
44,537
|
|
|
|
22.55
|
|
|
|
7,899
|
|
|
|
4.00
|
|
|
|
11,849
|
|
|
|
6.00
|
|
|
Tier 1 capital (to adjusted total assets)
|
|
|
44,537
|
|
|
|
14.02
|
|
|
|
12,706
|
|
|
|
4.00
|
|
|
|
15,883
|
|
|
|
5.00
|
|
|
Tangible capital (to tangible assets)
|
|
|
44,537
|
|
|
|
14.02
|
|
|
|
4,765
|
|
|
|
1.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The following is a reconciliation of the Bank’s equity under GAAP to regulatory capital at the dates indicated (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
GAAP equity
|
|
$
|
45,819
|
|
|
$
|
45,330
|
|
|
Goodwill and certain other intangible assets
|
|
|
(1,128
|
)
|
|
|
(1,181
|
)
|
|
Accumulated other comprehensive (income) loss
|
|
|
(62
|
)
|
|
|
388
|
|
|
Tier 1 capital
|
|
|
44,629
|
|
|
|
44,537
|
|
|
General regulatory allowance for loan losses*
|
|
|
2,717
|
|
|
|
2,474
|
|
|
Total capital
|
|
$
|
47,346
|
|
|
$
|
47,011
|
|
* Limited to 1.25% of risk-weighted assets
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the earnings of the Bank for the year-to-date plus retained earnings for the prior two fiscal years, net of any prior capital distributions. In addition, dividends paid by the Bank to the Company would be prohibited if the distribution would cause the Bank’s capital to be reduced below the applicable minimum capital requirements. In 2013 and 2012, the Bank paid dividends to the Company totaling $2.5 million and $3.5 million, respectively.
The Company maintains a liquidation account for the benefit of certain depositors of the Bank who remain depositors of the Bank at the time of liquidation. The liquidation account is designed to provide payments to these depositors of their liquidation interests in the event of a liquidation of the Company and the Bank, or the Bank alone. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. The Company may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the unlikely event that the Company and the Bank were to liquidate in the future, all claims of creditors, including those of depositors, would be paid first, followed by distribution to eligible depositors of the liquidation account maintained by the Company. Also, in a complete liquidation of both entities, or of just the Bank, when the Company has insufficient assets to fund the liquidation account distribution due to depositors and the Bank has positive net worth, the Bank would immediately pay amounts necessary to fund the Company’s remaining obligations under the liquidation account. If the Company is completely liquidated or sold apart from a sale or liquidation of the Bank, then the rights of such depositors in the liquidation account maintained by the Company would be surrendered and treated as a liquidation account in the Bank - the “bank liquidation account” - and these depositors shall have an equivalent interest in the bank liquidation account and the same rights and terms as the liquidation account.
After two years from the date of conversion and upon the written request of the OCC, the Company may eliminate or transfer the liquidation account and the interests in such account to the Bank and the liquidation account would become the liquidation account of the Bank and not subject in any manner or amount to the Company’s creditors. Also, under the rules and regulations of the OCC, no post-conversion merger, consolidation, or similar combination or transaction with another depository institution in which the Company or the Bank is not the surviving institution would be considered liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution.
401(k) Plan
The Company maintains a 401(k) plan for all full-time employees and may make a discretionary contribution to the plan based on a computation in relation to net income and compensation expense. The Company also matches the first 5% of employee deferrals on a graduated scale of 100% of the first 3% and 50% for the next 2% for a maximum match of 4%. Plan expense was approximately $151,000 and $145,000 for the years ended December 31, 2013 and 2012, respectively. A full-time employee is eligible to participate in the plan after three months of employment, the attainment of age 21, and completion of 250 hours of service each Plan year.
Supplemental Executive Retirement Plan
The Company maintains a nonqualified defined benefit supplemental executive retirement plan (“SERP”) for certain directors. The present value of estimated supplemental retirement benefits is charged to operations. A set retirement benefit is provided to the directors. The expense for the SERP plan for the years ended December 31, 2013 and 2012 was approximately $2,000 and $4,000, respectively.
The agreements for the nonqualified defined contribution SERP between the Bank and certain current and former key executive officers were terminated in November 2011. Benefit payments occurred in the fourth quarter of 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
Effective January 1, 2005, the Bank established a leveraged ESOP that purchased 122,735 shares of Company common stock with funds borrowed from the Company. A full-time employee is eligible to participate in the plan after three months of employment, the attainment of age 21, and completion of 250 hours of service in a plan year. Each plan year, the Bank may, at its discretion, make additional contributions to the plan; however, at a minimum, the Bank has agreed to provide a contribution in the amount necessary to service the debt incurred to release the stock.
