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 quarterly period ended September 30, 2014

 

OR

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_____________________ to_____________________

 

Commission File Number 000-31957

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   32-0135202
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
100 S. Second Avenue, Alpena, Michigan   49707
(Address of principal executive offices)     (Zip Code)

 

Registrant’s telephone number, including area code: (989) 356-9041

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

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

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
(Do not check if a smaller reporting company)    

 

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

 

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

 

Common Stock, Par Value $0.01   Outstanding at November 13, 2014
(Title of Class)   3,727,014 shares

 

 

 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended September 30, 2014

 

INDEX

 

        PAGE
PART I – FINANCIAL INFORMATION
ITEM 1 - UNAUDITED FINANCIAL STATEMENTS   3
  Consolidated Balance Sheet at September 30, 2014 and December 31, 2013   3
  Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013   4
  Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014   5
  Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013   6
  Notes to Unaudited Consolidated Financial Statements   7
         
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   25
         
ITEM 3 – QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK   32
         
ITEM 4 - CONTROLS AND PROCEDURES   32
         
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS   33
ITEM 1A - RISK FACTORS   33
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   33
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES   33
ITEM 4 - MINE SAFTEY DISCLOSURES   33
ITEM 5 - OTHER INFORMATION   33
ITEM 6 - EXHIBITS   33
  Section 302 Certifications    
  Section 906 Certifications    
  101.INS XBRL Taxonomy Extension Schema    
  101.SCH XBRL Taxonomy Extension Calculation Linkbase    
  101.CAL XBRL Taxonomy Extension Label Linkbase    
  101.DEF XBRL Taxonomy Extension Definition Linkbase    
  101.LAB XBRL Taxonomy Extension Label Linkbase    
  101.PRE XBRL Taxonomy Extension Presentation Linkbase    

 

When used in this Form 10-Q or future filings by First Federal of Northern Michigan Bancorp, Inc. (the “Company”) with the Securities and Exchange Commission ("SEC"), in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

 

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected.

 

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

2
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet

 

 

     September 30, 2014      December 31, 2013  
         (Unaudited)       
ASSETS          
Cash and cash equivalents:          
Cash on hand and due from banks  $6,980,433   $2,760,010 
Overnight deposits with FHLB   60,998    5,823 
Total cash and cash equivalents   7,041,431    2,765,833 
Securities AFS     115,259,801    50,358,175 
Securities HTM   2,215,000    2,255,000 
Loans held for sale   1,227,675    175,400 
Loans receivable, net of allowance for loan losses of $1,464,275 and          
$1,471,622 as of September 30, 2014 and December 31, 2013, respectively   163,357,644    136,314,964 
Foreclosed real estate and other repossessed assets   2,885,686    1,780,058 
Federal Home Loan Bank stock, at cost   3,422,800    3,266,100 
Premises and equipment   6,255,347    5,203,301 
Assets held for sale   530,707    —   
Accrued interest receivable   1,058,766    744,730 
Intangible assets   1,349,723    39,732 
Deferred tax asset   1,014,412    798,163 
Originated mortgage servicing rights     735,590    860,024 
Bank owned life insurance   4,697,415    4,610,070 
Other assets   871,270    485,234 
           
Total assets  $311,923,267   $209,656,784 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits  $258,506,307   $160,029,115 
Advances from borrowers for taxes and insurance   279,230    151,254 
Federal Home Loan Bank Advances   21,768,864    24,813,409 
Accrued expenses and other liabilities   1,396,177    1,138,324 
           
Total liabilities   281,950,578    186,132,102 
           
Stockholders' equity:          
Common stock ($0.01 par value 20,000,000 shares authorized)  4,034,764          
and 3,191,799 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively.   40,348    31,918 
Additional paid-in capital   28,264,216    23,853,891 
Retained earnings     4,520,179    2,763,242 
Treasury stock at cost (307,750 shares) at September 30, 2014 and December 31, 2013   (2,963,918)   (2,963,918)
Accumulated other comprehensive income (loss)   111,864    (160,451)
Total stockholders' equity   29,972,689    23,524,682 
           
