XNAS:NHTB New Hampshire Thrift Bancshares Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012

Commission File Number: 000-17859

 

 

NEW HAMPSHIRE THRIFT

BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

State of Delaware   02-0430695

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

I.D. Number)

9 Main St., PO Box 9, Newport, NH   03773
(Address of Principal Executive Offices)   (Zip Code)

603-863-0886

(Registrant’s Telephone Number, Including Area Code)

 

 

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  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.)    Yes  x    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. (Check one):

 

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

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of May 10, 2012, was 5,835,360.

 

 

 


NEW HAMPSHIRE THRIFT BANCSHARES, INC.

INDEX TO FORM 10-Q

 

         Page  

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements:   
 

Condensed Consolidated Balance Sheets - March 31, 2012 (unaudited) and December 31, 2011

     2   
 

Condensed Consolidated Statements of Income (unaudited) - For the Three Months Ended March 31, 2012 and 2011

     3   
 

Condensed Consolidated Statements of Comprehensive Income (unaudited) - For the Three Months Ended March 31, 2012 and 2011

     4   
 

Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months Ended March 31, 2012 and 2011

     5   
 

Notes to Condensed Consolidated Financial Statements (unaudited) -

     7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      36   

Item 4.

  Controls and Procedures      36   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      37   

Item 1A.

  Risk Factors      37   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 3.

  Defaults Upon Senior Securities      37   

Item 4.

  Mine Safety Disclosures      37   

Item 5.

  Other Information      37   

Item 6.

  Exhibits      37   

 


Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the Securities and Exchange Commission (the “SEC”), in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services or the impact or expected outcome of any legal proceedings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continues,” “remains,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

   

local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;

 

   

continued volatility and disruption in national and international financial markets;

 

   

changes in the level of non-performing assets and charge-offs;

 

   

changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

 

   

adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;

 

   

inflation, interest rate, securities market and monetary fluctuations;

 

   

the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

 

   

changes in consumer spending, borrowings and savings habits;

 

   

technological changes;

 

   

the ability to increase market share and control expenses;

 

   

changes in the competitive environment among banks, financial holding companies and other financial service providers;

 

   

the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;

 

   

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

 

   

the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and

 

   

our success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Throughout this report, the terms “Company,” “we,” “our” and “us” refers to the consolidated entity of New Hampshire Thrift Bancshares, Inc., its wholly owned subsidiaries, McCrillis & Eldredge Insurance, Inc. and Lake Sunapee Bank, fsb (the “Bank”), and the Bank’s subsidiaries, Lake Sunapee Group, Inc. and Lake Sunapee Financial Services Corporation.

 

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Information

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 AND DECEMBER 31, 2011

 

(Dollars in thousands)    March 31,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 12,090      $ 21,841   

Overnight deposits

     26,000        2,899   
  

 

 

   

 

 

 

Cash and cash equivalents

     38,090        24,740   

Securities available-for-sale

     204,183        210,318   

Federal Home Loan Bank stock

     7,496        7,615   

Loans held-for-sale

     4,387        3,434   

Loans receivable, net

     737,137        714,952   

Accrued interest receivable

     2,531        2,669   

Premises and equipment, net

     16,677        16,450   

Investments in real estate

     3,427        3,451   

Other real estate owned

     760        1,344   

Goodwill and other intangible assets

     30,238        30,352   

Investment in partially owned Charter Holding Corp., at equity

     5,020        4,895   

Bank owned life insurance

     18,461        13,347   

Due from broker, net

     18,121        —     

Other assets

     7,799        8,252   
  

 

 

   

 

 

 

Total assets

   $ 1,094,327      $ 1,041,819   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 61,783      $ 64,356   

Interest-bearing

     748,781        738,667   
  

 

 

   

 

 

 

Total deposits

     810,564        803,023   

Federal Home Loan Bank advances

     120,970        80,967   

Notes Payable

     272        543   

Securities sold under agreements to repurchase

     18,175        15,514   

Subordinated debentures

     20,620        20,620   

Accrued expenses and other liabilities

     15,012        12,492   
  

 

 

   

 

 

 

Total liabilities

     985,613        933,159   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, $.01 par value per share: 2,500,000 shares authorized, non-cumulative perpetual Series B; 20,000 shares issued and outstanding at March 31, 2012 and December 31, 2011; liquidation value $1,000 per share

     —          —     

Common stock, $.01 par value per share: 10,000,000 shares authorized, 6,295,639 shares issued and 5,835,360 shares outstanding at March 31, 2012 and 6,292,639 shares issued and 5,832,360 shares outstanding December 31, 2011

     63        63   

Warrants

     —          85   

Paid-in capital

     66,036        66,658   

Retained earnings

     50,918        49,892   

Accumulated other comprehensive loss

     (1,152     (887

Treasury Stock, 460,279 shares as of March 31, 2012 and December 31, 2011, at cost

     (7,151     (7,151
  

 

 

   

 

 

 

Total stockholders’ equity

     108,714        108,660   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,094,327      $ 1,041,819   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

(Dollars in thousands)    March 31,
2012
    March 31,
2011
 

Interest and dividend income

    

Interest and fees on loans

   $ 7,707      $ 7,965   

Interest on debt investments:

    

Taxable

     1,144        1,233   

Dividends

     17        10   

Other

     166        235   
  

 

 

   

 

 

 

Total interest and dividend income

     9,034        9,443   
  

 

 

   

 

 

 

Interest expense

    

Interest on deposits

     1,187        1,503   

Interest on advances and other borrowed money

     739        738   
  

 

 

   

 

 

 

Total interest expense

     1,926        2,241   
  

 

 

   

 

 

 

Net interest and dividend income

     7,108        7,202   

Provision for loan losses

     155        243   
  

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     6,953        6,959   
  

 

 

   

 

 

 

Noninterest income

    

Customer service fees

     1,203        1,177   

Gain on sales of securities, net

     1,151        440   

Net gain on sales of loans

     346        320   

(Loss) gain on other real estate and property owned, net

     (181     4   

Rental income

     194        172   

Income from equity interest in Charter Holding Corp.

     111        156   

Insurance and brokerage service income

     410        1   

Bank owned life insurance income

     104        95   
  

 

 

   

 

 

 

Total noninterest income

     3,338        2,365   
  

 

 

   

 

 

 

Noninterest expenses

    

Salaries and employee benefits

     3,784        3,282   

Occupancy expenses

     982        1,038   

Advertising and promotion

     127        111   

Depositors’ insurance

     193        316   

Outside services

     281        235   

Professional services

     242        311   

ATM processing fees

     116        126   

Supplies

     92        84   

Telephone expense

     214        168   

Other expenses

     1,292        764   
  

 

 

   

 

 

 

Total noninterest expense

     7,323        6,435   
  

 

 

   

 

 

 

Income before provision for income taxes

     2,968        2,889   

Provision for income taxes

     886        864   
  

 

 

   

 

 

 

Net income

   $ 2,082      $ 2,025   
  

 

 

   

 

 

 

Net income available to common stockholders

   $ 1,832      $ 1,896   
  

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.31      $ 0.33   
  

 

 

   

 

 

 

Average Number of Shares, basic

     5,834,173        5,773,772   

Earnings per common share, assuming dilution

   $ 0.31      $ 0.33   
  

 

 

   

 

 

 

Average Number of Shares, assuming dilution

     5,844,014        5,786,489   

Dividends declared per common share

   $ 0.13      $ 0.13   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

 

(Dollars in thousands)    For the three months ended
March 31,
 
     2012     2011  

Net Income

   $ 2,082      $ 2,025   

Other comprehensive (loss) income, net of tax effect

     (265     60   
  

 

 

   

 

 

 

Comprehensive income

   $ 1,817      $ 2,085   
  

 

 

   

 

 

 

Other comprehensive (loss) income consists of the following:

  
(Dollars in thousands)    As of March 31,  
     2012     2011  

Net unrealized holding losses on available-for-sale securities, net of taxes

   $ (312   $ —     

Unrecognized net actuarial (loss) gain, defined benefit pension plan, net of tax

     —          —     

Unrecognized net gain (loss), derivative, net of tax

     34        (52

Unrecognized net gain (loss), equity investment, net of tax

     13        (8
  

 

 

   

 

 

 

Other comprehensive (loss) income

   $ (265   $ 60   
  

 

 

   

 

 

 

Reclassification disclosure for the three months ended March 31, 2012 and 2011:

 

