Table Of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31,June 30, 2014

Commission file number 000-29599

 

PATRIOT NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Connecticut                                   06-1559137

                          (State of incorporation)                 (I.R.S. Employer Identification Number)

 

Connecticut06-1559137

(State of

incorporation)

(I.R.S. Employer

Identification Number)

900 Bedford Street, Stamford, Connecticut 06901

(Address of principal executive offices)

(203) 324-7500

(203) 324-7500

(Registrant’s telephone number)

 

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yesx    No  ¨    X   No_____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YesxX   No_____    No  ¨

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

 

Large Accelerated Filer

¨

Accelerated Filer

¨

Non-Accelerated Filer

¨  

Smaller Reporting Company

x

Large Accelerated Filer ____ Accelerated Filer ____ Non-Accelerated Filer    _ Smaller Reporting Company _ X_

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes¨   No  X_    No  x

State the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date.

Common stock, $0.01 par value per share, 39,160,627 shares outstanding as of the close of business April 30,July 31, 2014.


Table Of Contents

Tableof Contents

 

 

 


Table of Contents

PART I - FINANCIAL INFORMATION3
   
Item 1:Consolidated Financial Statements3
 Page 

Part I

Item 2:
FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements3

Item 2.

Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations45
  41
Item 3:

Item 3.

Quantitative and Qualitative Disclosures about Market Risk58
  
53Item 4:Controls and Procedures60
 
PART II - OTHER INFORMATION61

Item 4.

Controls and Procedures  
54Item 1:Legal Proceedings61
 
Item 1A:Risk Factors61

Part II

OTHER INFORMATION

Item 1.

Legal Proceedings  55
Item 6: 

Item 1A.

Risk Factors55

Item 6.

Exhibits5561

2

Table Of Contents

PARTPART I—I - FINANCIAL INFORMATION

Item 1:Consolidated Financial Statements

Item 1: Consolidated Financial Statements

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 

                                                
     (in thousands, except shares) 
     March 31, 2014   December 31, 2013 
     (Unaudited)     

ASSETS

      

Cash and due from banks:

      

Noninterest bearing deposits and cash

    $1,503    $1,570  

Interest bearing deposits

     58,254     33,296  
    

 

 

   

 

 

 

Total cash and cash equivalents

     59,757     34,866  

Securities:

      

Available for sale securities, at fair value (Note 2)

     36,815     37,701  

Other Investments

     4,450     4,450  

Federal Reserve Bank stock, at cost

     1,444     1,444  

Federal Home Loan Bank stock, at cost

     4,143     4,143  
    

 

 

   

 

 

 

Total securities

     46,852     47,738  

Loans receivable (net of allowance for loan losses: 2014: $ 5,480 2013: $5,681) (Note 3)

     415,123     418,148  

Accrued interest and dividends receivable

     1,578     1,566  

Premises and equipment, net

     14,866     15,061  

Cash surrender value of life insurance

     22,146     22,025  

Other real estate owned

     264     —    

Deferred tax asset (Note 6)

     —       —    

Other assets

     1,902     1,844  
    

 

 

   

 

 

 

Total assets

    $562,488    $541,248  
    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Liabilities

      

Deposits (Note 4):

      

Noninterest bearing deposits

    $57,967    $55,358  

Interest bearing deposits

     370,002     374,846  
    

 

 

   

 

 

 

Total deposits

     427,969     430,204  

Federal Home Loan Bank borrowings

     80,000     57,000  

Junior subordinated debt owed to unconsolidated trust

     8,248     8,248  

Accrued expenses and other liabilities

     3,659     3,955  
    

 

 

   

 

 

 

Total liabilities

     519,876     499,407  
    

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

      

Shareholders’ equity (Notes 5 and 10)

      

Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding

     —       —    

Common stock, $.01 par value, 100,000,000 shares authorized; 2014 39,134,164 shares issued; 39,122,459 shares outstanding. 2013 :38,786,680 shares issued; 38,774,975 shares outstanding

     391     388  

Additional paid-in capital

     105,540     105,484  

Accumulated deficit

     (62,365   (62,684

Less: Treasury stock, at cost: 2013 and 2012, 11,705 shares

     (160   (160

Accumulated other comprehensive income

     (794   (1,187
    

 

 

   

 

 

 

Total shareholders’ equity

     42,612     41,841  
    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    $562,488    $541,248  
    

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

(in thousands, except shares)

 
  

June 30, 2014

  

December 31, 2013

 
  

(Unaudited)

     

ASSETS

        

Cash and due from banks:

        

Noninterest bearing deposits and cash

 $1,584  $1,570 

Interest bearing deposits

  58,345   33,296 

Total cash and cash equivalents

  59,929   34,866 
         

Securities:

        

Available for sale securities, at fair value (Note 2)

  35,686   37,701 

Other Investments

  4,450   4,450 

Federal Reserve Bank stock, at cost

  1,517   1,444 

Federal Home Loan Bank stock, at cost

  4,143   4,143 

Total securities

  45,796   47,738 
         

Loans receivable (net of allowance for loan losses: 2014: $5,214 2013: $5,681) (Note 3)

  402,786   418,148 

Accrued interest and dividends receivable

  1,555   1,566 

Premises and equipment, net

  18,227   15,061 

Cash surrender value of life insurance

  22,262   22,025 

Deferred tax asset (Note 6)

  -   - 

Other assets

  1,498   1,844 

Total assets

 $552,053  $541,248 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Liabilities

        

Deposits (Note 4):

        

Noninterest bearing deposits

 $61,685  $55,358 

Interest bearing deposits

  364,747   374,846 

Total deposits

  426,432   430,204 
         

Federal Home Loan Bank borrowings

  72,000   57,000 

Junior subordinated debt owed to unconsolidated trust

  8,248   8,248 

Accrued expenses and other liabilities

  2,057   3,955 

Total liabilities

  508,737   499,407 
         

Commitments and Contingencies (Note 9)

        

Shareholders' equity (Notes 5 and 10)

        

Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding

  -   - 

Common stock, $.01 par value, 100,000,000 shares authorized; 2014: 39,172,332 shares issued; 39,160,627 shares outstanding. 2013 :38,786,680 shares issued; 38,774,975 shares outstanding

  392   388 

Additional paid-in capital

  105,610   105,484 

Accumulated deficit

  (61,840)  (62,684)

Less: Treasury stock, at cost: 2014 and 2013, 11,705 shares

  (160)  (160)

Accumulated other comprehensive income

  (686)  (1,187)

Total shareholders' equity

  43,316   41,841 

Total liabilities and shareholders' equity

 $552,053  $541,248 

 

                                                
     (in thousands, except per share amounts) 
     Three Months Ended 
     March 31, 
     2014     2013 

Interest and Dividend Income

        

Interest and fees on loans

     4,691       5,196  

Interest on investment securities

     135       248  

Dividends on investment securities

     41       29  

Other interest income

     12       28  
    

 

 

     

 

 

 

Total interest and dividend income

     4,879       5,501  
    

 

 

     

 

 

 

Interest Expense

        

Interest on deposits

     637       1,129  

Interest on Federal Home Loan Bank borrowings

     33       351  

Interest on subordinated debt

     200       71  

Interest on other borrowings

     —         76  
    

 

 

     

 

 

 

Total interest expense

     870       1,627  
    

 

 

     

 

 

 

Net interest income

     4,009       3,874  

Provision for Loan Losses (Note 3)

     —         (30
    

 

 

     

 

 

 

Net interest income after provision for loan losses

     4,009       3,904  
    

 

 

     

 

 

 

Non-Interest Income

        

Mortgage banking activity

     —         46  

Loan application, inspection & processing fees

     66       38  

Fees and service charges

     219       171  

Earnings on cash surrender value of life insurance

     121       127  

Other income

     187       105  
    

 

 

     

 

 

 

Total non-interest income

     593       487  
    

 

 

     

 

 

 

Non-Interest Expense

        

Salaries and benefits (Note 5)

     1,971       3,005  

Occupancy and equipment expense

     922       1,039  

Data processing expense

     250       371  

Advertising and promotional expenses

     51       42  

Professional services and other outside services

     471       889  

Loan administration and processing expenses

     17       77  

Regulatory assessments

     230       374  

Insurance expense

     97       79  

Other real estate operations

     16       2  

Material and communications

     93       106  

Other operating expenses

     165       385  
    

 

 

     

 

 

 

Total non-interest expense

     4,283       6,369  
    

 

 

     

 

 

 

Income (loss) before income taxes

     319       (1,978

Benefit for Income Taxes

     —         (21
    

 

 

     

 

 

 

Net income (loss)

     319       (1,957
    

 

 

     

 

 

 

Basic and diluted income (loss) per share (Note 7)

     0.01       (0.05
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014     2013 

Net income (loss)

    $319      $(1,957

Other comprehensive income:

        

Unrealized holding gains arising during the period

     393       55  
    

 

 

     

 

 

 

Total

     393       55  
    

 

 

     

 

 

 

Comprehensive income (loss)

    $712      $(1,902
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

                                                                                                                                                                        
            Accumulated     
                 Additional           Other     
     Number of     Common     Paid-In   Accumulated   Treasury   Comprehensive     
(in thousands, except shares)    Shares     Stock     Capital   Deficit   Stock   Income (Loss)   Total 

Three months ended March 31, 2013

                    

Balance at December 31, 2012

     38,480,114      $385      $105,356    $(55,395  $(160  $(618  $49,568  

Comprehensive loss

                    

Net loss

     —         —         —       (1,957   —       —       (1,957

Unrealized holding gain on available for sale securities, net of taxes

     —         —         —       —       —       55     55  
                    

 

 

 

Total comprehensive loss

                     (1,902
                    

 

 

 

Share-based compensation expense

     —         —         7     —       —       —       7  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

     38,480,114      $385      $105,363    $(57,352  $(160  $(563  $47,673  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2014

                    

Balance at December 31, 2013

     38,774,975      $388      $105,484    $(62,684  $(160  $(1,187  $41,841  

Comprehensive income

                    

Net income

     —         —         —       319     —       —       319  

Unrealized holding gain on available for sale securities, net of taxes

     —         —         —       —       —       393     393  
                    

 

 

 

Total comprehensive income

                     712  
                    

 

 

 

Share-based compensation expense

     —         —         59     —       —       —       59  

Issuance of restricted stock

     347,484       3       (3         —    
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     39,122,459      $391      $105,540    $(62,365  $(160  $(794  $42,612  
    

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014   2013 

Cash Flows from Operating Activities:

      

Net income (loss):

    $319    $(1,957

Adjustments to reconcile net income (loss) to net cash

      

provided by (used in) operating activities:

      

Amortization of investment premiums, net

     66     38  

Amortization and accretion of purchase loan premiums and discounts, net

     18     2  

Provision for loan losses

     —       (30

Gain on sale of mortgage loans

     —       (42

Originations of mortgage loans held for sale

     —       (7,154

Proceeds from sales of mortgage loans held for sale

     —       2,171  

Earnings on cash surrender value of life insurance

     (121   (127

Depreciation and amortization

     293     289  

Gain on sale of other real estate owned

     —       (200

Share-based compensation

     59     7  

Changes in assets and liabilities:

      

(Increase) in net deferred loan costs

     (13   (58

(Increase) decrease in accrued interest and dividends receivable

     (12   8  

(Increase) decrease in other assets

     (58   42  

Decrease in accrued expenses and other liabilities

     (296   (1,521
    

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     255     (8,532
    

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Principal repayments on available for sale securities

     1,213     632  

Proceeds from repurchase of excess stock by Federal Reserve Bank

     —       37  

Proceeds from repurchase of excess stock by Federal Home Loan Bank

     —       201  

Net decrease in loans

     3,020     2,938  

Purchase of other real estate owned

     (264   —    

Proceeds from sale of other real estate owned

     —       1,310  

Purchase of bank premises and equipment, net

     (98   (239
    

 

 

   

 

 

 

Net cash provided by investing activities

     3,871     4,879  
    

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Net increase in demand, savings and money market deposits

     5,073     7,245  

Net decrease in time certificates of deposits

     (7,308   (12,842

Increase in FHLB borrowings

     23,000     —    
    

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     20,765     (5,597
    

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,891     (9,250

Cash and Cash Equivalents:

      

Beginning

     34,866     71,014  
    

 

 

   

 

 

 

Ending

    $59,757    $61,764  
    

 

 

   

 

 

 

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Unaudited)

                                                
     (in thousands) 
     Three Months Ended 
     March 31, 
     2014     2013 

Supplemental Disclosures of Cash Flow Information

        

Interest paid

    $669      $1,561  
    

 

 

     

 

 

 

Income taxes paid

    $—        $—    
    

 

 

     

 

 

 

Supplemental disclosures of noncash operating, investing and financing activities:

        

Unrealized holding gain on available for sale securities arising during the period

    $393      $55  
    

 

 

     

 

 

 

Transfer of loans to other real estate owned

    $264      $—    
    

 

 

     

 

 

 

Reduction in deposits held for sale

    $—        $3,777  
    

 

 

     

 

 

 

Reduction in branch assets held for sale

    $—        $8  
    

 

 

     

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  

(in thousands, except per share amounts)

 
  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2014

   

2013

  

2014

  

2013

 
                  

Interest and Dividend Income

                 

Interest and fees on loans

 $4,667   $5,045  $9,358  $10,241 

Interest on investment securities

  133    226   268   474 

Dividends on investment securities

  42    29   83   58 

Other interest income

  14    9   26   37 

Total interest and dividend income

  4,856    5,309   9,735   10,810 
                  

Interest Expense

                 

Interest on deposits

  607    1,032   1,244   2,161 

Interest on Federal Home Loan Bank borrowings

  33    167   66   518 

Interest on subordinated debt

  82    71   282   142 

Interest on other borrowings

  -    6   -   82 

Total interest expense

  722 

 

  1,276   1,592   2,903 

Net interest income

  4,134    4,033   8,143   7,907 

Provision for Loan Losses

  -    -   -   (30)

Net interest income after provision for loan losses

  4,134    4,033   8,143   7,937 

Non-Interest Income

                 

Mortgage banking activity

  17    119   17   165 

Loan application, inspection & processing fees

  83    116   149   154 

Fees and service charges

  233    212   452   383 

Gains on sale of loans

  -    28   -   28 

Gain on sale branch assets and deposits

  -    51   -   51 

Earnings on cash surrender value of life insurance

  116    142   237   269 

Other income

  174    101   361   206 

Total non-interest income

  623    769   1,216   1,256 

Non-Interest Expense

                 

Salaries and benefits

  1,976    2,577   3,947   5,582 

Occupancy and equipment expense

  865    936   1,787   1,975 

Data processing expense

  279    289   529   660 

Advertising and promotional expenses

  73    76   124   118 

Professional and other outside services

  457    770   928   1,659 

Loan administration and processing expenses

  19    74   36   151 

Regulatory assessments

  237    304   467   678 

Insurance expense

  78    83   175   162 

Other real estate operations

  (4)   55   12   57 

Material and communications

  84    102   177   208 

Restructuring charges and asset disposals (Note 12)

  -    394   -   394 

Prepayment penalty on borrowings

  -    2,711   -   2,711 

Other operating expenses

  168    343   333   728 

Total non-interest expense

  4,232    8,714   8,515   15,083 

Income (loss) before income taxes

  525    (3,912)  844   (5,890)

Benefit for Income Taxes

  -    -   -   (21)

Net income (loss)

 $525   (3,912) 844  $(5,869)

Basic and diluted income (loss) per share

 $0.01   (0.10) $0.02  (0.15)

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

   

(in thousands)

 
   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2014

  

2013

   

2014

  

2013

 
                   

Net income (loss)

 $525  $(3,912)  $844  $(5,869)

Other comprehensive income:

                  

Unrealized holding gains (losses) arising during the period

  108   (629)   501   (574)
Total  108   (629)

 

  501   (574)

Comprehensive income (loss)

 $633  $(4,541)

 

 $1,345  $(6,443)

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except shares)

                     

Accumulated

     
          

Additional

          

Other

     
  

Number of

  

Common

  

Paid-In

  

Accumulated

  

Treasury

  

Comprehensive

     
  

Shares

  

Stock

  

Capital

  

Deficit

  

Stock

  

Income (Loss)

  

Total

 
                             

Six months ended June 30, 2014

                            
                             

Balance at December 31, 2013

  38,774,975  $388  $105,484  $(62,684) $(160) $(1,187) $41,841 
                             

Comprehensive income

                            

Net income

  -   -   -   844   -   -   844 

Unrealized holding gain on available forsale securities

  -   -   -   -   -   501   501 

Total comprehensive income

                          1,345 
                             

Share-based compensation expense

  -   -   130   -   -   -   130 

Issuance of restricted stock

  385,652   4   (4)              - 

Balance, June 30, 2014

  39,160,627  $392  $105,610  $(61,840) $(160) $(686) $43,316 
                             

Six months ended June 30, 2013

                            
                             

Balance at December 31, 2012

  38,480,114  $385  $105,356  $(55,395) $(160) $(618) $49,568 
                             

Comprehensive loss

                            

Net loss

  -   -   -   (5,869)  -   -   (5,869)

Unrealized holding loss on available forsale securities

  -   -   -   -   -   (574) $(574)

Total comprehensive loss

                          (6,443)
                             

Share-based compensation expense

  -   -   15   -   -   -   15 

Redemption of restricted stock

  (34,788)  -                   - 

Balance, June 30, 2013

  38,445,326  $385  $105,371  $(61,264) $(160) $(1,192) $43,140 

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

(in thousands)

 
  

Six Months Ended

 
  

June 30,

 
  

2014

  

2013

 
         

Cash Flows from Operating Activities:

        

Net income (loss):

 $844  $(5,869)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

        

Restructuring charges and asset disposals

  -   303 

Amortization of investment premiums, net

  128   87 

Amortization and accretion of purchase loan premiums and discounts, net

  40   16 

Provision for loan losses

  -   (30)

Gain on sale of loans

  -   (28)

Gain on sale of mortgage loans

  -   (161)

Originations of mortgage loans held for sale

  -   (28,975)

Proceeds from sales of mortgage loans held for sale

  -   19,111 

Earnings on cash surrender value of life insurance

  (237)  (269)

Depreciation and amortization

  573   588 

Loss (gain) on sale of other real estate owned

  4   (200)

Proceeds from sale of branch assets and deposits

  -   127 

Gain on sale of branch assets and deposits

�� -   (51)

Share-based compensation

  130   15 

Changes in assets and liabilities:

        

Decrease (Increase) in net deferred loan costs

  76   (110)

Decrease in accrued interest and dividends receivable

  11   184 

Decrease in other assets

  346   795 

Decrease in accrued expenses and other liabilities

  (1,898)  (1,286)

Net cash provided by (used in) operating activities

  17   (15,753)
         

Cash Flows from Investing Activities:

        

Principal repayments on available for sale securities

  2,388   1,514 

Purchases of Federal Reserve Bank stock

  (73)  - 

Proceeds from repurchase of excess stock by Federal Reserve Bank

  -   96 

Proceeds from repurchase of excess stock by Federal Home Loan Bank

  -   201 

Proceeds from sale of loans

  -   10,655 

Net decrease in loans

  15,246   477 

Purchase of other real estate owned

  (264)  - 

Proceeds from sale of other real estate owned

  260   1,310 

Capital improvements of other real estate owned

  -   (80)

Purchase of bank premises and equipment, net

  (3,739)  (2,708)

Net cash provided by investing activities

  13,818   11,465 
         

Cash Flows from Financing Activities:

        

Net increase in demand, savings and money market deposits

  9,640   17,103 

Net decrease in time certificates of deposits

  (13,412)  (22,205)

Decrease in deposits held for sale

  -   (14,538)

Increase (decrease) in FHLB borrowings

  15,000   (15,000)

Decrease in repurchase agreements

  -   (7,000)

Net cash provided by (used in) financing activities

  11,228   (41,640)
         

Net increase (decrease) in cash and cash equivalents

  25,063   (45,928)
         

Cash and Cash Equivalents:

        

Beginning

  34,866   71,014 

Ending

 $59,929  $25,086 

PATRIOT NATIONAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Unaudited)

  

Six Months Ended

 
  

June 30,

 
  

2014

  

2013

 
         

Supplemental Disclosures of Cash Flow Information

        

Interest paid

 $2,965  $2,866 

Income taxes paid

 $3  $3 

Supplemental disclosures of noncash operating, investing and financing activities:

        

Unrealized holding gain (loss) on available for sale securities arising during the period

 $501  $(574)

Reduction in deposits held for sale

 $-  $10,167 

Reduction in branch assets held for sale

 $-  $12 

See Accompanying Notes to Consolidated Financial Statements.

