Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” “believe,” “will,” “intends,” “will be” or “would.” These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These factors include general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, competition, real estate values in our market area, the ability of the Company or the Bank to effectively manage its growth, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.
Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and FHLB advances. The Company also generates non-interest income, primarily from fees and service charges. The Company’s non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.
Net income for the three months ended March 31, 2017 increased $198,000 compared to the same period in 2016. The increase was primarily due to an increase in net interest and dividend income and a reduction in non-interest expenses. Net interest and dividend income increased $144,000, or 5.6%, primarily due to the increase in commercial loans and residential loans outstanding, partially offset by increased interest expense on deposits. Non-interest expense decreased $155,000, or 5.9%, due primarily to a reduction in overhead. The reduction in overhead was primarily due to a reduction in marketing and recruitment expenses. Included in non-interest expense for the three months ended March 31, 2017 was $96,000 in merger related expenses, the majority of which are not tax deductible. The provision for loan losses totaled $39,000 for the three months ended March 31, 2017, compared to a $74,000 provision for loan losses during the same period in 2016. Non-interest income decreased $26,000, or 10.7%, primarily due to a decrease in customer service fees and gain on sale of Small Business Administration (“SBA”) loans. We continued to maintain strong asset quality, as non-performing assets to total assets were 0.29% at March 31, 2017.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses and the valuation of our deferred tax assets.
Allowance for Loan Losses.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in the size and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less costs to sell) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.
Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.
Loans secured by commercial real estate, multi-family and one- to four-family investment properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be more affected by adverse conditions in the real estate market or the economy.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.
Income Taxes.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary
differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
Comparison of Financial Condition at March 31, 2017 and December 31, 2016
Total assets increased $3.3 million, or 1.01%, to $321.9 million at March 31, 2017 from $318.6 million at December 31, 2016. The increase was primarily due to an increase in loans and cash and cash equivalents.
Cash and cash equivalents increased $2.1 million, or 33.0%, to $8.2 million at March 31, 2017 from $6.1 million at December 31, 2016. This temporary increase resulted from the timing of normal cash flows.
Loans, net of allowance for loan losses, increased $2.2 million, or 0.8%, to $279.6 million at March 31, 2017 from $277.4 million at December 31, 2016, due primarily to an increase in residential mortgage loans and commercial loans, partially offset by a decrease in construction loans. Despite the current competitive market, we have decided to maintain our historically high underwriting standards instead of relaxing these standards, and we have not reduced loan rates below levels at which we could not operate profitably. Residential mortgage loans increased $2.2 million, or 2.1%, to $108.3 million at March 31, 2017 from $106.1 million at December 31, 2016, primarily due to a $2.7 million, or 3.0%, increase in one- to-four family loans to $92.9 million at March 31, 2017 from $90.2 million at December 31, 2016. Commercial loans increased $3.8 million, or 2.5%, to $151.9 million at March 31, 2017 from $148.1 million at December 31, 2016, primarily due to a $3.2 million, or 15.4%, increase in commercial business loans. Construction loans decreased by $3.9 million, or 15.2%, to $21.3 million at March 31, 2017 from $25.2 million at December 31, 2016, primarily due to a $3.2 million, or 25.6%, decrease in one- to four-family construction loans.
Our total securities portfolio decreased $966,000, or 4.3%, to $21.3 million at March 31, 2017 from $22.3 million at December 31, 2016, due to the principal payments received on mortgage-backed securities.
Deposits remained flat at $240.5 million at March 31, 2017 and December 31, 2016. Money market accounts increased $3.4 million, or 5.3%, to $69.7 million at March 31, 2017 from $66.3 million at December 31, 2016. Certificates of deposit decreased $3.9 million, or 4.1%, to $89.6 million at March 31, 2017 from $93.5 million at December 31, 2016, primarily due to a $3.2 million, or 12.5%, decrease in certificates of deposit accounts obtained through a broker or listing service. Demand deposits decreased $294,000, or 0.9%, NOW accounts increased $678,000, or 1.1%, and savings accounts increased $371,000, or 2.3%. Management continues to focus on the generation of core checking accounts.