      2012     2011  

Net unrealized holding (losses) gains on available-for-sale securities

   $ (78   $ 440   

Reclassification adjustment for realized gains in net income

     (1,151     (440
  

 

 

   

 

 

 

Other comprehensive loss before income tax effect

     (1,229     —     

Income tax benefit

     917        —     
  

 

 

   

 

 

 
     (312     —     
  

 

 

   

 

 

 

Other comprehensive loss pension plan

     —          —     

Income tax benefit

     —          —     
  

 

 

   

 

 

 
     —          —     
  

 

 

   

 

 

 

Change in fair value of derivatives used for cash flow hedges

     54        (87

Income tax expense

     (20     35   
  

 

 

   

 

 

 
     34        (52
  

 

 

   

 

 

 

Other comprehensive income - equity investment

     13        (8

Income tax benefit (expense)

     —          —     
  

 

 

   

 

 

 
     13        (8
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax effect

   $ (265   $ 60   
  

 

 

   

 

 

 

 

 

4


NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

(Dollars in thousands)    March 31,
2012
    March 31,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 2,082      $ 2,025   

Depreciation and amortization

     357        321   

Amortization of fair value adjustments, net (loans)

     28        28   

Amortization of securities, net

     281        329   

Net decrease (increase) in mortgage servicing rights

     228        (48

Net (increase) decrease in loans held-for-sale

     (953     5,037   

Increase in cash surrender value of life insurance

     (114     (102

Amortization of intangible assets

     114        110   

Provision for loan losses

     155        235   

Decrease in accrued interest receivable and other assets

     336        597   

Net gain on sales of other real estate owned

     (9     (3

Net gain on sales and calls of securities

     (1,151     (440

Income from equity interest in Charter Holding Corp.

     (111     (156

Change in deferred loan origination fees and cost, net

     155        5   

Increase (decrease) in accrued expenses and other liabilities

     2,731        (986
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,129        6,952   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (534     (152

Write-down of other real estate owned

     190        —     

Proceeds from sales and calls of securities available-for-sale

     40,496        23,617   

Purchases of securities available-for-sale

     (52,127     (33,651

Redemptions of Federal Home Loan Bank stock

     119        —     

Loan originations and principal collections, net

     (22,523     (15,366

Proceeds from sale of other real estate owned

     403        79   

Purchase of life insurance policies

     (5,000     (2,500
  

 

 

   

 

 

 

Net cash used in investing activities

     (38,976     (27,973
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in deposits

     7,541        (37,711

Net increase (decrease) in securities sold under agreements to repurchase

     2,661        (1,615

Net increase in advances from Federal Home Loan Bank and other borrowings

     39,728        45,702   

Proceeds from other borrowed funds

     —          —     

Redemption of stock warrants

     (737     —     

Dividends paid on preferred stock

     (238     (125

Dividends paid on common stock

     (758     (751
  

 

 

   

 

 

 

Net cash provided by financing activities

     48,197        5,500   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     13,350        (15,521

CASH AND CASH EQUIVALENTS, beginning of period

     24,740        33,213   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 38,090      $ 17,692   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     March 31,
2012
    March 31,
2011
 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest on deposit accounts

   $ 1,240      $ 1,672   

Interest on advances and other borrowed money

     718        737   
  

 

 

   

 

 

 

Total interest paid

   $ 1,958      $ 2,409   
  

 

 

   

 

 

 

Income taxes (received) paid

   $ (58   $ 38   
  

 

 

   

 

 

 

Change in due from broker,net

   $ 18,121      $ —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


March 31, 2012

(Unaudited)

Nature of Operations

New Hampshire Thrift Bancshares, Inc. (the “Company”), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank organized in 1868 and McCrillis & Eldredge Insurance, Inc. (“McCrillis & Eldredge”), a full-line independent insurance agency, which offers a complete range of commercial insurance services and consumer products. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Company is regulated by the Federal Reserve Board, and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”). These wholly owned subsidiaries operate through 30 offices strategically located within the greater Dartmouth-Lake Sunapee-Kearsarge and Monadnock regions of west-central New Hampshire and central Vermont.

Note A - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2011 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of the management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Note B - Accounting Policies

The consolidated financial statements include the accounts of the Company, McCrillis & Eldredge, the Bank, Lake Sunapee Group, Inc. (“LSGI”), which owns and maintains all buildings, and Lake Sunapee Financial Services Corp. (“LSFSC”), which was formed to manage the flow of funds from the brokerage services. LSGI and LSFSC are wholly owned subsidiaries of the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third-party trust pool. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, “Consolidation-Overall,” these affiliates have not been included in the consolidated financial statements.

Note C - Impact of New Accounting Standards

In April 2011, FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. (see Note G)

In April 2011, FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial

 

7


assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

In May 2011, FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

In September 2011, FASB issued ASU 2011-08, “Intangibles – Goodwill and Other”, an update to ASC 350, “Intangibles – Goodwill and Other.” ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

In September 2011, FASB issued ASU 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan,” which amends ASC 715-80, “Compensation – Retirement Benefits – Multiemployer Plans,” and requires additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. This objective of this ASU is to help users of financial statements assess the potential future cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this ASU are effective for fiscal years ending after December 15, 2011, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented.

In December 2011, FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU is to enhance current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

8


In December 2011, FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

Note D – Fair Value Measurements

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in mortgage-backed securities, asset-backed securities, preferred stock with maturities and other debt securities available-for-sale are generally classified within level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The Company’s derivative financial instruments are generally classified within level 2 of the fair value hierarchy. For these financial instruments, the Company obtains fair value measurements from independent pricing services. The fair value measurements utilize a discounted cash flow model that incorporates and considers observable data, that may include publicly available third party market quotes, in developing the curve utilized for discounting future cash flows.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent

 

9


to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Assets and Liabilities Measured at Fair Value on a Recurring Basis.

Securities Available-for-Sale. The fair value of the Company’s available-for-sale securities portfolio is estimated using Level 1 and Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. For Levels 1 and 2, the fair value measurements consider (i) quoted prices in active markets for identical assets and (ii) observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and a bond’s terms and conditions, among other factors, respectively.

The following summarizes assets and liabilities measured at fair value for the periods ending March 31, 2012 and December 31, 2011.

 

     Fair Value Measurements at Reporting Date Using  

(Dollars in thousands)

   March 31,
2012
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs

Level 2
     Significant
Unobservable
Inputs

Level 3
 

Mortgage-backed securities

   $ 155,188       $ —         $ 155,188       $ —     

Municipal bonds

     22,414         —           22,414         —     

Other bonds and debentures

     26,148         —           26,148         —     

Equity securities

     433         433         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 204,183       $ 433       $ 203,750       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   December 31,
2011
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level  3
 

Mortgage-backed securities

   $ 155,942       $ —         $ 155,942       $ —     

Municipal bonds

     29,441         —           29,441         —     

Other bonds and debentures

     24,447         —           24,447         —     

Equity securities

     488         488         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 210,318       $ 488       $ 209,830       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


     Fair Value Measurements at Reporting Date Using  

(Dollars in thousands)

   March 31,
2012
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs

Level 2
     Significant
Unobservable
Inputs

Level 3
 

Derivative – interest rate swap

   $ 413       $ —         $ 413       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 413       $ —         $ 413       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   December 31,
2011
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Derivative – interest rate swap

   $ 468       $ —         $ 468       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 468       $ —         $ 468       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Fair values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service discounted by management based on historical losses for similar collateral.

Other Real Estate Owned. Other real estate owned is reported at the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Level 3 values are based on management estimates.

The following summarizes assets measured at fair value on a nonrecurring basis:

 

     Fair Value Measurements at Reporting Date Using  
(Dollars in thousands)    March 31,
2012
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs

Level 2
     Significant
Unobservable
Inputs

Level 3
 

Impaired loans

   $ 4,912       $ —         $ —         $ 4,912   

Other real estate owned

     760         —           —           760   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,672       $ —         $ —         $ 5,672   
  

 

 

    

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    December 31,
2011
     Quoted Prices in
Active Markets
for Identical
Assets

Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Impaired loans

   $ 2,581       $ —         $ —         $ 2,581   

Other real estate owned

     1,344         —           —           1,344   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,925       $ —         $ —         $ 3,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans and leases, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $5.7 million with a valuation allowance of $630 thousand at March 31, 2012. At December 31, 2011, impaired loans had a carrying amount of $4.2 million with a valuation allowance of $253 thousand. Changes in fair value recognized for partial charge-offs of loans and leases and impairment reserves on loans and leases was a net decrease of $423 thousand and $450 thousand for the three months ended March 31, 2012 and 2011, respectively.