PATRIOT NATIONAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1:                 Basis of Financial Statement Presentation

The Consolidated Balance Sheet at December 31, 2013 has been derived from the audited financial statements of Patriot National Bancorp, Inc. (“Bancorp” or “the Company”) at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and related notes should be read in conjunction with the previously filed audited financial statements of Bancorp and notes thereto for the year ended December 31, 2013.

The information furnished reflects, in the opinion of management, all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented. The results of operations for the threesix months ended March 31,June 30, 2014 are not necessarily indicative of the results of operations that may be expected for the remainder of 2014.

Note 2:          Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of available-for-sale securities at March 31,June 30, 2014 and December 31, 2013 are as follows:

 

                                                                                                
          Gross     Gross   
    Amortized     Unrealized     Unrealized Fair      

Gross

     
(in thousands)    Cost     Gains     Losses Value  

Amortized

  

Unrealized

  

Fair

 

March 31, 2014:

             
 

Cost

  

Losses

  

Value

 

June 30, 2014:

            
            

U. S. Government agency bonds

    $7,500      $—        $(255 $7,245   $7,500  $(156) $7,344 

U. S. Government agency mortgage-backed securities

     21,109       —         (477  20,632    19,872   (374)  19,498 

Corporate bonds

     9,000       —         (62  8,938    9,000   (156)  8,844 
    

 

     

 

     

 

  

 

  $36,372  $(686) $35,686 
    $37,609      $—        $(794 $36,815              

December 31, 2013:

            
    

 

     

 

     

 

  

 

             

December 31, 2013:

             

U. S. Government agency bonds

    $7,500      $—        $(421 $7,079   $7,500  $(421) $7,079 

U. S. Government agency mortgage-backed securities

     22,388       —         (636  21,752    22,388   (636)  21,752 

Corporate bonds

     9,000       —         (130  8,870    9,000   (130)  8,870 
    

 

     

 

     

 

  

 

  $38,888  $(1,187) $37,701 
    $38,888      $—        $(1,187 $37,701  
    

 

     

 

     

 

  

 

 

The following table presents the gross unrealized loss and fair value of Bancorp’s available-for-sale securities, aggregated by the length of time the individual securities have been in a continuous loss position, at March 31,June 30, 2014 and December 31, 2013:

 

                                                                                                                                                
    Less Than 12 Months   12 Months or More   Total 
    Fair     Unrealized   Fair     Unrealized   Fair     Unrealized  

Less Than 12 Months

   

12 Months or More

   

Total

 
(in thousands)    Value     Loss   Value     Loss   Value     Loss  

Fair

  

Unrealized

   

Fair

  

Unrealized

   

Fair

  

Unrealized

 

March 31, 2014:

                    
 

Value

  

Loss

   

Value

  

Loss

   

Value

  

Loss

 

June 30, 2014:

                          

U. S. Government agency bonds

    $7,245      $(255  $—        $—      $7,245      $(255 $-  $- 

 

 $7,344  $(156)  $7,344  $(156)

U. S. Government agency mortgage - backed securities

     8,402       (233   12,204       (244   20,606       (477

U. S. Government agency mortgage -backed securities

  -   - 

 

  19,484   (374)   19,484   (374)

Corporate bonds

     —         —       8,938       (62   8,938       (62  -   - 

 

  8,844   (156)   8,844   (156)
    

 

     

 

   

 

     

 

   

 

     

 

 

Totals

    $15,647      $(488  $21,142      $(306  $36,789      $(794 $-  $-   $35,672  $(686)  $35,672  $(686)
    

 

     

 

   

 

     

 

   

 

     

 

                           

December 31, 2013:

                                              
                          

U. S. Government agency bonds

                     $7,079  $(421)

 

 $-  $- 

 

 $7,079  $(421)

U. S. Government agency mortgage - backed securities

    $7,079      $(421  $—        $—      $7,079      $(421

U. S. Government agency mortgage -backed securities

  8,871   (291)

 

  12,856   (345)

 

  21,727   (636)

Corporate bonds

     8,871       (291   12,856       (345   21,727       (636  -   - 

 

  8,870   (130)

 

  8,870   (130)

Totals

     —         —       8,870       (130   8,870       (130 $15,950  $(712)

 

 $21,726  $(475)

 

 $37,676  $(1,187)
    

 

     

 

   

 

     

 

   

 

     

 

 
    $15,950      $(712  $21,726      $(475  $37,676      $(1,187
    

 

     

 

   

 

     

 

   

 

     

 

 

At March 31,June 30, 2014, all eleven available-for-sale securities had unrealized holding losses with aggregate depreciation of 2.1%1.9% from the amortized cost. At December 31, 2013, eleven securities had unrealized losses with aggregate depreciation of 3.2% from the amortized cost.

Bancorp performs a quarterly analysis of those securities that are in an unrealized loss position to determine if those losses qualify as other-than-temporary impairments. This analysis considers the following criteria in its determination: the ability of the issuer to meet its obligations, when the loss position is due to a deterioration in credit quality, management’s plans and ability to maintain its investment in the security, the length of time and the amount by which the security has been in a loss position, the interest rate environment, the general economic environment and prospects or projections for improvement or deterioration.

Management believes that none of the unrealized losses on available-for-sale securities noted above are other than temporary due to the fact that they relate to market interest rate changes on U.S. Government agency debt, corporate debt and mortgage -backedmortgage-backed securities issued by U.S. Government agencies. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade and the Company expects to receive all contractual principal and interest related to these investments. Because the Company does not intend to sell the investments, and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31,June 30, 2014.

The amortized cost and fair value of available-for-sale debt securities at March 31,June 30, 2014 by contractual maturity are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be prepaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary:

 

                                                
(in thousands)    Amortized
Cost
     Fair
Value
  

Amortized Cost

  

Fair Value

 

Maturity:

                

Corporate bonds 5 to 10 years

    $9,000      $8,938   $9,000  $8,844 

U.S. Government agency bonds < 5 years

     2,500       2,458    2,500   2,491 

U.S. Government agency bonds 5 to 10 years

     5,000       4,787    5,000   4,853 

U.S. Government agency mortgage-backed securities

     21,109       20,632    19,872   19,498 
    

 

     

 

 

Total

    $37,609      $36,815   $36,372  $35,686 
    

 

     

 

 

Note 3:         Loans Receivable and Allowance for Loan Losses

A summary of the Company’s loan portfolio at March 31,June 30, 2014 and December 31, 2013 is as follows:

 

(in thousands)

 

June 30,

  

December 31,

 
                                                 

2014

  

2013

 
    March 31,   December 31, 
(in thousands)    2014   2013 

Real Estate

              

Commercial

    $218,051    $223,165   $219,762  $223,165 

Residential

     103,019     106,198    89,517   106,198 

Construction

     260     260    -   260 

Construction to permanent

     12,650     11,303    14,436   11,303 

Commercial

     38,752     35,061    37,849   35,061 

Consumer home equity

     43,717     44,081    42,384   44,081 

Consumer installment

     3,389     2,990    3,397   2,990 
    

 

   

 

 

Total Loans

     419,838     423,058    407,345   423,058 

Premiums on purchased loans

     182     200    160   200 

Net deferred costs

     583     571    495   571 

Allowance for loan losses

     (5,480   (5,681  (5,214)  (5,681)
    

 

   

 

 

Loans receivable, net

    $415,123    $418,148   $402,786  $418,148 
    

 

   

 

 

The changes in the allowance for loan losses for the periods shown are as follows:

 

                                                
    Three months ended  

Three months ended

  

Six months ended

 
    March 31,  

June 30,

  

June 30,

 
(in thousands)    2014   2013  

2014

  

2013

  

2014

  

2013

 
                

Balance, beginning of period

    $5,681    $6,016   $5,480  $5,717  $5,681  $6,016 

Provision for loan losses

     —       (30  -   -   -   (30)

Loans charged-off

     (217   (306  (285)  (412)  (502)  (717)

Recoveries of loans previously charged-off

     16     37    19   17   35   53 
    

 

   

 

 

Balance, end of period

    $5,480    $5,717   $5,214  $5,322  $5,214  $5,322 
    

 

   

 

 

Loans past due ninety days or more, and still accruing interest were $834,000 and $866,000 at March 31, 2014, and December 31, 2013 respectively, and consisted of one loan at March 31, 2014 and two loans at December 31, 2013. The subject loan at March 31, 2014 was current as to interest payments but was past the loan’s maturity date and in the process of being renewed. It was approved for renewal in April, 2014. At December 31, 2013, the previously noted loan had a balance of $841,000 and was current and a second loan for $25,000 was current within 60 days as to interest payments. Both were past their maturity date and in the process of being renewed at December 31, 2013.

The unpaid principal balances of loans on nonaccrual status and considered impaired were $10.2$13.9 million at March 31,June 30, 2014 and $12.3 million at December 31, 2013. If non-accrual loans had been performing in accordance with their contractual terms, the Company would have recorded approximately $33,000$51,000 of additional income during the quarter ended March 31,June 30, 2014 and $306,000$373,000 during the quarter ended March 31,June 30, 2013. If non-accrual loans had been performing in accordance with their contractual terms, the Company would have recorded approximately $84,000 of additional income for the six months ended June 30, 2014 and $679,000 for the six month ended June 30, 2013.

For the three months ended March 31,June 30, 2014 and 2013, the interest collected and recognized as income on impaired loans, which includes non-accrual loans, TDRstrouble debt restructurings ('TDRs') and loans that were previously classified as TDRs that have been upgraded, was approximately $113,000$184,000 and $125,000$96,000 respectively. For the six months ended June 30, 2014 and 2013, the interest collected on impaired loans was approximately $419,000 and $220,000 respectively. The average recorded investment in impaired loans for the three and six months ended March 31,June 30, 2014 was $21.5 million.$22.1 million and $21.7 million respectively.

At March 31,June 30, 2014, there were 3 loans totaling $3.4 million that were considered “troubled debt restructurings,”"TDRs", as compared to December 31, 2013 when there were 2 loans totaling $2.2 million, all of which were included in impaired loans. At March 31,June 30, 2014, 2 of the 3 loans aggregating $2.1 million were accruing loans and 1 loan of $1.3 million was a non-accruing loan. The non-accruing loan was an existing TDR at December 31, 2013 which was restructured again in the quarter ended March 31, 2014.

The Company’sCompany's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County and New York City in New York. The Company originates commercial real estate loans, commercial business loans, and a variety of other consumer loans. In addition, the Company previously had originated loans for residential real estate, the construction of residential homes, residential developments and for land development projects. A moratorium on all new speculative construction loans was instituted by management in July 2008. All residential and commercial mortgage loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.

The Company has established credit policies applicable to each type of lending activity in which it engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 75% of the market value of the collateral for commercial real estate at the date of the credit extension depending on the Company’sCompany's evaluation of the borrowers’borrowers' creditworthiness and type of collateral and up to 80% for residential 1-4 family real estate.collateral. In the case of construction loans, the maximum loan-to-value was 65% of the “as completed” market value. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted.deemed necessary. Real estate is the primary form of collateral. Other important forms of collateral are accounts receivable, inventory, other business assets, marketable securities and time deposits. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows on all loans not related to construction.

Risk characteristics of the Company’s portfolio classes include the following:

Commercial Real Estate Loans –In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan or a decline in the general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied.

Commercial and Industrial Loans– The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory or new or used equipment and for other short or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees where obtained, as a secondary source. Payments on such loans are often dependent upon the successful operation of the underlying business involved. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.

Residential Real Estate LoansVariousHome equity loans secured by residential real estate properties are offered by the Company, including 1-4 familyCompany. The company no longer offers residential loans, and a variety of home equity line of credit products.having exited this business in 2013. Repayment of suchresidential real estate loans may be negatively impacted should the borrower default,have financial difficulties, should there be a significant decline in the value of the property securing the loan or should there be decline in general economic conditions.

Construction Loans– Construction loans are short-term loans (generally up to 18 months) secured by land for botheither residential andor commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Included in this category are loans to construct single family homes where no contract of sale exists, based upon the experience and the financial strength of the builder, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions.condition.

Other Loans– The Company also offers installments loans and reserve lines of credit to individuals. Repayments of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.

The following table sets forth activity in our allowance for loan losses, by loan type, for the three months ended March 31,June 30, 2014. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

 

(in thousands)

Three months ended March 31, 2014

 Commercial Commercial
Real Estate
 Construction Construction
to Permanent
 Residential Consumer Unallocated Total 

(in thousands)

                                

Three months ended June 30, 2014

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                        

Beginning Balance

 $2,285   $1,585   $260   $25   $795   $534   $197   $5,681   $2,371  $1,320  $260  $34  $704  $539  $252  $5,480 

Charge-offs

  (9  —      —      —      (178  (30  —      (217  (2)  -   (260)  -   (18)  (5)      (285)

Recoveries

  —      —      —      —      15    1    —      16    4   15   -   -   -   -   -   19 

Provision

  95    (265  —      9    72    34    55    —      105   (210)  -   115   (56)  160   (114)  - 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Ending Balance

 $2,371   $1,320   $260   $34   $704   $539   $252   $5,480   $2,478  $1,125  $-  $149  $630  $694  $138  $5,214 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Ending balance: individually evaluated for impairment

 $1,500   $17   $260   $—     $21   $2   $—     $1,800   $1,750  $307  $-  $-  $-  $5  $-  $2,062 

Ending balance: collectively evaluated for impairment

  871    1,303    —      34    683    537    252    3,680    728   818   -   149   630   689   138   3,152 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total Allowance for Loan Losses

 $2,371   $1,320   $260   $34   $704   $539   $252   $5,480   $2,478  $1,125  $-  $149  $630  $694  $138  $5,214 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

                                 

Total Loans ending balance

 $38,752   $218,051   $260   $12,650   $103,019   $47,106   $—     $419,838   $37,849  $219,762  $-  $14,436  $89,517  $45,781  $-  $407,345 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

                                 

Ending balance: individually evaluated for impairment

 $6,052   $8,855   $260   $—     $5,179   $587   $—     $20,933   $7,291  $11,610  $-  $-  $5,115  $588  $-  $24,604 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

                                 

Ending balance : collectively evaluated for impairment

 $32,700   $209,196   $—     $12,650   $97,840   $46,519   $—     $398,905  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Ending balance: collectively evaluated for impairment

 $30,558  $208,152  $-  $14,436  $84,402  $45,193  $-  $382,741 

The following table sets forth activity in our allowance for loan losses, by loan type, for the six months ended June 30, 2014. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

                                

Six months ended June 30, 2014

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                

Beginning Balance

 $2,285  $1,585  $260  $25  $795  $534  $197  $5,681 

Charge-offs

  (11)  -   (260)  -   (195)  (36)  -   (502)

Recoveries

  4   30   -   -   -   1   -   35 

Provision

  200   (490)  -   124   30   195   (59)  - 

Ending Balance

 $2,478  $1,125  $-  $149  $630  $694  $138  $5,214 

Ending balance: individually evaluated for impairment

 $1,750  $307  $-  $-  $-  $5  $-  $2,062 

Ending balance: collectively evaluated for impairment

  728   818   -   149   630   689   138   3,152 

Total Allowance for Loan Losses

 $2,478  $1,125  $-  $149  $630  $694  $138  $5,214 
                                 

Total Loans ending balance

 $37,849  $219,762  $-  $14,436  $89,517  $45,781  $-  $407,345 
                                 

Ending balance: individually evaluated for impairment

 $7,291  $11,610  $-  $-  $5,115  $588  $-  $24,604 
                                 

Ending balance: collectively evaluated for impairment

 $30,558  $208,152  $-  $14,436  $84,402  $45,193  $-  $382,741 

The following table sets forth activity in our allowance for loan losses, by loan type, for the three months ended June 39, 2013. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

Three months ended June 30, 2013

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                

Beginning Balance

 $1,847  $2,492  $307  $31  $746  $118  $176  $5,717 

Charge-offs

  -   (275)  (23)  -   (95)  (19)      (412)