Total liabilities and stockholders' equity  $311,923,267   $209,656,784 

 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income

 

   For the Three Months  For the Nine Months
   Ended September 30,  Ended September 30,
   2014  2013  2014  2013
   (Unaudited)  (Unaudited)
Interest income:                    
Interest and fees on loans  $1,933,858   $1,786,663   $5,335,249   $5,429,925 
Interest and dividends on investments                    
   Taxable   217,162    121,899    517,359    361,219 
   Tax-exempt   44,496    37,054    126,980    112,098 
Interest on mortgage-backed securities   191,790    119,852    477,353    342,018 
Total interest income   2,387,306    2,065,468    6,456,941    6,245,260 
                     
Interest expense:                    
Interest on deposits   204,812    201,046    583,060    631,586 
Interest on borrowings   65,535    73,553    195,191    249,017 
Total interest expense   270,347    274,599    778,251    880,603 
                     
Net interest income   2,116,959    1,790,869    5,678,690    5,364,657 
Provision for loan losses   257,300    31,733    273,065    371,560 
Net interest income after provision for loan losses   1,859,659    1,759,136    5,405,625    4,993,097 
                     
Non-interest income:                    
Service charges and other fees   206,499    240,103    575,717    654,822 
Mortgage banking activities   127,044    155,869    351,126    487,993 
Net gain on investment securities   646    —      646      
Net loss on sale of premises and equipment,                  —   
  real estate owned and other repossessed assets   (1,054)   (11,462)   (27,118)   (10,712)
Bargain purchase gain   1,816,255    —      1,816,255    —   
Other     75,549    74,468    188,900    231,831 
Total non-interest income   2,224,939    458,978    2,905,525    1,363,934 
                     
Non-interest expense:                    
Compensation and employee benefits   1,330,948    1,179,082    3,549,599    3,472,983 
FDIC Insurance Premiums   55,828    43,378    146,702    138,054 
Advertising   53,815    27,676    125,439    95,391 
Occupancy   273,602    237,924    729,547    689,578 
Amortization of intangible assets   42,177    29,646    81,909    88,938 
Service bureau charges   91,892    79,301    238,068    233,884 
Professional services   50,152    68,208    219,560    304,904 
Collection activity   4,806    42,840    34,302    106,603 
Real estate owned & other repossessed assets   91,360    54,548    120,042    175,967 
Merger related expense   139,525    38,941    264,259    38,941 
Other     336,147    234,113    871,743    765,199 
Total non-interest expense   2,470,252    2,035,657    6,381,170    6,110,442 
                     
Income before income tax expense   1,614,346    182,457    1,929,980    246,589 
Income tax expense   —      —      —      —   
                     
Net income     $1,614,346   $182,457   $1,929,980   $246,589 
                     
Other comprehensive income (loss):                    
Unrealized gain (loss) on available-for-sale investment securities -
net of tax
   (161,334)   557,775   $272,315   $(831,890)
Reclassification adjustment for gains realized in earnings -
net of tax
   426    —      426    —   
                     
   Comprehensive income (loss)  $1,453,438   $740,232   $2,202,721   $(585,301)
                     
Per share data:                    
Net income per share                      
   Basic  $0.48   $0.06   $0.63   $0.09 
   Diluted    $0.48   $0.06   $0.63   $0.09 
                     
Weighted average number of shares outstanding                    
   Basic   3,369,670    2,884,049    3,047,702    2,884,049 
   Including dilutive stock options   3,369,670    2,884,049    3,047,702    2,884,049 
Dividends per common share  $0.02   $—     $0.06   $—   

  

 

See accompanying notes to consolidated financial statements.