The fair value of impaired loans was measured based upon real estate appraisals primarily using the sales comparison approach. Unobservable inputs included adjustments to reflect realizable value.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012.

 

     Fair
Value
    

Valuation

Techniques

  

Unobservable

Inputs

   Range  
           

Impaired loans

   $ 4,912       Third Party Appraisal    Discount adjustment to reflect realizable value based on historical losses for similar collateral      25-40

Other real estate owned – commercial

     760       Broker listing price    Adjustments for cost to sell property      5

 

11


The estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011, all of which are held or issued for purposes other than trading, were as follows:

 

     Fair Value Measurements at Reporting Date Using  

(Dollars in thousands)

March 31, 2012

   Carrying
Value
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets

Level 1
     Significant
Other
Observable
Inputs

Level 2
     Significant
Unobservable
Inputs

Level 3
 

Financial assets:

              

Cash and cash equivalents

   $ 38,090       $ 38,090       $ 38,090       $ —         $ —     

Securities available-for-sale

     204,183         204,183         433         203,750      

Federal Home Loan Bank stock

     7,496         7,496         —           —           7,496   

Loans held-for-sale

     4,387         4,538         —           4,538      

Loans, net

     737,137         741,756         —           —           741,756   

Investment in unconsolidated subsidiaries

     620         555         —           —           555   

Accrued interest receivable

     2,531         2,818         —           —           2,818   

Deposits

     810,564         807,431         —           —           807,431   

FHLB advances

     120,970         122,821         —           —           122,821   

Securities sold under agreements to repurchase

     18,175         18,175         —           —           18,175   

Subordinated debentures

     20,620         18,461         —           —           18,461   

Derivatives – interest rate swap

     413         413         —           413         —     
     Fair Value Measurements at Reporting Date Using  

(Dollars in thousands)

December 31, 2011

   Carrying
Value
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets

Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs

Level 3
 

Financial assets:

              

Cash and cash equivalents

   $ 24,740       $ 24,740       $ 24,740       $ —         $ —     

Securities available-for-sale

     210,318         210,318         488         209,830      

Federal Home Loan Bank stock

     7,615         7,615         —           —           7,615   

Loans held-for-sale

     3,434         3,478         —           3,478      

Loans, net

     714,952         721,388         —           —           721,388   

Investment in unconsolidated subsidiaries

     620         554         —           —           554   

Accrued interest receivable

     2,669         2,669         —           —           2,669   

Deposits

     803,023         806,295         —           —           806,295   

FHLB advances

     80,967         82,999         —           —           82,999   

Securities sold under agreements to repurchase

     15,514         15,514         —           —           15,514   

Subordinated debentures

     20,620         18,419         —           —           18,419   

Derivatives – interest rate swap

     468         468         —           468         —     

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions, except for investment in unconsolidated subsidiaries and other investments and derivatives, which are included in other assets and other liabilities, respectively.

The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2012.

 

12


Note E – Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

The amortized cost of securities available-for-sale and their approximate fair values at March 31, 2012 and December 31, 2011 are summarized as follows:

 

(Dollars in thousands)

March 31, 2012

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Bonds and notes

           

Mortgage-backed securities

   $ 153,589       $ 1,599       $ —         $ 155,188   

Municipal bonds

     21,897         520         3         22,414   

Other bonds and debentures

     25,864         284         —           26,148   

Equity securities

     511         2         80         433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 201,861       $ 2,405       $ 83       $ 204,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

December 31, 2011

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Bonds and notes

           

Mortgage-backed securities

   $ 154,213       $ 1,786       $ 57       $ 155,942   

Municipal bonds

     28,475         984         18         29,441   

Other bonds and debentures

     24,281         255         89         24,447   

Equity securities

     511         9         32         488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 207,480       $ 3,034       $ 196       $ 210,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Maturities of debt securities, excluding mortgage-backed securities classified as available-for-sale, as of March 31, 2012 are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)    Estimated
Fair Value
 

Municipal bonds

   $ 1,048   

Other bonds and debentures

     4,031   
  

 

 

 

Total due in less than one year

   $ 5,079   
  

 

 

 

Municipal bonds

   $ 3,820   

Other bonds and debentures

     22,117   
  

 

 

 

Total due after one year through five years

   $ 25,937   
  

 

 

 

Municipal bonds

   $ 10,439   
  

 

 

 

Total due after five years through ten years

   $ 10,439   
  

 

 

 

Municipal bonds

   $ 7,107   
  

 

 

 

Total due after ten years

   $ 7,107   
  

 

 

 

For the three months ended March 31, 2012, proceeds from the sales of securities available-for-sale were $40.5 million. Gross gains of $1.2 million were realized during the same period on these sales.

For the three months ended March 31, 2011, proceeds from the sales of securities available-for-sale were $15.4 million. Gross gains of $440 thousand were realized during the same period on these sales.

Note F – Other-Than-Temporary Impairment Losses

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 months or more, and are not other-than-temporarily impaired, are as follows as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012  
     Less Than 12 Months      12 Months or Longer      Total  
(Dollars in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Bonds and notes

                 

Municipal bonds

   $ 145         —         $ 1,031       $ 3       $ 1,176       $ 3   

Equity securities

     291         51         118         29         409         80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 436       $ 51       $ 1,149       $ 32       $ 1,585       $ 83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Less Than 12 Months      12 Months or Longer      Total  
(Dollars in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Bonds and notes

                 

Mortgage-backed securities

   $ 38,094       $ 57       $ —         $ —         $ 38,094       $ 57   

Municipal bonds

     —           —           1,396         18         1,396         18   

Other bonds and debentures

     7,056         89         —           —           7,056         89   

Equity securities

     26         1         462         31         488         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 45,176       $ 147       $ 1,858       $ 49       $ 47,034       $ 196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The investments in the Company’s investment portfolio that are temporarily impaired as of March 31, 2012 consist of bonds issued by U.S. government-sponsored enterprises and agencies, municipal bonds, and equity securities. The unrealized losses are primarily attributable to changes in market interest rates and market inefficiencies. Management has determined that the Company has the intent and the ability to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary.

 

14


Note G – Loan Portfolio

Loans receivable consisted of the following as of the dates indicated:

 

(Dollars in thousands)    March 31,
2012
    December 31,
2011
 

Real estate loans

    

Conventional

   $ 409,786      $ 397,010   

Home equity

     70,445        71,990   

Construction

     13,840        12,731   

Commercial

     159,514        148,424   
  

 

 

   

 

 

 
     653,585        630,155   

Consumer loans

     6,741        7,343   

Commercial and municipal loans

     82,909        83,835   

Unamortized adjustment to fair value

     1,072        1,101   
  

 

 

   

 

 

 

Total loans

     744,307        722,434   

Allowance for loan losses

     (8,971     (9,131

Deferred loan origination costs, net

     1,801        1,649   
  

 

 

   

 

 

 

Loans receivable, net

   $ 737,137      $ 714,952   
  

 

 

   

 

 

 

The following table sets forth information regarding the allowance for loan and lease losses by portfolio segment as of March 31, 2012:

 

     Real Estate:                       
(Dollars in thousands)    Residential      Commercial      Land and
Construction
     Commercial      Consumer      Total  

Allowance for loan and lease losses:

                 

Ending balance:

                 

Individually evaluated for impairment

   $ 327       $ 415       $ —         $ —         $ —         $ 742   

Ending balance:

                 

Collectively evaluated for impairment

     5,170         2,030         230         751         48         8,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan and lease losses ending balance

   $ 5,497       $ 2,445       $ 230       $ 751       $ 48       $ 8,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Ending balance:

                 

Individually evaluated for impairment

   $ 5,549       $ 8,741       $ 1,212       $ 974       $ —         $ 16,476   

Ending balance:

                 

Collectively evaluated for impairment

     475,754         150,773         12,628         81,935         6,741         727,831   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans ending balance

   $ 481,303       $ 159,514       $ 13,840       $ 82,909       $ 6,741       $ 744,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


The following table sets forth information regarding nonaccrual loans and past-due loans as of March 31, 2012 and December 31, 2011:

 

(Dollars in thousands)

March 31, 2012

   30-59 Days      60-89 Days      Greater Than
90 Days
     Total Past
Due
     Recorded
Investment
Nonaccrual
Loans
 

Real estate:

              

Conventional

   $ 2,370       $ 218       $ 1,608       $ 4,196       $ 5,549   

Commercial

     681         —           970         1,651         8,741   

Home equity

     492         290         33         815         —     

Land and construction

     350         —           —           350         1,212   

Commercial

     196         28         446         670         974   

Consumer

     6         10         8         24         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,095       $ 546       $ 3,065       $ 7,706       $ 16,485   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

December 31, 2011

   30-59 Days      60-89 Days      Greater Than
90 Days
     Total Past
Due
     Recorded
Investments
Nonaccrual
Loans
 

Real estate:

              

Conventional

   $ 1,925       $ 615       $ 1,306       $ 3,846       $ 5,578   

Commercial

     966         584         1,513         3,063         8,485   

Home equity

     498         —           —           498         —     

Land and construction

     444         —           176         620         1,006   

Commercial

     178         352         280         810         1,540   

Consumer

     22         —           8         30         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,033       $ 1,551       $ 3,283       $ 8,867       $ 16,617   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

The following table presents the recorded investment in troubled debt restructured loans as of March 31, 2012 and December 31, 2011 based on payment performance status (in thousands):

 

     March 31, 2012  
     Real Estate                
(Dollars in thousands)    Residential      Commercial      Land and
Construction
     Commercial      Total  

Performing

   $ 3,245       $ 7,228       $ 900       $ 373       $ 11,746   

Non-performing

     787         281         —           272         1,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,032       $ 7,509       $ 900       $ 645       $ 13,086   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Real Estate                
(Dollars in thousands)    Residential      Commercial      Land and
Construction
     Commercial      Total  

Performing

   $ 3,447       $ 6,200       $ 202       $ 315       $ 10,164   

Non-performing

     402         1,144         —           381         1,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,849       $ 7,344       $ 202       $ 696       $ 12,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Troubled debt restructured loans and leases are considered impaired and are included in the previous impaired loans and leases disclosures in this footnote. As of March 31, 2012, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three month period ending March 31, 2012 and March 31, 2011, certain loans modifications were executed which constituted troubled debt restructurings. Substantially all of these modifications included one or a combination of the following: (1) an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; (2) temporary reduction in the interest rate; (3) change in scheduled payment amount; (4) permanent reduction of the principal of the loan; or (5) an extension of additional credit for payment of delinquent real estate taxes.

The following tables summarize troubled debt restructurings that occurred during the periods indicated (in thousands):

 

     For the three months ended March 31, 2012  
(Dollars in thousands)    Number
of Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Real estate:

        

Conventional

     3       $ 563       $ 563   

Commercial

     3         1,083         1,083   

Land and construction

     4         900         900   

Commercial

     2         104         104   
  

 

 

    

 

 

    

 

 

 

Total

     12       $ 2,650       $ 2,650   
  

 

 

    

 

 

    

 

 

 

 

     For the three months ended March 31, 2011  
(Dollars in thousands)    Number
of Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Real estate:

        

Commercial

     3       $ 642       $ 642   
  

 

 

    

 

 

    

 

 

 

Total

     3       $ 642       $ 642   
  

 

 

    

 

 

    

 

 

 

The troubled debt restructurings described above required a net allocation of the allowance for loan losses of $79 thousand and $293 thousand for the three month period ending March 31, 2012 and March 31, 2011, respectively. There was one charge-off totaling $65 thousand on the troubled debt restructurings for the three months ending March 31, 2012. There were no charge-offs on troubled debt restructurings for the three months ending March 31, 2011.

The following table presents information on how loans were modified as TDRs during the periods indicated:

 

     For the three months ended March 31, 2012  
(Dollars in thousands)    Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other  (a)      Total  

Real estate:

              

Residential

   $ —         $ —         $ —         $ 656       $ 656   

Commercial

     301         —           399         382         1,082   

Land and Construction

     698         —           —           202         900   

Commercial and industrial

     —           —           —           104         104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 999       $ —         $ 399       $ 1,344       $ 2,742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the three months ended March 31, 2011  
(Dollars in thousands)    Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other  (a)      Total  

Real estate:

              

Residential

   $ —         $ —         $ —         $ —         $ —     

Commercial

     —           —           —           642         642   

Land and Construction

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ —         $ —         $ —         $ 642       $ 642   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Other includes covenant modifications, forbearance and/or other modifications.

 

17


The following table summarizes the troubled debt restructurings for which there was a payment default within 12 months following the date of the restructuring for the periods indicated (in thousands):

 

     At March 31, 2012      At March 31, 2011  
(Dollars in thousands)    Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 

Real estate:

           

Conventional

     8       $ 764         3       $ 677   

Commercial

     6         1,924         6         2,097   

Commercial and industrial

     1         77         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15       $ 2,765         9       $ 2,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans are considered to be in payment default once a loan is greater than 30 days contractually past due under the modified terms. The troubled debt restructurings described above that subsequently defaulted resulted in a net allocation of the allowance for credit losses of $69 thousand for the three month period ending March 31, 2012. There was one charge-off on these defaulted troubled debt restructurings during the three month period ending March 31, 2012. There were no allocations or charge-offs relating to trouble debt restructurings during the three month period ending March 31, 2011.

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the three months ended March 31, 2012:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real estate:

              

Conventional

   $ 3,441       $ 3,441       $ —         $ 3,504       $ 22   

Commercial

     5,195         5,195         —           5,250         80   

Land and construction

     1,212         1,212         —           1,109         12   

Commercial

     974         974         —           1,045         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance:

   $ 10,822       $ 10,822       $ —         $ 10,908       $ 118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real estate:

              

Conventional

   $ 2,108       $ 2,108       $ 327       $ 2,163       $ 22   

Commercial

     3,546         3,546         415         3,393         73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded:

   $ 5,654       $ 5,654       $ 742       $ 5,556       $ 95   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real estate:

              

Conventional

   $ 5,549       $ 5,549       $ 327       $ 5,667       $ 44   

Commercial

     8,741         8,741         415         8,643         153   

Land and construction

     1,212         1,212         —           1,109         12   

Commercial

     974         974         —           1,045         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans:

   $ 16,476       $ 16,476       $ 742       $ 16,464       $ 213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real estate:

              

Conventional

   $ 3,926       $ 3,926       $ —         $ 2,124       $ 83   

Commercial

     7,584         7,584         —           6,407         437   

Land and construction

     1,006         1,006         —           307         11   

Commercial

     1,211         1,211         —           690         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance:

   $ 13,727       $ 13,727       $ —         $ 9,528       $ 576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real estate:

              

Conventional

   $ 1,563       $ 1,563       $ 77       $ 542       $ 32   

Commercial

     1,326         1,326         231         782         86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded:

   $ 2,889       $ 2,889       $ 308       $ 1,324       $ 118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real estate:

              

Conventional

   $ 5,489       $ 5,489       $ 77       $ 2,666       $ 115   

Commercial

     8,910         8,910         231         7,189         523   

Land and construction

     1,006         1,006         —           307         11   

Commercial

     1,211         1,211         —           690         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans:

   $ 16,616       $ 16,616       $ 308       $ 10,852       $ 694   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk ratings as of March 31, 2012:

 

     Real Estate                       
(Dollars in thousands)    Residential      Commercial      Land and
Construction
     Commercial      Consumer      Total  

Grade:

                 

Not formally rated

   $ 475,320       $ —         $ —         $ —         $ 6,741       $ 482,061   

Pass

     —           136,096         11,420         80,914         —           228,430   

Special Mention

     107         5,265         1,156         731         —           7,259   

Substandard

     5,876         18,153         1,264         1,264         —           26,557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 481,303       $ 159,514       $ 13,840       $ 82,909       $ 6,741       $ 744,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk ratings as of December 31, 2011:

 

     Real Estate                       
(Dollars in thousands)    Residential      Commercial      Land and
Construction
     Commercial      Consumer      Total  

Grade:

                 

Not formally rated

   $ 463,402       $ —         $ —         $ —         $ 7,343       $ 470,745   

Pass

     —           125,405         10,506         81,835         —           217,746   

Special Mention

     109         5,266         1,166         1,163         —           7,704   

Substandard

     5,489         17,753         1,059         837         —           25,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 469,000       $ 148,424       $ 12,731       $ 83,835       $ 7,343       $ 721,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Credit Quality Information

The Company utilizes a nine grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 10-35: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 70: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans over $250 thousand.

Loan Servicing

The Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates.

Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

The balance of capitalized servicing rights, net of valuation allowances, included in other assets at March 31, 2012 was $1.6 million. Servicing rights of $233 thousand were capitalized during the three months ended March 31, 2012. Amortization of capitalized servicing rights was $236 thousand for the three months ended March 31, 2012. The fair value of capitalized servicing rights was $2.0 million of March 31, 2012.