Total FHLB advances increased $2.7 million, or 6.6%, to $44.6 million at March 31, 2017 compared to $41.9 million at December 31, 2016, primarily due to advances used to fund loan growth. Short-term advances increased $3.7 million and long-term advances decreased $1.0 million during the three months ended March 31, 2017.
Stockholders’ equity increased $247,000, or 0.8%, to $32.4 million at March 31, 2017 from $32.2 million at December 31, 2016. The increase resulted primarily from net income of $278,000 for the three months ended March 31, 2017 and other comprehensive income, partially offset by dividend payments and stock repurchases. Other comprehensive income, net of taxes, of $36,000 reflects the change in net unrealized gains/losses, net of taxes, on securities available for sale from a net unrealized loss of $41,000 at December 31, 2016 to a net unrealized loss of $5,000 at March 31, 2017. Dividend payments totaled $88,000 for the three months ended March 31, 2017. We repurchased 4,670 shares at an average cost of $25.80 totaling $120,000 during the three months ended March 31, 2017.
Loan Portfolio Composition
.
The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
At
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
92,869
|
|
32.97
|
%
|
$
|
90,190
|
|
32.27
|
%
|
|
|
Home equity loans and lines of credit
|
|
|
15,468
|
|
5.49
|
|
|
15,879
|
|
5.68
|
|
|
|
Total residential mortgage loans
|
|
|
108,337
|
|
38.46
|
|
|
106,069
|
|
37.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family investment property
|
|
|
14,400
|
|
5.11
|
|
|
13,081
|
|
4.68
|
|
|
|
Multi-family real estate
|
|
|
30,214
|
|
10.73
|
|
|
30,748
|
|
11.00
|
|
|
|
Commercial real estate
|
|
|
83,390
|
|
29.60
|
|
|
83,583
|
|
29.90
|
|
|
|
Commercial business
|
|
|
23,851
|
|
8.47
|
|
|
20,675
|
|
7.40
|
|
|
|
Total commercial loans
|
|
|
151,855
|
|
53.91
|
|
|
148,087
|
|
52.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
9,368
|
|
3.33
|
|
|
12,599
|
|
4.51
|
|
|
|
Multi-family
|
|
|
4,505
|
|
1.60
|
|
|
5,725
|
|
2.05
|
|
|
|
Non-residential
|
|
|
7,454
|
|
2.65
|
|
|
6,830
|
|
2.44
|
|
|
|
Total construction loans
|
|
|
21,327
|
|
7.58
|
|
|
25,154
|
|
9.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
150
|
|
0.05
|
|
|
182
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
281,669
|
|
100.00
|
%
|
|
279,492
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
540
|
|
|
|
|
484
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,642)
|
|
|
|
|
(2,605)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
279,567
|
|
|
|
$
|
277,371
|
|
|
|
|
Asset Quality
. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Delinquent loans that are 90 days or more past due and/or on non-accrual status are generally considered non-performing assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$
|
937
|
|
$
|
953
|
|
|
|
Commercial loans
|
|
|
—
|
|
|
—
|
|
|
|
Construction loans
|
|
|
—
|
|
|
—
|
|
|
|
Consumer
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
937
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing restructured loans
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
937
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
937
|
|
$
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.33
|
%
|
|
0.34
|
%
|
|
|
Non-performing assets to total assets
|
|
|
0.29
|
%
|
|
0.30
|
%
|
|
|
Allowance for loan losses to non-performing loans
|
|
|
281.96
|
%
|
|
273.35
|
%
|
|
Total delinquent loans decreased $78,000, from $1.0 million at December 31, 2016 to $939,000 at March 31, 2017, primarily in residential loans.
Non-performing assets totaled $937,000 and $953,000 at March 31, 2017 and December 31, 2016, respectively. Total non-performing assets represented 0.29% and 0.30% of total assets at March 31, 2017 and December 31, 2016, respectively.
