Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Highlights and Overview
Our profitability is derived from our two operating segments, Banking and Wealth Management. The following is a summary of key financial
results for the three months ended March 31, 2016:
|
|
|
Net income was $2.5 million, or $0.29 per diluted common share.
|
|
|
|
Return on average common stockholders equity was 7.12% and return on average assets was 0.64%.
|
|
|
|
Common Equity Tier 1 capital remained strong at 9.46%.
|
|
|
|
Total assets increased $45.4 million, or 2.99%, to $1.6 billion.
|
|
|
|
Loans decreased $5.3 million, or 0.43%, to $1.2 billion.
|
|
|
|
Loans totaling $60.3 million were originated.
|
|
|
|
As a percentage of total loans, non-performing loans decreased to 0.45%.
|
|
|
|
Net loan charge-offs (excluding overdrafts) were $304 thousand, or 0.10% (annualized), of average loans.
|
|
|
|
Deposits decreased $15.9 million, or 1.37%, to $1.1 billion.
|
|
|
|
Book value per common share increased 2.12% to $16.66.
|
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 unaudited condensed consolidated financial statements and accompanying notes contained elsewhere in this report.
Critical Accounting Policies
Our
condensed consolidated financial statements are prepared in accordance with U.S. 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 our consolidated 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. There
have been no material changes to our critical accounting policies during the three months ended March 31, 2016. For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements
included in our 2015 Annual Report on Form 10-K (Annual Report).
Operating Segments
Our operations are managed along two reportable segments that represent our core businesses: Banking and Wealth Management. The Banking segment
provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and
homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and Charter Trust. A summary of the financial results for each of our segments is
included in Note N Operating Segments in the notes to our unaudited condensed consolidated financial statements located elsewhere within this report.
Comparison of Financial Condition at March 31, 2016 (unaudited) and December 31, 2015
Assets.
Total assets were $1.6 billion at March 31, 2016, compared to $1.5 billion at December 31, 2015, an increase of
$45.4 million, or 2.99%.
Securities Portfolio.
Securities available-for-sale increased $50.1 million, or 41.67%, to $170.3
million at March 31, 2016 from $120.2 million at December 31, 2015 as a result of $50.2 million in securities purchased during the period. Net unrealized gains on securities available-for-sale were $1.3 million at March 31, 2016
compared to net unrealized losses of $1.3 million at December 31, 2015. During the three months ended March 31, 2016, we sold no securities and $362 thousand of municipal bonds were called. During the same period, we purchased securities
totaling $50.2 million, including mortgage-backed securities and corporate bonds. Our net unrealized gain (after tax) on our investment portfolio was $791 thousand at March 31, 2016 compared to an unrealized loss (after tax) of $810 thousand at
December 31, 2015. The investments in our investment portfolio that were temporarily impaired as of March 31, 2016 consisted of U.S. Treasury notes, U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S.
government-sponsored enterprises, municipal bonds, other bonds and equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates. We have the ability and intent to hold debt securities
until maturity, and therefore, no declines are deemed to be other-than-temporary. The unrealized losses on equity securities have occurred for less than 12 months and we do not believe the losses relate to credit quality of the issuers. We have the
ability and intent to hold these investments until a recovery of cost basis.
31
Loans.
Net loans held in portfolio decreased $5.3 million, or 0.43%, to $1.2
billion at March 31, 2016 from $1.2 billion at December 31, 2015. The decrease of loans held in portfolio was primarily due to decreases in construction loans of $13.4 million, commercial and municipal loans of $4.7 million and consumer
loans of $458 thousand, offset in part by an increase in conventional and home equity loans of $2.1 million and commercial real estate loans of $11.0 million. As a percentage of total loans, impaired loans decreased to 0.86% at March 31, 2016
from 1.06% at December 31, 2015. During the three months ended March 31, 2016, we originated $60.3 million in loans, an increase of 0.33%, compared to $60.1 million during the same period in 2015. At March 31, 2016, our mortgage
servicing loan portfolio was $446.1 million, compared to $445.9 million at December 31, 2015. 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, 2016, adjustable-rate mortgages comprised approximately 61.59% of our real estate mortgage loan portfolio,
which represents a slightly higher percentage compared to the mix at December 31, 2015 of 60.67%.
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 managements judgment, affect the collectability of the
portfolio.