Shares are scheduled for release as the loan is repaid based on the interest method. The present amortization schedule calls for 8,182 shares to be released each December 31. The Company utilized current year dividends on allocated and unallocated shares in the payment of the current year loan payment in accordance with the plan document. The use of allocated dividends reduces compensation expense and participants will receive an equivalent allocation of shares in relation to their respective dividends to compensate for use of dividends in the loan payment.
As shares in the ESOP are earned and committed to be released, compensation expense is recorded based on their average fair value. The difference between the average fair value of the shares committed to be released and the cost of those shares to the ESOP is charged or credited to additional paid-in capital. The balance of unearned shares held by the ESOP is shown as a reduction of stockholders’ equity. Only those shares in the ESOP that have been earned and are committed to be released are included in the computation of earnings per share.
ESOP compensation expense was $142,000 for the year ended December 31, 2013 compared to $102,000 for the year ended December 31, 2012. There were 8,182 shares earned and committed to be released and 49,482 allocated shares at December 31, 2013. At December 31, 2012, there were 8,182 shares earned and committed to be released and 44,963 allocated shares. The 49,095 and 57,277 remaining unearned/unallocated shares at December 31, 2013 and 2012, respectively, had an approximate fair market value of $956,000 and $931,000, respectively.
|
13.
|
Stock-Based Compensation
|
In 2013 and 2012, the Company granted restricted shares of common stock and options to purchase shares of common stock to certain directors, executive officers and key employees of the Company. The restricted shares and options vest over five years at the rate of 20% per year and the stock options have a 10 year contractual life from the date of grant. The closing price of the Company’s common stock on the grant date is the exercise price of the options.
Details of the grants are summarized as follows at the dates indicated (dollars in thousands).
|
|
|
2013
|
|
|
2012
|
|
|
|
|
October 1
|
|
|
April 2
|
|
|
September 25
|
|
|
April 2
|
|
|
Number of restricted shares granted
|
|
|
15,500
|
|
|
|
14,750
|
|
|
|
-
|
|
|
|
16,240
|
|
|
Number of stock options granted
|
|
|
-
|
|
|
|
74,170
|
|
|
|
68,000
|
|
|
|
17,000
|
|
|
Grant date common stock price
|
|
$
|
19.00
|
|
|
$
|
17.65
|
|
|
$
|
15.00
|
|
|
$
|
13.92
|
|
|
Restricted shares market value before tax
|
|
|
295
|
|
|
|
260
|
|
|
|
-
|
|
|
|
226
|
|
|
Stock options market value before tax
|
|
|
-
|
|
|
|
277
|
|
|
|
204
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option pricing assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
N/A
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
Expected dividend yield
|
|
|
N/A
|
|
|
|
0.91
|
%
|
|
|
0.87
|
%
|
|
|
0.86
|
%
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
0.82
|
%
|
|
|
0.71
|
%
|
|
|
1.02
|
%
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
21.8
|
%
|
|
|
20.8
|
%
|
|
|
22.6
|
%
|
|
Weighted average grant date fair value
|
|
|
N/A
|
|
|
$
|
3.73
|
|
|
$
|
3.00
|
|
|
$
|
3.14
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes expense associated with the awards over the five-year vesting period. Compensation expense was $270,000 for the year ended December 31, 2013 compared to $156,000 for the year ended December 31, 2012. As of December 31, 2013, there was $1.2 million of total unrecognized compensation cost related to nonvested stock-based compensation compared to $644,000 at December 31, 2012. The compensation expense cost at December 31, 2013 is expected to be recognized ratably over the weighted average remaining service period of 4.0 years. The Company realized a tax benefit for stock options (NSOs) of $53,000 for the year ended December 31, 2013 compared to $22,000 for the year ended December 31, 2012.
As of December 31, 2013, there were 3,882 shares available to be issued in connection with the exercise of stock options and 141 shares that may be issued as restricted stock for the 2006 Plan. As of December 31, 2013, there were no shares available to be issued in connection with the exercise of stock options and 18,627 shares that may be issued as restricted stock for the 2011 Plan. The 74,170 stock option shares and 30,250 of the 48,877 restricted stock shares available to be issued from the 2011 Plan as of December 31, 2012 were granted in 2013.