Following is an analysis of the aggregate changes in the valuation allowances for capitalized servicing rights during the period indicated:

 

(Dollars in thousands)    Three Months  Ended
March 31, 2012
 

Balance, beginning of period

   $ 58   

Increase

     225   
  

 

 

 

Balance, end of period

   $ 283   
  

 

 

 

 

20


Note H – Stock-based Compensation

At March 31, 2012, the Company had two stock-based employee compensation plans. The Company accounts for those plans under ASC 718-10, “Compensation-Stock Compensation-Overall.” No stock-based employee compensation cost was recognized for the Company’s fixed stock option plans during the quarters and three months ended March 31, 2012 or March 31, 2011.

Note I – Pension Benefits

The following summarizes the net periodic pension cost for the three months ended March 31:

 

    

Three Months Ended

March 31,

 
(Dollars in thousands)    2012     2011  

Interest cost

   $ 84      $ 82   

Expected return on plan assets

     (134     (126

Amortization of unrecognized net loss

     65        51   
  

 

 

   

 

 

 

Net periodic pension cost

   $ 15      $ 7   
  

 

 

   

 

 

 

Note J – Accumulated Other Comprehensive Loss

The following summarizes the composition of accumulated other comprehensive loss at March 31, 2012 and December 31, 2011:

 

(Dollars in thousands)    March 31,
2012
    December 31,
2011
 

Net unrealized holding gains (losses) on available-for-sale securities, net of taxes

   $ 1,402      $ 1,714   

Unrecognized net actuarial loss, defined benefit pension plan, net of tax

     (2,342     (2,342

Unrecognized net loss, derivative, net of tax

     (249     (283

Unrecognized net income, equity investment, net of tax

     37        24   
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (1,152   $ (887
  

 

 

   

 

 

 

 

21


Note K – Earnings Per Share (EPS)

Basic and diluted net income per common share calculations are as follows (dollars in thousands, except per share data):

 

     For the three months
ended March 31,
 
     2012     2011  

Basic EPS:

    

Net income as reported

   $ 2,082      $ 2,025   

Preferred stock net accretion

     —          (4

Cumulative preferred stock dividend earned

     (250     (125
  

 

 

   

 

 

 

Net income available to common stock holders

   $ 1,832      $ 1,896   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     5,834,173        5,773,772   

Net income per common share – basic

   $ 0.31      $ 0.33   
  

 

 

   

 

 

 

Dilutive EPS:

    

Net income available to common stock holders

   $ 1832      $ 1,896   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     5,834,173        5,773,772   

Effect of dilutive securities, options

     9,841        12,717   
  

 

 

   

 

 

 

Average common shares outstanding – diluted

     5,844,014        5,786,489   

Net income per common share – diluted

   $ 0.31      $ 0.33   
  

 

 

   

 

 

 

 

22


Item 2. Management’s Discussion and Analysis

Highlights and Overview

Our profitability is derived primarily from the Bank. The Bank’s earnings in turn are generated from income from the earnings on its loan and investment portfolios less the cost of its deposit accounts and borrowings. These core revenues are supplemented by gains on sales of loans originated for sale, retail banking service fees, gains on the sale of investment securities and brokerage fees. The following is a summary of key financial results for the three months ended March 31, 2012:

 

   

Total assets increased $52.5 million, or 5.04%, to $1.1 billion at March 31, 2012 from $1.0 billion at December 31, 2011.

 

   

Net loans increased $22.2 million, or 3.10%, to $737.1 million at March 31, 2012 from $715.0 million at December 31, 2011.

 

   

For the three months ended March 31, 2012, we originated $72.7 million in loans, compared to $69.0 million for the same period in 2011.

 

   

Our loan servicing portfolio was $357.2 million at March 31, 2012 compared to $365.8 million at December 31, 2011.

 

   

Total deposits increased $7.6 million, or 0.94%, to $810.6 million at March 31, 2012 from $803.0 million at December 31, 2011.

 

   

Net interest and dividend income for the three months ended March 31, 2012 was $7.1 million compared to $7.2 million for the same period in 2011.

 

   

As a percentage of total loans, non-performing assets decreased from 2.47% at December 31, 2011 to 2.39% at March 31, 2012.

 

23


   

We earned $2.1 million, or $0.31 per common share, assuming dilution, for the three months ended March 31, 2012, compared to $2.0 million, or $0.33 per common share, assuming dilution, for the three months ended March 31, 2011.

 

   

Our return on average assets and average equity for the three months ended March 31, 2012 were 0.77% and 7.27%, respectively, compared to 0.80% and 8.91%, respectively, for the same period in 2011.

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Notes A, B and C of the accompanying unaudited condensed consolidated financial statements and Note 1 of the consolidated financial statements included in our 2011 Annual Report on Form 10-K.

Financial Condition and Results of Operations

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets were $1.1 billion at March 31, 2012, compared to $1.0 billion at December 31, 2011, an increase of $52.5 million, or 5.04%. Securities available-for-sale decreased $6.1 million, or 2.92%, to $204.2 million at March 31, 2012 from $210.3 million at December 31, 2011. Net unrealized gains on securities available-for-sale were $2.3 million at March 31, 2012, compared to net unrealized gains of $2.8 million at December 31, 2011. During the three months ended March 31, 2012, we sold securities with a total book value of $40.5 million for a net gain on sales of $1.2 million. During the same period, we purchased $5.0 million of other bonds and debentures and $49.8 million of mortgage-backed securities. Our net unrealized gain (after tax) on our investment portfolio was $1.4 million at March 31, 2012, compared to an unrealized gain (after tax) of $1.7 million at December 31, 2011. The investments in our securities portfolio that were temporarily impaired as of March 31, 2012 consisted of municipal bonds with strong credit ratings and stable credit outlooks and equity securities. The unrealized losses were primarily attributable to changes in market interest rates and recent uncertainties in the financial markets. Management does not intend to sell these securities in the near term. Since we have the ability to hold debt securities until maturity and equity securities until recovery of cost basis, no declines are deemed to be other than temporary.

Net loans held in portfolio increased $22.2 million, or 3.10%, to $737.1 million at March 31, 2012 from $715.0 million at December 31, 2011. The allowance for loan losses decreased $160 thousand to $9.0 million at March 31, 2012, from $9.1 million at December 31, 2011. The change in the allowance for loan losses is the net of the effect of provisions of $155 thousand, charge-offs of $441 thousand, and recoveries of $125 thousand. As a percentage of total loans, non-performing loans decreased from 2.45% at December 31, 2011 to 2.32% at March 31, 2012. Total loan production for the three months ended March 31, 2012 was $72.7 million compared to $69.0 million for the same period in 2011. The increase of loans held in portfolio was primarily due to increases in residential mortgages and commercial real estate loans. At March 31, 2012, our mortgage servicing loan portfolio

 

24


was $357.2 million compared to $365.8 million at December 31, 2011. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At March 31, 2012, adjustable-rate mortgages comprised approximately 65.3% of our real estate mortgage loan portfolio, which is consistent with prior periods.

Goodwill and other intangible assets amounted to $30.2 million, or 2.76% of total assets, as of March 31, 2012 compared to $30.4 million, or 2.91% of total assets, as of December 31, 2011. The decrease was due to normal amortization of core deposit intangible and customer list assets.

Other real estate owned (“OREO”) and property acquired in settlement of loans amounted to $760 thousand as of March 31, 2012, compared to $1.3 million as of December 31, 2011. The balance at March 31, 2012 represents one commercial real estate property.

Total deposits increased $7.6 million, or 0.94%, to $810.6 million at March 31, 2012 from $803.0 million at December 31, 2011. Non-interest bearing deposit accounts decreased $2.6 million, or 4.00%, and interest-bearing deposit accounts increased $10.1 million, or 1.37%, over the same period. The balances at March 31, 2012 included $5.0 million of brokered deposits and $6.3 million of deposits obtained through listing services, which is unchanged compared to December 31, 2011.

Securities sold under agreements to repurchase increased $2.7 million, or 17.15%, to $18.2 million at March 31, 2012 from $15.5 million at December 31, 2011. Repurchase agreements are collateralized by some of our U.S. government and agency investment securities.

We maintained balances of $121.0 million in advances from the Federal Home Loan Bank of Boston (“FHLB”) at March 31, 2012, an increase of $40.0 million from $81.0 million at December 31, 2011 as advances were utilized, in part, to fund loan growth.