Loans classified as substandard increased $537,000, to $3.4 million at March 31, 2017 from $2.9 million at December 31, 2016, primarily in commercial real estate loans and commercial business loans.
The allowance for loan losses increased $37,000 to $2.6 million at March 31, 2017 primarily due to the growth in the commercial loan portfolio. There were $3,000 of loan charge-offs and $1,000 in recoveries for the three months ended March 31, 2017, as compared to no loan charge-offs and $1,000 in recoveries for the same period in 2016. The allowance represented 0.94% and 0.93% of total loans at March 31, 2017 and December 31, 2016, respectively. At these levels, the allowance for loan losses as a percentage of non-performing loans was 281.96% at March 31, 2017 and 273.35% at December 31, 2016.
Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016
General
.
Net income increased $198,000, or 247.5%, to $278,000 for the three months ended March 31, 2017, from $80,000 for the three months ended March 31, 2016. The increase in net income was caused by an increase in net interest and dividend income and decreases in the provision for loan losses and non-interest expense, partially offset by a decrease in non-interest income.
Interest and Dividend Income.
Interest and dividend income increased $232,000, or 7.3%, to $3.4 million for the three months ended March 31, 2017, primarily due to an increase in interest income on loans. Interest income on loans increased $243,000, or 8.1%, to $3.2 million for the three months ended March 31, 2017, due to a $22.4 million, or 8.6%, increase in the average balance of loans, partially offset by a two basis point decrease in yield to 4.59% for the three months ended March 31, 2017 from 4.61% for the three months ended March 31, 2016.
Interest and dividend income on investment securities decreased $12,000, or 7.8%, to $142,000 for the three months ended March 31, 2017 from $154,000 for the three months ended March 31, 2016, due to a $143,000, or 0.6% decrease in the average balance of investment securities and by an 18 basis point decrease in yield to 2.32% for the three months ended March 31, 2017 from 2.50% for the three months ended March 31, 2016.
Interest Expense.
Interest expense increased $88,000, or 15.3%, to $662,000 for the three months ended March 31, 2017 from $574,000 for the three months ended March 31, 2016. Interest expense on deposits increased $83,000, or 20.2%, to $494,000 for the three months ended March 31, 2017 from $411,000 for the three months ended March 31, 2016, due to an increase in the average balance of interest-bearing deposits of $13.3 million, or 6.9%, to $207.3 million for the three months ended March 31, 2017 from $194.0 million for the three months ended March 31, 2016 and an increase in the average rate we paid on interest-bearing deposits to 0.95% for the three months ended March 31, 2017 compared to 0.85% for the three months ended March 31, 2016. The increase in interest expense on deposits was primarily due to certificates of deposit and money market accounts. Interest expense on certificates of deposit increased $60,000, or 19.6%, to $366,000 for the three months ended March 31, 2017 from $306,000 for the three months ended March 31, 2016 due to an increase in the average balance in certificates of deposit of $8.0 million, or 9.6%, to $91.3 million for the three months ended March 31, 2017 from $83.3 million for the same period in 2016 and by an increase in the average rate we paid on certificates of deposits to 1.60% for the three months ended March 31, 2017 compared to 1.47% for the same period in 2016. Interest expense on money market deposits increased $24,000, or 29.6%, to $105,000 for the three months ended March 31, 2017 from $81,000 for the three months ended March 31, 2016 due to an increase in the average balance in money market deposits of $6.3 million, or 10.4%, to $67.6 million for the three months ended March 31, 2017 from $61.3 million for the same period in 2016 and by an increase in the average rate we paid on money market deposits to 0.62% for the three months ended March 31, 2017 compared to 0.53% for the same period in 2016.
