| • FORM 10-Q • EX-31.1 • EX-31.2 • EX-32.1 • EX-32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 June 30, 2012 Commission File Number: 000-17859
NEW HAMPSHIRE THRIFT BANCSHARES, INC. (Exact Name of Registrant as Specified in Its Charter)
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):
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 August 10, 2012, was 5,907,402.
Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC.
Table of ContentsForward-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:
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” refer 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.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2012 AND DECEMBER 31, 2011
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Change in accumulated other comprehensive loss consists of the following:
Accumulated other comprehensive loss consists of the following:
Reclassification disclosure for the three and six month periods ended June 30, 2012 and 2011.
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsPART I. FINANCIAL INFORMATION Item 1. Financial Information NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011 (Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 six months ended June 30, 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, the Financial Accounting Standards Board (“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)
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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 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 did not 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 did not have an impact on the Company’s results of operations or financial position, and the required disclosures are reflected in the Company’s notes to the financial statements. 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 did not have an impact on the Company’s results of operations or financial position. The required disclosures have been reflected in the accompanying footnotes. 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 did not 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. The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In December 2011, the FASB issued ASU 2011-10, “Derecognition of in Substance Real Estate,” an update to Topic 360, “Property, Plant and Equipment.” The objective of the amendments in this ASU is to resolve the diversity in practice about whether the guidance in Subtopic 360-20, “Property, Plant, and Equipment—Real Estate Sales”, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, “Consolidation—Overall”) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This ASU does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. Under the amendments of this ASU, when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this ASU are effective for fiscal years and interim periods beginning on or after June 15, 2012 and should be applied on a prospective basis to deconsolidating events occurring after the effective date. 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 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. 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 required disclosures have been reflected in the accompanying 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.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. 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
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The following summarizes assets and liabilities measured at fair value at June 30, 2012 and December 31, 2011. Assets measured at fair value on a recurring basis
Liabilities measured at fair value on a recurring basis
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets measured at fair value on a nonrecurring basis
Impaired loans and leases, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $3.4 million with no valuation allowance at June 30, 2012. At December 31, 2011, impaired loans had a recorded investment 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 $697 thousand and $1 million for the three months ended June 30, 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 June 30, 2012.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011, all of which are held or issued for purposes other than trading, were as follows:
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.
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the six months ended June 30, 2012. 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 June 30, 2012, and December 31, 2011 are summarized as follows:
Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of June 30, 2012:
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2012, the proceeds from sales of securities available-for-sale were $97.5 million. Gross gains of $2.3 million were realized during the same period on these sales. For the six months ended June 30, 2011, proceeds from sales of securities available-for-sale amount to $53.8 million. Gross gains of $1.3 million were realized during the same period on these sales. For the three months ended June 30, 2012, the proceeds from sales of securities available-for-sale were $57.0 million. Gross gains of $1.2 million were realized during the same period on these sales. For the three months ended June 30, 2011, the proceeds from sales of securities available-for-sale were $30.1 million. Gross gains of $869 thousand were realized during the same period on these sales. Securities, carried at $141.8 million and $155.9 million were pledged to secure public deposits, Federal Home Loan Bank advances and securities sold under agreements to repurchase as of June 30, 2012, and December 31, 2011, respectively. 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 June 30, 2012:
The investments in the Company’s investment portfolio that are temporarily impaired as of June 30, 2012, consist of mortgage-backed securities issued by U.S. government sponsored enterprises and equity securities. The unrealized losses on 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 equity securities until the recovery of cost basis, and therefore, no declines are deemed to be other than temporary. Note G – Loan Portfolio Loans receivable consisted of the following as of the dates indicated:
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth information regarding the allowance for loan and lease losses by portfolio segment as of June 30, 2012:
The following table sets forth information regarding nonaccrual loans and past-due loans as of June 30, 2012, and December 31, 2011:
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Troubled Debt Restructurings The following table presents the recorded investment in troubled debt restructured loans as of June 30, 2012 and December 31, 2011 based on payment performance status (in thousands):
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 June 30, 2012, we have not committed to lend additional amounts to customers with outstanding loans and leases that are classified as troubled debt restructurings. During the six month period ending June 30, 2012, certain loans and lease 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):
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the troubled debt restructurings for which there was a payment default within twelve months following the date of the restructuring for the periods indicated (in thousands):
Loans and leases are considered to be in payment default once it 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 $9 thousand for the six month period ending June 30, 2012. There were four charge-offs totaling $135 thousand on these defaulted troubled debt restructurings during the six month period ending June 30, 2012. Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of June 30, 2012:
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2011:
The following table presents the Company’s loans by risk ratings as of June 30, 2012:
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The following table presents the Company’s loans by risk ratings as of December 31, 2011:
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
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2012, was $1.6 million. Servicing rights of $425 thousand were capitalized during the six months ended June 30, 2012, and $192 thousand during the three months ended June 30, 2012. Amortization of capitalized servicing rights was $499 thousand for the six months ended June 30, 2012, and $263 thousand during the three months ended June 30, 2012. The fair value of capitalized servicing rights was $2.0 million of June 30, 2012. Following is an analysis of the aggregate changes in the valuation allowance for capitalized servicing rights during the period indicated:
Note H – Stock-based Compensation At June 30, 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 three and six month periods ending June 30, 2012, and June 30, 2011. Note I - Pension Benefits The following summarizes the net periodic pension cost for the three and six month periods ended June 30:
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Table of ContentsNEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note J – Earnings Per Share (EPS) Basic and diluted net income per common share calculations are as follows (in thousands, except per share data):
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Table of ContentsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation Highlights and Overview Our profitability is derived primarily from the Bank. The Bank’s earnings in turn are generated from the net 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 quarter and six months ended June 30, 2012:
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. Recent Legislative Updates In June 2012, the Federal Reserve Board, the OCC and the FDIC issued three proposals that would amend the existing regulatory risk-based capital adequacy requirements of banks and bank holding companies. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The Basel III proposal would increase the minimum levels of required capital, narrow the definition of capital, and places much greater emphasis on common equity. The proposed rules will be subject to a comment period through September 7, 2012. The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to us and the Bank under the proposals would
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Table of Contentsbe: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, such as trust preferred securities, which would be phased out over time. Although the Dodd-Frank Act only required the phase out of such instruments for institutions with total consolidated assets of $15 billion or more, the proposed rules would require almost all institutions to phase out instruments that will no longer qualify as Tier 1 capital, albeit on a longer time frame than for institutions with total consolidated assets of $15 billion or more. The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. We are still in the process of assessing the impacts of these complex proposals, however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis. 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 June 30, 2012 and December 31, 2011 Total assets were $1.1 billion at June 30, 2012, compared to $1.0 billion at December 31, 2011, an increase of $100.0 million, or 9.60%. Securities available-for-sale decreased $23.3 million, or 11.08%, to $187.0 million at June 30, 2012 from $210.3 million at December 31, 2011. Net unrealized gains on securities available-for-sale were $2.5 million at June 30, 2012, compared to net unrealized gains of $2.8 million at December 31, 2011. During the six months ended June 30, 2012, we sold securities with a total book value of $95.2 million for a net gain on sales of $2.3 million. During the same period, we purchased $15.0 million of other bonds and
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Table of Contentsdebentures and $83.3 million of mortgage-backed securities. Our net unrealized gain (after tax) on our investment portfolio was $1.5 million at June 30, 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 June 30, 2012, consisted primarily of equity securities issued. Management does not intend to sell these securities in the near term. Since we have the ability to hold equity securities until recovery of cost basis, no declines are deemed to be other than temporary. Net loans held in portfolio increased $76.6 million, or 10.71%, to $791.6 million at June 30, 2012, from $715.0 million at December 31, 2011. The allowance for loan losses decreased $9 thousand to $9.1 million at June 30, 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 $1.2 million, charge-offs of $1.4 million, and recoveries of $173 thousand. As a percentage of total loans, non-performing loans decreased from 2.26% at December 31, 2011, to 1.93% at June 30, 2012. Total loan production for the six months ended June 30, 2012, was $206.8 million compared to $132.0 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 June 30, 2012, our mortgage servicing loan portfolio was $349.0 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 June 30, 2012, adjustable-rate mortgages comprised approximately 63.9% of our real estate mortgage loan portfolio, which is lower than the mix at December 31, 2011 as more fixed rate real estate loans with terms of 10 years or less were originated during the six months ended June 30, 2012. Goodwill and other intangible assets amounted to $30.2 million, or 2.64% of total assets, as of June 30, 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. We held no other real estate owned (“OREO”) and property acquired in settlement of loans at June 30, 2012, compared to $1.3 million at December 31, 2011. Total deposits increased $23.9 million, or 2.98%, to $826.9 million at June 30, 2012, from $803.0 million at December 31, 2011. Non-interest bearing deposit accounts increased $1.6 million, or 2.43%, and interest-bearing deposit accounts increased $22.3 million, or 3.02%, over the same period. The balances at June 30, 2012, included $20.0 million of brokered deposits and $6.3 million of deposits obtained through listing services which is an increase of $15.0 million and no change, respectively, compared to December 31, 2011. Securities sold under agreements to repurchase increased $5.8 million, or 37.42%, to $21.3 million at June 30, 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 $151.0 million in advances from the Federal Home Loan Bank of Boston (“FHLBB”) at June 30, 2012, an increase of $70.0 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 the 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
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Table of ContentsAcquired 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 June 30, 2012, and December 31, 2011 was $9.1 million. At approximately $9.1 million, the allowance for loan losses represents 1.13% of total loans, down from 1.27% at December 31, 2011. Total non-performing assets at June 30, 2012, were approximately $15.4 million, representing 169.37% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $1.2 million to the allowance for loan and lease losses during the six months ended June 30, 2012, compared to $400 thousand for the same period in 2011. Loan charge-offs (excluding the overdraft program) were $1.3 million during the six month period ended June 30, 2012, compared to $246 thousand for the same period in 2011. Recoveries were $99 thousand during the six month period ended June 30, 2012, compared to $84 thousand for the same period in 2011. This activity resulted in net charge-offs of $1.2 million for the six month period ended June 30, 2012, compared to $162 thousand for the same period in 2011. One-to-four family residential mortgages, commercial real estate, commercial, and consumer loans accounted for 42%, 30%, 27%, and 1%, respectively, of the amounts charged-off during the six month period ended June 30, 2012. The effects of national economic issues that 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 $9.1 million. The provisions made in 2012 reflect growth in the portfolio, 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 June 30, 2012, the overdraft allowance was $16 thousand, compared to $18 thousand at year-end 2011. Provisions for overdraft losses in the amount of $29 thousand were recorded during the six month period ended June 30, 2012, compared to provisions of $10 thousand that were recorded 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.
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Table of ContentsThe following is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for the six month periods ended June 30:
The following is a summary of activity in the allowance for overdraft privilege account for the six month period ended June 30:
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Table of ContentsThe following table sets forth the allocation of the allowance for loan losses (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:
The following table shows total allowances including overdraft allowances:
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 $25.6 million at June 30, 2012, compared to $25.1 million at December 31, 2011. In addition, we had no OREO at June 30, 2012, compared to $1.3 million at December 31, 2011. During the six month period ended June 30, 2012, we sold five properties which were classified as OREO at December 31, 2011. Losses are incurred in the liquidation process and 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. Five loans considered to be impaired loans at June 30, 2012, have specific allowances identified and assigned. The five loans are secured by real estate, business assets or a combination of both. At June 30, 2012, the allowance included $96 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2011 was $308 thousand. At June 30, 2012, we had 51 loans with net carrying values of $12.1 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors” and are included in impaired loans. At June 30, 2012, 39 of the “troubled debt restructurings” were performing under contractual terms. Of the loans classified as troubled debt restructured, twelve were more than thirty days past due at June 30, 2012. The balances of these past due loans were $1.6 million and have no assigned specific allowances. 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 $2.4 million at June 30, 2012, compared to $3.3 million at December 31, 2011. Loans 30 to 89 days past due were $6.2 million at June 30, 2012, compared to $5.6 million at December 31, 2011. As a percentage of assets, the recorded investment in non-performing loans decreased from 1.59% at December 31, 2011, to 1.36% at June 30, 2012, and, as a percentage of total loans, decreased from 2.26% at December 31, 2011, to 1.93% at June 30, 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 capital resources. For the period ended June 30, 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.
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Table of ContentsAt June 30, 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:
The following table sets forth the breakdown of non-performing assets at the dates indicated:
The following table sets forth the recorded investment in nonaccrual loans by category at the dates indicated:
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.
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Table of ContentsLiquidity and Capital Resources We are required to maintain sufficient liquidity for safe and sound operations. At June 30, 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 June 30, 2012, we had approximately $91.0 million in additional borrowing capacity from the FHLB. At June 30, 2012, stockholders’ equity totaled $110.2 million, compared to $108.7 million at December 31, 2011. This reflects net income of $4.1 million, the declaration and payment of $1.5 million in common stock dividends, the declaration of $500 thousand in preferred stock dividends, the purchase of $737 thousand of stock warrants outstanding, and an increase of $124 thousand in accumulated other comprehensive loss. At June 30, 2012, 148,088 shares remained to be repurchased under the repurchase plan previously approved by the Board of Directors. The repurchase plan permits the repurchase of up to 253,776 shares of our common stock. 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 six months ended June 30, 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 (the “EESA”), we were prohibited from repurchasing shares of our common stock prior to exiting the program on August 25, 2011. On June 14, 2012, the Company awarded 5,000 restricted shares of NHTB common stock to each of the Bank’s seven non-employee directors. These shares, issued from Treasury Stock, represent restricted common shares which vest 1,000 common shares per year beginning on June 14, 2013. At June 30, 2012, we had unrestricted funds available in the amount of $2.4 million. As of June 30, 2012, our total cash needs for the remainder of 2012 are estimated to be approximately $2.8 million with $1.5 million projected to be used to pay dividends on our common stock, $502 thousand to pay interest on our capital securities, $384 thousand to pay dividends on our Series B Preferred Stock (as defined below), $272 thousand to pay-off notes payable and due, and approximately $128 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 six months ended June 30, 2012, net cash used in operating activities increased $8.3 million to $2.0 million cash used in compared to $6.3 million provided by for the same period in 2011. The change in loans held for sale increased $10.9 million for the six months ended June 30, 2012, compared to the same period in 2011, with $6.2 million increase in loans held for the period in 2012 compared to a decrease of $4.7 million in 2011. Net gain on sales and calls of securities increased $1.0 million for the six months ended June 30, 2012, compared to the same period in 2011, as a result of the sale and settlement of approximately $97.5 million of securities during the six months ended June 30, 2012, compared to approximately $52.5 million of securities during the same period in 2011. The provision for loan losses increased $819 thousand for the six months ended June 30, 2012, compared to the same period in 2011. The increase in accrued interest receivable and other assets increased $370 thousand while the change in accrued expenses and liabilities decreased $2.1 million. Net cash used in investing activities was $78.9 million for the six months ended June 30, 2012, compared to $30.0 million for the same period in 2011, an increase of $48.9 million. The cash provided by net securities activities was $6.5 million for the six months ended June 30, 2012, compared to $8.4 million for the same period in 2011. Cash used to purchase Federal Home Loan Bank stock was $1.5 million for the six months ended June 30, 2012, compared to no related cash activity for the same period in 2011. Cash used in loan originations and principal collections, net, was $78.6 million for the six months ended June 30, 2012, an increase of $42.9 million,
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Table of Contentscompared to the same period in 2011. Additionally, $5.0 million of cash was used in the purchase of life insurance policies during the six months ended June 30, 2012, compared to $2.5 million for this purpose in the same period in 2011. For the six months ended June 30, 2012, net cash flows provided by financing activities increased $64.0 million to $96.6 million compared to net cash provided by financing activities of $32.6 million for the six months ended June 30, 2011. We experienced a net increase of $30.3 million in cash provided by deposits and securities sold under agreements to repurchase comparing the six months ended June 30, 2012, to the same period in 2011. We had an increase of $34.7 million cash provided by FHLBB advances comparing the six months ended June 30, 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”.) 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. Banks are required to maintain tier one leverage capital and total risk based capital ratios of 4.00% and 8.00%, respectively. As of June 30, 2012, the Bank’s ratios were 8.79% and 14.19%, respectively, well in excess of the regulators’ requirements. Book value per common share was $15.27 at June 30, 2012, compared to $15.20 per common share at December 31, 2011. Tangible book value per common share was $10.16 at June 30, 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.
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Table of ContentsA reconciliation of these non-GAAP financial measures is provided below:
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 June 30, 2012 was positive 2.75%, 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 15 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 economic value of equity (EVE) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The EVE ratio, under any rate scenario, is defined as the EVE 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 EVE 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 EVE 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.
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Table of ContentsThe following table sets forth our EVE at June 30, 2012, as calculated by an independent third party agent:
Comparison of the Operating Results for the Six Months Ended June 30, 2012 and June 30, 2011 Consolidated net income for the six months ended June 30, 2012, was $4.1 million, or $0.61 per common share (assuming dilution), compared to $4.0 million, or $0.65 per common share (assuming dilution), for the same period in 2011, an increase of $69 thousand, or 1.73%. Our net interest margin decreased to 3.00% at June 30, 2012, from 3.16% at June 30, 2011. Our return on average assets and average equity for the six months ended June 30, 2012, were 0.82% and 6.94%, respectively, compared to 0.79% and 8.72%, respectively, for the same period in 2011. Net interest and dividend income increased $101 thousand, or 0.71%, to $14.4 million for the six month period ended June 30, 2012, from $14.3 million for the six month period ended June 30, 2011, as a result of the increase in interest-earning assets offset by the overall decline in net interest margin. For the six months ended June 30, 2012, total interest and dividend income decreased $564 thousand, or 3.00%, to $18.2 million from $18.8 million for the same period in 2011. Interest and fees on loans decreased $101 thousand, or 0.64%, for the six month period ended June 30, 2012, to $15.7 million from $15.8 million at June 30, 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 decreased $463 thousand, or 15.79%, for the six month period ended June 30, 2012, due primarily to a decreased position in investments coupled with lower yields on investments held comparing periods. For the six months ended June 30, 2012, total interest expense decreased $665 thousand, or 14.99%, to $3.8 million from $4.4 million for the same period in 2011. Interest on deposits decreased $662 thousand, or 22.48%, due to the overall decline in short-term interest rates comparing periods. Interest on advances and other borrowed money decreased $3 thousand, or 0.19%, to $1.5 million from $1.5 million for the same period in 2011. The provision for loan losses (not including overdraft allowances) was $1.2 million for the six months ended June 30, 2012, and $400 thousand for the same period in 2011. We made adjustments to the provisions for overdraft losses in the six months ended June 30, 2012, and 2011, recording provisions of $29 thousand and $10 thousand, respectively. For additional information on provisions and adequacy, please refer to the section on Allowances for Loan and Lease Losses. For the six months ended June 30, 2012, total noninterest income increased $1.8 million, or 35.29%, to $6.9 million, from $5.1 million for the same period in 2011, as discussed below. In summary, the increase was primarily due to increases in net gains on sales of loans, gains on sales of securities, net, and insurance commission income. For the six month period ended June 30, 2012:
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For the six months ended June 30, 2012, total noninterest expense increased $990 thousand, or 7.45%, to $14.3 million, from $13.3 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 six month period ended June 30, 2012:
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Comparison of the Operating Results for the Three Months Ended June 30, 2012, and June 30, 2011 Consolidated net income for the three months ended June 30, 2012, was $2.0 million, or $0.30 per common share (assuming dilution), compared to $2.0 million, or $0.32 per common share (assuming dilution), for the same period in 2011, an increase of $12 thousand, or 0.62%. Net interest and dividend income increased $196 thousand, or 2.74%, to $7.3 million for the three month period ended June 30, 2012, from $7.1 million for the three month period ended June 30, 2011. For the three months ended June 30, 2012, total interest and dividend income decreased $154 thousand, or 1.65%, to $9.2 million from $9.3 million for the same period in 2011. Interest and fees on loans increased $157 thousand, or 1.99%, for the three month period ended June 30, 2012, to $8.0 million from $7.9 million for the same period in 2011 due to the increase in new loans booked offsetting the impact of lower market rates. Interest on investments decreased $311 thousand, or 21.39%, for the three month period ended June 30, 2012, due primarily to overall lower yields on the investment portfolio in the period during 2012. For the three months ended June 30, 2012, total interest expense decreased $350 thousand, or 15.97%, to $1.8 million from $2.2 million for the same period in 2011. Interest on deposits decreased $346 thousand, or 24.00%, due to the overall decline in short-term interest rates comparing periods. Interest on advances and other borrowed money decreased $4 thousand, or 0.53%, to $749 thousand from $753 thousand for the same period in 2011.
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Table of ContentsThe provision for loan losses (not including overdraft allowances) was $1.0 million for the three months ended June 30, 2012, and $150 thousand for the same period in 2011. We made adjustments to the provisions for overdraft losses in the three months ended June 30, 2012, and 2011, recording provisions of $24 thousand and $18 thousand, respectively. For additional information on provisions and adequacy, please refer to the section on Allowances for Loan and Lease Losses. For the three months ended June 30, 2012, total noninterest income increased $857 thousand, or 31.39%, to $3.6 million, from $2.7 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 June 30, 2012:
For the three months ended June 30, 2012, total noninterest expense increased $101 thousand, or 1.47%, to $7.0 million, from $6.9 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.
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Table of ContentsFor the three month period ended June 30, 2012:
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 six 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.
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Table of ContentsCapital 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 and are obligated to make quarterly interest payments at a fixed-rate of 6.65%. 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.
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Table of ContentsThere 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.
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Table of ContentsThere 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. 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. None. 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.
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Table of ContentsSIGNATURES 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 August 14, 2012.
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Table of ContentsEXHIBIT INDEX
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