The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogeneous
problem loans in accordance with ASC 310-10-35, Receivables-Overall-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 loans 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 homogeneous 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 at March 31, 2016 was $8.7 million compared to $8.9 million at
December 31, 2015. The allowance for loan losses represents 0.71% of total loans held at March 31, 2016 compared to 0.73% at December 31, 2015. Total impaired loans at March 31, 2016 were $10.5 million, representing 120.40% of
the allowance for loan losses. Modestly improving economic and market conditions and actual charge-off experience within the portfolio during the period resulted in us making $111 thousand in provisions to the allowance for loan losses during the
three months ended March 31, 2016, compared to $205 thousand in provisions made for the same period in 2015. Loan charge-offs were $426 thousand during the three month period ended March 31, 2016, compared to $448 thousand for the same
period in 2015. Recoveries were $105 thousand during the three month period ended March 31, 2016, compared to $62 thousand for the same period in 2015. This activity resulted in net charge-offs of $321 thousand for the three month period ended
March 31, 2016, compared to $386 thousand for the same period in 2015. One-to-four family residential mortgages, commercial mortgages, commercial and municipal and consumer loans accounted for 17%, 57%, 5% and 21%, respectively, of the amounts
charged-off during the three month period ended March 31, 2016.
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 at $8.7 million. The risk of loss inherent in the loan portfolio was affected
by a decrease in the originated loan portfolio, a reduction in impaired loans and modestly improving economic conditions. Management may make additional provisions during the remainder of 2016 to maintain the allowance at an adequate level.
Included in the allowance for loan losses 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, 2016, the overdraft allowance was $10 thousand, compared to $16 thousand at December 31, 2015. There were provisions of $11 thousand for overdraft losses recorded during the three month period ended March 31, 2016, compared
to $5 thousand for the same period during 2015. 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.
The following table is a summary of activity in the allowance for loan losses account
for the periods indicated:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three months ended
March 31, 2016
|
|
|
|
Originated
|
|
|
Acquired
|
|
|
Total
|
|
Balance, beginning of year
|
|
$
|
8,607
|
|
|
$
|
298
|
|
|
$
|
8,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
(74
|
)
|
|
|
|
|
|
|
(74
|
)
|
Commercial real estate
|
|
|
(243
|
)
|
|
|
|
|
|
|
(243
|
)
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and municipal loans
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
Consumer loans
|
|
|
(88
|
)
|
|
|
(1
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charged-off loans
|
|
|
(425
|
)
|
|
|
(1
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
7
|
|
|
|
19
|
|
|
|
26
|
|
Commercial and municipal loans
|
|
|
10
|
|
|
|
1
|
|
|
|
11
|
|
Consumer loans
|
|
|
67
|
|
|
|
1
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
84
|
|
|
|
21
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries:
|
|
|
(341
|
)
|
|
|
20
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for loan loss charged to income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
238
|
|
|
|
(57
|
)
|
|
|
181
|
|
Commercial real estate
|
|
|
163
|
|
|
|
22
|
|
|
|
185
|
|
Construction
|
|
|
(93
|
)
|
|
|
(4
|
)
|
|
|
(97
|
)
|
Commercial and municipal loans
|
|
|
(225
|
)
|
|
|
(7
|
)
|
|
|
(232
|
)
|
Consumer loans
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
Unallocated
|
|
|
63
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
|
157
|
|
|
|
(46
|
)
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,423
|
|
|
$
|
272
|
|
|
$
|
8,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three months ended
March 31, 2015
|
|
|
|
Originated
|
|
|
Acquired
|
|
|
Total
|
|
Balance, beginning of year
|
|
$
|
9,269
|
|
|
$
|
|
|
|
$
|
9,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
(135
|
)
|
|
|
|
|
|
|
(135
|
)
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
Commercial and municipal loans
|
|
|
(247
|
)
|
|
|
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charged-off loans
|
|
|
(448
|
)
|
|
|
|
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
Commercial and municipal loans
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
62
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs:
|
|
|
(386
|
)
|
|
|
|
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for loan loss charged to income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
(52
|
)
|
|
|
|
|
|
|
(52
|
)
|
Commercial real estate
|
|
|
(392
|
)
|
|
|
|
|
|
|
(392
|
)
|
Construction
|
|
|
113
|
|
|
|
|
|
|
|
113
|
|
Consumer loans
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Commercial and municipal loans
|
|
|
151
|
|
|
|
|
|
|
|
151
|
|
Unallocated
|
|
|
380
|
|
|
|
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
205
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,088
|
|
|
$
|
|
|
|
$
|
9,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of activity in the allowance for overdraft privilege accounts for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
16
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Overdraft charge-offs
|
|
|
(81
|
)
|
|
|
(57
|
)
|
Overdraft recoveries
|
|
|
64
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Net overdraft charge-offs
|
|
|
(17
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Provision for overdraft losses
|
|
|
11
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
34
The following table sets forth the allocation of the allowance for loan losses, 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, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
% of
Allowance
|
|
|
% of
Loans
|
|
|
|
|
|
% of
Allowance
|
|
|
% of
Loans
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional, 1-4 family and home equity loans
|
|
$
|
4,251
|
|
|
|
49
|
%
|
|
|
54
|
%
|
|
$
|
3,997
|
|
|
|
45
|
%
|
|
|
54
|
%
|
Commercial
|
|
|
2,693
|
|
|
|
31
|
%
|
|
|
22
|
%
|
|
|
2,751
|
|
|
|
31
|
%
|
|
|
21
|
%
|
Land and construction
|
|
|
104
|
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
182
|
|
|
|
2
|
%
|
|
|
3
|
%
|
Commercial and municipal loans
|
|
|
964
|
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
1,192
|
|
|
|
13
|
%
|
|
|
11
|
%
|
Collateral and consumer loans
|
|
|
58
|
|
|
|
1
|
%
|
|
|
|
|
|
|
68
|
|
|
|
1
|
%
|
|
|
|
|
Unallocated
|
|
|
125
|
|
|
|
1
|
%
|
|
|
|
|
|
|
62
|
|
|
|
1
|
%
|
|
|
|
|
Acquired loans (discounts to related credit quality)
|
|
|
272
|
|
|
|
3
|
%
|
|
|
10
|
%
|
|
|
298
|
|
|
|
3
|
%
|
|
|
10
|
%
|
Impaired loans
|
|
|
228
|
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
355
|
|
|
|
4
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
8,695
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
8,905
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for originated loans as a percentage of originated loans
|
|
|
|
|
|
|
0.77
|
%
|
|
|
|
|
|
|
|
|
|
|
0.78
|
%
|
|
|
|
|
Non-performing loans as a percentage of allowance
|
|
|
|
|
|
|
63.12
|
%
|
|
|
|
|
|
|
|
|
|
|
67.79
|
%
|
|
|
|
|
The following table shows total allowances including overdraft allowances:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Allowance for loan losses
|
|
$
|
8,685
|
|
|
$
|
8,889
|
|
Overdraft allowance
|
|
|
10
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
8,695
|
|
|
$
|
8,905
|
|
|
|
|
|
|
|
|
|
|
Asset Quality.
Classified loans include non-performing loans and performing loans that have been
adversely classified, net of specific reserves. Total classified loans net of specific reserves were $21.1 million at March 31, 2016, compared to $19.7 million at December 31, 2015. OREO was $799 thousand at March 31, 2016 compared to
$904 thousand at December 31, 2015. Losses have occurred 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. Six loans considered to be impaired loans
at March 31, 2016 have specific allowances identified and assigned. The six loans are secured by real estate, business assets or a combination of both. At March 31, 2016, the allowance included $229 thousand allocated to impaired loans
compared to $386 thousand at December 31, 2015.
At March 31, 2016, we had 56 loans totaling $8.3 million considered to be TDRs
as defined in ASC 310-40, Receivables-Troubled Debt Restructurings by Creditors, included in impaired loans. At March 31, 2016, 43 of the TDRs were performing under contractual terms. Of the loans classified as TDRs, 13 were
non-performing at March 31, 2016. The total balance of these past due loans was $1.7 million. At December 31, 2015, we had 56 loans totaling $8.4 million considered to be TDRs.
Loans over 90 days past due were $2.8 million at March 31, 2016, compared to $3.9 million at December 31, 2015. Loans 30 to 89 days
past due totaled $6.6 million at March 31, 2016, compared to $6.0 million at December 31, 2015. As a percentage of assets, the recorded investment in non-performing loans decreased from 0.40% at December 31, 2015 to 0.35% at
March 31, 2016 and, as a percentage of total loans, decreased from 0.49% at December 31, 2015 to 0.45% at March 31, 2016.
Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not reflect trends or uncertainties that we
reasonably expect will materially impact future operating results, liquidity or capital resources. For the period ended March 31, 2016, 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, 2016, 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.
35
The following table shows the breakdown of the amount of non-performing assets and non-performing
assets as a percentage of the total allowance and total assets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of Total
Assets
|
|
|
Amount
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of Total
Assets
|
|
Non-accrual loans
|
|
$
|
5,488
|
|
|
|
63.12
|
%
|
|
|
0.35
|
%
|
|
$
|
6,026
|
|
|
|
67.67
|
%
|
|
|
0.40
|
%
|
Other real estate owned and chattel
|
|
|
799
|
|
|
|
9.19
|
%
|
|
|
0.05
|
%
|
|
|
904
|
|
|
|
10.15
|
%
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
6,287
|
|
|
|
72.31
|
%
|
|
|
0.40
|
%
|
|
$
|
6,930
|
|
|
|
77.82
|
%
|
|
|
0.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the recorded investment in nonaccrual loans by category as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
2,311
|
|
|
$
|
3,017
|
|
Home equity
|
|
|
131
|
|
|
|
183
|
|
Commercial
|
|
|
2,940
|
|
|
|
2,242
|
|
Commercial and municipal
|
|
|
106
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,488
|
|
|
$
|
6,026
|
|
|
|
|
|
|
|
|
|
|
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 due to increases in the loan portfolio, or 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.
Goodwill
.
Goodwill was $44.6 million, or
2.85% of total assets, as of March 31, 2016, compared to $44.6 million, or 2.94% of total assets, as of December 31, 2015.
Other Intangible Assets.
Other intangible assets were $7.5 million, or 0.48% of total assets, as of March 31, 2016,
compared to $7.8 million, or 0.52% of total assets, as of December 31, 2015. The decrease was due to normal amortization of core deposit intangible and customer list assets.
Other Real Estate Owned.
OREO was $799 thousand, representing three residential properties and one commercial property, at
March 31, 2016, compared to $904 thousand, representing three residential properties and two commercial properties at December 31, 2015. During the three months ended March 31, 2016, one property was sold while no additional
properties were added.
Deposits
.
Total deposits decreased $15.9 million, or 1.37%, to $1.1 billion at March 31,
2016 compared to $1.2 billion at December 31, 2015. The decrease was primarily due to a decrease of $43.0 million in savings and money market accounts, partially offset by increases of $13.2 million in time deposits and $9.4 million in checking
accounts.
Borrowings.
We had outstanding balances of $203.4 million in advances from the FHLB at March 31, 2016,
representing an increase of $53.4 million in outstanding balances compared to December 31, 2015. In addition to advances, we had 10 letters of credit totaling $42.8 million with the FHLB to secure customer deposits under pledge agreements.
These letters of credit are factored against borrowing capacity with the FHLB. Securities sold under agreements to repurchase increased $2.3 million, or 12.82%, to $20.3 million at March 31, 2016 from $18.0 million at December 31, 2015.
Comparison of the Operating Results for the Three Months Ended March 31, 2016 and March 31, 2015 (unaudited)
Overview.
Consolidated net income for the three months ended March 31, 2016 was $2.5 million, or $0.29 per diluted common
share, compared to $2.3 million, or $0.28 per diluted common share, for the same period in 2015, an increase of $166 thousand, or 7.21%. Our net interest margin remained consistent at 2.99% at March 31, 2016 and March 31, 2015. Our return
on average assets and average common stockholders equity for the three months ended March 31, 2016 were 0.64% and 7.12%, respectively, compared to 0.62% and 7.02%, respectively, for the same period in 2015.
36
Net Interest and Dividend Income.
Net interest and dividend income increased $330
thousand, or 3.22%, to $10.6 million for the three-month period ended March 31, 2016, compared to $10.2 million for the three-month period ended March 31, 2015, due to the additional income of $392 thousand related to $50.2 million of
securities purchased in the first quarter of 2016 and a decrease in interest on deposits of $134 thousand, or 12.57%, offset in part by increase in interest on advances and other borrowed money of $144 thousand, or 51.25%.
Interest and Dividend Income.
For the three months ended March 31, 2016, total interest and dividend income increased $366
thousand, or 3.04%, to $12.4 million, compared to $12.1 million for the same period in 2015. Interest and fees on loans decreased $64 thousand, or 0.55%, to $11.5 million for the three month period ended March 31, 2016, compared to $11.6
million for the same period in 2015. Interest and dividends on investments and other interest increased $430 thousand, or 92.27%, for the three-month period ended March 31, 2016 compared to the same period in 2015.
Interest Expense.
For the three months ended March 31, 2016, total interest expense increased $36 thousand, or 1.97%, to
$1.9 million, compared to $1.8 million for the same period in 2015. Interest on deposits decreased $134 thousand, or 12.57%, to $932 thousand for the three month period ended March 31, 2016 compared to the same period in 2015 due in part to the
migration from time deposits to lower cost deposit products. For the three months ended March 31, 2016, interest on advances and other borrowed money increased $144 thousand, or 51.25%, to $425 thousand from $281 thousand for the same period in
2015 due in part to the increase in FHLB advances of $53.4 million during the three months ended March 31, 2016.
The following table
sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the three-month periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
(Dollars in thousands)
|
|
Average
Balance
(1)
|
|
|
Interest
|
|
|
Yield/
Cost
|
|
|
Average
Balance
(1)
|
|
|
Interest
|
|
|
Yield/
Cost
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(2)
|
|
$
|
1,230,715
|
|
|
$
|
11,526
|
|
|
|
3.75
|
%
|
|
$
|
1,212,177
|
|
|
$
|
11,590
|
|
|
|
3.82
|
%
|
Investment securities and other
|
|
|
184,542
|
|
|
|
896
|
|
|
|
1.94
|
%
|
|
|
157,560
|
|
|
|
466
|
|
|
|
1.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,415,257
|
|
|
|
12,422
|
|
|
|
3.51
|
%
|
|
|
1,369,737
|
|
|
|
12,056
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
21,299
|
|
|
|
|
|
|
|
|
|
|
|
16,171
|
|
|
|
|
|
|
|
|
|
Other noninterest-earning assets
(3)
|
|
|
108,809
|
|
|
|
|
|
|
|
|
|
|
|
102,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
130,108
|
|
|
|
|
|
|
|
|
|
|
|
118,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,545,365
|
|
|
|
|
|
|
|
|
|
|
$
|
1,488,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and MMAs
|
|
$
|
772,719
|
|
|
$
|
247
|
|
|
|
0.13
|
%
|
|
$
|
741,490
|
|
|
$
|
206
|
|
|
|
0.11
|
%
|
Time deposits
|
|
|
322,200
|
|
|
|
685
|
|
|
|
0.85
|
%
|
|
|
355,189
|
|
|
|
860
|
|
|
|
0.97
|
%
|
Repurchase agreements
|
|
|
17,562
|
|
|
|
25
|
|
|
|
0.57
|
%
|
|
|
15,377
|
|
|
|
14
|
|
|
|
0.36
|
%
|
Subordinated debentures and other borrowed funds
|
|
|
228,728
|
|
|
|
902
|
|
|
|
1.58
|
%
|
|
|
171,213
|
|
|
|
743
|
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,341,209
|
|
|
|
1,859
|
|
|
|
0.55
|
%
|
|
|
1,283,269
|
|
|
|
1,823
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
45,407
|
|
|
|
|
|
|
|
|
|
|
|
50,431
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
20,138
|
|
|
|
|
|
|
|
|
|
|
|
15,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
65,545
|
|
|
|
|
|
|
|
|
|
|
|
65,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
138,611
|
|
|
|
|
|
|
|
|
|
|
|
139,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,545,365
|
|
|
|
|
|
|
|
|
|
|
$
|
1,488,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income/Net interest rate spread
|
|
|
|
|
|
$
|
10,563
|
|
|
|
2.96
|
%
|
|
|
|
|
|
$
|
10,233
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
105.52
|
%
|
|
|
|
|
|
|
|
|
|
|
106.74
|
%
|
(1)
|
Monthly average balances have been used for all periods.
|
37
(2)
|
Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans
caused any material difference in the information presented.
|
(3)
|
Other noninterest-earning assets include non-earning assets and OREO.
|
The following table
sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the three month periods indicated.
Volume changes are computed by multiplying the volume difference by the prior periods rate. Rate changes are computed by multiplying the rate difference by the prior periods balance. The change in interest income and expense due to both
rate and volume has been allocated proportionally between the volume and rate variances (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
2016 vs. 2015
Increase
(Decrease) Due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest income on loans
|
|
$
|
188
|
|
|
$
|
(252
|
)
|
|
$
|
(64
|
)
|
Interest income on investments
|
|
|
91
|
|
|
|
339
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
279
|
|
|
|
87
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on savings, NOW and MMAs
|
|
|
(3
|
)
|
|
|
44
|
|
|
|
41
|
|
Interest expense on time deposits
|
|
|
(19
|
)
|
|
|
(156
|
)
|
|
|
(175
|
)
|
Interest expense on repurchase agreements
|
|
|
(3
|
)
|
|
|
14
|
|
|
|
11
|
|
Interest expense on capital securities and other borrowed funds
|
|
|
219
|
|
|
|
(60
|
)
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
194
|
|
|
|
(158
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
85
|
|
|
$
|
245
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses.
The provision for loan losses was $111 thousand for the three months
ended March 31, 2016, compared to $205 thousand of provisions during the same period in 2015. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $11
thousand in provisions for overdraft losses in the three months ended March 31, 2016, compared to $5 thousand in provisions during the same period in 2015. For additional information on provisions and adequacy, please refer to the Allowance for
Loan Losses section herein.
Noninterest Income and Expense.
For the three months ended March 31, 2016, total
noninterest income decreased $175 thousand, or 3.68%, to $4.6 million, compared to $4.8 million for the same period in 2015.
Customer
service fees increased $42 thousand, or 3.06%, to $1.4 million from $1.4 million for the three months ended March 31, 2015. This increase includes an increase of $29 thousand in fees related to ATM interchange income.
Gain on sales of securities decreased $373 thousand, or 100.00%, from $373 thousand for the three months ended March 31, 2015. This
decrease is due to the decreased volume of sales of securities with no securities sold during the three months ended March 31, 2016, compared to $35.6 million for the same period in 2015.
Mortgage banking activities decreased $16 thousand, or 12.50%, to $112 thousand from $128 thousand for the three months ended March 31,
2015. The change represents a decrease of $70 thousand in gains on sales of loans and a decrease of $55 thousand for capitalized mortgage servicing rights, which were partially offset by a decrease of $110 thousand for the amortization of mortgage
servicing rights. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.
Net gains and losses on other real estate and property owned decreased $12 thousand, or 400.00%, to a net loss of $15 thousand for the three
months ended March 31, 2016 from a net loss of $3 thousand for the same period in 2015.
Trust and investment management fee income
increased $9 thousand, or 0.44%, to $2.1 million for the three months ended March 31, 2016, compared to $2.0 million for the same period in 2015.
Insurance and brokerage service income increased $14 thousand, or 2.68% to $537 thousand for the three months ended March 31, 2016
compared to $523 thousand for the same period in 2015.
Bank owned life insurance income increased $73 thousand, or 50.00% to $219
thousand for the three months ended March 31, 2016 compared to $146 thousand for the same period in 2015, primarily related to the addition of $10 million of bank owned life insurance purchased during the fourth quarter of 2015.
38
Other income increased $89 thousand to $92 thousand for the three months ended March 31,
2016 from $3 thousand for the same period in 2015. The increase is primarily related to a distribution of $86 thousand from a limited partnership.
Total noninterest expenses increased $129 thousand, or 1.13%, to $11.5 million for the three months ended March 31, 2016, compared to
$11.4 million for the same period in 2015, as discussed below.
Salaries and employee benefits increased $186 thousand, or 3.08%, to $6.2
million from $6.0 million for the three months ended March 31, 2015. Gross salaries and benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $197 thousand, or 3.07%, to $6.6 million from
$6.4 million for the three months ended March 31, 2015. Salary expense increased $321 thousand, or 6.8%, to $5.0 million from $4.7 million for the same period in 2015, reflecting ordinary cost-of-living adjustments, staffing increases and
promotional increases. The deferral of expenses in conjunction with the origination of loans increased $11 thousand, or 2.86%, to $396 thousand from $385 thousand for the same period in 2015.
Occupancy expenses decreased $179 thousand, or 10.65%, to $1.5 million from $1.7 million for the same period in 2015. The decrease relates
primarily to $72 thousand and $40 thousand decreases in snow removal and fuel expenses, respectively, due to mild weather during the first quarter of 2016 compared to the same period in 2015.
Advertising and promotion decreased $27 thousand, or 15.98%, to $142 thousand from $169 thousand for the same period in 2015. Outside services
increased $41 thousand, or 6.93%, to $633 thousand from $592 thousand for the same period in 2015. Professional services increased $13 thousand, or 4.61%, to $295 thousand from $282 thousand for the same period in 2015.
Supplies expense increased $38 thousand, or 34.55%, to $148 thousand from $110 thousand for the same period in 2015. Telephone expense
increased $2 thousand, or 0.74%, to $271 thousand from $269 thousand for the same period in 2015.
Amortization of intangible assets
decreased $44 thousand, or 11.28%, to $346 thousand from $390 million for the same period in 2015 as our intangible assets are on the sum-of-the-years-digits declining amortization method, resulting in a reduction to year-over-year amortization.
Other expenses increased $99 thousand, or 6.79%, to $1.6 million from $1.5 million for the same period in 2015. This increase includes
increases of $26 thousand in insurance premium expense, $81 thousand of MSR impairment expense and $47 thousand in expenses related to stock awards, partially offset by decreases of $110 thousand related to shareholder expenses.
Contractual Obligations and Contingent Liabilities
During the three months ended March 31, 2016, there were no material changes to our contractual obligations and commitments described in
the section in our Annual Report titled Managements Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations and Contingent Liabilities.
Liquidity and Capital Resources
Liquidity
The term liquidity refers to our ability to generate adequate amounts of cash to fund loan originations, loan
purchases, deposit withdrawals and operating expenses. At March 31, 2016, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $90.0 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, 2016, we had approximately $236.3 million in additional borrowing capacity from the FHLB.
At March 31, 2016, stockholders equity totaled $139.7 million, compared to $136.7 million at December 31, 2015. This increase
reflects net income of $2.5 million, the declaration of $1.2 million in common stock dividends, contributions and reinvestments in the dividend reinvestment program of $64 thousand and $1.6 million in other comprehensive income.
At March 31, 2016, we had unrestricted funds available in the amount of $3.3 million. As of March 31, 2016, our total cash needs for
the remainder of 2015 are estimated to be approximately $5.6 million with $3.5 million projected to be used to pay cash dividends on our common stock, $861 thousand to pay interest on our subordinated debt, $468 thousand to pay interest on our
capital securities and approximately $750 thousand for ordinary operating expenses. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC and the FRB. Since the Bank is well-capitalized and has
capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the additional Company cash requirements for 2016, as needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I Capital.
For the three months ended March 31, 2016, net cash provided by operating activities decreased $1.6 million to $3.0 million,
compared to cash provided of $4.6 million for the same period in 2015. Cash provided by loans sold decreased $7.7 million for the three months ended March 31, 2016, compared to the same period in 2015. Net gain on sales of loans decreased $70
thousand for the three months ended March 31, 2016, compared to the same period in 2015. Net gain on sales of securities decreased $373 thousand for the three months ended March 31, 2016, compared to the same period in 2015, as a result of
no securities sold during the three months ended March 31, 2016, compared to approximately $35.6 million of securities sold during the same period in 2015. The provision for loan losses decreased $94 thousand for the three months ended
March 31, 2016, compared to the same period in 2015. The change in accrued interest receivable and other assets increased $3.1 million for the three months ended March 31, 2016, compared to the same period in 2015. The change in accrued
expenses and other liabilities decreased $1.9 million, compared to the same period in 2015.
39
Net cash used in investing activities was $45.5 million for the three months ended March 31,
2016, compared to cash provided of $13.2 million for the same period in 2015, a change of $58.7 million. The cash used by net securities activities was $47.5 million for the three months ended March 31, 2016, compared to cash provided by net
securities activities of $239 thousand for the same period in 2015. The cash used for purchases of securities decreased by $31.1 million for the three months ended March 31, 2016, compared to the same period in 2015, and cash provided by
maturities of securities decreased $43.6 million for the three months ended March 31, 2016, compared to the same period in 2015. Cash provided by loan originations and principal collections, net, was $5.0 million for the three months ended
March 31, 2016, a decrease of $8.4 million, compared to cash provided of $13.4 million for the same period in 2015.
For the three
months ended March 31, 2016, net cash flows provided by financing activities were $38.7 million compared to net cash used in financing activities of $23.1 million for the three months ended March 31, 2015, an increase of $61.7 million. For
the three months ended March 31, 2016, we experienced a net increase of $8.5 million in cash used by deposits and securities sold under agreements to repurchase comparing cash used of $13.6 million in 2016 to cash used of $22.0 million for the
same period in 2015. For the three months ended March 31, 2016, we had an increase of $53.4 million of cash provided by FHLB advances and other borrowings, comparing $53.4 million provided for the three months ended March 31, 2016 to net
cash provided of zero for the same period in 2015.
U.S. Treasurys Small Business Lending Fund Program
On August 25, 2011, as part of the U.S. Treasurys Small Business Lending Fund (SBLF) program, we entered into a Purchase
Agreement with the U.S. Department of Treasury (the Treasury) pursuant to which we issued and sold to the Treasury 20,000 shares of our Series B Preferred Stock. We used $10.0 million of the SBLF proceeds to repurchase the Series A
Preferred Stock previously issued under the Treasurys Capital Purchase Program. With the acquisition of The Nashua Bank in 2012, we assumed $3.0 million of preferred stock issued to the Treasury. We used a portion of the net proceeds from the
sale of the subordinated notes (as discussed below) to redeem a portion of our outstanding shares of Series B Preferred Stock. At each of March 31, 2016 and December 31, 2015, we had no shares of Series B Preferred Stock issued and
outstanding to the Treasury.
Subordinated Notes
On October 29, 2014, we entered into a Subordinated Note Purchase Agreement with certain accredited investors pursuant to which
we issued an aggregate of $17.0 million of subordinated notes to the accredited investors. The notes have a maturity date of November 1, 2024 and bear interest at a fixed rate of 6.75% per annum. We may, at our option, beginning with the
interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among
all of the noteholders. The notes are not subject to repayment at the option of the noteholders. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to our senior indebtedness and to our obligations
to our general creditors. Total expenses associated with the offering of $621 thousand are deducted from the carrying value of the subordinated notes and are being amortized on a straight-line basis over the life of the subordinated note.
The notes are intended to qualify as Tier 2 capital for regulatory purposes. We used a portion of the net proceeds from the sale of the notes
to redeem a portion of our Series B Preferred Stock and we plan to use the remainder of the net proceeds for general corporate purposes. The notes were offered and sold in reliance on the exemptions from registration provided by Section 4(a)(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.
Capital Ratios
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the federal banking agencies that, if undertaken, could have a direct material effect on the Companys and the Banks financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other
factors.
Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Company and the Bank
became subject to new capital regulations adopted by the FRB and the OCC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1
(CET1) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%.
CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered well capitalized, the Bank must maintain a CET1
capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, the regulations establish a capital conservation buffer
above the required capital ratios that phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016,
failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay dividends, repurchase shares or pay discretionary bonuses to executive officers and similar employees.
40
The new regulations implemented changes to what constitutes regulatory capital. Certain
instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax
assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital. The Company and the Bank have elected to permanently opt out of the inclusion of accumulated other comprehensive income in
capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital ratios.
The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility
commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with
maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for
equity exposures to 600% from 100%.
As of March 31, 2016 (unaudited), the Company and the Bank met each of their capital
requirements and the most recent notification from the OCC categorized the Bank as well-capitalized. There are no conditions or events since that notification that management believes have changed the Banks category.
The Companys and the Banks actual capital amounts and ratios are presented in the table below as of March 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
To Be Well
Capitalized Under
Prompt Corrective
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Lake Sunapee Bank Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
$
|
117,800
|
|
|
|
7.87
|
%
|
|
$
|
59,902
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Risk-Based Capital
|
|
|
117,800
|
|
|
|
10.93
|
|
|
|
64,685
|
|
|
|
6.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Risk-Based Capital
|
|
|
143,678
|
|
|
|
13.33
|
|
|
|
86,247
|
|
|
|
8.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Common Equity Tier 1 Capital
|
|
|
97,800
|
|
|
|
9.07
|
|
|
|
48,514
|
|
|
|
4.5
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Lake Sunapee Bank, fsb:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage Capital
|
|
$
|
130,523
|
|
|
|
8.72
|
%
|
|
$
|
59,870
|
|
|
|
4.0
|
%
|
|
$
|
74,838
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital
|
|
|
130,523
|
|
|
|
12.12
|
|
|
|
64,634
|
|
|
|
6.0
|
|
|
|
86,178
|
|
|
|
8.0
|
|
Total Risk-Based Capital
|
|
|
139,401
|
|
|
|
12.94
|
|
|
|
86,178
|
|
|
|
8.0
|
|
|
|
107,723
|
|
|
|
10.0
|
|
Common Equity Tier 1 Capital
|
|
|
130,523
|
|
|
|
12.12
|
|
|
|
48,475
|
|
|
|
4.5
|
|
|
|
70,020
|
|
|
|
6.5
|
|
Tangible Book Value
Book value per common share was $16.66 at March 31, 2016, compared to $16.32 per common share at December 31, 2015. Tangible book
value per common share was $11.14 at March 31, 2016, compared to $10.76 per common share at December 31, 2015. Tangible book value per common share is a non-U.S. GAAP financial measure calculated using U.S. GAAP amounts. Tangible book
value per common share is calculated by dividing tangible common equity by the total number of common 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 stockholders equity. We believe that tangible book value per common share provides information to investors that may be useful in understanding our 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.
41
A reconciliation of these non-U.S. GAAP financial measures is provided below:
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Stockholders equity
|
|
$
|
139,681
|
|
|
$
|
136,708
|
|
Less goodwill (1)
|
|
|
40,847
|
|
|
|
40,847
|
|
Less other intangible assets(1)
|
|
|
5,473
|
|
|
|
5,726
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
93,361
|
|
|
$
|
90,135
|
|
|
|
|
|
|
|
|
|
|
Ending common shares outstanding
|
|
|
8,381,713
|
|
|
|
8,376,841
|
|
Tangible book value per common share
|
|
$
|
11.14
|
|
|
$
|
10.76
|
|
(1)
|
Net of related deferred tax liability.
|
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 deducted from the carrying value of the
debentures 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 per floating 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 to 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 deducted from the carrying value of the debentures 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 five years of the stated liquidation amount of $10 per fixed-floating capital security. We have fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly
distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III 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.
Stock Repurchase Plan
The Board of
Directors 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; three performance benchmarks against which
bank and thrift holding companies are measured. On June 12, 2007, the Board of Directors reactivated a previously adopted but incomplete stock repurchase program to repurchase up to 253,776 shares of common stock. We buy stock in the open
market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. At March 31, 2016, there were 148,088 shares available to be repurchased under the repurchase plan previously approved by the Board of
Directors. The Company did not repurchase any shares during the three months ended March 31, 2016.
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.
42