Recoveries

  1   15   -   -   1   -   -   17 

Provision

  (126)  (279)  (48)  (7)  282   145   33   - 

Ending Balance

 $1,722  $1,953  $236  $24  $934  $244  $209  $5,322 

Ending balance: individually

                                

evaluated for impairment

 $1,251  $539  $236  $-  $158  $2  $-  $2,186 

Ending balance: collectively

                                

evaluated for impairment

  471   1,414   -   24   776   242   209   3,136 

Total Allowance for Loan Losses

 $1,722  $1,953  $236  $24  $934  $244  $209  $5,322 
                                 
                                 
                                 

Total Loans ending balance

 $36,278  $236,224  $3,471  $9,904  $117,416  $49,090  $-  $452,383 
                                 

Ending balance: individuallyevaluated for impairment

 $6,349  $15,615  $3,471  $1,228  $8,754  $600  $-  $36,017 
                                 

Ending balance: collectivelyevaluated for impairment

 $29,929  $220,609  $-  $8,676  $108,662  $48,490  $-  $416,366 

The following table sets forth activity in our allowance for loan losses, by loan type, for the yearsix months ended December 31,June 30, 2013. The following table also details the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

 

 

(in thousands)

2013

  Commercial  Commercial
Real Estate
  Construction  Construction
to Permanent
   Residential  Consumer  Unallocated   Total 

Allowance for loan losses:

           

Beginning Balance

  $942   $3,509   $311   $19    $897   $217   $121    $6,016  

Charge-offs

   (63  (403  (205  —       (919  (78  —       (1,668

Recoveries

   4    335    20    —       1    3    —       363  

Provision

   1,402    (1,856  134    6     816    392    76     970  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending Balance

  $2,285   $1,585   $260   $25    $795   $534   $197    $5,681  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $1,500   $31   $260   $—      $98   $2   $—      $1,891  

Ending balance: collectively evaluated for impairment

   785    1,554    —      25     697    532    197     3,790  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total Allowance for Loan Losses

  $2,285   $1,585   $260   $25    $795   $534   $197    $5,681  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Total Loans ending balance

  $35,061   $223,165   $260   $11,303    $106,198   $47,071   $—      $423,058  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   6,152    7,767    260    1,197     6,024    593    —       21,993  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance : collectively evaluated for impairment

  $28,909   $215,398   $—     $10,106    $100,174   $46,478   $—      $401,065  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

(in thousands)

Six months ended June 30, 2013

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 

Allowance for loan losses:

                                

Beginning Balance

 $942  $3,509  $311  $19  $897  $217  $121  $6,016 

Charge-offs

  -   (290)  (23)  -   (385)  (19)  -   (717)

Recoveries

  2   30   20   -   1   -   -   53 

Provision

  778   (1,296)  (72)  5   421   46   88   (30)

Ending Balance

 $1,722  $1,953  $236  $24  $934  $244  $209  $5,322 

Ending balance: individually

                                

evaluated for impairment

 $1,251  $539  $236  $-  $158  $2  $-  $2,186 

Ending balance: collectively

                                

evaluated for impairment

  471   1,414   -   24   776   242   209   3,136 
                                 

Total Allowance for Loan Losses

 $1,722  $1,953  $236  $24  $934  $244  $209  $5,322 
                                 
                                 
                                 

Total Loans ending balance

 $36,278  $236,224  $3,471  $9,904  $117,416  $49,090  $-  $452,383 
                                 

Ending balance: individuallyevaluated for impairment

 $6,349  $15,615  $3,471  $1,228  $8,754  $600  $-  $36,017 
                                 

Ending balance: collectivelyevaluated for impairment

 $29,929  $220,609  $-  $8,676  $108,662  $48,490  $-  $416,366 

The following table details for the year ended December 31, 2013 the amount of loans receivable, net, that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)

2013

 

Commercial

  

Commercial Real Estate

  

Construction

  

Construction to Permanent

  

Residential

  

Consumer

  

Unallocated

  

Total

 
                                 

Total Loans ending balance

 $35,061  $223,165  $260  $11,303  $106,198  $47,071  $-  $423,058 
                                 

Ending balance:

                                

individually evaluated for

                                

impairment

  6,152   7,767   260   1,197   6,024   593   -   21,993 
                                 

Ending balance:

                                

collectively evaluated for

                                

impairment

 $28,909  $215,398  $-  $10,106  $100,174  $46,478  $-  $401,065 

The Company monitors the credit quality of its loans receivable on an ongoing manner. Credit quality is monitored by reviewing certain credit quality indicators. Management has determined that internally assigned risk ratings and loan-to-value ratios (LTVs), at period end, are the key credit quality indicators that best help management monitor the credit quality of the Company’s loans receivable. Loan-to-value ratios used by management in monitoring credit quality are based on current period loan balances and original values at time of origination (unless a current appraisal has been obtained as a result of the loan being deemed impaired or the loan is a maturing construction loan).

Appraisals on properties securing non-performing loans and Other Real Estate Owned (“OREO”) are updated annually. We update our impairment analysis monthly based on the most recent appraisal as well as other factors (such as senior lien positions, e.g.i.e. property taxes).

The majority of the Company’s impaired loans have been resolved through courses of action other than via bank liquidations of real estate collateral through OREO.foreclosure. These include normal loan payoffs, the traditional workout process, triggering personal guarantee obligations, and troubled debt restructurings. However, as loan workout efforts progress to a point where the bank’s liquidation of real estate collateral is the likely outcome, the impairment analysis is updated to reflect actual recent experience with bank sales of OREO properties.

A

Included in the allowance for loan losses are disposition discount adjustments made to real estate appraisals on collateral dependent impaired loans anticipated to become OREO in the coming quarter. The appraisal adjustments percentage is builtreviewed quarterly and modified based on an analysis of actual variances between appraised values as of the date prior loans were transferred into our impairment analysisOREO and reflected in our allowance once a property is determined to be a likely OREO (e.g. foreclosure is probable). To determine the discount we compare theactual average sales prices of our prior OREO properties to the appraised value that was obtained as of the date when we took title to the property.these loans. The difference is the bank-owned disposition discount.

The Company has a risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign an Obligor and a Facility risk rating to each loan in their portfolio at origination, which is ratified or modified by the Committee to which the loan is submitted for approval. When the lender learns of important financial developments, the risk rating is reviewed accordingly, and adjusted if necessary. Similarly, the Loan Committee can adjust a risk rating.

In addition, the Company engages a third party independent loan reviewer that performs quarterly reviews of a sample of loans, validating the Bank’s risk ratings assigned to such loans. The risk ratings play an important role in the establishment of the loan loss provision and to confirm the adequacy of the allowance for loan losses. Any upgrades to classified loans must be approved by the Board Loan Committee.

When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-pointten-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification as in one of the following categories: An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Charge–off generally commences after the loan is classified “doubtful” to reduce the loan to its recoverable balance. If the account is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. This amount is recognized as a recovery once the collateral is sold.

In accordance with FFIEC (“Federal Financial Institutions Examination Council”) published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” credits are charged-off when 180 days delinquent and “Closed-end” credits are charged-off when 120 days delinquent.

In lieu of charging off the entire loan balance, loans with collateral may be written down to the value of the collateral less the cost to sell.

The following table details the credit risk exposure of loans receivable, by loan type and credit quality indicator at March 31,June 30, 2014:

CREDIT RISK PROFILE BY CREDIT WORTHINESS CATEGORY

 

(in thousands) 

Commercial

  

Commercial

Real Estate

  

Construction

  

Constructionto

Permanent

  

Residential

Real Estate

  

Consumer

     

LTVs:

 

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

Other

  

Total

 

Internal Risk Rating

                                                        

Pass

 $26,290  $3,944  $199,352  $6,471  $-  $-  $12,674  $1,762  $67,516  $19,970  $43,547  $1,543  $659  $383,728 

Special Mention

  150   -   3,926   3,096   -   -   -   -   -   -   -   -   -   7,172 

Substandard

  7,465   -   3,634   3,283   -   -   -   -   1,549   482   32   -   -   16,445 
  $33,905  $3,944  $206,912  $12,850  $-  $-  $12,674  $1,762  $69,065  $20,452  $43,579  $1,543  $659  $407,345 

 

(in thousands) Commercial  Commercial
Real Estate
  Construction  Construction
to Permanent
  Residential
Real Estate
  Consumer    
LTVs: < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  Other  Total 

Internal Risk Rating

              

Pass

 $27,343   $3,760   $195,649   $7,178   $—     $—     $8,050   $4,600   $81,304   $19,640   $42,661   $3,756   $654   $394,595  

Special Mention

  159    —      5,774    2,477    —      —      —      —      —      —      —      —      —      8,410  

Substandard

  7,490    —      3,664    3,309    60    200    —      —      1,576    499    35    —      —      16,833  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $34,992   $3,760   $205,087   $12,964   $60   $200   $8,050   $4,600   $82,880   $20,139   $42,696   $3,756   $654   $419,838  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CREDIT RISK PROFILE

 

                                                                                                                                                                        
    Commercial     Commercial
Real Estate
     Construction     Construction  to
Permanent
     Residential             
(in thousands)    Real Estate     Consumer     Totals   Commercial    Commercial Real Estate    Construction     Construction to Permanent  

Residential

Real Estate

  

Consumer

  

Totals

 

Performing

    $32,700      $216,302      $—        $12,650      $100,944      $47,076      $409,672   $30,558  $215,205  $-  $14,436  $87,486  $45,749  $393,434 

Non Performing

     6,052       1,749       260       —         2,075       30       10,166    7,291   4,557   -   -   2,031   32   13,911 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total

    $38,752      $218,051      $260      $12,650      $103,019      $47,106      $419,838   $37,849  $219,762  $-  $14,436  $89,517  $45,781  $407,345 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

The following table details the credit risk exposure of loans receivable, by loan type and credit quality indicator at December 31, 2013:

CREDIT RISK PROFILE BY CREDIT WORTHINESS CATEGORY

 

(in thousands)

                         

 

                             
  

Commercial

  

Commercial Real Estate

  

Construction

   Construction to Permanent   

Residential Real Estate

  

Consumer

     

LTVs:

 

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

< 75%

  

>= 75%

  

Other

  

Total

 

Internal Risk Rating

                                                        

Pass

 $23,493  $3,898  $199,118  $7,951  $-  $-  $10,106  $-  $82,704  $20,592  $42,542  $3,839  $650  $394,893 

Special Mention

  167   -   6,573   2,502   -   -   -   -   -   -   -   -   -   9,242 

Substandard

  7,503   -   3,690   3,331   60   200   1,197   -   1,976   926   9   31   -   18,923 
  $31,163  $3,898  $209,381  $13,784  $60  $200  $11,303  $-  $84,680  $21,518  $42,551  $3,870  $650  $423,058 

 

(in thousands) Commercial  Commercial
Real Estate
  Construction  Construction to
Permanent
  Residential
Real Estate
  Consumer    
LTVs: < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  < 75%  >= 75%  Other  Total 

Internal Risk Rating

              

Pass

 $23,493   $3,898   $199,118   $7,951   $—     $—     $10,106   $—     $82,704   $20,592   $42,542   $3,839   $650   $394,893  

Special Mention

  167    —      6,573    2,502    —      —      —      —      —      —      —      —      —      9,242  

Substandard

  7,503    —      3,690    3,331    60    200    1,197    —      1,976    926    9    31    —      18,923  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $31,163   $3,898   $209,381   $13,784   $60   $200   $11,303   $—     $84,680   $21,518   $42,551   $3,870   $650   $423,058  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

CREDIT RISK PROFILE

 

(in thousands)  Commercial     Commercial Real Estate   Construction    Construction to Permanent   

Residential

Real Estate

  

Consumer

  

Totals

 
                            
 Commercial  Commercial
Real Estate
  Construction  Construction to
Permanent
  Residential     
(in thousands) Real Estate Consumer Totals 

Performing

 $28,909   $221,401   $—     $10,106   $103,296   $47,038   $410,750   $28,909  $221,401  $-  $10,106  $103,296  $47,038  $410,750 

Non Performing

  6,152    1,764    260    1,197    2,902    33    12,308    6,152   1,764   260   1,197   2,902   33   12,308 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total

 $35,061   $223,165   $260   $11,303   $106,198   $47,071   $423,058   $35,061  $223,165  $260  $11,303  $106,198  $47,071  $423,058 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

 

The following table sets forth the detail, and delinquency status, of non-accrual loans and past due loans at March 31,June 30, 2014:

                                                                                                                                                                        
     Non-Accrual and Past Due Loans 
     Non-Accrual Loans             

(in thousands)

2014

    31-60 Days
Past Due
     61-90 Days
Past Due
     Greater Than
90 Days
     Total Past Due     Current     >90 Days Past
Due and
Accruing
     Total Non-
Accrual and
Past Due
Loans
 

Commercial

                            

Substandard

    $—        $—        $2      $2      $6,050      $—        $6,052  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $—        $—        $2      $2      $6,050      $—        $6,052  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Substandard

    $—        $—        $313      $313      $1,436      $834      $2,583  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $—        $—        $313      $313      $1,436      $834      $2,583  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $260      $260      $—        $—        $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Substandard

    $—        $—        $2,075      $2,075      $—        $—        $2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $—        $—        $2,075      $2,075      $—        $—        $2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Substandard

    $—        $—        $2      $2      $28      $—        $30  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $—        $—        $2      $2      $28      $—        $30  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $—        $—        $2,652      $2,652      $7,514      $834      $11,000  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following table sets forth the detail, and delinquency status, of non-accrual loans and past due loans at December 31, 2013:

 

                                                                                                                                                                         

Non-Accrual and Past Due Loans

 

(in thousands)

 

Non-Accrual Loans

        
    Non-Accrual and Past Due Loans                             
    Non-Accrual Loans             

(in thousands)

2013

    31-60 Days
Past Due
     61-90 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current     >90 Days
Past Due
and
Accruing
     Total Non-
Accrual and
Past Due Loans
 

2014

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

>90 Days Past Due and Accruing

  

Total Non-Accrual and Past Due Loans

 

Commercial

                                                        

Pass

    $—        $—        $—        $—        $—        $25      $25  

Substandard

     —         —         2       2       6,150       —         6,152   $1,300  $3  $5  $1,308  $5,983  $-  $7,291 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Commercial

    $—        $—        $2      $2      $6,150      $25      $6,177   $1,300  $3  $5  $1,308  $5,983  $-  $7,291 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Commercial Real Estate

                                                        

Substandard

    $—        $—        $1,764      $1,764      $—        $841      $2,605   $-  $-  $313  $313  $4,244  $-  $4,557 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Commercial Real Estate

    $—        $—        $1,764      $1,764      $—        $841      $2,605   $-  $-  $313  $313  $4,244  $-  $4,557 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Construction

                            

Substandard

    $—        $—        $260      $260      $—        $—        $260  
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Construction

    $—        $—        $260      $260      $—        $—        $260  
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Construction to Permanent

                            

Substandard

    $—        $—        $—        $—        $1,197      $—        $1,197  
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Construction to Permanent

    $—        $—        $—        $—        $1,197      $—        $1,197  
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Residential Real Estate

                                                        

Substandard

    $—        $—        $2,523      $2,523      $379      $—        $2,902   $-  $-  $2,031  $2,031  $-  $-  $2,031 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Residential Real Estate

    $—        $—        $2,523      $2,523      $379      $—        $2,902   $-  $-  $2,031  $2,031  $-  $-  $2,031 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Consumer

                                                        

Substandard

    $—        $—        $2      $2      $31      $—        $33   $-  $-  $5  $5  $27  $-  $32 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total Consumer

    $—        $—        $2      $2      $31      $—        $33   $-  $-  $5  $5  $27  $-  $32 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Total

    $—        $—        $4,551      $4,551      $7,757      $866      $13,174   $1,300  $3  $2,354  $3,657  $10,254  $-  $13,911 
    

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded balance of these non-accrual loans was $10.2$13.9 million and $12.3 million at March 31,June 30, 2014, and December 31, 2013 respectively. Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status. Additionally, certain

At June 30, 2014, $10.3 million or 74% of the non-accruing loan balance of $13.9 million was current.

There were no loans that cannot demonstrate sufficient global cash flow to continue loan payments in the future and certain troubled debt restructures (TDRs) are placed on non-accrual status.

Loans past due ninety days or more, and still accruing interest at June 30, 2014. There were $834,000 and $866,000 at March 31, 2014, and December 31, 2013 respectively, and consisted of one loan at March 31, 2014 and two such loans at December 31, 2013. The subject loan at March 31, 2014 was current as to interest payments but was past the loan’s maturity date and in the process of being renewed. It was approved for renewal in April, 2014. At December 31, 2013, the previously notedtotaling $866,000. One loan had a balance of $841,000 and was current and a second loan for $25,000 was current within 60 days as to interest payments.

Both were past the loan’s maturity date and in the process of being renewed at December 31, 2013.

The following table sets forth the detail, and delinquency status, of non-accrual loans and past due loans at December 31, 2013:

  

Non-Accrual and Past Due Loans

 

(in thousands)

 

Non-Accrual Loans

         

2013

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Greater Than 90 Days

  

Total Past Due

  

Current

  

>90 Days Past Due and Accruing

  

Total Non-Accrual and Past Due Loans

 

Commercial

                            

Pass

 $-  $-  $-  $-  $-  $25  $25 

Substandard

 $-  $-  $2  $2  $6,150  $-  $6,152 

Total Commercial

 $-  $-  $2  $2  $6,150  $25  $6,177 

Commercial Real Estate

                            

Substandard

 $-  $-  $1,764  $1,764  $-  $841  $2,605 

Total Commercial Real Estate

 $-  $-  $1,764  $1,764  $-  $841  $2,605 

Construction

                            

Substandard

 $-  $-  $260  $260  $-  $-  $260 

Total Construction

 $-  $-  $260  $260  $-  $-  $260 

Construction to Permanent

                            

Substandard

 $-  $-  $-  $-  $1,197  $-  $1,197 

Total Construction to Permanent

 $-  $-  $-  $-  $1,197  $-  $1,197 

Residential Real Estate

                            

Substandard

 $-  $-  $2,523  $2,523  $379  $-  $2,902 

Total Residential Real Estate

 $-  $-  $2,523  $2,523  $379  $-  $2,902 

Consumer

                            

Substandard

 $-  $-  $2  $2  $31  $-  $33 

Total Consumer

 $-  $-  $2  $2  $31  $-  $33 
                             

Total

 $-  $-  $4,551  $4,551  $7,757  $866  $13,174 

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at March 31,June 30, 2014.