|
|
|
Stock Options
|
|
|
Stock-Based Compensation
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Outstanding at December 31, 2011
|
|
|
140,119
|
|
|
$
|
16.86
|
|
|
6.86
|
|
|
Granted
|
|
|
85,000
|
|
|
|
14.78
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
225,119
|
|
|
$
|
16.07
|
|
|
7.29
|
|
|
Granted
|
|
|
74,170
|
|
|
|
17.65
|
|
|
|
|
|
Exercised or converted
|
|
|
(1,326
|
)
|
|
|
14.15
|
|
|
|
|
|
Forfeited
|
|
|
(283
|
)
|
|
|
14.15
|
|
|
|
|
|
Expired
|
|
|
(3,599
|
)
|
|
|
19.22
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
294,081
|
|
|
$
|
16.44
|
|
|
7.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
118,691
|
|
|
$
|
17.52
|
|
|
4.69
|
|
|
|
|
Stock Options
|
|
|
Restricted Stock Awards
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Nonvested at December 31, 2011
|
|
|
64,020
|
|
|
$
|
3.55
|
|
|
|
9,632
|
|
|
$
|
13.90
|
|
|
Granted
|
|
|
85,000
|
|
|
|
3.03
|
|
|
|
16,240
|
|
|
|
13.92
|
|
|
Vested
|
|
|
(15,945
|
)
|
|
|
3.94
|
|
|
|
(3,320
|
)
|
|
|
14.12
|
|
|
Nonvested at December 31, 2012
|
|
|
133,075
|
|
|
$
|
3.17
|
|
|
|
22,552
|
|
|
$
|
13.88
|
|
|
Granted
|
|
|
74,170
|
|
|
|
3.73
|
|
|
|
30,250
|
|
|
|
18.34
|
|
|
Vested
|
|
|
(31,572
|
)
|
|
|
3.36
|
|
|
|
(5,946
|
)
|
|
|
13.63
|
|
|
Forfeited
|
|
|
(283
|
)
|
|
|
6.04
|
|
|
|
(141
|
)
|
|
|
14.15
|
|
|
Nonvested at December 31, 2013
|
|
|
175,390
|
|
|
$
|
3.37
|
|
|
|
46,715
|
|
|
$
|
16.80
|
|
|
14.
|
Concentration of Credit Risk
|
The risk of loss from lending and investing activities includes the possibility that a loss may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility of loss is known as credit risk. Credit risk can be reduced by diversifying the Company’s assets to prevent imprudent concentrations. The Company has adopted policies designed to prevent imprudent concentrations within its security and loan portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The primary investment vehicles for the Company for the years ended December 31, 2013 and 2012 were mortgage-backed securities, which are comprised of diversified individual residential mortgage notes, and REMICs (real estate mortgage investment conduits), which represent a participation interest in a pool of mortgages. Mortgage-backed securities are guaranteed as to the timely repayment of principal and interest by a Government-sponsored enterprise. REMICs are created by redirecting the cash flows from the pool of mortgages underlying those securities to create two or more classes (or tranches) with different maturity or risk characteristics designed to meet a variety of investor needs and preferences. REMICs may be sponsored by U.S. Government agencies and Government-sponsored enterprises. Investments in other securities consist of Government-sponsored enterprise securities and municipal bonds which are made to provide and maintain liquidity within the guidelines of applicable regulations.
Substantially all of the Company’s loans, excluding those serviced by others, are made to customers located in southwestern Pennsylvania. The Company does not have any other concentration of credit risk representing greater than 10% of loans.
Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to fund construction loans, standby letters of credit, and commitments to extend credit on consumer and commercial lines of credit, fixed rate residential, and home equity installment commitments, and are summarized as follows at the dates indicated (dollars in thousands). The Company utilizes standby letters of credit through the FHLB to secure public deposits.
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Loans in process
|
|
$
|
10,617
|
|
|
$
|
3,431
|
|
|
Standby letters of credit
|
|
|
12,700
|
|
|
|
-
|
|
|
Unused consumer revolving lines of credit
|
|
|
4,732
|
|
|
|
4,072
|
|
|
Unused commercial lines of credit
|
|
|
13,836
|
|
|
|
6,962
|
|
|
One- to four-family residential commitments
|
|
|
1,188
|
|
|
|
65
|
|
|
Commercial commitments
|
|
|
140
|
|
|
|
7,933
|
|
|
Consumer commitments
|
|
|
6,190
|
|
|
|
1,632
|
|
|
Total commitments outstanding
|
|
$
|
49,403
|
|
|
$
|
24,095
|
|
|
15.
|
Fair Value Measurements and Fair Values of Financial Instruments
|
Management uses its best judgment in estimating the fair value of the Company’s 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 the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of December 31, 2013 and 2012 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to December 31, 2013 and 2012 may be different than the amounts reported at each period end.
The fair value hierarchy prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
|
Level 1
|
–
|
Quoted prices for identical instruments in active markets.
|
|
Level 2
|
–
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are active, and model-derived valuations in which significant inputs or significant drivers are observable in active markets.
|
|
Level 3
|
–
|
Valuations derived from valuation techniques in which one or more significant inputs or significant drivers are unobservable.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a discussion of assets and liabilities measured at fair value on a recurring basis and the valuation techniques used:
Securities available for sale
.