 

4
 

 

First Federal of Northern Michigan Bancorp Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

 

                        Accumulated      
              Additional         Other      
    Common     Treasury    Paid-in    Retained    Comprehensive      
    Stock    Stock    Capital    Earnings    Income (Loss)    Total 
                               
Balance at January 1, 2014  31,918   (2,963,918)  23,853,891   2,763,242   (160,451)  23,524,682 
                               
Exchange of Alpena Banking Corp Stock (842,965 shares issued)   8,430    —      4,410,325    —      —      4,418,755 
                               
Net income for the period   —      —      —      1,929,980    —      1,929,980 
                               
Changes in unrealized loss:                              
        on available-for-sale securities                              
        (net of tax of $140,284)   —      —      —      —      272,315    272,315 
                               
Dividends declared   —      —      —      (173,043)   —      (173,043)
Balance at September 30, 2014  40,348   (2,963,918)  28,264,216   4,520,179   111,864   29,972,689 

  

                       Accumulated      
              Additional         Other      
    Common     Treasury    Paid-in    Retained    Comprehensive      
    Stock    Stock    Capital    Earnings    Income     Total 
                               
Balance at January 1, 2013  31,918   (2,963,918)  23,853,891   2,766,170   746,723  24,434,784 
                               
Net income for the period   —      —      —      246,589     —      246,589  
                               
Changes in unrealized gain                              
        on available-for-sale securities                              
        (net of tax of $428,550)   —      —      —      —      (831,891)    (831,891) 
Balance at September 30, 2013  31,918   (2,963,918)  23,853,891   3,012,759   (85,168)   23,849,482 

 

See accompanying notes to the consolidated financial statements.

 

5
 

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

 

 

   For Nine Months Ended
   September 30,
   2014  2013
   (Unaudited)
Cash Flows from Operating Activities:          
Net income  $1,929,980   $246,589 
Adjustments to reconcile net income to net cash from operating activities:          
    Depreciation and amortization   320,565    301,053 
    Provision for loan loss   273,065    371,560 
    Accretion of acquired loans   (17,659)   —   
    Amortization and accretion on securities   345,067    439,662 
    Bargain purchase gain from bank acquisition   (1,816,255)   —   
    Gain on investment securities   (646)   —   
    Gain on sale of loans held for sale   (154,558)   (207,229)
    Originations of loans held for sale   (9,623,562)   (12,443,497)
    Proceeds from sale of loans held for sale   8,725,845    11,755,518 
    Loss (gain) on sale of fixed assets   22,934    (9,084)
    Loss on sale of real estate owned and other repossessed assets   4,184    19,796 
Net change in:          
    Accrued interest receivable   (98,482)   17,162 
    Other assets   (152,535)   (300,039)
    Prepaid FDIC insurance premiums   —      582,945 
    Bank owned life insurance   (87,345)   (100,728)
    Deferred income tax benefit   (19,534)   —   
    Accrued expenses and other liabilities   190,638    (195,632)
           
Net cash (used in) provided by operating activities   (158,298)   478,076 
           
Cash Flows from Investing Activities:          
  Net cash received in bank acquisition   41,356,940    —   
  Net decrease (increase) in loans (loans originated, net of principal payments)   4,048,637    (678,131)
  Proceeds from maturity and sale of available-for-sale securities   7,732,474    12,840,206 
  Proceeds from sale of property and equipment   3,016    56,163 
  Proceeds from sale of real estate owned and other repossed assets   412,850    1,339,307 
  Purchase of securities   (48,517,143)   (14,017,425)
  Purchase of premises and equipment   (180,383)   (55,065)
           
Net cash provided by (used in) investing activities   4,856,391    (514,945)
           
Cash Flows from Financing Activities:          
  Dividend paid on common stock   (173,043)   —   
  Net increase in deposits   2,690,650    (295,870)
  Net increase in Repo Sweep accounts   —      2,377,100 
  Net increase in advances from borrowers   104,443    83,215 
  Advances  from Federal Home Loan Bank   12,555,000    39,155,000 
  Repayments of Federal Home Loan Bank advances   (15,599,545)   (40,497,389)
Net cash (used in) provided by financing activities   (422,495)   822,056 
           
Net increase in cash and cash equivalents   4,275,598    785,187 
Cash and cash equivalents at beginning of period   2,765,833    2,751,810 
Cash and cash equivalents at end of period  $7,041,431   $3,536,997 
           
Supplemental disclosure of cash flow information:          
Cash paid during the period for          
  Interest  $788,218   $880,717 
Transfers of loans to foreclosed real estate and repossessed assets  $1,481,000   $1,213,318 

  

 

See accompanying notes to the consolidated financial statements.