                                                                                                                                                                        
     Performing (Accruing) Loans             

(in thousands)

2014

    31-60 Days
Past Due
     61-90 Days
Past Due
     Total Past
Due
     Current     Total
Performing
Loans
     Total Non-
Accrual and
Past Due
Loans
     Total Loans 

Commercial

                            

Pass

    $120      $—        $120      $30,983      $31,103      $—        $31,103  

Special Mention

     16       —         16       143       159       —         159  

Substandard

     —         —         —         1,438       1,438       6,052       7,490  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $136      $—        $136      $32,564      $32,700      $6,052      $38,752  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Pass

    $654      $1,188      $1,842      $200,986      $202,828      $—        $202,828  

Special Mention

     —         —         —         8,251       8,251       —         8,251  

Substandard

     —         —         —         4,389       4,389       2,583       6,972  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $654      $1,188      $1,842      $213,626      $215,468      $2,583      $218,051  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction to Permanent

                            

Pass

    $—        $—        $—        $12,650      $12,650      $—        $12,650  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction to Permanent

    $—        $—        $—        $12,650      $12,650      $—        $12,650  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Pass

    $53      $—        $53      $100,891      $100,944      $—        $100,944  

Substandard

     —         —         —         —         —         2,075       2,075  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $53      $—        $53      $100,891      $100,944      $2,075      $103,019  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Pass

    $4      $—        $4      $47,067      $47,071      $—        $47,071  

Substandard

     —         —         —         5       5       30       35  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $4      $—        $4      $47,072      $47,076      $30      $47,106  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $847      $1,188      $2,035      $406,803      $408,838      $11,000      $419,838  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

(in thousands)

 

Performing (Accruing) Loans

         

2014

 

31-60 Days Past Due

  

61-90 Days Past Due

  

Total Past Due

  

Current

  

Total Performing Loans

  

Total Non-Accrual and Past Due Loans

  

Total Loans

 

Commercial

                            

Pass

 $1,002  $-  $1,002  $29,231  $30,233  $-  $30,233 

Special Mention

  -   15   15   135   150   -   150 

Substandard

  -   25   25   150   175   7,291   7,466 

Total Commercial

 $1,002  $40  $1,042  $29,516  $30,558  $7,291  $37,849 

Commercial Real Estate

                            

Pass

 $-  $-  $-  $205,823  $205,823  $-  $205,823 

Special Mention

  1,816   -   1,816   5,206   7,022   -   7,022 

Substandard

  -   -   -   2,360   2,360   4,557   6,917 

Total Commercial Real Estate

 $1,816  $-  $1,816  $213,389  $215,205  $4,557  $219,762 

Construction to Permanent

                            

Pass

 $-  $-  $-  $14,436  $14,436  $-  $14,436 

Total Construction to Permanent

 $-  $-  $-  $14,436  $14,436  $-  $14,436 

Residential Real Estate

                            

Pass

 $155  $-  $155  $87,331  $87,486  $-  $87,486 

Substandard

  -   -   -   -   -   2,031   2,031 

Total Residential Real Estate

 $155  $-  $155  $87,331  $87,486  $2,031  $89,517 

Consumer

                            

Pass

 $11  $100  $111  $45,638  $45,749  $-  $45,749 

Substandard

  -   -   -   -   -   32   32 

Total Consumer

 $11  $100  $111  $45,638  $45,749  $32  $45,781 

Total

                            

Pass

 $1,168  $100  $1,268  $382,459  $383,727  $-  $383,727 

Special Mention

  1,816   15   1,831   5,341   7,172   -   7,172 

Substandard

  -   25   25   2,510   2,535   13,911   16,446 

Grand Total

 $2,984  $140  $3,124  $390,310  $393,434  $13,911  $407,345 

The following table sets forth the detail and delinquency status of loans receivable by performing and non-performing loans at December 31, 2013.

                                                                                                                                                                        
     Performing (Accruing) Loans             

(in thousands)

2013

    31-60 Days
Past Due
     61-89 Days
Past Due
     Total Past
Due
     Current     Total Loan
Balances
     Total Non-
Accrual and
Past Due Loans
     Total Loans
Receivable
 

Commercial

                            

Pass

    $725      $—        $725      $26,641      $27,366      $25      $27,391  

Special Mention

     —         —         —         167       167       —         167  

Substandard

     —         —         —         1,351       1,351       6,152       7,503  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial

    $725      $—        $725      $28,159      $28,884      $6,177      $35,061  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Commercial Real Estate

                            

Pass

    $1,858      $266      $2,124      $204,944      $207,068      $—        $207,068  

Special Mention

     —         —         —         9,075       9,075       —         9,075  

Substandard

     —         —         —         4,417       4,417       2,605       7,022  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Commercial Real Estate

    $1,858      $266      $2,124      $218,436      $220,560      $2,605      $223,165  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction

                            

Substandard

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction

    $—        $—        $—        $—        $—        $260      $260  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Construction to Permanent

                            

Pass

    $—        $—        $—        $10,106      $10,106      $—        $10,106  

Substandard

     —         —         —         —         —         1,197       1,197  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Construction to Permanent

    $—        $—        $—        $10,106      $10,106      $1,197      $11,303  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Residential Real Estate

                            

Pass

    $32      $—        $32      $103,264      $103,296      $—        $103,296  

Substandard

     —         —         —         —         —         2,902       2,902  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Residential Real Estate

    $32      $—        $32      $103,264      $103,296      $2,902      $106,198  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Consumer

                            

Pass

    $350      $560      $910      $46,121      $47,031      $—        $47,031  

Substandard

     7       —         7       —         7       33       40  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Consumer

    $357      $560      $917      $46,121      $47,038      $33      $47,071  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $2,972      $826      $3,798      $406,085      $409,884      $13,174      $423,058  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

(in thousands)

 

Performing (Accruing) Loans

         

2013

 

31-60 Days Past Due

  

61-89 Days Past Due

  

Total Past Due

  

Current

  

Total Loan Balances

  

Total Non-Accrual and Past Due Loans

  

Total Loans Receivable

 

Commercial

                            

Pass

 $725  $-  $725  $26,641  $27,366  $25  $27,391 

Special Mention

  -   -   -   167   167   -   167 

Substandard

  -   -   -   1,351   1,351   6,152   7,503 

Total Commercial

 $725  $-  $725  $28,159  $28,884  $6,177  $35,061 

Commercial Real Estate

                            

Pass

 $1,858  $266  $2,124  $204,944  $207,068  $-  $207,068 

Special Mention

  -   -   -   9,075   9,075   -   9,075 

Substandard

  -   -   -   4,417   4,417   2,605   7,022 

Total Commercial Real Estate

 $1,858  $266  $2,124  $218,436  $220,560  $2,605  $223,165 

Construction

                            

Substandard

  -   -   -   -   -   260   260 

Total Construction

 $-  $-  $-  $-  $-  $260  $260 

Construction to Permanent

                            

Pass

 $-  $-  $-  $10,106  $10,106  $-  $10,106 

Substandard

  -   -   -   -   -   1,197   1,197 

Total Construction to Permanent

 $-  $-  $-  $10,106  $10,106  $1,197  $11,303 

Residential Real Estate

                            

Pass

 $32  $-  $32  $103,264  $103,296  $-  $103,296 

Substandard

  -   -   -   -   -   2,902   2,902 

Total Residential Real Estate

 $32  $-  $32  $103,264  $103,296  $2,902  $106,198 

Consumer

                            

Pass

 $350  $560  $910  $46,121  $47,031  $-  $47,031 

Substandard

  7   -   7   -   7   33   40 

Total Consumer

 $357  $560  $917  $46,121  $47,038  $33  $47,071 

Total

                            

Pass

 $2,965  $826  $3,791  $391,076  $394,867  $25  $394,892 

Special Mention

  -   -   -   9,242   9,242   -   9,242 

Substandard

  7   -   7   5,768   5,775   13,149   18,924 

Grand Total

 $2,972  $826  $3,798  $406,086  $409,884  $13,174  $423,058 

The following table summarizes impaired loans as of March 31,June 30, 2014:

                                                                        
(in thousands)                  
     Recorded
Investment
     Unpaid Principal
Balance
     Related Allowance 

With no related allowance recorded:

            

Commercial

    $2      $160      $—    

Commercial Real Estate

     8,699       9,537       —    

Construction

     —         —         —    

Construction to Permanent

     —         —        

Residential

     4,680       7,203       —    

Consumer

     585       664       —    
    

 

 

     

 

 

     

 

 

 

Total:

    $13,966      $17,564      $—    

With an allowance recorded:

            

Commercial

    $6,050      $6,050      $1,500  

Commercial Real Estate

     156       210       17  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     499       545       21  

Consumer

     2       2       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $6,967      $7,294      $1,800  

Commercial

    $6,052      $6,210      $1,500  

Commercial Real Estate

     8,855       9,747       17  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     5,179       7,748       21  

Consumer

     587       666       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $20,933      $24,858      $1,800  
    

 

 

     

 

 

     

 

 

 

(in thousands)

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

 
             
             

With no related allowance recorded:

            

Commercial

 $1,308  $1,374  $- 

Commercial Real Estate

  8,640   9,467   - 

Construction

  -   510   - 

Construction to Permanent

  -   -   - 

Residential

  4,746   7,316   - 

Consumer

  583   662   - 

Total:

 $15,277  $19,329  $- 

With an allowance recorded:

            

Commercial

 $5,983  $5,983  $1,750 

Commercial Real Estate

  2,970   3,013   307 

Construction

  -   -   - 

Construction to Permanent

  -   -   - 

Residential

  369   397   - 

Consumer

  5   5   5 

Total:

 $9,327  $9,398  $2,062 

Commercial

 $7,291  $7,357  $1,750 

Commercial Real Estate

  11,610   12,480   307 

Construction

  -   510   - 

Construction to Permanent

  -   -   - 

Residential

  5,115   7,713   - 

Consumer

  588   667   5 

Total:

 $24,604  $28,727  $2,062 

Impaired loans consist of non-accrual loans, TDRs and loans that were previously classified as TDRs that have been upgraded.

upgraded from non-accrual.

The following table summarizes impaired loans as of December 31, 2013:

                                                                        
(in thousands)      
     Recorded
Investment
     Unpaid Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

            

Commercial

    $2      $151      $—    

Commercial Real Estate

     7,597  ��    8,316       —    

Construction

     —         —         —    

Construction to Permanent

     1,197       1,425       —    

Residential

     5,098       7,632       —    

Consumer

     591       670       —    
    

 

 

     

 

 

     

 

 

 

Total:

    $14,485      $18,194      $—    

With an allowance recorded:

            

Commercial

    $6,150      $6,150      $1,500  

Commercial Real Estate

     170       215       31  

Construction

     260       487       260  

Construction to Permanent

     —         —         —    

Residential

     926       1,066       98  

Consumer

     2       2       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $7,508      $7,920      $1,891  

Commercial

    $6,152      $6,301      $1,500  

Commercial Real Estate

     7,767       8,531       31  

Construction

     260       487       260  

Construction to Permanent

     1,197       1,425       —    

Residential

     6,024       8,698       98  

Consumer

     593       672       2  
    

 

 

     

 

 

     

 

 

 

Total:

    $21,993      $26,114      $1,891  
    

 

 

     

 

 

     

 

 

 

(in thousands)

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

 
             
             

With no related allowance recorded:

            

Commercial

 $2  $151  $- 

Commercial Real Estate

  7,597   8,316   - 

Construction

  -   -   - 

Construction to Permanent

  1,197   1,425   - 

Residential

  5,098   7,632   - 

Consumer

  591   670   - 

Total:

 $14,485  $18,194  $- 
             

With an allowance recorded:

            

Commercial

 $6,150  $6,150  $1,500 

Commercial Real Estate

  170   215   31 

Construction

  260   487   260 

Construction to Permanent

  -   -   - 

Residential

  926   1,066   98 

Consumer

  2   2   2 

Total:

 $7,508  $7,920  $1,891 
             

Commercial

 $6,152  $6,301  $1,500 

Commercial Real Estate

  7,767   8,531   31 

Construction

  260   487   260 

Construction to Permanent

  1,197   1,425   - 

Residential

  6,024   8,698   98 

Consumer

  593   672   2 

Total:

 $21,993  $26,114  $1,891 

The recorded investment of impaired loans at March 31,June 30, 2014 and December 31, 2013 was $20.9$24.6 million and $22.0 million, with related allowances of $1.8$2.1 million and $1.9 million, respectively.

Included in the tables above at March 31,June 30, 2014 and December 31, 2013 are loans with carrying balances of $14.0$15.2 million and $14.5 million that required no specific reserves in our allowance for loan losses. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged-off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.

On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to remain competitive and assist customers who may be experiencing financial difficulty, as well as to preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a troubled debt restructured loan.

The following table presents the total troubled debt restructured loans as of March 31,June 30, 2014:

 

                                                                                                                                                
    Accrual     Non-accrual     Total 
    # of           # of           # of        

Accrual

  

Non-accrual

  

Total

 
(Dollars in thousands)    Loans     Amount     Loans     Amount     Loans     Amount  

# of

      

# of

      

# of

     
 

Loans

  

Amount

  

Loans

  

Amount

  

Loans

  

Amount

 

Commercial Real Estate

     2      $2,128       1      $1,280       3      $3,408    2  $2,109   1  $1,274   3  $3,383 
    

 

     

 

     

 

     

 

     

 

     

 

 

Total Troubled Debt Restructurings

     2      $2,128       1      $1,280       3      $3,408    2  $2,109   1  $1,274   3  $3,383 
    

 

     

 

     

 

     

 

     

 

     

 

 

The following table presents the total troubled debt restructured loans as of December 31, 2013:

 

                                                                                                                                                
     Accrual     Non-accrual     Total 
     # of           # of           # of       
(Dollars in thousands)    Loans     Amount     Loans     Amount     Loans     Amount 

Construction to permanent

     1      $991       1      $1,197       2      $2,188  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total Troubled Debt Restructurings

     1      $991       1      $1,197       2      $2,188  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Two

  

Accrual

  

Non-accrual

  

Total

 

(Dollars in thousands)

 

# of

      

# of

      

# of

     
  

Loans

  

Amount

  

Loans

  

Amount

  

Loans

  

Amount

 

Commercial Real Estate

  1  $991   -  $-   1  $991 

Construction to Permanent

  -   -   1   1,197   1   1,197 

Total Troubled Debt Restructurings

  1  $991   1  $1,197   2  $2,188 

No loans including a loan which had been modified in a prior year, were modified in a troubled debt restructuring during the three months ended March 31,June 30, 2014. The following table summarizes loans that were modified in a troubled debt restructuring during the threesix months ended March 31,June 30, 2014.

 

                                                                                                
    Three months ended March 31, 2014  

Six months ended June 30, 2014

 
          Pre-Modification           Post-Modification      

Pre-Modification

      

Post-Modification

 
    Number of     Outstanding Recorded     Number of     Outstanding Recorded  

Number of

  

Outstanding Recorded

  

Number of

  

Outstanding Recorded

 
(Dollars in thousands)    Relationships     Investment     Relationships     Investment  

Relationships

  

Investment

  

Relationships

  

Investment

 

Troubled Debt Restructurings

                

Commercial Real Estate

     2      $2,439       2      $2,430    2  $2,439   2  $2,430 
    

 

     

 

     

 

     

 

 

Total Troubled Debt Restructurings

     2      $2,439       2      $2,430    2  $2,439   2  $2,430 
    

 

     

 

     

 

     

 

 

Substantially all of our troubled debt restructured loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. If the borrower had demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

All troubled debt restructurings are impaired loans, which are individually evaluated for impairment.

Note 4:          Deposits

The following table is a summary of the Company’s deposits at:

 

                                                
    March 31,     December 31,  

June 30,

  

December 31,

 
(in thousands)    2014     2013  

2014

  

2013

 
        

Non-interest bearing

    $57,967      $55,358   $61,685  $55,358 
    

 

     

 

         

Interest bearing

                

NOW

     25,464       28,618    30,133   28,618 

Savings

     86,409       80,983    85,218   80,983 

Money market

     29,502       29,310    26,873   29,310 

Time certificates, less than $100,000

     121,955       129,548    117,513   129,548 

Time certificates, $100,000 or more

     106,672       106,387    105,010   106,387 
    

 

     

 

 

Total interest bearing

     370,002       374,846    364,747   374,846 
    

 

     

 

 

Total Deposits

    $427,969      $430,204   $426,432  $430,204 
    

 

     

 

 

Note 5:          Share-Based Compensation

The Company maintains the Patriot National Bancorp, Inc. 2012 Stock Plan to provide an incentive to directors and employees of the Company by the grant of options, restricted stock awards or phantom stock units. The Plan provides for the issuance of up to 3,000,000 shares of the Company’s common stock subject to certain Plan limitations. 2,240,268As of June 30, 2014, 2,202,100 shares of stock remain available for issuance under the Plan as of March 31, 2014.Plan. The vesting of restricted stock awards and options may be accelerated in accordance with terms of the plan. The Compensation Committee shall make terms and conditions applicable to the vesting of restricted stock awards and stock options. Restricted stock grants are available to directors and employees and generally vest in quarterly or annual installments over a three, four or five year period from the date of grant. The Compensation Committee accelerated the vesting of the initial grant of restricted stock in 2012, whereby the first year of the tranche vested immediately. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a straight-line basis.

During the three months ended March 31,June 30, 2014 and March 31,June 30, 2013, the Company recorded $59,000$72,000 and $7,000$8,000 of total stock-based compensation, respectively. During the quartersix months ended March 31,June 30, 2014 and June 30, 2013, the Company recorded $130,000 and $15,000 of total stock-based compensation, respectively. During the six months ended June 30, 2014, there were 347,484385,652 awards granted under the 2012 Stock Plan.

The following is a summary of the status of the Company’s restricted shares as of March 31,June 30, 2014, and changes therein during the period then ended.