The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values were primarily determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. In some cases, the fair value was determined from a broker who is able to quote a price based on observable inputs in a liquid market for similar securities.
In some instances, the fair value of certain securities cannot be determined using these techniques due to the lack of relevant market data. As such, these securities are valued using an alternative technique and classified within Level 3 of the fair value hierarchy. At December 31, 2013, Level 3 includes three corporate debt securities with a fair value of $3.6 million.
The corporate debt securities are pooled trust preferred CDOs collateralized by the trust preferred securities of insurance companies in the United States. The CDOs, which were rated A at purchase and are currently rated below investment grade, could not be priced using quoted market prices, observable market activity or comparable trades, and the financial market was considered not active. The trust preferred market has been severely impacted by the lack of liquidity in the credit markets and concern over the financial services industry. There has been little or no active trading in these securities; therefore it was more appropriate to determine fair value using a discounted cash flow analysis.
The Bank utilized a third party pricing service that performed a two-step process to determine the fair value of the CDOs. First, an asset analysis was performed to evaluate the credit quality of the collateral and the deal structure using probability of default values for each underlying issuer and loss given default values by asset type. Probability of default is the likelihood that the issuer of the CDOs will go into default and stop paying and was estimated using an expected default frequency approach, which considers the market value and volatility of a firm’s assets and the threshold for default. Probability of default was combined with correlation assumptions, which is the tendency of companies to default once other companies have defaulted. CDOs are more likely to experience stress at the same time since they are concentrated in the same sector, therefore a 50% asset correlation was assumed for issuers in the same industry. Loss given default is the amount of cash lost to the investor at the time of default and is related to the recovery rate. Loss and recovery estimates determine how much cash remains when an issuer goes into default. Deferrals are a common feature of CDOs and were treated as defaults in the analysis. Loss given default has been historically high for CDOs and therefore a 0% recovery rate was assumed on currently defaulted and deferring assets, which resulted in a 100% loss given default.
Second, a liability analysis was performed in which the expected cash flows produced based off the expected credit events of the asset analysis were allocated across the tranches to determine the tranches that would get paid or incur a loss. These expected cash flows were discounted at a risk free interest rate plus a premium for illiquidity (3 month LIBOR plus 300 basis points) to produce a discounted cash flow valuation and determine an estimated fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial assets measured at fair value on a recurring basis, the following tables set forth the fair value measurements by fair value hierarchy at the dates indicated (dollars in thousands).
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Significant other observable inputs (Level 2)
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
7,970
|
|
|
$
|
9,181
|
|
|
Mortgage-backed - GSEs
|
|
|
8,192
|
|
|
|
12,815
|
|
|
REMICs
|
|
|
7,019
|
|
|
|
18,700
|
|
|
Equities
|
|
|
-
|
|
|
|
4
|
|
|
Total significant other observable inputs (Level 2)
|
|
|
23,181
|
|
|
|
40,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant unobservable inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
3,591
|
|
|
|
1,882
|
|
|
Total significant unobservable inputs (Level 3)
|
|
|
3,591
|
|
|
|
1,882
|
|
|
Total securities available-for-sale
|
|
$
|
26,772
|
|
|
$
|
42,582
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a recurring basis
|
|
$
|
26,772
|
|
|
$
|
42,582
|
|
|
|
|
(Level 3)
|
|
|
December 31, 2011
|
|
$
|
1,486
|
|
|
Total unrealized gains included in other comprehensive income
|
|
|
428
|
|
|
Paydowns and maturities
|
|
|
(14
|
)
|
|
Net transfers out of level 3
|
|
|
(18
|
)
|
|
December 31, 2012
|
|
$
|
1,882
|
|
|
Total unrealized gains included in other comprehensive income
|
|
|
1,708
|
|
|
Discount accretion
|
|
|
1
|
|
|
December 31, 2013
|
|
$
|
3,591
|
|
Seven mortgage-backed securities were transferred out of Level 3 and into Level 2 in 2012 because a reliable price could be obtained using a model based valuation technique or through a broker quote.
We may be required to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or writedowns of individual assets.
The following is a discussion of assets and liabilities measured at fair value on a nonrecurring basis.
Impaired loans.
Certain impaired loans over $250,000 are individually reviewed to determine the amount of each loan that may be at risk of noncollection. When repayment is expected solely from the collateral, the impaired loans are reported at the fair value of the underlying collateral using property appraisals less any projected selling costs or financial statements.
Real estate owned.