 

6
 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—BASIS OF FINANCIAL STATEMENT PRESENTATION

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the financial statements of First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

All adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash flows, have been made. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

Note 2— PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan (the “Bank”), and the Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation (“FSMC”) and FFNM Agency. FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency is to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to the Grotenhuis Group. All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Note 3 - BUSINESS COMBINATIONS

 

As of August 8, 2014 ("Merger Date"), the Company completed its merger with Alpena Banking Corporation and its wholly owned subsidiary Bank of Alpena (“Alpena”). Alpena had one branch office and $102.9 million in assets as of August 8, 2014. The results of operations due to the merger have been included in the Company's results since the Merger Date. The merger was effected by the issuance of shares of the Company’s common stock to Alpena Banking Corporation shareholders. Each share of Alpena’s common stock was converted into the right to receive 1.549 shares of the Company’s common stock, with cash paid in lieu of fractional shares. The conversion of Alpena’s shares resulted in the issuance of 842,965 shares of the Company's common stock.

 

The merger transaction was recorded using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the Merger Date. The following table provides the purchase price calculation as of the Merger Date and the identifiable assets acquired and liabilities assumed at their estimated fair values. These fair value measurements are provisional based on third-party valuations that are currently under review and are subject to refinement for up to one year after the Merger Date based on additional information that may be obtained by us that existed on the Merger Date.

 

7
 

 

Purchase Price:
(,000's omitted except per share data)

 

First Federal of Northern Michigan Bancorp, Inc. common stock issued for Alpena Banking Corporation common shares   842,965 
      
Price per share, based on First Federal of Northern Michigan Bancorp, Inc. closing price on August 8, 2014  $5.59 
      
Total purchase price  $4,712,174.00 

  

Preliminary Statement of Net Assets Acquired at Fair Value:

 

Assets     
Cash and cash equivalents  $41,650,000 
Securities   24,008,000 
Loans   32,828,000 
Premises and Equipment   1,667,000 
Core Deposit Intangible   1,392,000 
Deferred Tax Asset   337,000 
Other Assets   524,000 
Total Assets  $102,406,000 
Liabilities     
Deposits   95,787,000 
Other Liabilities   91,000 
Total Liabilities  $95,878,000 
Net Identifiable Assets Acquired  $6,528,000 
Bargain Purchase Gain  $(1,816,000)

 

The results of operations for the three and nine months ended September 30, 2014 include the operating results of the acquired assets and assumed liabilities for the 51 days subsequent to the Merger Date. Alpena's results of operations prior to the Merger Date are not included in the Company's consolidated statement of comprehensive income.

 

We recorded merger related expenses of $140,000 and $264,000 during the three and nine months ended September 30, 2014. These expenses were for professional services such as legal, accounting and contractual arrangements for consulting services. Alpena's entire operating system has been integrated with the Company's.

 

The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2014, as if the merger had occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Bank of Alpena. In addition, the $264,000 in merger-related costs noted above are included in each period presented. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of the Company.

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2014  2013  2014  2013
             
Net interest income  $2,412,746   $2,388,898   $7,217,268   $7,211,261 
Non-interest expense   2,851,736    2,931,486    7,920,539    8,312,999 
Net income   1,709,130    214,409    1,997,384    342,821 
Net income per diluted share   0.46    0.07    0.54    0.12 

 

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the valuation of acquired loans. For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Alpena's previously established allowance for loan losses.