Interest expense on FHLB advances increased $5,000, or 3.1%, to $168,000 for the three months ended March 31, 2017 from $163,000 for the three months ended March 31, 2016. The increase was primarily due to an increase in the average outstanding balance of advances of $4.0 million, or 9.3%, to $47.6 million for the three months ended March 31, 2017 from $43.6 million for the three-month period ended March 31, 2016, partially offset by the average rate we paid, which decreased nine basis points to 1.41% for the three months ended March 31, 2017 compared to 1.50% for the three months ended March 31, 2016. The average outstanding balance of short-term advances increased $7.3 million, or 44.4%, to $23.8 million for the three months ended March 31, 2017 from $16.5 million for the three months ended March 31, 2016 and the average outstanding balance of long-term advances decreased $3.3 million, or 12.2%, to $23.8 million for the three months ended March 31, 2017 from $27.1 million for the same period in 2016. We expect the average balance of short-term FHLB advances to increase in the near term, as we fund current loan demand.
Net Interest and Dividend Income
.
Net interest and dividend income increased $144,000, or 5.6%, to $2.7 million for the three months ended March 31, 2017 compared to $2.6 million for the three months ended March 31, 2016. The increase in net interest and dividend income was primarily the result of a $3.0 million, or 5.6%, increase in net average interest-earning assets to $56.8 million for the three months ended March 31, 2017, from $53.8 million for the same period in 2016. Our net interest margin may compress in the future due to competitive pricing in our market area and due to a rising interest rate environment.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several quantitative and qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible
to significant revision as more information becomes available. After an evaluation of these factors, we recorded a provision for loan losses of $39,000 for the three months ended March 31, 2017, compared to a provision for loan losses of $74,000 for the three months ended March 31, 2016. There were $3,000 in loan charge-offs and $1,000 of recoveries for the three months ended March 31, 2017, as compared to no charge-offs and $1,000 in recoveries for the same period in 2016. The allowance for loan losses was $2.6 million, or 0.94% of total loans and 281.96% of non-performing loans at March 31, 2017, compared to an allowance for loan losses of $2.6 million, or 0.93% of total loans and 273.35% of non-performing loans at December 31, 2016. For additional information please refer to Note 6, Loans and Servicing.
Non-interest Income
.
Non-interest income decreased $26,000, or 10.7%, to $216,000 for the three months ended March 31, 2017 from $242,000 for the three months ended March 31, 2016, primarily due to a decrease in gain on sale of SBA loans and customer service fees. There were no gains on sale of SBA loans for the three months ended March 31, 2017, compared to $15,000 during the same period in 2016. Income from customer service fees decreased $19,000, or 10.3%, to $165,000 for the three months ended March 31, 2017 from $184,000 for the three months ended March 31, 2016. The decrease was primarily from a reduction in overdraft fees, ATM service charges, and account service charges. Mortgage banking income, net increased $6,000, or 66.7%, to $15,000 for the three months ended March 31, 2017 from $9,000 for the three months ended March 31, 2016.
Non-interest Expense.
Non-interest expense decreased $155,000, or 5.9%, to $2.5 million for the three months ended March 31, 2017, from $2.6 million for the three months ended March 31, 2016, due primarily to decreases in data processing expenses, professional fees, advertising expenses and other general and administrative expenses, partially offset by merger related expenses. Data processing expenses decreased $42,000, or 19.6%, primarily due to a reduction in one-time implementation fees. Professional fees decreased $87,000, or 29.9%, primarily due to a reduction in the costs associated with enhancements to our regulatory compliance staff and compliance programs made during 2016. Advertising expenses decreased $84,000, or 96.6%, as no new marketing initiatives have been committed to during the three months ended March 31, 2017. Other general and administrative expenses decreased $53,000, or 18.1%, to $240,000 for the three months ended March 31, 2017 from $293,000 for the same period in 2016, primarily due to a reduction in recruitment related expenses. Merger related expenses totaled $96,000 during the three months ended March 31, 2017, of which $57,000 were not deductible for income tax purposes.
Income Tax Expense.