The fair value of real estate owned is estimated using property appraisals less any projected selling costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For financial assets measured at fair value on a nonrecurring basis, the following tables set forth the fair value measurements by fair value hierarchy:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
(Dollars in thousands)
|
|
Carrying
Value
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
Fair Value
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
586
|
|
|
$
|
586
|
|
|
$
|
4,552
|
|
|
$
|
4,552
|
|
|
Real estate owned
|
|
|
465
|
|
|
|
465
|
|
|
|
146
|
|
|
|
146
|
|
Total assets measured at fair value
on a nonrecurring basis
|
|
$
|
1,051
|
|
|
$
|
1,051
|
|
|
$
|
4,698
|
|
|
$
|
4,698
|
|
For Level 3 assets measured at fair value on a recurring or nonrecurring basis as of December 31, 2013, the following table sets forth the significant unobservable inputs used in the fair value measurements.
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant
Unobservable Inputs
|
|
Significant
Unobservable
Input Value
|
|
|
Recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
3,591
|
|
Discounted cash flow
|
|
Average probability of default
|
|
|
|
1.28%
|
|
|
|
|
|
|
|
|
|
|
Correlation for issuers in the same industry
|
|
|
|
50%
|
|
|
|
|
|
|
|
|
|
|
Deferral/default recovery rate on currently defaulted/deferring assets and projected defaults
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
Prepayment
|
|
|
|
0%
|
|
|
|
Nonrecurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
586
|
|
Appraisal value
|
|
Selling costs
|
|
|
10
|
-
|
20%
|
|
|
Real estate owned
|
|
|
465
|
|
Appraisal value
|
|
Selling costs
|
|
|
10
|
-
|
20%
|
|
The following presents the fair value of financial instruments. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be sustained by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In addition, the following information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2013 and 2012:
Cash and Cash Equivalents
The carrying amounts approximate the asset’s fair values.
Securities
See previous discussion on securities available-for-sale measured at fair value on a recurring basis for further details on the valuation techniques used to determine the fair value of securities available-for-sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans
The fair values for residential real estate loans are estimated using discounted cash flow analyses using mortgage commitment rates from either FNMA or FHLMC. The fair values of consumer and commercial business loans are estimated using discounted cash flow analyses, using interest rates reported in various government releases. The fair values of multi-family and commercial real estate loans are estimated using discounted cash flow analysis, using interest rates based on national commitment rates on similar loans. The carrying value is net of the allowance for loan losses. Due to the significant judgment involved in evaluating credit quality and the allowance for loan losses, loans are classified as Level 3.
Federal Home Loan Bank Stock
The carrying amount approximates the asset’s fair value.
Accrued Interest Receivable and Accrued Interest Payable
The fair value of these instruments approximates the carrying value.
Deposits
The fair values disclosed for demand deposits (e.g., savings accounts) are, by definition, equal to the amount payable on demand at the repricing date (i.e., their carrying amounts). Fair values of certificates of deposits are estimated using a discounted cash flow calculation that applies the FHLB of Pittsburgh advance yield curve to the maturity schedule of the Bank’s certificates of deposit.
Borrowings
The fair value of the FHLB advances and repurchase agreements are estimated using a discounted cash flow calculation using the current FHLB advance yield curve. This is the method that the FHLB of Pittsburgh used to determine the cost of terminating the borrowing contract.
Commitments to Extend Credit
These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure purposes.
The following table sets forth the carrying amount and estimated fair value of financial instruments (dollars in thousands).
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair Value Measurements
|
|
|
December 31, 2013
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,552
|
|
|
$
|
5,552
|
|
|
$
|
5,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Securities
|
|
|
26,772
|
|
|
|
26,772
|
|
|
|
-
|
|
|
|
23,181
|
|
|
|
3,591
|
|
|
Loans, net
|
|
|
268,812
|
|
|
|
271,038
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271,038
|
|
|
FHLB stock
|
|
|
2,589
|
|
|
|
2,589
|
|
|
|
-
|
|
|
|
2,589
|
|
|
|
-
|
|
|
Accrued interest receivable
|
|
|
993
|
|
|
|
993
|
|
|
|
-
|
|
|
|
993
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
219,232
|
|
|
|
219,538
|
|
|
|
-
|
|
|
|
219,538
|
|
|
|
-
|
|
|
Borrowings
|
|
|
45,591
|
|
|
|
46,446
|
|
|
|
-
|
|
|
|
46,446
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
251
|
|
|
|
251
|
|
|
|
-
|
|
|
|
251
|
|
|
|
-
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair Value Measurements
|
|
|
December 31, 2012
|
|
Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,874
|
|
|
$
|
5,874
|
|
|
$
|
5,874
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Securities
|
|
|
42,582
|
|
|
|
42,582
|
|
|
|
-
|
|
|
|
40,700
|
|
|
|
1,882
|
|
|
Loans, net
|
|
|
249,530
|
|
|
|
260,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
260,538
|
|
|
FHLB stock
|
|
|
3,787
|
|
|
|
3,787
|
|
|
|
-
|
|
|
|
3,787
|
|
|
|
-
|
|
|
Accrued interest receivable
|
|
|
1,035
|
|
|
|
1,035
|
|
|
|
-
|
|
|
|
1,035
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
214,057
|
|
|
|
215,863
|
|
|
|
-
|
|
|
|
215,863
|
|
|
|
-
|
|
|
Borrowings
|
|
|
48,678
|
|
|
|
50,347
|
|
|
|
-
|
|
|
|
50,347
|
|
|
|
-
|
|
|
Accrued interest payable
|
|
|
302
|
|
|
|
302
|
|
|
|
-
|
|
|
|
302
|
|
|
|
-
|
|
|
16.