Allowance and Provision for Loan Losses

We maintain an allowance for loan losses to absorb losses inherent in our loan portfolio. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses. We test the adequacy of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, we consider historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with ASC 310-10-35, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment.

Our commercial loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. We also have loan review, internal audit and compliance programs with results reported directly to the Audit Committee of the Board of Directors.

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at March 31, 2012 was $9.0 million compared to $9.1 million at December 31, 2011. At approximately

 

25


$9.0 million, the allowance for loan losses represents 1.21% of total loans, down from 1.27% at December 31, 2011. Total non-performing assets at March 31, 2012 were approximately $20.3 million, representing 226.29% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $150 thousand to the allowance for loan and lease losses during the three months ended March 31, 2012 compared to $250 thousand for the same period in 2011. Loan charge-offs (excluding the overdraft program) were $379 thousand during the three month period ended March 31, 2012 compared to $167 thousand for the same period in 2011. Recoveries were $74 thousand during the three month period ended March 31, 2012, compared to $8 thousand for the same period in 2011. This activity resulted in net charge-offs of $305 thousand for the three month period ended March 31, 2012, compared to $159 thousand for the same period in 2011. One-to-four family residential mortgages, commercial real estate, and commercial accounted for 8%, 31%, and 61%, respectively, of the amounts charged-off during the three month period ended March 31, 2012.

The effects of national economic issues continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to maintain our allowance for loan losses of $9.0 million. The provisions made in 2012 reflect loan loss experience and changes in economic conditions that affect the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions during the remainder of 2012 to maintain the allowance at an adequate level.

In addition to the allowance for loan losses, there is an allowance for losses from the fee for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days. At March 31, 2012, the overdraft allowance was $12 thousand, compared to $14 thousand at year-end 2011. Provisions for overdraft losses in the amount of $5 thousand were recorded during the three month period ended March 31, 2012, compared to provisions of $8 thousand that were reversed for the same period during 2011. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

 

26


The following is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for the three month period ended March 31:

 

(Dollars in thousands)    2012     2011  

Balance, beginning of year

   $ 9,114      $ 9,841   
  

 

 

   

 

 

 

Charge-offs:

    

Residential real estate

     (31     (147

Commercial real estate

     (116     —     

Consumer loans

     (3     (20

Commercial loans

     (229 )     —     
  

 

 

   

 

 

 

Total charged-off loans

     (379     (167
  

 

 

   

 

 

 

Recoveries

    

Residential real estate

     57        5   

Commercial real estate

     7        —     

Land and construction

     1        —     

Consumer loans

     4        2   

Commercial loans

     5        1   
  

 

 

   

 

 

 

Total recoveries

     74        8   
  

 

 

   

 

 

 

Net charge-offs

     (305     (159

Provision for loan loss charged to income:

    

Residential real estate

     98        157   

Commercial real estate

     33        55   

Land and construction

     3        6   

Consumer loans

     1        3   

Commercial loans

     15        29   
  

 

 

   

 

 

 

Total provision

     150        250   
  

 

 

   

 

 

 

Ending balance

   $ 8,959      $ 9,932   
  

 

 

   

 

 

 

The following is a summary of activity in the allowance for overdraft privilege account for the three month period ended March 31:

 

(Dollars in thousands)    2012     2011  

Beginning balance

   $ 18      $ 23   
  

 

 

   

 

 

 

Overdraft charge-offs

     (62     (68

Overdraft recoveries

     51        67   
  

 

 

   

 

 

 

Net overdraft losses

     (11     (1
  

 

 

   

 

 

 

Provision (benefit) for overdrafts

     5        (8
  

 

 

   

 

 

 

Ending balance

   $ 12      $ 14   
  

 

 

   

 

 

 

 

27


The following table sets forth the allocation of the loan loss allowance (excluding overdraft allowances), the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated:

 

(Dollars in thousands)    March 31, 2012     December 31, 2011  

Real estate loans

              

Residential, 1-4 family and home equity loans

   $ 5,170         58     65   $ 4,907         54     65

Commercial

     2,030         23     21     2,915         32     20

Land and construction

     230         3     2     222         2     2

Collateral and consumer loans

     36         —          1     40         1     1

Commercial and municipal loans

     751         8     11     721         8     12

Impaired loans

     742         8     —          308         3     —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 8,959         100     100   $ 9,113         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total loans

        1.21          1.27  

Non-performing loans as a percentage of allowance

        217.82          178.98  

The following table shows total allowances including overdraft allowances:

 

(Dollars in thousands)    March 31, 2012      December 31, 2011  

Allowance for loan losses

   $ 8,959       $ 9,113   

Overdraft allowance

     12         18   
  

 

 

    

 

 

 

Total allowance

   $ 8,971       $ 9,131   
  

 

 

    

 

 

 

Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans at carrying value (substandard loans less specific allowance) were $24.6 million at March 31, 2012, compared to $25.1 million at December 31, 2011. In addition, we had $760 thousand of OREO at March 31, 2012 representing one commercial real estate foreclosure, compared to $1.3 million at December 31, 2011. During the three month period ended March 31, 2012, we sold three properties which were classified as OREO at December 31, 2011. Losses are incurred in the liquidation process our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Twelve loans considered to be impaired loans at March 31, 2012 have specific allowances identified and assigned. The 12 loans are secured by real estate, business assets or a combination of both. At March 31, 2012, the allowance included $742 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2011 was $480 thousand.

At March 31, 2012, we had 55 loans with net carrying values of $13.1 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At March 31, 2012, 44 of the “troubled debt restructurings” were performing under contractual terms and are included in impaired loans. Of the loans classified as troubled debt restructured, 11 were more than 30 days past due at March 31, 2012. The balances of these past due loans were $1.4 million and have assigned specific allowances of $107 thousand. At December 31, 2011, we had 50 loans with net carrying values of $12.0 million considered to be “troubled debt restructurings.”

Loans over 90 days past due were $3.1 million at March 31, 2012, compared to $3.3 million at December 31, 2011. Loans 30 to 89 days past due were $4.6 million at March 31, 2012, compared to $5.6 million at December 31, 2011. As a percentage of assets, non-performing loans increased from 1.59% at December 31, 2011 to 1.79% at March 31, 2012, and as a percentage of total loans, increased from 2.45% at December 31, 2011 to 2.65% at March 31, 2012.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which we reasonably expect will materially impact future operating results, liquidity, or

 

28


capital resources. For the period ended March 31, 2012, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At March 31, 2012, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

The following table shows the breakdown of the carrying value of non-performing assets and non-performing assets as a percentage of the total allowance and total assets for the periods indicated:

 

     March 31, 2012     December 31, 2011  
(Dollars in thousands)    Carrying
Value
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
    Carrying
Value
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
 

90 day delinquent loans (1)

   $ —           —          —        $ 100         1.10     0.01

Non-accrual impaired loans

     3,389         37.78     0.31     4,173         45.79     0.40

Trouble debt restructured

     13,087         145.88     1.20     12,037         132.09     1.16

Other real estate owned

     760         8.47     0.07     1,365         14.98     0.13
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-performing assets

   $ 17,236         192.13     1.58   $ 17,675         193.96     1.70
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

All loans 90 days or more delinquent are placed on non-accruing status.

The following table sets forth the carrying value breakdown of non-performing assets at the dates indicated:

 

(Dollars in thousands)    March 31, 2012      December 31, 2011  

Nonaccrual loans (1)

   $ 16,476       $ 16,617   

Real estate and chattel property owned

     760         1,365   
  

 

 

    

 

 

 

Total non-performing assets

   $ 17,236       $ 17,982   
  

 

 

    

 

 

 

 

(1) 

All loans 90 days or more delinquent are placed on a non-accruing status.

The following table sets forth nonaccrual loans by category at carrying value at the dates indicated:

 

(Dollars in thousands)    March 31, 2012      December 31, 2011  

Real estate loans

     

Conventional

   $ 5,549       $ 5,578   

Commercial

     8,741         8,485   

Home equity

     —           —     

Land and construction

     1,212         1,006   

Consumer loans

     9         8   

Commercial and municipal loans

     974         1,540   
  

 

 

    

 

 

 

Total

   $ 16,485       $ 16,617   
  

 

 

    

 

 

 

We believe the allowance for loan losses is at a level sufficient to cover inherent losses, given the current level of risk in the loan portfolio. At the same time, we recognize that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary if economic, real estate, and other conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.

 

29


Liquidity and Capital Resources

We are required to maintain sufficient liquidity for safe and sound operations. At March 31, 2012, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $51.0 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At March 31, 2012, we had approximately $140.0 million in additional borrowing capacity from the FHLB.

At March 31, 2012, stockholders’ equity totaled $108.7 million, compared to $108.7 million at December 31, 2011. This reflects net income of $2.1 million, the payout of $758 thousand in common stock dividends, the payout of $238 thousand in preferred stock dividends, the purchase of $737 thousand of stock warrants outstanding, and an increase of $265 thousand in accumulated other comprehensive loss.

On June 12, 2007, we reactivated a previously adopted but uncompleted stock repurchase program to repurchase up to an additional 253,776 shares of common stock. At March 31, 2012, 148,088 shares remained to be repurchased under the plan. The Board of Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity, which are three performing benchmarks against which bank and thrift holding companies are measured. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. During the three months ended March 31, 2012, no shares were repurchased. As a participant in the Capital Purchase Program (“CPP”) established by the United States Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2009, we were prohibited from repurchasing shares of its common stock prior to exiting the program on August 25, 2011.

At March 31, 2012, we had unrestricted funds available in the amount of 3.4 million. As of March 31, 2012, our total cash needs for the remainder of 2012 are estimated to be approximately $2.3 million projected to to pay dividends on our common stock, $765 thousand to pay interest on our capital securities, $500 thousand to pay dividends on our Series B Preferred Stock (as defined below), $272 thousand to pay-off notes payable and due, and approximately $200 thousand for ordinary operating expense. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC. Since the Bank is well-capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover additional Company cash requirements for 2012, if needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

For the three months ended March 31, 2012, net cash provided by operating activities decreased $2.8 million to $4.1 million compared to $7.0 million for the same period in 2011. Net gain on sales and calls of securities increased $711 thousand for the three months ended March 31, 2012 compared to the same period in 2011, as a result of the sale and settlement of approximately of $28.1 million of securities during the three months ended March 31, 2012, compared to approximately $15.9 million of securities during the same period in 2011. The provision for loan losses decreased $80 thousand for the three months ended March 31, 2012, compared to the same period in 2011. The decrease in accrued interest receivable and other assets decreased $261 thousand while the change in accrued expenses and liabilities increased $3.7 million.

Net cash used in investing activities was $39.0 million for the three months ended March 31, 2012, compared to $28.0 million for the same period in 2011, an increase of $11.0 million. The cash used in net securities activities was $11.6 million for the three months ended March 31, 2012 compared to $10.0 million for the same period in 2011. Cash used in loan originations and principal collections, net, was $22.5 million for the three months ended March 31, 2012, an increase of $7.2 million, compared to the same period in 2011. Additionally, $5.0 million of cash was used in the purchase of life insurance policies during the three months ended March 31, 2012, compared to $2.5 million for this purpose in the same period in 2011.

For the three months ended March 31, 2012, net cash flows provided by financing activities increased $42.7 million to $48.2 million compared to net cash provided by financing activities of $5.5 million for the three months

 

30


ended March 31, 2011. We experienced a net increase of $49.5 million in cash provided by deposits and securities sold under agreements to repurchase comparing the three months ended March 31, 2012 to the same period in 2011. We had a decrease of $6.0 million cash provided by FHLB advances and other borrowings comparing the three months ended March 31, 2012 to the same period in 2011.

On August 25, 2011, as part of the Small Business Lending Fund (“SBLF”) program, we entered into a Letter Agreement with Treasury pursuant to which we issued and sold to Treasury 20,000 shares of our Non-Cumulative Perpetual Preferred Stock, Series B, par value $.01 per preferred share, having a liquidation preference of $1,000 per preferred share (the “Series B Preferred Stock”). The SBLF is Treasury’s effort to bring Main Street banks and small businesses together to help create jobs and promote economic growth in local communities. We used $10.0 million of the proceeds to redeem the Series A Preferred Stock issued under CPP.

The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be paid only when declared by our Board of Directors. The Series B Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

The Series B Preferred Stock generally is non-voting, other than class voting on certain matters that could adversely affect the Series B Preferred Stock.

On October 11, 2011, the Company announced it had entered an agreement to acquire McCrillis & Eldredge Insurance, Inc., (“McCrillis & Eldredge”) of Newport, New Hampshire. McCrillis & Eldredge is a full-line independent insurance agency which offers a complete range of commercial insurance services and consumer products, including life, health, auto, and homeowner insurances. The transaction closed on November 10, 2011.

Banks are required to maintain tier one leverage capital and total risk based capital ratios of 4.00% and 8.00%, respectively. As of March 31, 2012, the Bank’s ratios were 8.92% and 14.83%, respectively, well in excess of the regulators’ requirements.

Book value per common share was $15.20 at March 31, 2012, compared to $15.20 per common share at December 31, 2011. Tangible book value per common share was $10.02 at March 31, 2012 compared to $10.00 per common share at December 31, 2011. Tangible book value per common share is a non-GAAP financial measure calculated using GAAP amounts. Tangible book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of shareholder’s equity. We believe that tangible book value per common share provides information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

A reconciliation of these non-GAAP financial measures is provided below:

 

(Dollars in thousand except for per share data)    March 31, 2012      December 31, 2011  

Shareholders’ equity

   $ 108,714       $ 108,660   

Less goodwill

     28,597         28,597   

Less other intangible assets

     1,641         1,755   

Less preferred stock

     20,000         20,000   
  

 

 

    

 

 

 

Tangible common equity

   $ 58,476       $ 58,308   
  

 

 

    

 

 

 

Ending common shares outstanding

     5,835,360         5,832,360   

Tangible book value per common share

   $ 10.02       $ 10.00   

 

31


Interest Rate Sensitivity

The principal objective of our interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given our business strategies, operating environment, capital and liquidity requirements and performance objectives, and to manage the risk consistent with our Board of Directors’ approved guidelines. The Board of Directors has established an Asset/Liability Committee (ALCO) to review our asset/liability policies and interest rate position. Trends and interest rate positions are reported to the Board of Directors monthly.

Gap analysis is used to examine the extent to which assets and liabilities are “rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specified period of time and the amount of interest-bearing liabilities maturing or repricing within the same specified period of time. The strategy of matching rate sensitive assets with similar liabilities stabilizes profitability during periods of interest rate fluctuations.

Our one-year cumulative interest-rate gap at March 31, 2012 was positive 2.62%, compared to the December 31, 2011 gap of positive 1.65%. With an asset sensitive (positive) gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease.

We continue to offer adjustable-rate mortgages, which reprice at one, three, five and seven-year intervals. In addition, we sell most fixed-rate mortgages with terms of fifteen-years or longer into the secondary market in order to minimize interest rate risk and provide liquidity.

As another part of its interest rate risk analysis, we use an interest rate sensitivity model, which generates estimates of the change in our net portfolio value (NPV) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the NPV model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the NPV measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on our net interest income and will likely differ from actual results.

The following table sets forth our NPV at March 31, 2012, as calculated by an independent third party agent:

 

     Book
Value
    -100 bp     0 bp     +100 bp     +200 bp     +300 bp     +400 bp  

Net Portfolio Value:

              

Amount

   $ 124,450      $ 97,303      $ 108,397      $ 106,066      $ 101,358      $ 95,506      $ 89,690   

Percent of Change

       -10.2       -2.2     -6.5     -11.9     -17.3

NPV Ratio:

              

Ratio

     11.34     8.91     10.03     10.03     9.81     9.46     9.09

Change in basis points

       -112          0        -22        -57        -95   

 

32


Comparison of the Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

Consolidated net income for the three months ended March 31, 2012 was $2.1 million, or $0.31 per common share (assuming dilution), compared to $2.0 million, or $0.33 per common share (assuming dilution), for the same period in 2011, an increase of $57 thousand, or 2.82%. Our net interest margin decreased to 3.05% at March 31, 2012 from 3.18% at March 31, 2011. Our return on average assets and equity for the three months ended March 31, 2012 were 0.87% and 7.27%, respectively, compared to 0.80% and 8.91%, respectively, for the same period in 2011.

Net interest and dividend income decreased $94 thousand, or 1.31%, to $7.1 million for the three month period ended March 31, 2012 from $7.2 million for the three month period ended March 31, 2011, primarily as a result of the overall decline in net interest margins.

Interest and fees on loans decreased $258 thousand, or 3.24%, for the three month period ended March 31, 2012 to $7.7 million from $8.0 million at March 31, 2011 due primarily to loans repricing, new loans booked at current market rates, and an increase in tax-exempt loans comparing periods. Interest on investments and other interest and dividends decreased $151 thousand, or 10.22%, for the three month period ended March 31, 2012 due primarily to an increased position in lower yield investments comparing periods.

For the three months ended March 31, 2012, total interest expense decreased $315 thousand, or 14.06%, to $1.9 million from $2.2 million for the same period in 2011. Interest on deposits decreased $316 thousand, or 21.02%, due to the overall decline in short-term interest rates and increase in low cost deposit accounts as time deposits decreased and transaction accounts increased comparing periods. Interest on advances and other borrowed money increased $1 thousand, or 0.14%, to $739 thousand from $738 thousand at March 31, 2011.

The provision for loan losses (not including overdraft allowances) was $150 thousand for the three months ended March 31, 2012 and $250 thousand for the same period in 2011. We made adjustments to the provisions for overdraft losses in the three months ended March 31, 2012 and 2011, recording provisions of $5 thousand and a benefit of $8 thousand, respectively.

For the three months ended March 31, 2012, total noninterest income increased $973 thousand, or 41.14%, to $3.3 million, from $2.4 million for the same period in 2011, as discussed below. In summary, the increase was primarily due to increases in gains on sales of securities, net, and insurance and brokerage service income.

For the three month period ended March 31, 2012:

 

   

Customer service fees increased $26 thousand, or 2.21%, to $1.2 million from $1.2 million for the three months ended March 31, 2012. This increase includes an increase of $60 thousand in ATM-related income for the three months ended March 31, 2012 compared to the same period in 2011 offset in part by decreases of $24 thousand in overdraft fees.

 

   

Gain on sales of securities, net increased $711 thousand to $1.2 million for the three months ended March 31, 2012, from $440 thousand for the three months ended March 31, 2011. This reflects the recognition of gains on the sales of approximately $40.5 million of securities sold during the three months ended March 31, 2012, compared to $15.9 million of securities sold during the same period in 2011.

 

   

Net gain on sale of loans increased $26 thousand, or 8.13%, compared to the same period in 2011, represented by an increase of $3.7 million in loans sold into the secondary market, to $72.7 million for the three months ended March 31, 2012 from $69.0 million for the three months ended March 31, 2011.

 

   

(Loss) gain on sales of other real estate and property owned, net changed $185 thousand to a loss of $181 thousand for the three months ended March 31, 2012, from a gain of $4 thousand for the three months ended March 31, 2011. This reflects the recognition of a $190 thousand write-down on a commercial real estate property owned during the three months ended March 31, 2012.

 

33


   

Income from equity interest in Charter Holding Corp. decreased $45 thousand to $111 thousand for the three months ended March 31, 2012 from $156 thousand for the same period in 2011. During the three months ended March 31, 2011, there was non-recurring revenue at Charter Holding Corp. in the amount of approximately $44 thousand accounting for the majority of the change in revenue comparing periods.

 

   

Insurance and brokerage service income increased $409 thousand to $410 thousand for the three months ended March 31, 2012 compared to the same period in 2011 due to commissions recorded related to McCrillis & Eldredge operations.

 

   

Bank-owned life insurance income increased $9 thousand to $104 thousand from $95 thousand for the three months ended March 31, 2011.

For the three months ended March 31, 2012, total noninterest expense increased $888 thousand, or 13.80%, to $7.3 million, from $6.4 million for the same period in 2011, discussed as follows. In summary, the increase was primarily due to increases in salary and employee benefits and other expenses.

For the three month period ended March 31, 2012:

 

   

Salaries and employee benefits increased $502 thousand, or 15.30%, compared to the three months ended March 31, 2011. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $532 thousand, or 14.60%, from $3.6 million for the three months ended March 31, 2011, to $4.2 million for the three months ended March 31, 2012. Salary expense increased $411 thousand, or 16.06%, reflecting ordinary cost-of-living adjustments and additional staffing primarily in the lending and compliance departments, as well as the additional staff related to McCrillis & Eldredge which accounts for approximately 40% of the increase. The deferral of expenses in conjunction with the origination of loans increased $30 thousand, or 8.33%, to $390 thousand from $360 thousand for the same period in 2011.

 

   

Occupancy expense decreased $56 thousand, or 5.39 %, to $982 thousand compared to the same period in 2011, which reflects decreases in seasonal expenses and utilities.

 

   

Advertising and promotion increased $16 thousand, or 14.41%, to $127 thousand from $111 thousand for the same period in 2011. This increase includes a net increase in print media expenses for the three months ended March 31, 2012 compared to the same period in 2011, partially offset by decreases in web, radio and television media expenses.

 

   

Depositors’ insurance decreased $123 thousand, or 38.92%, to $193 thousand from $316 thousand for the same period in 2011 due primarily to modifications made by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates during the second half of 2011.

 

   

Outside services increased $46 thousand, or 19.57%, to $281 thousand compared to $235 thousand for the same period in 2011. This increase primarily reflects increases in expenses associated with our core processing system.

 

   

Professional services decreased $69 thousand, or 22.19%, to $242 thousand compared to $311 thousand for the same period in 2011, reflecting a decrease in consulting fees.

 

   

ATM processing fees decreased $10 thousand, or 7.94%, to $116 thousand compared to $126 thousand for the same period in 2011 due to lower assessments.

 

34


   

Supplies increased $8 thousand, or 9.52%, to $92 thousand compared to $84 thousand for the same period in 2011.

 

   

Other expenses increased $528 thousand, or 69.11%, to $1.3 million for the three months ended March 31, 2012 compared to $764 thousand for the same period in 2011. This primarily reflects increases of stockholder expenses of $123 thousand, non-performing assets and other real estate owned expenses of $78 thousand, and mortgage service impairment of $235 thousand.

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures (“Debentures II”). Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10.00 per capital security. We have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities us and used the net proceeds from the offering to purchase a like amount of our 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”). Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures III, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Interest Rate Swap

On May 1, 2008, we entered into an interest rate swap agreement with PNC Bank, effective on June 17, 2008. The interest rate agreement converts Trust II’s interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement has a notional amount of $10 million maturing June 17, 2013. Under the swap agreement, we are to receive quarterly interest payments at a floating rate based on three month LIBOR plus 2.79% and are obligated to make quarterly interest payments at a fixed-rate of 6.65%.

 

35


Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

 

36


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There is no material litigation pending to which we or any of our subsidiaries are a party or to which our property or the property any of our subsidiaries is subject, other than ordinary routine litigation incidental to our business.

Item 1A. Risk Factors

For a summary of risk factors relevant to our operations, see Part I, Item 1A, “Risk Factors” in our 2011 Annual Report on Form 10-K. There are no material changes in the risk factors relevant to our operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

37


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 15, 2012.

 

NEW HAMPSHIRE THRIFT BANCSHARES, INC.
(Registrant)

/s/ Stephen W. Ensign

Stephen W. Ensign
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)

/s/ Laura Jacobi

Laura Jacobi
Senior Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer)

 

38


EXHIBIT INDEX

 

Exhibit No.

  

Description

3.1      Certificate of Incorporation of the Company (as amended) (filed as Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Commission on March 25, 2012 and incorporated herein by reference).
3.2      Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).
3.3      Certificate of Designations establishing the rights of the Company’s Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 29, 2011 and incorporated herein by reference).
3.4      Amended and Restated Bylaws of NHTB (as amended) (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Commission on March 25, 2012 and incorporated herein by reference).
4.1      Stock Certificate (filed as an exhibit to the Company’s Registration Statement on Form S-4 filed with the Commission on March 1, 1989 and incorporated herein by reference).
4.2      Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Floating Rate Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
4.3      Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Commission on March 29, 2006 and incorporated herein by reference).
4.4     

Indenture by and between New NHTB, as Issuer, and U.S. Bank National Association, as

Trustee, dated March 30, 2004 for Fixed/Floating Rate Junior Subordinated Deferrable

Interest Debentures (filed as Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.5      Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Commission on March 29, 2005 and incorporated herein by reference).
4.6      Warrant to purchase shares of the Company’s common stock (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 22, 2009 and incorporated herein by reference).
31.1 *    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

 

39


Exhibit No.

 

Description

31.2 *   Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1 *   Section 1350 Certification of the Chief Executive Officer.
32.2 *   Section 1350 Certification of the Chief Financial Officer.
101 **   Financial statements from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

 

* Filed herewith.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

40

XNAS:NHTB New Hampshire Thrift Bancshares Inc Quarterly Report 10-Q Filling

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