The income before income taxes of $428,000 resulted in income tax expense of $150,000 for the three months ended March 31, 2017, compared to income before income taxes of $120,000 resulting in an income tax expense of $40,000 for the three months ended March 31, 2016. The effective income tax rate was 35.1% for the three months ended March 31, 2017 compared to 33.3% for the three months ended March 31, 2016. The increase in the effective tax rate was primarily due to an increase in taxable income as a percentage of total income, and $57,000 of merger related expenses that were not tax deductible for income tax purposes, partially offset by an excess tax benefit realized on share based compensation.
Average Balance Sheet.
The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average annualized yields on its interest-earning assets and the average annualized costs of its interest-bearing liabilities. Average yields are calculated by dividing the annualized interest and dividend income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the annualized interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average annualized yields and costs include fees that are considered adjustments to such average yields and costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
Outstanding
|
|
|
|
|
Yield/
|
|
|
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
Balance
|
|
Interest (1)
|
|
Rate (1)
|
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (2)
|
|
$
|
283,146
|
|
$
|
3,246
|
|
4.59
|
%
|
$
|
260,704
|
|
$
|
3,003
|
|
4.61
|
%
|
|
Investment securities (1)
|
|
|
24,514
|
|
|
152
|
|
2.48
|
%
|
|
24,657
|
|
|
163
|
|
2.65
|
%
|
|
Short-term investments
|
|
|
4,074
|
|
|
7
|
|
0.69
|
%
|
|
6,035
|
|
|
6
|
|
0.40
|
%
|
|
Total interest-earning assets
|
|
|
311,734
|
|
|
3,405
|
|
4.37
|
%
|
|
291,396
|
|
|
3,172
|
|
4.35
|
%
|
|
Non-interest-earning assets
|
|
|
8,742
|
|
|
—
|
|
|
|
|
9,224
|
|
|
—
|
|
|
|
|
Total assets
|
|
$
|
320,476
|
|
|
3,405
|
|
|
|
$
|
300,620
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
16,331
|
|
|
1
|
|
0.02
|
%
|
$
|
15,720
|
|
|
1
|
|
0.03
|
%
|
|
NOW accounts
|
|
|
32,062
|
|
|
22
|
|
0.27
|
%
|
|
33,722
|
|
|
23
|
|
0.27
|
%
|
|
Money market accounts
|
|
|
67,639
|
|
|
105
|
|
0.62
|
%
|
|
61,273
|
|
|
81
|
|
0.53
|
%
|
|
Certificates of deposit
|
|
|
91,251
|
|
|
366
|
|
1.60
|
%
|
|
83,280
|
|
|
306
|
|
1.47
|
%
|
|
Total interest-bearing deposits
|
|
|
207,283
|
|
|
494
|
|
0.95
|
%
|
|
193,995
|
|
|
411
|
|
0.85
|
%
|
|
FHLB advances
|
|
|
47,647
|
|
|
168
|
|
1.41
|
%
|
|
43,612
|
|
|
163
|
|
1.50
|
%
|
|
Total interest-bearing liabilities
|
|
|
254,930
|
|
|
662
|
|
1.04
|
%
|
|
237,607
|
|
|
574
|
|
0.97
|
%
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
30,554
|
|
|
|
|
|
|
|
27,912
|
|
|
|
|
|
|
|
Other non-interest-bearing liabilities
|
|
|
4,012
|
|
|
|
|
|
|
|
4,056
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
289,496
|
|
|
|
|
|
|
|
269,575
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
30,980
|
|
|
|
|
|
|
|
31,045
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
320,476
|
|
|
|
|
|
|
$
|
300,620
|
|
|
|
|
|
|
|
Net interest-earning assets (3)
|
|
$
|
56,804
|
|
|
|
|
|
|
$
|
53,789
|
|
|
|
|
|
|
|
Fully tax-equivalent net interest income
|
|
|
|
|
|
2,743
|
|
|
|
|
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: tax-equivalent adjustments
|
|
|
|
|
|
(10)
|
|
|
|
|
|
|
|
(9)
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
2,733
|
|
|
|
|
|
|
$
|
2,589
|
|
|
|
|
Net interest rate spread (1)(4)
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
3.38
|
%
|
|
Net interest margin (1)(5)
|
|
|
|
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
3.57
|
%
|
|
Average of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
122.28
|
%
|
|
|
|
|
|
|
122.64
|
%
|
|
|
(1)
|
|
Interest and yield on investment securities, interest rate spread and net interest margin are presented on a tax-equivalent basis. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income. For the three months ended March 31, 2017 and 2016, the yield on investment securities before tax-equivalent adjustments was 2.32% and 2.50%, respectively, and the yield on total interest-earning assets was 4.36% and 4.34%, respectively. Net interest rate spread before tax-equivalent adjustments for the three months ended March 31, 2017 and 2016 was 3.32% and 3.37%, respectively, while net interest margin before tax-equivalent adjustments was 3.51% and 3.55%, respectively.
|
|
|
(2)
|
|
Includes loans held for sale.
|
|
|
(3)
|
|
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
|
|
|
(4)
|
|
Net interest rate spread represents the difference between the tax-equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
|
(5)
|
|
Net interest margin represents net interest income (tax-equivalent basis) divided by average total interest-earning assets.
|
Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our fully-taxable net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2017
|
|
|
|
|
Compared to the Three Months Ended
|
|
|
|
|
March 31, 2016
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
259
|
|
$
|
(16)
|
|
$
|
243
|
|
|
Investment securities (1)
|
|
|
(1)
|
|
|
(10)
|
|
|
(11)
|
|
|
Short-term investments
|
|
|
(2)
|
|
|
3
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
256
|
|
|
(23)
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
NOW accounts
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
Money market accounts
|
|
|
8
|
|
|
16
|
|
|
24
|
|
|
Certificates of deposit
|
|
|
29
|
|
|
31
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
36
|
|
|
47
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
|
15
|
|
|
(10)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
51
|
|
|
37
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
205
|
|
$
|
(60)
|
|
$
|
145
|
|
|
|
(1)
|
|
Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $10,000 and $9,000 for the three months ended March 31, 2017 and 2016, respectively.
|
Liquidity Management.
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities. The excess cash and cash equivalent balances are expected to be used to fund increases in loans and securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $8.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $18.8 million at March 31, 2017. Our policies also allow for access to the wholesale funds market for up to 40.0% of total
assets, or $128.7 million. At March 31, 2017, we had $44.6 million in FHLB advances outstanding, $21.0 million in certificates of deposit obtained through a listing service and $1.2 million in brokered certificates of deposit, allowing the Company access to an additional $61.9 million in wholesale funds based on policy guidelines.
At March 31, 2017 we had $4.5 million in loan commitments outstanding. In addition to commitments to originate loans, we had $42.1 million in unadvanced funds to borrowers.
Certificates of deposit due within one year of March 31, 2017 totaled $33.1 million, or 13.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit or other wholesale funding options. Depending on market conditions, we may be required to pay higher rates on such deposits than we currently pay on the certificates of deposit due on or before March 31, 2018. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB and other wholesale market sources.
Our primary investing activities are the origination and purchase of loans and the purchase of securities. During the three months ended March 31, 2017, we originated $15.3 million in loans and purchased $1.7 million of residential loans. We expect to purchase additional residential mortgages to replace recent residential loan prepayments.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase in total deposits of $22,000 for the three months ended March 31, 2017. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. FHLB advances increased $2.8 million during the three months ended March 31, 2017 due to loan growth. FHLB advances have primarily been used to fund loan demand and deposit outflows. We sold $271,000 of mortgage loans during the three months ended March 31, 2017.
Capital Management.
Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The regulations require a common equity Tier 1 (“CET1”) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5%, a Tier 1 risk based capital ratio of 8.0%, a total risk based capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that began phasing in on January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.
At March 31, 2017, Georgetown Bank met each of its capital requirements and was considered “well-capitalized”, and also met each of its capital requirements on a fully phased-in basis, including the capital conservation buffer.
Off-Balance Sheet Arrangements.
For the three months ended March 31, 2017, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (1) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