 

                                                
    Number of
Shares
Awarded
     Weighted
Average Grant
Date Fair Value
  

Number of

Shares

Awarded

  

Weighted

Average Grant

Date Fair Value

 

Non-vested at December 31, 2013

     281,835      $1.26    281,835  $1.26 

Granted

     347,484       1.01    385,652   1.04 

Vested

     4,435       1.73    (8,874)  1.73 
    

 

     

Non-vested at March 31, 2014

     624,884      $1.12  
    

 

     

Non-vested at June 30, 2014

  658,613  $1.12 

Expected future stock award expense related to the non-vested restricted awards as of March 31,June 30, 2014, is $648,000$627,000 over an average period of 2.82.75 years.

The companyCompany had no outstanding stock options at March 31,June 30, 2014.

Note 6:     Income Taxes

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. The deferred tax position has been affected by several significant transactions in prior years. These transactions include provision for loan losses, the levels of non-accrual loans and other-than-temporary impairment write-offs of certain investments, as well as a loss on the bulk sale of loans in 2011. As a result, the Company was in a cumulative net loss position in 2011 and under the applicable accounting guidance, had concluded that it was not more-likely-than-notthat the Company would be able to realize its deferred tax assets and, accordingly, had established a full valuation allowance totaling $14.4 totaling$14.4million against the deferred tax asset balance remaining after the IRC 382 write-down (see below).

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than 50% change of ownership in 2010. Consequently, use of the Company’sCompany's net operating loss carry forward and certain built in deductions available against future taxable income in any one year are limited. The maximum amount of carry forwards available in a given year is limited to the product of the Company’sCompany's fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carry forward not utilized in prior years.

The Company analyzed the impact of its ownership change in 2010 and calculated the annual limitation under IRC 382 to be $284,000. Based on the analysis, the Company had determined that the pre-change net operating losses and net unrealized built-in deductions were approximately $36.2 million. Based on a 20 year carry forward period, the Company could utilize approximately $5.6 million of the pre-change net operating losses and built-in deductions. Therefore, the Company wrote-off approximately $10.4 million of deferred tax assets in 2011. Accordingly, the write-off of the deferred tax asset did not affect the consolidated financial statements as there was a full valuation allowance against the deferred tax asset.

Management has reviewed the deferred tax position of the Company at March 31,June 30, 2014. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. At March 31,June 30, 2014, the companyCompany reported taxable income for the secondthird consecutive quarter. However, basedquarter and is anticipating earnings to be positive in the future.  Based on current accounting guidance the Company has not generated taxable income for a sufficient length of time in order to reverse the DTA valuation allowance at June 30, 2014 and, accordingly, had an allowance totaling $17.8 million at March 31, 2014.$17.6 million. In the future, whenas the Company has generatedcontinues to generate taxable income on a more sustained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

Note 7:          Income (loss) per share

The Company is required to present basic income (loss) per share and diluted income (loss) per share in its consolidated statements of operations. Basic income (loss) per share amounts are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted income (loss) per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and arewould be determined using the treasury stock method. The Company is also required to provide a reconciliation of the numerator and denominator used in the computation of both basic and diluted income (loss) per share.

The stock options and non-vested

Non-vested restricted stock awards did not have an impact on the diluted earnings per share. The Company had no outstanding stock options. The following is information about the computation of income (loss) per share for the three and six months ended March 31,June 30, 2014 and 2013:

 

                                                                        
         Weighted Average
Common Shares
O/S
       
Three months ended March 31, 2014    Net Income       Amount 

Basic and Diluted Income Per Share

          

Income attributable to common shareholders

    $319,000     38,493,189      $0.01  
    

 

 

   

 

 

     

 

 

 
Three months ended March 31, 2013    Net Loss   Weighted Average
Common Shares

O/S
     Amount 

Basic and Diluted Loss Per Share

          

Loss attributable to common shareholders

    $(1,957,000   38,435,597      $(0.05
    

 

 

   

 

 

     

 

 

 
Three months ended June 30, 2014 

Net Income

   

 Weighted Average

Common Shares

O/S

  

Amount

 

Basic and Diluted Income Per Share

            

Income attributable to common shareholders

 $525,000   38,497,624  $0.01 

Three months ended June 30, 2013 

Net Loss

   

Weighted Average
Common Shares
O/S

  

Amount

 

Basic and Diluted Loss Per Share

            

Loss attributable to common shareholders

 $(3,912,000)  38,434,298  $(0.10)

 Six months ended June 30, 2014 

Net Income

   Weighted Average
Common Shares
O/S
  

Amount

 

Basic and Diluted Income Per Share

            

Income attributable to common shareholders

 $844,000   38,495,394  $0.02 

Six months ended June 30, 2013 

Net Loss

   Weighted Average

Common Shares

O/S

  

Amount

 

Basic and Diluted Loss Per Share

            

Loss attributable to common shareholders

 $(5,869,000)  38,434,919  $(0.15)

Note 8:          Other Comprehensive Income

Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available-for-sale securities, is as follows:

 

                                                                                                                                                 

Three Months Ended

  

Six Months Ended

 
    Three Months Ended     Three Months Ended  

June 30, 2014

  

June 30, 2014

 
    March 31, 2014     March 31, 2013  

Before Tax

      

Net of Tax

  

Before Tax

      

Net of Tax

 
( in thousands)    Before Tax
Amount
     Tax Effect     Net of Tax
Amount
     Before Tax
Amount
     Tax Effect     Net of Tax
Amount
  

Amount

  

Tax Effect

  

Amount

  

Amount

  

Tax Effect

  

Amount

 

Unrealized holding gains arising during the period

    $393      $—        $393      $55      $—        $55   $108  $-  $108  $501  $-  $501 
    

 

     

 

     

 

     

 

     

 

     

 

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2013

  

June 30, 2013

 
  

Before Tax

      

Net of Tax

  

Before Tax

      

Net of Tax

 
  

Amount

  

Tax Effect

  

Amount

  

Amount

  

Tax Effect

  

Amount

 

Unrealized holding (losses) arising during the period

 $(629) $-  $(629) $(574) $-  $(574)

Note 9:          Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The contractual amount of commitments to extend credit and standby letters of credit represent the total amount of potential accounting loss should: the contracts be fully drawn upon; the customers default; and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that the Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.

Financial instruments whose contractual amounts represent credit risk at March 31,June 30, 2014 are as follows:

 

                        
    (in thousands)  (in thousands) 

Commitments to extend credit:

     

 

 

Future loan commitments

    $15,526   $12,577 

Home equity lines of credit

     27,708    23,461 

Unused lines of credit

     36,871    42,331 

Undisbursed construction loans

     2,174    5,888 

Financial standby letters of credit

     1,118    1,118  
    

 

  $85,375 
    $83,397  
    

 

 

Standby letters of credit are written commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Guarantees that are not derivative contracts are recorded on the Company’s consolidated balance sheet at their fair value at inception.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates, or other termination clauses, and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include residential and commercial property, deposits and securities. The bank has established a reserve of $12,000 as of March 31,June 30, 2014.

Note 10:     Regulatory and Operational Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory—mandatory - and possibly additional discretionary—discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’sCompany's financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’sCompany's and the Bank’sBank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’sCompany's and the Bank’sBank'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 Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). In addition, due to the Bank’s asset profile and current economic conditions in its markets, theThe Bank’s capital plan pursuant to the Agreement described below does targettargets a minimum 9% Tier 1 leverage capital ratio.

In February 2009 the Bank entered into a formal written agreement (the “Agreement”) with the Office of the Comptroller of the Currency. Under the terms of the Agreement, the Bank has appointed a Compliance Committee of outside directors and the Chief Executive Officer. The Committee must report quarterly to the Board of Directors and to the OCC on the Bank’s progress in complying with the Agreement. The Agreement requires the Bank to review, adopt and implement a number of policies and programs related to credit and operational issues. The Agreement further provides for limitations on the acceptance of certain brokered deposits and the extension of credit to borrowers whose loans are criticized. The Bank may pay dividends during the term of the Agreement only with prior written permission from the OCC. The Agreement also requires that the Bank develop and implement a three-year capital plan. The Bank has taken or put into process all of the steps required by the Agreement, and does not anticipate that the restrictions included within the Agreement will impair its current business plan.

In June 2010 the companyCompany entered into a formal written agreement (the “Reserve Bank Agreement”) with the Federal Reserve Bank of New York (the “Reserve Bank”). Under the terms of the Reserve Bank Agreement, the Board of Directors of the Company are required to take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank including taking steps to insure that the Bank complies with the Agreement with the OCC. The Reserve Bank Agreement requires the Company to submit, adopt and implement a capital plan that is acceptable to the Reserve Bank. The Company must also report to the Reserve Bank quarterly on the Company’s progress in complying with the Reserve Bank Agreement. The Agreement further provides for certain restrictions on the payment or receipt of dividends, distributions of interest or principal on subordinate debentures or trust preferred securities and the Company’s ability to incur debt or to purchase or redeem its stock without the prior written approval of the Reserve Bank. The Company has taken or put into process all of the steps required by the Reserve Bank Agreement, and does not anticipate that the restrictions included within the Reserve Bank Agreement will impair its current business plan.

The Company’s and the Bank’s actual capital amounts and ratios at March 31,June 30, 2014 and December 31, 2013 were:

  

Actual

  

For Capital Adequacy Purposes

  

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

 

(Dollars in thousands)

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
                         

June 30, 2014

                        
                         

The Company:

                        
                         

Total Capital (to Risk Weighted Assets)

 $57,020   14.21% $32,098   8.00% 

N/A

  

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

  52,002   12.96%  16,049   4.00% 

N/A

  

N/A

 

Tier 1 Capital (to Average Assets)

  52,002   9.61%  21,636   4.00% 

N/A

  

N/A

 
                         

The Bank:

                        
                         

Total Capital (to Risk Weighted Assets)

 $57,081   14.24% $32,069   8.00% $48,103   12.00%

Tier 1 Capital (to Risk Weighted Assets)

  52,068   12.99%  16,034   4.00%  42,090   10.50%

Tier 1 Capital (to Average Assets)

  52,068   9.63%  21,620   4.00%  48,646   9.00%
                         

December 31, 2013

                        
                         

The Company:

                        
                         

Total Capital (to Risk Weighted Assets)

 $56,060   13.95% $32,153   8.00% 

N/A

  

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

  51,027   12.70%  16,076   4.00% 

N/A

  

N/A

 

Tier 1 Capital (to Average Assets)

  51,027   9.33%  21,888   4.00% 

N/A

  

N/A

 
                         

The Bank:

                        
                         

Total Capital (to Risk Weighted Assets)

 $55,758   13.86% $32,187   8.00% $48,280   12.00%

Tier 1 Capital (to Risk Weighted Assets)

  50,730   12.61%  16,093   4.00%  42,245   10.50%

Tier 1 Capital (to Average Assets)

  50,730   9.28%  21,872   4.00%  49,212   9.00%

  

                                                                                                                                                
     Actual  For Capital
Adequacy Purposes
  To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
(Dollars in thousands)    Amount     Ratio  Amount     Ratio  Amount     Ratio 

March 31, 2014

                  

The Company:

                  

Total Capital (to Risk Weighted Assets)

    $56,405       14.12 $31,952       8.00  N/A       N/A  

Tier 1 Capital (to Risk Weighted Assets)

     51,406       12.87  15,976       4.00  N/A       N/A  

Tier 1 Capital (to Average Assets)

     51,406       9.56  21,507       4.00  N/A       N/A  

The Bank:

                  

Total Capital (to Risk Weighted Assets)

    $56,342       14.12 $31,919       8.00 $39,898       10.00

Tier 1 Capital (to Risk Weighted Assets)

     51,349       12.87  15,959       4.00  23,939       6.00

Tier 1 Capital (to Average Assets)

     51,349       9.56  21,491       4.00  26,864       5.00

December 31, 2013

                  

The Company:

                  

Total Capital (to Risk Weighted Assets)

    $56,060       13.95 $32,153       8.00  N/A       N/A  

Tier 1 Capital (to Risk Weighted Assets)

     51,027       12.70  16,076       4.00  N/A       N/A  

Tier 1 Capital (to Average Assets)

     51,027       9.33  21,888       4.00  N/A       N/A  

The Bank:

                  

Total Capital (to Risk Weighted Assets)

    $55,758       13.86 $32,153       8.00 $32,187       10.00

Tier 1 Capital (to Risk Weighted Assets)

     50,730       12.61  16,076       4.00  24,140       6.00

Tier 1 Capital (to Average Assets)

     50,730       9.28  21,888       4.00  27,340       5.00

Restrictions on dividends, loans and advances

The Company’s ability to pay dividends is dependent on the Bank’s ability to pay dividends to the Company. Pursuant to the February 9, 2009 Agreement between the Bank and the OCC, the Bank can pay dividends to the Company only pursuant to a dividend policy requiring compliance with the Bank’sBank's OCC-approved capital program, in compliance with applicable law and with the prior written determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the Agreement, certain other restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances.  The approval of the OCC is required to pay dividends in excess of the Bank’s earnings retained in the current year plus retained net earnings for the preceding two years.  As of March 31,June 30, 2014, the Bank had an accumulated deficit; therefore, dividends may not be paid to the Company. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements.

The Company’s ability to pay dividends and incur debt is also restricted by the Reserve Bank Agreement. Under the terms of the Reserve Bank Agreement, the Company has agreed that it shall not declare or pay any dividends or incur, increase or guarantee any debt without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the Board of Governors.

Loans or advances to the Company from the Bank are limited to 10% of the Bank’sBank's capital stock and surplus on a secured basis.

Recent Legislative Developments

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) was signed into law on July 21, 2010. The Act is a significant piece of legislation that continues to have a major impact on the financial services industry, including the organization, financial condition and operations of banks and bank holding companies. Management continues to evaluate the impact of the Act; however, uncertainty remains as to its operational impact, which could have a material adverse impact on the Company’s business, results of operations and financial condition. Many of the provisions of the Act are aimed at financial institutions that are significantly larger than the Company and the Bank. Notwithstanding this, there are many other provisions that the Company and the Bank are subject to and will have to comply with, including any new rules applicable to the Company and the Bank promulgated by the Bureau of Consumer Financial Protection, a new regulatory body dedicated to consumer protection. As rules and regulations are promulgated by the agencies responsible for implementing and enforcing the Act, the Company and the Bank will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

The Dodd-Frank Act broadens the base for Federal Deposit Insurance Corporation insurance assessments. Under rules issued by the FDIC in February 2011, the base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risks of the institution being assessed. The rule was effective beginning April 1, 2011. This did not have a material impact on the Company.

On June 28, 2011, the Federal Reserve Board approved a final debit-card interchange rule. This primarily impacts larger banks and has not had a material impact on the Company.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on the Company. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

Note 11:      Fair Value and Interest Rate Risk

The Company used fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable and payable: The carrying amount is a reasonable estimate of fair value. These financial instruments are not recorded at fair value on a recurring basis.

Available-for-Sale Securities: These financial instruments are recorded at fair value in the financial statements. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds and mortgage-backed securities, corporate bonds and money market preferred equity securities. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricings. The fair value measurements considered observable data may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data. Level 3 securities are instruments for which significant unobservable input are utilized. Available-for-sale securities are recorded at fair value on a recurring basis.

Other Investments:The Bank’s investment portfolio includes the Solomon Hess SBA Loan Fund totaling $4.5 million. This investment is utilized for the purposes of the Bank satisfying its CRA lending requirements. As this fund operates as a private fund, shares in the Fund are not publicly traded and therefore have no readily determinable market value. An investment in the Fund is reported in the financial statements at cost, as adjusted for income, losses, and cash distributions attributable to the investment. 

Loans:For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using the period end rates, estimated by using local market data, at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of collateral. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans.

Other Real Estate Owned: The fair value of the Company’s OREO properties is based on the estimated current property valuations less estimated selling costs. When the fair value is based on current observable appraised values, OREO is classified within Level 2. The Company classifies the OREO within Level 3 when unobservable adjustments are made to appraised values. The Company does not record other real estate owned at fair value on a recurring basis.

Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities on such deposits. The Company does not record deposits at fair value on a recurring basis.

Short-term borrowings: The carrying amounts of borrowings under short-term repurchase agreements and other short-term borrowings maturing within 90 days approximate their fair values. The Company does not record short-term borrowings at fair value on a recurring basis.

Junior Subordinated Debt:Junior subordinated debt reprices quarterly and as a result the carrying amount is considered a reasonable estimate of fair value. The Company does not record junior subordinated debt at fair value on a recurring basis.

Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of similar maturity to a schedule of maturities of such advances. The Company does not record these borrowings at fair value on a recurring basis.

Other Borrowings: The fair values of longer term borrowings and fixed rate repurchase agreements are estimated using a discounted cash flow calculation that applies current interest rates for transactions of similar maturity to a schedule of maturities of such transactions. The Company does not record these borrowings at fair value on a recurring basis.

Off-balance sheet instruments: Fair values for the Company’s off-balance-sheet instruments (lending commitments) are based on interest rate changes and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Company does not record its off-balance-sheet instruments at fair value on a recurring basis.

The following table details the financial assets measured at fair value on a recurring basis as of March 31,June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine fair value:

(in thousands)

                
  

 Quoted Prices in 

  

Significant

  

Significant

     
  

Active Markets

  

Observable

  

Unobservable

  

Balance

 
  

for Identical Assets

  

Inputs

  

Inputs

  

as of

 

June 30, 2014

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

June 30, 2014

 
                 

U.S. Government agency mortgage-backed securities

 $-  $19,498  $-  $19,498 

U.S. Government agency bonds

  -   7,344   -   7,344 

Corporate bonds

  -   8,844   -   8,844 
                 

Securities available for sale

 $-  $35,686  $-  $35,686 

  

Quoted Prices in

  

Significant

  

Significant

     
  

Active Markets

  

Observable

  

Unobservable

  

Balance

 
  

for Identical Assets

  

Inputs

  

Inputs

  

as of

 

December 31, 2013

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

December 31, 2013

 

U.S. Government agency mortgage-backed securities

 $-  $21,752  $-  $21,752 

U.S. Government agency bonds

  -   7,079   -   7,079 

Corporate bonds

  -   8,870   -   8,870 
       -   -     

Securities available for sale

 $-  $37,701  $-  $37,701 

 

(in thousands)  Quoted Prices in
Active Markets
for Identical Assets

(Level 1)
   Significant
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Balance
as of
March 31, 2014
 

March 31, 2014

        

U.S. Government agency mortgage- backed securities

  $—      $20,632    $—      $20,632  

U.S. Government agency bonds

   —       7,245     —       7,245  

Corporate bonds

   —       8,938     —       8,938  
  

 

 

   

 

 

   

 

 

   

 

 

 

Securities available for sale

  $—      $36,815    $—      $36,815  
  

 

 

   

 

 

   

 

 

   

 

 

 
   Quoted Prices in
Active Markets

for Identical Assets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Balance
as of
December 31, 2013
 

December 31, 2013

        

U.S. Government agency mortgage- backed securities

  $—      $21,752    $—      $21,752  

U.S. Government agency bonds

     7,079       7,079  

Corporate bonds

   —       8,870     —       8,870  
  

 

 

   

 

 

   

 

 

   

 

 

 

Securities available for sale

  $—      $37,701    $—      $37,701  
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers of assets between levels 1, 2 or 3 as of March 31,June 30, 2014 or December 31, 2013. Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following tables reflect financial assets measured at fair value on a non-recurring basis as of March 31,June 30, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

                                                                                                
(in thousands)    Quoted Prices in
Active Markets

for Identical Assets
(Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
   Balance 

March 31, 2014

              

Impaired Loans(1)

    $—        $—        $6,855    $6,855  
    

 

 

     

 

 

     

 

 

   

 

 

 

Other real estate owned(2)

    $ —        $—        $264    $264  
    

 

 

     

 

 

     

 

 

   

 

 

 

December 31, 2013

              

Impaired Loans(1)

    $—        $—        $7,508    $7,508  
    

 

 

     

 

 

     

 

 

   

 

 

 

Other real estate owned(2)

    $—        $—        $—      $—    
    

 

 

     

 

 

     

 

 

   

 

 

 
  

Quoted Prices in

  

Significant

  

Significant

     

(in thousands)

 

Active Markets

  

Observable

  

Unobservable

     
  

for Identical Assets

  

Inputs

  

Inputs

  

Balance

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

     

June 30, 2014

                
                 

Non-accrual loans

 $-  $-  $11,849  $11,849 
                 

December 31, 2013

                
                 

Non-accrual loans

 $-  $-  $11,283  $11,283 

 

(1)

Represents carrying value for which adjustments are based on the appraised value of the collateral.

(2)

Represents carrying value for which adjustments are based on the appraised value of the property.

The Company discloses fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements and, accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The estimated fair value amounts have been measured as of March 31,June 30, 2014 and December 31, 2013 and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair value of these financial instruments subsequent to the respective reporting dates may be different than amounts reported on those dates.

The information presented should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the 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 bank holding companies may not be meaningful.

The following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments not measured and not reported at fair value on the consolidated balance sheets at March 31,June 30, 2014 and December 31, 2013 (in thousands):2013:

 

                                                                                                                        
      March 31, 2014     December 31, 2013 
(in thousands)    Fair Value
Hierarchy
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial Assets:

                    

Cash and noninterest bearing balances due from banks

     Level 1      $1,503      $1,503      $1,570      $1,570  

Interest-bearing deposits due from banks

     Level 1       58,254       58,254       33,295       33,295  

Other investments

     Level 2       4,450       4,450       4,450       4,450  

Federal Reserve Bank stock

     Level 1       1,444       1,444       1,444       1,444  

Federal Home Loan Bank stock

     Level 1       4,143       4,143       4,143       4,143  

Loans receivable, net

     Level 3       415,123       420,486       418,148       424,831  

Accrued interest receivable

     Level 1       1,578       1,578       1,566       1,566  

Financial Liabilities:

                    

Demand deposits

     Level 1      $57,967      $57,967      $55,358      $55,358  

Savings deposits

     Level 1       86,409       86,409       80,983       80,983  

Money market deposits

     Level 1       29,502       29,502       29,310       29,310  

NOW accounts

     Level 1       25,464       25,464       28,618       28,618  

Time deposits

     Level 2       228,627       229,231       235,935       236,602  

FHLB Borrowings

     Level 2       80,000       80,000       57,000       57,000  

Subordinated debentures

     Level 2       8,248       8,248       8,248       8,248  

Accrued interest payable

     Level 1       1,589       1,589       1,388       1,388  

   

June 30, 2014

  

December 31, 2013

 

(in thousands)

Fair Value

 

Carrying

  

Estimated

  

Carrying

  

Estimated

 
 Hierarchy 

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Financial Assets:

                 

Cash and noninterest bearing balances due from banks

Level 1

 $1,584  $1,584  $1,570  $1,570 

Interest-bearing deposits due from banks

Level 1

  58,345   58,345   33,295   33,295 

Other investments

Level 2

  4,450   4,450   4,450   4,450 

Federal Reserve Bank stock

Level 1

  1,517   1,517   1,444   1,444 

Federal Home Loan Bank stock

Level 1

  4,143   4,143   4,143   4,143 

Loans receivable, net

Level 3

  402,786   407,430   418,148   424,831 

Accrued interest receivable

Level 1

  1,555   1,555   1,566   1,566 
                  

Financial Liabilities:

                 

Demand deposits

Level 1

 $61,685  $61,685  $55,358  $55,358 

Savings deposits

Level 1

  85,218   85,218   80,983   80,983 

Money market deposits

Level 1

  26,873   26,873   29,310   29,310 

NOW accounts

Level 1

  30,133   30,133   28,618   28,618 

Time deposits

Level 2

  222,523   223,029   235,935   236,602 

FHLB Borrowings

Level 2

  72,000   72,000   57,000   57,000 

Subordinated debentures

Level 2

  8,248   8,248   8,248   8,248 

Accrued interest payable

Level 1

  15   15   1,388   1,388 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Off-balance sheet instruments

Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31,June 30, 2014 and December 31, 2013. The estimated fair value of fee income on letters of credit at March 31,June 30, 2014 and December 31, 2013 was insignificant.

Note 12:12:     Restructuring Charges and Asset Disposals

The Company recorded no restructuring charges for the six months ended June 30, 2014, compared to $394,000 in the same period as last year. These costs are included in restructuring charges and asset disposals in the Consolidated Statements of Operations. The $394,000 of restructuring charges for the six months ended June 2013 consisted of a workforce reduction related charge of $515,000, partially offset by $121,000 reduction in existing restructuring reserves related to lease liability costs.

On June 13, 2013, the Company executed a workforce reduction of the residential lending group and retail operations to further reduce operating expenses. There were nineteen employees in total affected by this announcement. Restructuring charges for this initiative resulted in $515,000 in severance expenses.

On May 29, 2013, the Company purchased a branch location where the cost of the lease exceeded the cost to own. This branch was part of a restructuring initiative in 2011, resulting in a reduction of $121,000 in lease liability costs.

Restructuring reserves at June 30, 2014 for the restructuring activities taken in connection with prior year initiatives were $29,000.

Note 13:     Recent Accounting Pronouncements

On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

ASU No. 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,”requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. ASU No. 2013-12 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted this guidance on January 1, 2013 and it did not have a material impact on the consolidated financial statements.

Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurements (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” was issued as a result of the effort to develop common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). While ASU No. 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands the existing disclosure requirements for fair value measurements and clarifies the existing guidance or wording changes to align with IFRS No. 13. Many of the requirements for the amendments in ASU No. 2011-04 do not result in a change in the application of the requirements in Topic 820. The Company adopted ASU No. 2011-04 on January 1, 2012 and it did not have a material impact on the consolidated financial statements.

ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income,” requires an entity to present components of comprehensive income either in a single continuous statement of comprehensive income or in two separate consecutive statements. These amendments made the financial statement presentation of other comprehensive income more prominent by eliminating the alternative to present comprehensive income within the statement of equity. As originally issued, ASU No. 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement was deferred byASU No. 2011-12,No.2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards”.ASU No. 2011-05 is effective for all interim and annual periods beginning on or after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and elected to present comprehensive income in a separate consolidated statement of comprehensive income.

ASU 2014-01: No. 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects (Topic 323) allows an entity that invests in low income housing projects and meets all the specified conditions to use the proportional amortization method to account for the costs of those investments. The effective date is for annual periods and interim periods within those annual periods beginning after December 15, 2014. The companyCompany is in the process of evaluating the impact of ASU 2014-01 on its financial statement and processes.

In January 2014, the FASB issued ASU No. 2014-04,“ Receivables –Troubled Debt Restructuring by CreditorsCreditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, “to clarify that when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for annual reporting periods beginning after December 15, 2014. The companyCompany is in the process of evaluating the impact of ASU 2014-04 on its financial statements and processes.

 

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

Item2: Management's Discussion and Analysis of Financial Condition and Results of Operations

"SAFE HARBOR”HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in Bancorp’s public reports,statements, including this report,one, and in particular in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be forward looking and subject to a variety of risks and uncertainties. These factors include, but are not limited to; (1) changes in prevailing interest rates which would affect the interest earned on Bancorp’s interest earning assets and the interest paid on its interest bearing liabilities; (2) the timing of repricing of Bancorp’s interest earning assets and interest bearing liabilities; (3) the effect of changes in governmental monetary policy; (4) the effect of changes in regulations applicable to Bancorp and the Bank and the conduct of its business; (5) changes in competition among financial service companies, including possible further encroachment of non-banks on services traditionally provided by banks; (6) the ability of competitors that are larger than Bancorp to provide products and services which it is impracticable for Bancorp to provide; (7) the state of the economy and real estate values in Bancorp’s market areas, and the consequent effect on the quality of Bancorp’s loans, customers, vendors and communities; (8) recent governmental initiatives that are expected to have a profound effect on the financial services industry and could dramatically change the competitive environment of Bancorp;Company ; (9) other legislative or regulatory changes, including those related to residential mortgages, changes in accounting standards, and Federal Deposit Insurance Corporation (“FDIC”) premiums that may adversely affect Bancorp.the Company;(10) the application of generally accepted accounting principles, consistently applied, (11) the fact that one period of reported results may not be indicative of future periods, (12) the state of the economy in the greater New York metropolitan area and its particular effect on the Company's customers, vendors and communities and other such factors, including risk factors, as may be described in Bancorp's other filings with the SEC.

Although Bancorp believes that it offers the loan and deposit products and has the resources needed for continued success, future revenues and interest spreads and yields cannot be reliably predicted. These trends may cause Bancorp to adjust its operations in the future. Because of the foregoing and other factors, recent trends should not be considered reliable indicators of future financial results or stock prices.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified the accounting for the allowance for loan losses, the analysis of its investment securities and the valuation of deferred income tax assets, as Bancorp’s most critical accounting policies and estimates in that they are important to the portrayal of Bancorp’s financial condition and results of operations. They require management’s most subjective and complex judgment as a result of the need to make an estimate about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis.

Summary

Summary

Bancorp reported net income of $319,000$525,000 ($0.01 basic and diluted income per share) for the quarter ended March 31, 2014,June 30, 2014; an increase of $4.4 million, compared to net loss of $2.0$3.9 million ($0.050.10 basic and diluted loss per share) for the quarter ended March 31,June 30, 2013. The primary reasonFor the six months ended June 30, 2014, Bancorp reported net income of $844,000 ($0.02 basic and diluted income per share), an increase of $6.7 million, compared to net loss of $5.9 million ($0.15 basic and diluted loss per share) for the increase in the quarterly comparison is a reduction in non-interest expense of $2.1 million, or 33%, and is a result of cost reduction initiatives implemented. This decrease included lower salaries and benefits of $1.0 million and lower professional services expense of $0.4 million.

Bancorp’s net interest incomesix months ended June 30, 2013. Results for the quarter and year ended March 31,June 30, 2013 included prepayment penalty fees on borrowings of $2.7 million and net restructuring charges of $394,000. Excluding these expenses, net income at June 30, 2014 was $4.0increased $1.3 million compared to $3.9($0.03 per share) and $3.6 million for($0.09 per share) from the prior year’s quarter ended March 31, 2013, an increaseand year-to-date net income, respectively.

Bancorp’s improved operating performance is primarily the result of $135,000. Included in net interest income forprofit improvement initiatives implemented during the quarter ending March 31, 2014 was an unfavorable adjustment related to prior period interest expense on subordinated debtpast 15 months. Some of $117,000. Excluding this adjustment, net interest income increased $252,000 as compared to the quarter ended March 31, 2013. The net interest income increase was due to interest expense decrease of $757,000, partially offset by interest income reduction of $622,000. The decrease in interest expense wasmore significant initiatives primarily due to strategic reduction of rates paid on term deposits, in addition to lower interest expense on borrowings. From April 2013 to September 2013, the Bank prepaid high rate borrowings, replacing these with borrowings at lower rates. The decline in interest income was due primarily to lower average loan balances primarily due to loan payoffs in excess of new loan originations, in addition to lower investment yields.included:

Prepayment of higher cost borrowings and strategic repricing of deposits resulting in a reduction of the Company's cost of funds

Asset quality improvement which has helped reduce related expenses and increase loan yields

Exit from the Residential Mortgage Lending business realizing expense savings in excess of revenue reduction

Purchasing three properties resulting in reduced occupancy expense and incremental rental income

Reduction of excess staffing

Contract renegotiation with major vendors and replacement of some existing vendors resulting in operating expense savings

Total assets increased $21.3$10.9 million from $541.2 million at December 31, 2013 to $562.5$552.1 million at March 31,June 30, 2014. Cash and cash equivalents increased $24.9$25.0 million from $34.9 million at December 31, 2013 to $59.8$59.9 million at March 31, 2014.June 30, 2014; reflective of the Bank’s actions to increase liquidity. The net loan portfolio decreased $3.0$15.3 million from $418.1 million at December 31, 2013 to $415.1$402.8 million at March 31,June 30, 2014. The decrease was primarily a result of loan payoffs and normal amortization in excess of new origination of loans. Decreases in commercial real estateResidential loans of $5.1decreased $16.7 million and residentialas several large loans of $3.2 million were partially offset with increases in commercialpaid off. The Bank stopped originating Residential loans of $3.7 million.during 2013. Deposits decreased $2.2$3.8 million from $430.2 million at December 31, 2013 to $428.0$426.4 million at March 31,June 30, 2014. This wasNon-interest bearing deposits increased $6.3 million. Interest bearing deposits decreased $10.1 million primarily due to decreases in certificates ofstrategic deposit (CDs) of $7.3 million due to maturities of higher cost deposit accounts. Partially offsetting the CD decrease was an increase of $5.4 million in savings accounts reflecting increases in both consumer and commercial savings accounts. The overall cost of deposits decreased from 0.69% for the quarter ended December 31, 2013 to 0.61% for the quarter ended March 31, 2014. Borrowings increased $23.0 million to $88.2 million from $65.2 million.repricing initiatives.

FINANCIAL CONDITION

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $24.9$25.0 million, or 71%72%, to $59.8$59.9 million at March 31,June 30, 2014 compared to $34.9 million at December 31, 2013. This increase was primarily the result of a $23.0$15.0 million increase in borrowings, reflecting the Bank’s actions to increase liquidity.

Investments The liquidity ratio was 15.75% at June 30, 2014 compared to 11.50% at December 31, 2013.

Investments

The following table is a summary of Bancorp’s available-for-sale securities portfolio, at fair value, at the dates shown:

(in thousands)

 

June 30,

  

December 31,

 
  

2014

  

2013

 
         
         

U.S. Government Agency bonds

 $7,344  $7,079 

U.S. Government Agency mortgage-backed securities

  19,498   21,752 

Corporate bonds

  8,844   8,870 
��        

Total Available-for-Sale Securities

 $35,686  $37,701 

 

(in thousands)

  March 31,
2014
   December 31,
2013
 

U.S. Government Agency bonds

  $7,245    $7,079  

U.S. Government Agency mortgage- backed securities

   20,632     21,752  

Corporate bonds

   8,938     8,870  
  

 

 

   

 

 

 

Total Available-for-Sale Securities

  $36,815    $37,701  
  

 

 

   

 

 

 

Available-for-sale securities decreased $886,000,$2.0 million or 2.4%5.3%, from $37.7 million at December 31, 2013 to $36.8$35.7 million at March 31,June 30, 2014. This decrease was primarily due to principal pay downs of $1.2$2.4 million on mortgage backed securities partially offset by $393,000an increase of $501,000 in unrealized gains.

Loans

Loans

The following table is a summary of Bancorp’s loan portfolio at the dates shown:

 

                                                

(in thousands)

    March 31,
2014
   December 31,
2013
 

Real Estate

      

Commercial

    $218,051    $223,165  

Residential

     103,019     106,198  

Construction

     260     260  

Construction to permanent

     12,650     11,303  

Commercial

     38,752     35,061  

Consumer home equity

     43,717     44,081  

Consumer installment

     3,389     2,990  
    

 

 

   

 

 

 

Total Loans

     419,838     423,058  

Premiums on purchased loans

     182     200  

Net deferred costs

     583     571  

Allowance for loan losses

     (5,480   (5,681
    

 

 

   

 

 

 

Loans receivable, net

    $415,123    $418,148  
    

 

 

   

 

 

 

(in thousands)

 

June 30,

  

December 31,

 
  

2014

  

2013

 

Real Estate

        

Commercial

 $219,762  $223,165 

Residential

  89,517   106,198 

Construction

  -   260 

Construction to permanent

  14,436   11,303 

Commercial

  37,849   35,061 

Consumer home equity

  42,384   44,081 

Consumer installment

  3,397   2,990 

Total Loans

  407,345   423,058 

Premiums on purchased loans

  160   200 

Net deferred costs

  495   571 

Allowance for loan losses

  (5,214)  (5,681)

Loans receivable, net

 $402,786  $418,148 

Bancorp’s net loan portfolio decreased $3.0$15.4 million, or 0.7%3.7%, from $418.1 million at December 31, 2013 to $415.1$402.8 million at March 31,June 30, 2014. The decrease was primarily a result of loan payoffs. Decreasespayoffs and normal amortization in commercial real estateexcess of new originations. Residential loans of $5.1decreased $16.7 million andprimarily due to several large loan pay-offs. The Bank no longer originates residential loans of $3.2 million were partially offset with increases in commercial loans of $3.7 million.

loans.

At March 31,June 30, 2014, the net loan to deposit ratio was 97%94% and the net loan to total assets ratio was 74%73%. At December 31, 2013, these ratios were 97% and 77%, respectively.

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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. 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 decreased $201,000$467,000 from December 31, 2013 to March 31,June 30, 2014 primarily due to charge-off of construction loans of $260,000 which were specifically covered in the allowance for loan losses, and also to the partial charge-off of a non-accrual loan, in which the property was transferred to OREO.OREO and subsequently sold.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged off isare reversed against interest income. The interestAll payments received on thesenon-accrual loans is accounted for on the cash-basis methodare generally applied to principal only, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, future payments are reasonably assured, and there is 6 months of performance.

Management considers all non-accrual loans and troubled debt restructurings to be impaired. In most cases, loan payments that are past due less than 90 days, based on contractual terms, are considered collection delays and the related loans are not considered to be impaired. The Bank considers consumer installment loans to be pools of smaller balance homogeneous loans, which are collectively evaluated for impairment.

The changes in the allowance for loan losses for the periods shown are as follows:

 

                                                 

Three months ended

  

Six months ended

 
    Three months ended  

June 30,

  

June 30,

  

June 30,

  

June 30,

 

(Dollars in thousands)

    March 31,
2014
 March 31,
2013
 

(in thousands)

 

2014

  

2013

  

2014

  

2013

 
                

Balance at beginning of period

    $5,681   $6,016   $5,480  $5,717  $5,681  $6,016 

Charge-offs

     (217  (306  (285)  (412)  (502)  (717)

Recoveries

     16    37    19   17   35   53 
    

 

  

 

 

Net Charge-offs

     (201  (269  (266)  (395)  (467)  (664)
    

 

  

 

 

Provision charged to operations

     —      (30  -   -   -   (30)
    

 

  

 

 

Balance at end of period

    $5,480   $5,717   $5,214  $5,322  $5,214  $5,322 
    

 

  

 

                 

Annualized net charge-offs during the period to average loans outstanding during the period

     0.19  0.23

Annualized net charge-offs during the period to average loans outstanding

  0.26%  0.34%  0.22%  0.29%
    

 

  

 

                 

Ratio of ALL / Gross Loans

     1.30  1.24  1.28%  1.18%  1.28%  1.18%
    

 

  

 

 

Based upon the overall assessment and evaluation of the loan portfolio, management believes the allowance for loan losses of $5.5$5.2 million, at March 31,June 30, 2014, which represents 1.30%1.28% of gross loans outstanding, is adequate under prevailing economic conditions, to absorb existing losses in the loan portfolio.

NNon-Accrual,on-Accrual, Past Due and Restructured Loans

The following table presents non-accruing loans and loans past due 90 days or more and still accruing:

 

                                                 

June 30,

  

December 31,

 

(Dollars in thousands)

    March 31,
2014
 December 31,
2013
  

2014

  

2013

 
        

Loans past due over 90 days still accruing

    $834   $866   $-  $866 

Non accruing loans

     10,166    12,308    13,911   12,308 
    

 

  

 

 

Total

    $11,000   $13,174   $13,911  $13,174 
    

 

  

 

 

% of Total Loans

     2.62  3.11  3.41%  3.11%

% of Total Assets

     1.96  2.43  2.52%  2.43%

Impaired loans are primarily attributable to the lingering effects of the downturn in the economy, which has severely impacted the real estate market and placed unprecedented stress on credit markets. The Bank’s customers, many of whom are associated with the financial services industry, have been affected by the impact of the poor economy on employment and real estate values.

The $10.2$13.9 million of non-accrual loans at March 31,June 30, 2014 is comprised of 1215 loans, for which a specific reserve of $1.8$2.0 million has been established. In all cases, the Bank has obtained appraisal reports from independent licensed appraisal firms and discounted those values for estimated selling costs to determine estimated impairment. Of the $10.2$13.9 million of non-accrual loans at March 31,June 30, 2014 borrowers of 411 loans with aggregate balances of $7.5$11.6 million continue to make loan payments and these loans are current within one and two months as to payments.

Potential Problem Loans

In addition to the above, there are $6.7$2.5 million of substandard accruing loans comprised of 11 loans and $8.4$7.2 million of special mention loans comprised of 16 loans for which management has a concern as to the ability of the borrowers to comply with the present repayment terms.loans. All of the substandard accruing and all of the special mention loans with the exception of one loan of $15,000 continue to make timely payments and arewere within 30 days at March 31,June 30, 2014 with the exception of three loans totaling $40,000, of which one loan of $9,000 was paid off subsequent to June 30, 2014. Subsequently, one $2.6 million special mention loan paid off.

Other Real Estate Owned

The following table is a summary of Bancorp’s other

There was no real estate owned at June 30, 2014 and December 31, 2013. During the dates shown:six months ended June 30, 2014, one OREO property was obtained and subsequently sold.

 

                                                
(in thousands)      
     March 31,
2014
     December 31,
2013
 

Residential real estate

    $264      $—    
    

 

 

     

 

 

 

Other real estate owned

    $264      $—    
    

 

 

     

 

 

 

The balance of other real estate owned at March 31, 2014 was comprised of 1 property with an aggregate carrying value of $264,000. The Company had a contract for the sale of this property at March 31, 2014.Deferred Taxes

Deferred Taxes

The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Managementrealized.Management has reviewed the deferred tax position of the Company at March 31,June 30, 2014. The valuation allowance is analyzed quarterly for changes affecting the deferred tax asset. At March 31,June 30, 2014, the companyCompany reported taxable income for the secondthird consecutive quarter and wasis anticipating earnings to be positive in the future. However, basedBased on current accounting guidance the Company has not generated taxable income for a sufficient length of time in order to reverse the DTA valuation allowance at June 30, 2014 and, accordingly, had an allowance totaling $17.8 million at March 31, 2014.$17.6 million. In the future, whenas the Company has generatedcontinues to generate taxable income on a more sustainedsubstained basis, management’s conclusion regarding the need for a deferred tax asset valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation allowance.

Deposits

Deposits

The following table is a summary of Bancorp’s deposits at the dates shown:

 

                                                 

June 30,

  

December 31,

 
(in thousands)    March 31,
2014
     December 31,
2013
  

2014

  

2013

 
        

Non-interest bearing

    $57,967      $55,358   $61,685  $55,358 
    

 

     

 

         

Interest bearing

                

NOW

     25,464       28,618    30,133   28,618 

Savings

     86,409       80,983    85,218   80,983 

Money market

     29,502       29,310    26,873   29,310 

Time certificates, less than $100,000

     121,955       129,548    117,513   129,548 

Time certificates, $100,000 or more

     106,672       106,387    105,010   106,387 
    

 

     

 

 

Total interest bearing

     370,002       374,846    364,747   374,846 
    

 

     

 

 

Total Deposits

    $427,969      $430,204   $426,432  $430,204 
    

 

     

 

 

Deposits decreased $2.2$3.8 million from $430.2 million at December 31, 2013 to $428.0$426.4 million at March 31,June 30, 2014. This was primarily due to decreases in certificates of deposit (CDs) of $7.3$13.4 million dueresulting from strategic pricing initiatives intended to maturitiesreduce higher cost deposits. Decrease in money market balances of higher rate deposit accounts and decrease in NOW balance by $3.2$2.4 million were primarily due to lower IOLTA account balances.shift in balances to savings account. Partially offsetting the CD decreasenoted decreases was an increase of $5.4$4.2 million in savings accounts reflecting increases in both consumer and commercial savings accounts due to promotional activities and a non-interest bearing balance increase of $2.6 million.

$6.3 million or 11.4%.

Borrowings

Borrowings

At March 31,June 30, 2014 and December 31, 2013, total borrowings were $88.2$80.2 million and $65.2 million respectively. In addition to the outstanding borrowings disclosed in the consolidated balance sheet, the Bank has the ability to borrow approximately $38.0$75 million in additional advances from the Federal Home Loan Bank of Boston (“FHLB”), including a $2.0$2 million overnight line of credit. The Bank has also established a line of credit at the Federal Reserve Bank. Subsequent to March 31, 2014, the Bank was in the process of collateralization of additional loans with the FHLB which will increase the Bank’s borrowing capacity with the FHLB from $38.0 million to approximately $85.0 million.

The subordinated debentures of $8,248,000$8.2 million are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of amounts on the capital securities. The subordinated debentures, which bear interest at three-month LIBOR plus 3.15% (3.3851%(3.3836% at March 31,June 30, 2014), mature on March 26, 2033. Beginning in the second quarter of 2009, the Company began deferringdeferred quarterly interest payments on the subordinated debentures for 20 consecutive quarters as permitted under the terms of the debentures. Interest iswas still being accrued and charged to operations. The Company may only defer themade a payment of approximately $1.6 million of all interest for 20 consecutive quarters, or through March 2014, and all accrued interest must be paid at the completion of the deferral period, which ispayable in June 2014. As of March 31, 2014, the accrued interest payable was approximately $1.6 million. The Company is prepared to pay the full amount of interest due pending approval from its regulators.

The duration of the trust is 30 years, with an early redemption feature at the company’sCompany’s option on a quarterly basis which commenced March 26, 2008.basis.               

Capital

Capital increased $771,000$1.5 million compared to December 31, 2013 primarily as a result of year-to-date net income of $319,000 for the three months ended March 31, 2014,$844,000, other comprehensive income of $393,000$501,000 and $59,000$130,000 of share based compensation.

Off-Balance Sheet Arrangements

Bancorp’s off-balance sheet arrangements, which primarily consist of commitments to lend, increased by $4.1$6.1 million from $79.3 million at December 31, 2013 to $83.4$85.4 million at March 31,June 30, 2014, primarily due to increasestoincreases of $8.4$5.4 million in future loan commitments and $3.7 million in undisbursed construction loans offset by decreases of $3.3 million in unused lines of credit and $1.0$5.3 million in home equity lines of credit.

RESULTS OF OPERATIONS

Interest and dividend income and expense

The following tables present average balance sheets (daily averages), interest income, interest expense and the corresponding yields earned and rates paid for major balance sheet components:

 

                                                                                                                                                 

Three months ended June 30,

 
    Three months ended March 31  

2014

  

2013

 
    2014 2013      

Interest

          

Interest

     
        Interest           Interest        

Average

  

Income/

  

Average

  

Average

  

Income/

  

Average

 
    Average   Income/     Average Average   Income/     Average  

Balance

  

Expense

  

Rate

  

Balance

  

Expense

  

Rate

 
(in thousands)    Balance   Expense     Rate Balance   Expense     Rate 
 

(dollars in thousands)

 

Interest earning assets:

                                         

Loans

    $417,468    $4,691       4.56 $465,895    $5,196       4.52 $412,393  $4,667   4.54% $470,236  $5,045   4.30%

Investments

     47,386     176       1.51  51,622     277       2.17  46,317   175   1.52%  50,727   255   2.02%

Interest bearing deposits in banks

     34,937     12       0.15  57,095     28       0.20  42,405   14   0.13%  18,583   9   0.19%

Total interest earning assets

  501,115   4,856   3.89%  539,546   5,309   3.95%
    

 

   

 

     

 

  

 

   

 

     

 

                         

Total Interest earning assets

     499,791     4,879       3.96  574,612     5,501       3.88
    

 

   

 

     

 

  

 

   

 

     

 

                         

Cash and due from banks

     1,886          5,504          1,922           4,458         

Premises and equipment, net

     14,971          3,991          16,751           4,803         

Allowance for loan losses

     (5,620        (6,017        (5,488)          (5,739)        

Other assets

     25,720          30,923          25,836           29,308         
    

 

        

 

       

Total Assets

    $536,748         $609,013         $540,136          $572,376         
    

 

        

 

                               

Interest bearing liabilities:

                                         

Deposits

    $370,034    $637       0.70 $427,770    $1,129       1.07 $369,043  $607   0.66% $416,326  $1,032   0.99%

FHLB advances

     57,922     33       0.23  50,000     351       2.85  61,066   33   0.22%  37,209   167   1.80%

Subordinated debt(1)

     8,248     200       9.83  8,248     71       3.47

Subordinated debt

  8,248   82   3.99%  8,248   71   3.45%

Other borrowings

     —       —         N/A    7,000     76       4.41  -   -  

N/A

   538   6   4.47%
    

 

   

 

     

 

  

 

   

 

     

 

                         

Total interest bearing liabilities

     436,204     870       0.81  493,018     1,627       1.34  438,357   722   0.66%  462,321   1,276   1.11%
    

 

   

 

     

 

  

 

   

 

     

 

                         

Demand deposits

     54,226          61,255          55,150           61,016         

Accrued expenses and other liabilities

     3,913          5,635          3,496           4,170         

Shareholders’ equity

     42,405          49,105        
    

 

        

 

       

Shareholders' equity

  43,133           44,869         

Total liabilities and equity

    $536,748         $609,013         $540,136          $572,376         
    

 

        

 

                               

Net interest income

      $4,009         $3,874           $4,134          $4,033     
      

 

        

 

     

Interest margin

           3.25        2.73          3.31%          3.00%
          

 

        

 

 

Interest spread

           3.15        2.54          3.23%          2.84%
          

 

        

 

 

 

(1)

  

Six months ended June 30,

 
  

2014

  

2013

 
      

Interest

          

Interest

     
  

Average

  

Income/

  

Average

  

Average

  

Income/

  

Average

 
  

Balance

  

Expense

  

Rate

  

Balance

  

Expense

  

Rate

 
  

(dollars inthousands)

 

Interest earning assets:

                        

Loans

 $414,916  $9,358   4.55% $468,077  $10,241   4.41%

Investments

  46,848   351   1.51%  51,172   532   2.10%

Interest bearing deposits in banks

  38,692   26   0.14%  37,731   37   0.20%

Total interest earning assets

  500,456   9,735   3.92%  556,980   10,810   3.91%
                         
                         

Cash and due from banks

  1,917           4,978         

Premises and equipment, net

  15,866           4,400         

Allowance for loan losses

  (5,553)          (5,877)        

Other assets

  25,765           30,112         

Total Assets

 $538,451          $590,593         
                         

Interest bearing liabilities:

                        

Deposits

 $369,536  $1,244   0.68% $422,016  $2,161   1.03%

FHLB advances

  59,503   66   0.22%  43,569   518   2.40%

Subordinated debt (1)

  8,248   282   6.89%  8,248   142   3.47%

Other borrowings

  -   -  

N/A

   3,751   82   4.41%
                         

Total interest bearing liabilities

  437,287   1,592   0.73%  477,584   2,903   1.23%
                         

Demand deposits

  54,691           61,135         

Accrued expenses and other liabilities

  3,702           4,898         

Shareholders' equity

  42,771           46,976         

Total liabilities and equity

 $538,451          $590,593         
                         

Net interest income

     $8,143          $7,907     

Interest margin

          3.28%          2.86%

Interest spread

          3.19%          2.68%

(1)     Subordinated debt interest expense for the six months ended June 30, 2014 includes a $117,000 expense applicable to a prior year adjustment.

Includes $117,000 applicable to prior year adjustment.

The following rate volume analysis reflects the impact that changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities had on net interest income during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change resulting from the combined impact of volume and rate is allocated proportionately to the change due to volume and the change due to rate.

 

                                                                         

Three months ended June 30,

  Six Months ended June 30, 
    Three months ended March 31  

2014 vs 2013

  

2014 vs 2013

 
    2014 vs 2013  

Increase (decrease) in Interest

  

Increase (decrease) in Interest

 
    Increase (decrease) in Interest  

Income/Expense

  

Income/Expense

 
    Income/Expense  

Due to change in:

  

Due to change in:

 
    Due to change in:  

Volume

  

Rate

  

Total

  

Volume

  

Rate

  

Total

 
(in thousands)    Volume   Rate   Total 
 

(dollars in thousands)

  

(dollars in thousands)

 

Interest earning assets:

                                

Loans

    $(551  $46    $(505 $(648) $270  $(378) $(946) $63  $(883)

Investments

     (25   (76   (101  (23)  (57)  (80)  (42)  (139)  (181)

Interest bearing deposits in banks

     (13   (3   (16  14   (9)  5   -   (11)  (11)
    

 

   

 

   

 

 

Total interest earning assets

     (589   (33   (622  (657)  204   (453)  (988)  (87)  (1,075)
    

 

   

 

   

 

                         

Interest bearing liabilities:

                                

Deposits

    $(170  $(322  $(492 $(126) $(299) $(425) $(246) $(671) $(917)

FHLB advances

     63     (381   (318  147   (281)  (134)  185   (637)  (452)

Subordinated debt

     0     129     129    -   11   11   -   140   140 

Other borrowings

     (76   0     (76  (6)  -   (6)  (82)  -   (82
    

 

   

 

   

 

 

Total interest bearing liabilities

     (183   (574   (757  15   (569)  (554)  (143)  (1,168)  (1,311)
    

 

   

 

   

 

 

Net interest income

    $(406  $541    $135   $(672) $773  $101  $(845) $1,081) $236 
    

 

   

 

   

 

 

For the quarter ended March 31,June 30, 2014, net interest income was $4,879,000, a decrease$4,134,000 an increase of $622,000$101,000 or 2.5% from net interest income of $5,501,000$4,033,000 for the quarter ended March 31,June 30, 2013. Interest expense decrease of $554,000 was partially offset by lower interest income of $453,000.

The interest income reduction was primarily due to lower average earning assets and lower investment yields partially offset by increased total yield on loans. Average interest earning assets decreased $74.8$38.4 million, or 13.0%7.1%, to $499.8$501.1 million from $574.6$539.5 million and was responsible for $589,000$657,000 of the reduction in interest income. LowerThe decrease in investment yields partially offset bywas primarily due to repricing of bonds to lower rates. Average loan yields increased primarily due to improved asset quality and higher yields on loans was responsible for mostloan fees.

The interest expense reduction of the remaining interest income reduction.

Total interest expense$554,000 for the quarter ended March 31,June 30, 2014 of $870,000 represents a decrease of $757,000, or 46.5%, compared to interest expense of $1.6 million for the same period last year. The decrease in interest expense was primarily due to strategic reduction of rates paid on term deposits, and resulting term deposit average balance reduction of $44.4$29.2 million, in addition to lower interest expense on borrowings due to rate reductions. From April 2013 to September 2013, the Bank prepaid highhigher rate borrowings, replacing these with borrowings at lower rates. The Bank incurred a one-time charge of $117,000 during the most recent quarter related to prior period subordinated debt. Excluding this charge, the total rate on interest bearing liabilities was 0.70% as compared to 1.34% for the quarter ended March 31, 2013.

As a result of the above, Bancorp’s net interest income increased $135,000 or 3.5%, to $4.0 million for the three months ended March 31, 2014 compared to $3.9 million for the same period last year. The net

Net interest margin for the three months ended March 31,June 30, 2014 was 3.25%3.31% as compared to 2.73%3.00% for the three months ended March 31,June 30, 2013 primarily due to the Bank’s reduction’sreduction in total cost of funds to 0.59% from 0.98%.

For the six months ended June 30, 2014, net interest income was $8,143,000 an increase of $236,000 or 3.0% from net interest income of $7,907,000 for the six months ended June 30, 2013. Interest expense decrease of $1,311,000 was partially offset by lower interest income of $1,075,000. In the quarter ended March 31, 2014, Bancorp recorded interest expense of $117,000 on subordinated debt which was related to prior years. Excluding this adjustment net interest income would have been $353,000 or 4.5% higher for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Similar to quarterly results, the year-to-date interest income reduction was primarily due to lower average earning assets and lower investment yields partially offset by increased total yield on loans. Average interest earning assets decreased $56.5 million, or 10.1%, to $500.5 million from $557.0 million and was responsible for $988,000 of the reduction in interest income. The decrease in investment yields was primarily due to repricing of bonds to lower rates. Average loan yields increased primarily due to improved asset quality and higher loan fees.

The interest expense reduction of $1,311,000 for the six months ended June 30, 2014 was primarily due to strategic reduction of rates paid on term deposits, and resulting term deposit average balance reduction of $36.7 million, in addition to lower interest expense on borrowings due to previously mentioned replacement of higher rate borrowings with borrowings at lower rates.

Net interest margin for the six months ended June 30, 2014 was 3.28% as compared to 2.86% for the six months ended June 30, 2013 primarily due to the Bank’s reduction in average funding rates. The Bank’sExcluding the $117,000 subordinated interest expense adjustment net margin excludingfor the previously noted one-time charge of $117,000six months ended June 30, 2014 was 3.35%3.33%.

Provision for Loan Losses

Based on management’s most recent evaluation of the adequacy of the allowance for loan losses, the provision for loan losses was unchanged for the three months ended March 31, 2014, compared to $30,000 reduction of theJune 30, 2014. The provision for loan loss provision was also unchanged for the three months ended March 31, 2013 due to the reduction of the loan portfolio and improvement in credit quality. The allowance for loan losses decreased by $201,000 from December 31, 2013 to March 31, 2014 primarily due to partial charge-off of a non-accrual loan, which was transferred to OREO.June 30, 2013.

An analysis of the changes in the allowance for loan losses is presented under “Allowance for Loan Losses.”

Non-interest income

Non-interest income increased $106,000decreased $146,000 from $487,000$769,000 for the quarter ended March 31,June 30, 2013 to $593,000$623,000 for the quarter ended March 31,June 30, 2014. This iswas primarily due to increaseddecreases in mortgage banking activity of $102,000, and gains of $51,000 and $28,000 recognized in 2013 from a branch sale and portfolio loan sales, respectively. These decreases were partially offset by rental income resulting from the Bank’s purchase of the previously leased Greenwich branch building in November, 20132013.

For the six months ended June 30, 2014, non-interest income decreased $40,000, or 3.2%, to $1.2 million as compared to $1.3 million for the six months ended June 30, 2013. This decrease was primarily due to decreases in mortgage banking activity of $148,000 and Stamford branch building in May, 2013.the previously noted gains totaling $79,000, partially offset by higher rental income.

Non-interest expense

Non-interest expense decreased $2.1$4.5 million or 33%51.4% from $6,369,000$8.7 million for the quarter ended March 31,June 30, 2013 to $4,283,000$4.2 million for the quarter ended March 31,June 30, 2014. This decreaseExcluding prepayment penalty on borrowings of $2.7 million and net restructuring charges of $394,000incurred in the quarter ended June 30, 2013, non-interest expense decreased $1.4 million or 24.5%. Decreases included lower salaries and benefits of $1.0 million$601,000 and lower professional and other outside services expense of $0.4 million,$313,000, both resulting from management initiatives to reduce non-interest expense.

LIQUIDITY

Bancorp’sFor the six months ended June 30, 2014 non-interest expense decreased $6.6 million or 43.5% to $8.5 million from $15.1 million for the same period in 2013. Excluding the prepayment penalty on borrowings of $2.7 million and net restructuring charges of $394,000 incurred in 2013, non-interest expense decreased $3.5 million or 28.9%. This reduction was primarily due to expense reduction initiatives cited earlier. Salaries and benefits decreased $1.6 million. Professional and other outside services expenses decreased $731,000 and regulatory assessments decreased $211,000.

LIQUIDITY

Bancorp's liquidity ratio was 15.5%15.75% at March 31,June 30, 2014 compared to 11.5%11.50% at December 31, 2013. The liquidity ratio is defined as the percentage of liquid assets to total assets. The following categories of assets, as described in the accompanying consolidated balance sheets, are considered liquid assets: cash and due from banks, federal funds sold, short-term investments and unpledged available-for-sale securities. Liquidity is a measure of Bancorp’s ability to generate adequate cash to meet financial obligations. The principal cash requirements of a financial institution are to cover downward fluctuations in deposit accounts and increases in its loan portfolio. Management believes Bancorp’s short-term assets provide sufficient liquidity to cover loan demand, potential fluctuations in deposit accounts and to meet other anticipated cash operating requirements.

CAPITAL

CAPITAL

The following table illustrates Bancorp’s regulatory capital ratios at March 31,June 30, 2014 and December 31, 2013 respectively:

 

                                                
    March 31, 2014 December 31, 2013  

June 30, 2014

  

December 31, 2013

 

Tier 1 Leverage Capital

     9.56  9.33  9.61%   9.33% 

Tier 1 Risk-based Capital

     12.87  12.70  12.96%   12.70% 

Total Risk-based Capital

     14.12  13.95  14.215   13.95% 

The following table illustrates the Bank’s regulatory capital ratios at March 31,June 30, 2014 and December 31, 2013 respectively:

 

                                                
    March 31, 2014 December 31, 2013  

June 30, 2014

  

December 31, 2013

 

Tier 1 Leverage Capital

     9.56  9.28  9.63%   9.28% 

Tier 1 Risk-based Capital

     12.87  12.61  12.99%   12.61% 

Total Risk-based Capital

     14.12  13.86  14.24%   13.86% 

IMPACT OF INFLATION AND CHANGING PRICES

Bancorp’s consolidated financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, in particular, real estate. Inflation, or disinflation, could significantly affect Bancorp’s earnings in future periods.

MANAGEMENT CHANGES

There were no changes in executive management during

In February, 2014, the quarter.

Company announced the appointment of Richard A. Muskus as Executive officer responsible for lending effective March 17, 2014. The OCC has reviewed the Notice of Change of Director or Senior Executive officer submitted and has determined that the notice is technically complete as of June 24, 2014.

Item3: Quantitative and Qualitative Disclosures about Market Risk

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign exchange rates, equity prices, commodity prices and other market-driven rates or prices. Based upon the nature of Bancorp’s business, the primary source of market risk is interest rate risk, which is the impact that changing interest rates have on current and future earnings. In addition, Bancorp’s loan portfolio is primarily secured by real estate in the company’sCompany’s market area. As a result, the changes in valuation of real estate could also impact Bancorp’s earnings.

Qualitative Aspects of Market Risk

Bancorp’s goal is to maximize long term profitability while minimizing its exposure to interest rate fluctuations. The first priority is to structure and price Bancorp’s assets and liabilities to maintain an acceptable interest rate spread while reducing the net effect of changes in interest rates. In order to accomplish this, the focus is on maintaining a proper balance between the timing and volume of assets and liabilities re-pricing within the balance sheet. One method of achieving this balance is to originate variable rate loans for the portfolio and purchase short-term investments to offset the increasing short term re-pricing of the liability side of the balance sheet. In fact, a number of the interest-bearing deposit products have no contractual maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions. Additionally, loans and investments with longer term rate adjustment frequencies are matched against longer term deposits and borrowings to lock in a desirable spread.

The exposure to interest rate risk is monitored by the Management Asset and Liability Committee consisting of senior management personnel. The Committee meets on a monthly basis, but may convene more frequently as conditions dictate. The Committee reviews the interrelationships within the balance sheet to maximize net interest income within acceptable levels of risk. This Committee reports to the Board of Directors on a monthly basis regarding its activities. In addition to the Management Asset and Liability Committee, there is a Board Asset and Liability Committee (“ALCO”), which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment transactions during the period and determines compliance with Bank policies.

Quantitative Aspects of Market Risk

Management analyzes Bancorp’s interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income simulation and GAP analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period.

Management’s goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income. Interest income simulations are completed quarterly and presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. Changes to these assumptions can significantly affect the results of the simulations. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.

Simulation analysis is only an estimate of Bancorp’s interest rate risk exposure at a particular point in time. Management regularly reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth examples of changes in estimated net interest income and the estimated net portfolio value based on projected scenarios of interest rate increases and decreases. The analyses indicate the rate risk embedded in Bancorp’s portfolio at the dates indicated should all interest rates instantaneously rise or fall. The results of these changes are added to or subtracted from the base case; however, there are certain limitations to these types of analyses. Rate changes are rarely instantaneous and these analyses may also overstate the impact of short-term repricings. As a result of the historically low interest rate environment, the calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the risk to earnings and equity since the interest rates on certain balance sheet items have approached their minimums and therefore, it is not possible for the analyses to fully measure the true impact of these downward shocks.

Net Interest Income and Economic Value

Summary Performance

 

March 31, 2014

 
   Net Interest Income  Net Portfolio Value 

Projected Interest

   Estimated     $ Change    % Change    Estimated     $ Change    % Change  

Rate Scenario

   Value     from Base    from Base    Value     from Base    from Base  

+200

   16,270     (420  -2.5  60,115     (9,609  -13.8

+100

   16,602     (88  -0.5  64,884     (4,840  -6.9

BASE

   16,690       69,724     

-100

   16,821     131    0.8  76,482     6,758    9.7

-200

   16,685     (5  0.0  80,825     11,101    15.9

December 31, 2013

 
   Net Interest Income  Net Portfolio Value 

Projected Interest

   Estimated     $ Change    % Change    Estimated     $ Change    % Change  

Rate Scenario

   Value     from Base    from Base    Value     from Base    from Base  

+200

   16,147     (780  -4.6  59,238     (11,808  -16.6

+100

   16,656     (271  -1.6  65,079     (5,967  -8.4

BASE

   16,927       71,046     

-100

   17,124     197    1.2  78,332     7,286    10.3

-200

   16,864     (63  -0.4  82,687     11,641    16.4

June 30, 2014

 
     

Net Interest Income

  

Net Portfolio Value

 
 

Projected Interest

  

Estimated

  

$ Change

  

% Change

  

Estimated

  

$ Change

  

% Change

 
 

Rate Scenario

  

Value

  

from Base

  

from Base

  

Value

  

from Base

  

from Base

 
 

+ 200

   15,990  (299)  -1.8%   62,021  (7,309)  -10.5% 
 

+ 100

   16,253  (36)  -0.2%   65,625  (3,705)  -5.3% 
 

BASE

   16,289           69,330         
 -100   16,447  158   1.0%   75,059  5,729   8.3% 
 -200   16,357  68   0.4%   78,660  9,330   13.5% 
                            

 

 

December 31, 2013

 
     

Net Interest Income

  

Net Portfolio Value

 
 

Projected Interest

  

Estimated

  

$ Change

  

% Change

  

Estimated

  

$ Change

  

% Change

 
 

Rate Scenario

  

Value

  

from Base

  

from Base

  

Value

  

from Base

  

from Base

 
 

+ 200

   16,147  (780)  -4.6%   59,238  (11,808)  -16.6% 
 

+ 100

   16,656  (271)  -1.6%   65,079  (5,967)  -8.4% 
 

BASE

   16,927           71,046         
 -100   17,124  197   1.2%   78,332  7,286   10.3% 
 -200   16,864  (63)  -0.4%   82,687  11,641   16.4% 

Item4: Controls and Procedures 

Item 4:

Controls and Procedures

Based on an evaluation of the effectiveness of Bancorp’s disclosure controls and procedures performed by Bancorp’s management, with the participation of Bancorp’s Chief Executive Officer and its Chief Financial Officer as of the end of the period covered by this report, Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that Bancorp’s disclosure controls and procedures have been effective.

As used herein, “disclosure controls and procedures” means controls and other procedures of Bancorp that are designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Bancorp in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to Bancorp’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 were no changes in Bancorp’s internal controls over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during Bancorp’s fiscal quarter ended March 31,June 30, 2014 that has materially affected, or is reasonably likely to materially affect, Bancorp’s internal controls over financial reporting.

PART II—OTHER INFORMATION.

 

PARTII - OTHER INFORMATION 

Item1:

Legal Proceedings

Neither Bancorp nor the Bank has any pending legal proceedings, other than ordinary routine litigation incidental to its business, to which Bancorp or the Bank is a party or any of its property is subject.

 

Item 1A:

Risk Factors

During the three months ended March 31,June 30, 2014, there were no material changes to the risk factors relevant to Bancorp’s operations, which are described in the Annual Report on Form 10-K for the year ended December 31, 2013.

Item 6:

Exhibits

 

No.Description

No.

 

Description

 22  Agreement and Plan of Reorganization dated as of June 28, 1999 between Bancorp and the Bank (incorporated by reference to Exhibit 2 to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
2.1 

2.1

Securities Purchase Agreement by and among Patriot National Bancorp, Inc., Patriot National Bank and PNBK Holdings LLC dated as of December 16, 2009 (incorporated by reference to Exhibit 10.1 to Bancorp’s Current Report on Form 8-K dated December 17, 2009).

2.2 
2.2

Amendment to Securities Purchase Agreement by and among Patriot National Bancorp, Inc., Patriot National Bank and PNBK Holdings LLC dated as of May 3, 2010 (incorporated by reference to Exhibit 10(a) to Bancorp’s Current Report on Form 8-K dated May 4, 2010).

3(i)3(i)Certificate of Incorporation of Bancorp, (incorporated by reference to Exhibit 3(i) to Bancorp’s Current Report on Form 8-K dated December 1, 1999 (Commission File No. 000-29599)).
3(i)(A)

Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated July 16, 2004 (incorporated by reference to Exhibit 3(i)(A) to Bancorp’sBancorp's Annual Report on Form 10- KSB for the year ended December 31, 2004 (Commission File No. 000-29599)).

3(i)(B) 
3(i)(B) 

Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to Exhibit 3(i)(B) to Bancorp’s Quarterly Report of Form 10-Q for the quarter ended September 30, 2006 (commission File No. 000-29599)).

NoDescription

No.

 

Description

3(i)(C) Certificate of Amendment of Certificate of Incorporation of Patriot National Bancorp, Inc. (incorporated by reference to Exhibit 3(i) to Bancorp’s current report Form 8-K dated October 21, 2010.
3(ii)3(ii)Amended and Restated By-laws of Bancorp (incorporated by reference to Exhibit 3(ii) to Bancorp’s Current Report on Form 8-K dated November 1, 2010 (Commission File No. 000-29599))
10(a)(2) 

10(a) (2)

2012 Stock Plan of Bancorp (incorporated by reference from Annex A to the Proxy Statement on Form 14C filed November 1, 2011.

10(a)(14)10(a) (14) Change of Control Agreement, dated as of January 1, 2007 among Philip W. Wolford, Patriot National Bank and Bancorp (incorporated by reference to Exhibit 10(a)(14) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2006 (Commission File No. 000-29599)).
10(a)(15)10(a) (15) Formal Written Agreement between Patriot National Bank and the Office of the Comptroller of the Currency (incorporated by reference to Exhibit 10(a)(15) to Bancorp’s Current Report on Form 8-K dated February 9, 2009 (Commission File No. 000-29599)).
10(a)(16)10(a) (16) Formal Written Agreement between Patriot National Bank and the Federal Reserve Bank of New York (incorporated by reference to Exhibit 10(a)(16) to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010 (Commission File No. 000-29599)).
10(a)(17)10(a) (17)Financial Services Agreement dated November 8, 2011 of Bancorp (incorporated by reference to Exhibit 10(a)(20) on the Quarterly Report on Form 10-Q dated November 10, 2011.
14 
10(a) (20)Amended Financial Sevices Agreement, dated August 7, 2014.
14Code of Conduct for Senior Financial Officers (incorporated by reference to Exhibit 14 to Bancorp’s Annual Report on Form 10 -KSB for the year ended December 31, 2004 (Commission File No. 000-29599).
2121  Subsidiaries of Bancorp (incorporated by reference to Exhibit 21 to Bancorp’s Annual Report on Form 10-KSB for the year ended December 31, 1999 (Commission File No. 000-29599)).
31(1)31(1)  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31(2)31(2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 
32Section 1350 Certifications

No.

 
NoDescription
101.INS#

DescriptionXBRL Instance Document

101.INS# XBRL Instance Document
101.SCH#

XBRL Schema Document

101.SCH# XBRL Schema Document
101.CAL#XBRL Calculation Linkbase Document
101.LAB#101.LAB#XBRL Labels Linkbase Document

101.PRE#XBRL Presentation Linkbase Document
101.DEF#101.DEF#XBRL Definition Linkbase Document
The exhibits marked with the section symbol (#) are interactive data files. Pursuant to Rule 406T of Regulations S-T, these interactive data files (i) are not deemed filed or part of a registration statement of prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and (ii) are deemed to have complied with Rule 405 of Regulations S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files. 

The exhibits marked with the section symbol (#) are interactive data files. Pursuant to Rule 406T of Regulations S-T, these interactive data files (i) are not deemed filed or part of a registration statement of prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and (ii) are deemed to have complied with Rule 405 of Regulations S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files.

SIGNATURES

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

 

PATRIOT NATIONAL BANCORP, INC.

PATRIOT NATIONAL BANCORP,INC.

(Registrant)

(Registrant)
By: 

By:

/s/ Christina L. Maier

Christina L. Maier

Executive Vice President

 Chief Financial Officer
 (On behalf of the registrant and as
 Chief Financial Officer)
August 8, 2014

May 9, 2014

 

58