 

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounting for under ASC 310-30 ("acquired impaired"), and loans that do not meet the criteria, which are accounted for under ACC 310-20 ("acquired non-impaired"). In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

 

8
 

  

The provisional fair value of loans as of the Merger Date is presented in the following table:

 

   Acquired  Acquired  Acquired
   Impaired  Non-Impaired  Total
   (in thousands)
Real estate loans:               
  Residential mortgages  $397   $6,992   $7,389 
Commercial Loans:               
  Contruction - real estate   —      109    109 
  Secured by real estate   2,846    14,721    17,568 
  Other   1,201    4,213    5,414 
  Total commercial loans   4,048    19,043    23,091 
                
Consumer loans:               
  Secured by real state   30    1,563    1,593 
  Other   —      755    755 
  Total consumer loans   30    2,318    2,348 
                
Total Loans  $4,474   $28,353   $32,828 

 

The following table presents data on acquired impaired loans at the Merger Date:

 

   Acquired  Acquired  Acquired
   Impaired  Non-Impaired  Total
   (in thousands)
          
Loans acquired- contractual required payments  $5,930   $28,587   $34,517 
Non accretable difference   (1,456)   —      (1,456)
Expected cash flows   4,474    28,587    33,062 
Accretable yield   —      (234)   (234)
Carrying balance at acquisition date  $4,474   $28,353   $32,828 

 

Note 4—SECURITIES

 

Investment securities have been classified according to management’s intent. The carrying value and estimated fair value of securities are as follows: 

9
 

 

   September 30, 2014
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized Losses
  Market
Value
   (in thousands)
Securities Available for Sale                    
      U.S. Treasury securities and obligations of U.S.                    
           government corporations and agencies  $25,665   $38   $(141)  $25,562 
Municipal obligations   22,803    350    (108)   23,045 
Corporate bonds & other obligations   4,788    19    (1)   4,806 
Mortgage-backed securities   61,832    296    (287)   61,841 
Equity securities   2    4    —      7 
                     
Total  $115,090   $707   $(537)  $115,260 
                     
Securities Held to Maturity                    
Municipal obligations  $2,215   $102   $—     $2,317 

 

    December 31, 2013 
    Amortized
Cost
    Gross Unrealized Gains    Gross Unrealized (Losses)    Market
Value
 
    (in thousands) 
Securities Available for Sale                    
      U.S. Treasury securities and obligations of U.S.            
           government corporations and agencies  $7,111   $36   $(105)   7,042 
Municipal obligations   13,694    216    (301)   13,609 
Corporate bonds & other obligations   1,085    12    —      1,097 
Mortgage-backed securities   28,708    279    (384)   28,603 
Equity securities   3    4    —      7 
                     
Total  $50,601   $547   $(790)  $50,358 
                     
Securities Held to Maturity                    
Municipal obligations  $2,255   $145   $—     $2,400 

 

The amortized cost and estimated market value of securities at September 30, 2014, by contract maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities with no specified maturity date are separately stated.

 

   September 30, 2014
   Amortized
Cost
  Market
Value
   (in thousands)
Available For Sale:          
Due in one year or less  $6,968   $7,006 
Due after one year through five years   34,070    34,057 
Due in five year through ten years   10,888    10,902 
Due after ten years   1,330    1,448 
           
Subtotal   53,256    53,413 
           
Equity securities   2    7 
Mortgage-backed securities   61,832    61,840 
           
Total  $115,090   $115,260 
           
Held To Maturity:          
Due in one year or less  $95   $96 
Due after one year through five years   500    514 
Due in five year through ten years   715    762 
Due after ten years   905    945 
           
Total  $2,215   $2,317 

 

At September 30, 2014 and December 31, 2013, securities with a carrying value and fair value of $37,800,000 and $36,000,000, respectively, were pledged to certain deposit accounts, FHLB advances and our line of credit at the Federal Reserve.

Gross proceeds from the sale of securities for the nine-months ended September 30, 2014 and 2013 were $218,000 and $0, respectively, resulting in gross gains of $646 and $0, respectively and gross losses of $0 and $0, respectively. 