|
Condensed Financial Statements of Parent Company
|
Financial information pertaining only to FedFirst Financial Corporation (dollars in thousands).
Statements of Financial Condition
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,086
|
|
|
$
|
6,067
|
|
|
Investment in First Federal Savings Bank
|
|
|
45,819
|
|
|
|
45,330
|
|
|
Loan receivable, ESOP
|
|
|
1,283
|
|
|
|
1,458
|
|
|
Other assets
|
|
|
585
|
|
|
|
409
|
|
|
Total assets
|
|
$
|
51,773
|
|
|
$
|
53,264
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
27
|
|
|
|
30
|
|
|
Stockholders' equity
|
|
|
51,746
|
|
|
|
53,234
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
51,773
|
|
|
$
|
53,264
|
|
Statements of Operations
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Interest income
|
|
$
|
84
|
|
|
$
|
93
|
|
|
Dividend from bank subsidiary
|
|
|
2,512
|
|
|
|
3,463
|
|
|
Noninterest expense
|
|
|
315
|
|
|
|
320
|
|
|
Income before undistributed net loss of subsidiary and income tax benefit
|
|
|
2,281
|
|
|
|
3,236
|
|
|
Undistributed net loss of subsidiary
|
|
|
(125
|
)
|
|
|
(1,059
|
)
|
|
Income before income tax benefit
|
|
|
2,156
|
|
|
|
2,177
|
|
|
Income tax benefit
|
|
|
(79
|
)
|
|
|
(78
|
)
|
|
Net income
|
|
$
|
2,235
|
|
|
$
|
2,255
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Years ended December 31,
|
|
2013
|
|
|
2012
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,235
|
|
|
$
|
2,255
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
Undistributed net loss of subsidiary
|
|
|
125
|
|
|
|
1,059
|
|
|
Noncash expense for stock-based compensation
|
|
|
270
|
|
|
|
156
|
|
|
Increase in other assets
|
|
|
(195
|
)
|
|
|
(58
|
)
|
|
(Decrease) increase in other liabilities
|
|
|
(2
|
)
|
|
|
4
|
|
|
Net cash provided by operating activities
|
|
|
2,433
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
ESOP loan principal payments received
|
|
|
175
|
|
|
|
165
|
|
|
Net cash provided by investing activities
|
|
|
175
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of common stock for retirement
|
|
|
(4,061
|
)
|
|
|
(6,751
|
)
|
|
Cash dividends paid
|
|
|
(528
|
)
|
|
|
(1,084
|
)
|
|
Net cash used in financing activities
|
|
|
(4,589
|
)
|
|
|
(7,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,981
|
)
|
|
|
(4,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
6,067
|
|
|
|
10,321
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,086
|
|
|
$
|
6,067
|
|
|
17.
|
Segment and Related Information
|
The consolidated operating results of FedFirst Financial are presented as a single financial services segment. FedFirst Financial is the parent company of the Bank, which owns FFEC. FFEC has an 80% controlling interest in Exchange Underwriters. Exchange Underwriters is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a table of selected financial data for the Company's subsidiaries and consolidated results for 2013 and 2012 (dollars in thousands).
|
|
|
First Federal
Savings Bank
|
|
|
Exchange
Underwriters,
Inc.
|
|
|
FedFirst
Financial
Corporation
|
|
|
Net
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
319,381
|
|
|
$
|
1,438
|
|
|
$
|
51,773
|
|
|
$
|
(53,565
|
)
|
|
$
|
319,027
|
|
|
Liabilities
|
|
|
273,457
|
|
|
|
578
|
|
|
|
27
|
|
|
|
(6,886
|
)
|
|
|
267,176
|
|
|
Stockholders' equity
|
|
|
45,924
|
|
|
|
860
|
|
|
|
51,746
|
|
|
|
(46,679
|
)
|
|
|
51,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
318,576
|
|
|
$
|
1,034
|
|
|
$
|
53,264
|
|
|
$
|
(54,114
|
)
|
|
$
|
318,760
|
|
|
Liabilities
|
|
|
273,186
|
|
|
|
401
|
|
|
|
30
|
|
|
|
(8,151
|
)
|
|
|
265,466
|
|
|
Stockholders' equity
|
|
|
45,390
|
|
|
|
633
|
|
|
|
53,234
|
|
|
|
(45,963
|
)
|
|
|
53,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
12,920
|
|
|
$
|
-
|
|
|
$
|
2,596
|
|
|
$
|
(2,596
|
)
|
|
$
|
12,920
|
|
|
Total interest expense
|
|
|
2,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
2,694
|
|
|
Net interest income
|
|
|
10,142
|
|
|
|
-
|
|
|
|
2,596
|
|
|
|
(2,512
|
)
|
|
|
10,226
|
|
|
Provision for loan losses
|
|
|
740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
740
|
|
|
Net interest income after provision for loan losses
|
|
|
9,402
|
|
|
|
-
|
|
|
|
2,596
|
|
|
|
(2,512
|
)
|
|
|
9,486
|
|
|
Noninterest income
|
|
|
1,095
|
|
|
|
3,222
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,317
|
|
|
Noninterest expense
|
|
|
7,443
|
|
|
|
2,547
|
|
|
|
315
|
|
|
|
-
|
|
|
|
10,305
|
|
|
Undistributed net income (loss) of subsidiary
|
|
|
385
|
|
|
|
-
|
|
|
|
(125
|
)
|
|
|
(260
|
)
|
|
|
-
|
|
Income before income tax expense (benefit) and
noncontrolling interest in net income of
consolidated subsidiary
|
|
|
3,439
|
|
|
|
675
|
|
|
|
2,156
|
|
|
|
(2,772
|
)
|
|
|
3,498
|
|
|
Income tax expense (benefit)
|
|
|
975
|
|
|
|
290
|
|
|
|
(79
|
)
|
|
|
-
|
|
|
|
1,186
|
|
Net income before noncontrolling interest in net
income of consolidated subsidiary
|
|
|
2,464
|
|
|
|
385
|
|
|
|
2,235
|
|
|
|
(2,772
|
)
|
|
|
2,312
|
|
Noncontrolling interest in net income
of consolidated subsidiary
|
|
|
77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
|
Net income
|
|
$
|
2,387
|
|
|
$
|
385
|
|
|
$
|
2,235
|
|
|
$
|
(2,772
|
)
|
|
$
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
13,948
|
|
|
$
|
1
|
|
|
$
|
3,556
|
|
|
$
|
(3,556
|
)
|
|
$
|
13,949
|
|
|
Total interest expense
|
|
|
3,725
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
3,632
|
|
|
Net interest income
|
|
|
10,223
|
|
|
|
1
|
|
|
|
3,556
|
|
|
|
(3,463
|
)
|
|
|
10,317
|
|
|
Provision for loan losses
|
|
|
310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
310
|
|
|
Net interest income after provision for loan losses
|
|
|
9,913
|
|
|
|
1
|
|
|
|
3,556
|
|
|
|
(3,463
|
)
|
|
|
10,007
|
|
|
Noninterest income
|
|
|
1,011
|
|
|
|
2,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,475
|
|
|
Noninterest expense
|
|
|
7,452
|
|
|
|
2,172
|
|
|
|
320
|
|
|
|
-
|
|
|
|
9,944
|
|
|
Undistributed net income (loss) of subsidiary
|
|
|
159
|
|
|
|
-
|
|
|
|
(1,059
|
)
|
|
|
900
|
|
|
|
-
|
|
|
Income before income tax expense (benefit) and
noncontrolling interest in net income of
consolidated subsidiary
|
|
|
3,631
|
|
|
|
293
|
|
|
|
2,177
|
|
|
|
(2,563
|
)
|
|
|
3,538
|
|
|
Income tax expense (benefit)
|
|
|
1,195
|
|
|
|
134
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
1,251
|
|
Net income before noncontrolling interest in net
income of consolidated subsidiary
|
|
|
2,436
|
|
|
|
159
|
|
|
|
2,255
|
|
|
|
(2,563
|
)
|
|
|
2,287
|
|
Noncontrolling interest in net income
of consolidated subsidiary
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
Net income
|
|
$
|
2,404
|
|
|
$
|
159
|
|
|
$
|
2,255
|
|
|
$
|
(2,563
|
)
|
|
$
|
2,255
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
18.
|
Quarterly Financial Information (Unaudited)
|
The following table summarizes selected information regarding the Company’s results of operations for the periods indicated (dollars in thousands, except per share data). Quarterly earnings per share data may vary from annual earnings per share due to rounding.
|
|
|
Three Months Ended
|
|
|
2013
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Interest income
|
|
$
|
3,244
|
|
|
$
|
3,282
|
|
|
$
|
3,155
|
|
|
$
|
3,239
|
|
|
Interest expense
|
|
|
714
|
|
|
|
681
|
|
|
|
658
|
|
|
|
641
|
|
|
Net interest income
|
|
|
2,530
|
|
|
|
2,601
|
|
|
|
2,497
|
|
|
|
2,598
|
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
165
|
|
|
|
200
|
|
|
|
375
|
|
Net interest income after
provision for loan losses
|
|
|
2,530
|
|
|
|
2,436
|
|
|
|
2,297
|
|
|
|
2,223
|
|
|
Noninterest income
|
|
|
1,269
|
|
|
|
1,084
|
|
|
|
1,008
|
|
|
|
956
|
|
|
Noninterest expense
|
|
|
2,612
|
|
|
|
2,592
|
|
|
|
2,551
|
|
|
|
2,550
|
|
|
Income before income tax expense
and noncontolling interest in net
income of consolidated subsidiary
|
|
|
1,187
|
|
|
|
928
|
|
|
|
754
|
|
|
|
629
|
|
|
Income tax expense
|
|
|
351
|
|
|
|
342
|
|
|
|
273
|
|
|
|
220
|
|
Net income before noncontrolling interest in
net income of consolidated subsidiary
|
|
|
836
|
|
|
|
586
|
|
|
|
481
|
|
|
|
409
|
|
Noncontrolling interest in net income
of consolidated subsidiary
|
|
|
42
|
|
|
|
10
|
|
|
|
18
|
|
|
|
7
|
|
|
Net income
|
|
$
|
794
|
|
|
$
|
576
|
|
|
$
|
463
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
|
Earnings per share - diluted
|
|
|
0.32
|
|
|
|
0.23
|
|
|
|
0.19
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share - regular
|
|
|
0.04
|
|
|
|
0.06
|
|
|
|
0.06
|
|
|
|
0.06
|
|
|
|
|
Three Months Ended
|
|
|
2012
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Interest income
|
|
$
|
3,619
|
|
|
$
|
3,490
|
|
|
$
|
3,500
|
|
|
$
|
3,340
|
|
|
Interest expense
|
|
|
1,056
|
|
|
|
964
|
|
|
|
851
|
|
|
|
761
|
|
|
Net interest income
|
|
|
2,563
|
|
|
|
2,526
|
|
|
|
2,649
|
|
|
|
2,579
|
|
|
Provision for loan losses
|
|
|
160
|
|
|
|
50
|
|
|
|
100
|
|
|
|
-
|
|
Net interest income after
provision for loan losses
|
|
|
2,403
|
|
|
|
2,476
|
|
|
|
2,549
|
|
|
|
2,579
|
|
|
Noninterest income
|
|
|
857
|
|
|
|
856
|
|
|
|
830
|
|
|
|
932
|
|
|
Noninterest expense
|
|
|
2,522
|
|
|
|
2,399
|
|
|
|
2,379
|
|
|
|
2,644
|
|
|
Income before income tax expense
and noncontolling interest in net
income (loss) of consolidated subsidiary
|
|
|
738
|
|
|
|
933
|
|
|
|
1,000
|
|
|
|
867
|
|
|
Income tax expense
|
|
|
265
|
|
|
|
335
|
|
|
|
346
|
|
|
|
305
|
|
Net income before noncontrolling interest in
net income (loss) of consolidated subsidiary
|
|
|
473
|
|
|
|
598
|
|
|
|
654
|
|
|
|
562
|
|
Noncontrolling interest in net income (loss)
of consolidated subsidiary
|
|
|
17
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
Net income
|
|
$
|
456
|
|
|
$
|
594
|
|
|
$
|
649
|
|
|
$
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic and diluted
|
|
$
|
0.16
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share - regular
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
0.04
|
|
|
Dividends per share - special
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.25
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2002, the Company purchased an 80% controlling interest in Exchange Underwriters. The President of Exchange Underwriters is Richard B. Boyer, who owns the remaining 20% of Exchange Underwriters (“Shareholder”). Mr. Boyer is on the board of directors of the Company.
The stock purchase agreement between FFEC and the Shareholder includes an obligation for the Company to purchase the Shareholder’s 20% stake upon the earliest of (1) the termination of the Shareholder’s employment for any reason, (2) June 1, 2014 (the twelfth anniversary of the closing date of the stock purchase agreement), or (3) the transfer by the Shareholder of any of his shares. The Shareholder has a right of first refusal to purchase the FFEC’s interest in Exchange Underwriters prior to the FFEC selling or transferring such shares and has “tag-along” rights to participate in any sale to a buyer on the same terms and conditions as FFEC.