10
 

 

The following is a summary of temporarily impaired investments that have been impaired for less than and more than twelve months as of September 30, 2014 and December 31, 2013:

 

   September 30, 2014
      Gross
Unrealized
Losses
     Gross
Unrealized
Losses
   Fair Value  <12 months  Fair Value  > 12 months
   (in thousands)
Available For Sale:                    
    U.S. Treasury securities and obligations of U.S.                    
        government corporations and agencies  $14,867   $(90)  $949   $(51)
Corporate bonds & other obligations   744    (1)   —      —   
Municipal obligations   3,931    (16)   5,355    (93)
Mortgage-backed securities   29,539    (155)   4,878    (132)
Equity securities   —      —      —      —   
                     
Total  $49,080   $(261)  $11,182   $(276)
                     
Held to Maturity:                    
Municipal obligations  $—     $—     $—     $—   

 

   December 31, 2013
      Gross
Unrealized
Losses
     Gross
Unrealized
Losses
   Fair Value  <12 months  Fair Value  > 12 months
   (in thousands)
Available For Sale:                    
    U.S. Treasury securities and obligations of U.S.  $—     $—     $894   $(105)
        government corporations and agencies                    
Municipal obligations   7,902    (243)   1,668    (58)
Mortgage-backed securities   14,471    (334)   2,052    (50)
Equity securities   —      —      —      —   
                     
Total  $22,373   $(577)  $4,614   $(213)
                     
Held to Maturity:                    
       Municipal obligations  $—     $—     $—     $—   

 

As of September 30, 2014, there were 81 securities with unrealized losses totaling $537,000 compared to 39 securities with unrealized losses totaling $790,000 at December 31, 2013.

 

The unrealized losses on the securities held in the portfolio are not considered other than temporary and have not been recognized into income. This decision is based on the Company’s ability and intent to hold any potentially impaired security until maturity. The performance of the security is based on the contractual terms of the agreement, the extent of the impairment and the financial condition and credit quality of the issuer. The decline in market value is considered temporary and a result of changes in interest rates and other market variables.

 

Note 5—LOANS

 

Originated loans are reported at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

 

Acquired loans are those obtained in the Merger (See Note 3 – Business Combination for further information). These loans were recorded at estimated fair value at the Acquisition Date with no carryover of the related allowance. The acquired loans were segregated between those considered to be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, that all contractually required payments will not be collected. Acquired loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Acquisition Date and are accounted for in pools. As of September 30, 2014, no acquired loans were modified as troubled debt restructurings after the Acquisition Date. 

 

11
 

 

The fair value estimates for acquired loans are based on expected prepayments and the amount and timing of discounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value. In determining the Acquisition Date fair value of acquired impaired loans, and in subsequent accounting, we have generally aggregated acquired mortgage, commercial and consumer loans into pools of loans with common risk characteristics.

 

The difference between the fair value of an acquired non-impaired loan and contractual amounts due at the Acquisition Date is accreted into income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

 

The excess of an acquired impaired loan’s contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess cash flows expected to be collected over the carrying amount of the acquired loan is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

 

We evaluate quarterly the remaining contractual required payments receivable and estimate cash flows expected to be collected over the life of the impaired loans. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Acquisition Date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

 

Increases in expected cash flows of acquired impaired loans subsequent to the Acquisition Date are recognized prospectively through adjustments of the yield on the loans or pools over their remaining lives, while decreases in expected cash flows are recognized as impairment through a provision for loan losses and an increase in the allowance.

 

The following table sets forth the composition of our loan portfolio by loan type at the dates indicated. 

 

12
 

 

   At September 30,  At December 31,
   2014  2013
   (in thousands)
Originated Loans:          
Real estate loans:          
  Residential mortgage  $65,526   $63,839 
Commercial loans:          
  Construction - real estate   634    173 
  Secured by real estate   45,697    51,726 
  Other   12,578    12,451 
  Total commercial loans   58,909    64,350 
           
Consumer loans:          
  Secured by real estate   7,905    8,730 
  Other   1,098    1,165 
  Total consumer loans   9,003    9,895 
           
  Total gross loans  $133,438   $138,084 
  Less:          
  Net deferred loan fees   (266)   (297)
  Allowance for loan losses   (1,464)   (1,472)
           
  Total loans, net  $131,708   $136,315 

  

   At September 30,        
   2014        
   (in thousands)        
Acquired Loans:           
Real estate loans:             
  Residential mortgage  $7,036         
Commercial loans:             
  Construction - real estate   94         
  Secured by real estate   17,170         
  Other   5,288         
  Total commercial loans   22,552         
              
Consumer loans:             
  Secured by real estate   1,823         
  Other   239         
  Total consumer loans   2,062         
              
  Total loans, net  $31,650         

 

Total outstanding balance and carrying value of acquired impaired loans was $5.9 million and $5.2 million, respectively, as of September 30, 2014. Changes in the accretable yield for acquired impaired loans for the three and nine months ended September 30, 2014 were as follows:

 

   Acquired  Acquired   
   Impaired  Non-Impaired  Acquired
   Non accretable  Accretable  Total
   (in thousands)
          
          
Beginning of year  $—     $—     $—   
Net discount associated with acquired loans   (1,456)   (586)   (2,041)
Premium   —      352    352 
Accretion of discount for credit spread   —      38    38 
Amortization of premium   —      (20)   (20)
   $(1,456)  $(216)  $(1,672)

 

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2014 and December 31, 2013: 

 

13
 

 

Contractual Aging of Recorded Balance in Past Due Loans by Class of Loan
As of September 30, 2014
    30 - 59  60 - 89  Greater
than
        Total  
Recorded
Investment > 90
   Days  Days  90 Days  Total     Financing  Days and
   Past Due  Past Due  Past Due  Past Due  Current  Receivables  Accruing
   (dollars in thousands)
Originated Loans:                                   
Commercial Real Estate:                                   
   Commercial Real Estate - construction  $—     $—     $173   $173   $461   $634   $—   
   Commercial Real Estate - other   144    10    —      154    45,543    45,697    —   
Commercial - non real estate   —      —      —      —      12,578    12,578    —   
                                    
Consumer:                                   
   Consumer - Real Estate   19    4    12    35    7,870    7,905    —   
   Consumer - Other   —      —      3    3    1,095    1,098    3 
                                    
Residential:                                   
   Residential   1,553    415    371    2,339    63,187    65,526    —   
        Total  $1,716   $429   $559   $2,704   $130,734   $133,438   $3 

 

   30 - 59  60 - 89  Greater
than
        Total  Recorded
Investment > 90
   Days  Days  90 Days  Total     Financing  Days and
   Past Due  Past Due  Past Due  Past Due  Current  Receivables  Accruing
   (dollars in thousands)
Acquired Loans:                                   
Commercial Real Estate:                                   
   Commercial Real Estate - construction  $—     $—     $—     $—     $94   $94   $—   
   Commercial Real Estate - other   461    —      91    552    16,618    17,170    —   
Commercial - non real estate   82    —      105    187    5,101    5,288    —   
                                    
Consumer:                                   
   Consumer - Real Estate   9    6    7    22    1,801    1,823    —   
   Consumer - Other   —      —      —      —      239    239    42 
                                    
Residential:                                   
   Residential   92    —      525    617    6,419    7,036    225 
        Total  $644   $6   $728   $1,378   $30,272   $31,650   $267 

 

As of December 31, 2013
   30 - 59  60 - 89  Greater
than
           Recorded
Investment > 90
   Days  Days  90 Days  Total     Total  Days and
   Past Due  Past Due  Past Due  Past Due  Current  Loans  Accruing
   (dollars in thousands)
                      
Commercial Real Estate:                                   
   Commercial Real Estate - construction  $—     $—     $173   $173   $—     $173   $—   
   Commercial Real Estate - other   —      521    1,441    1,962    49,764    51,726    —   
Commercial - non real estate   33    20    —      53    12,398    12,451    —   
                                    
Consumer: