Item 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 three months ended June 30, 2013:
|
|
•
|
|
Total assets were $1.2 billion at June 30, 2013, from $1.3 billion at December 31, 2012, a decrease of $50.5 million, or 3.97%.
|
|
|
•
|
|
Net loans were $909.6 million at June 30, 2013, from $902.5 million at December 31, 2012, an increase of $7.3 million, or 0.81%.
|
|
|
•
|
|
During the six months ended June 30, 2013, we originated $177.5 million in loans compared to $206.8 million for the same period in 2012. During
the quarter ended June 30, 2013, we originated $99.8 million in loans compared to $134.1 million for the same period in 2012.
|
|
|
•
|
|
Our loan servicing portfolio was $405.1 million at June 30, 2013, compared to $385.4 million at December 31, 2012.
|
|
|
•
|
|
Total deposits were $912.4 million at June 30, 2013, from $949.3 million at December 31, 2012, a decrease of $36.9 million, or 3.89%.
|
|
|
•
|
|
Net interest and dividend income for the six months ended June 30, 2013, was $16.0 million compared to $14.4 million for the same period in 2012,
an increase of $1.6 million, or 11.11%. Net interest and dividend income for the quarter ended June 30, 2013, was $7.8 million compared to $7.3 million for the same period in 2012, an increase of $479 thousand, or 6.53%.
|
|
|
•
|
|
Net income available to common stockholders increased $52 thousand to $3.6 million for the six months ended June 30, 2013, compared to the same
period in 2012. Common shares outstanding, assuming dilution, were 7,069,896 at June 30, 2013, compared to 5,850,456 at June 30, 2012, due primarily to the issuance of 1,153,544 shares in conjunction with the acquisition of The Nashua Bank
on December 21, 2012. Net income available to common stockholders was $1.7 million for the quarter ended June 30, 2013, compared to $1.8 million for the same period in 2012. Common shares outstanding, assuming dilution for the quarter,
were 7,079,171 at June 30, 2013, compared to 5,857,022 at 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.
Pending Mergers
On
February 15, 2013, the Bank entered into a purchase and sale agreement with MVSB, pursuant to which the Bank will acquire all of the shares of common stock of Charter Holding held by MVSB for a total purchase price of $6.2 million in cash or
its equivalent. As of the date hereof, each of the Bank and MVSB own 50% of Charter Holding’s outstanding shares of common stock; upon completion of the transaction the Bank will own all of the outstanding shares of Charter Holding, and Charter
Holding will become a wholly owned subsidiary of the Bank. Completion of the transaction is subject to closing conditions, including the receipt of all regulatory approvals by the Bank and the satisfactory completion of purchase accounting
valuations by an independent third party. The transaction is expected to close during the third quarter of 2013.
On
April 3, 2013, the Company and CFC jointly announced that they entered into a definitive agreement pursuant to which the Company will acquire CFC in an all-stock transaction. The transaction, approved by the boards of directors of both
companies, is valued at approximately $14.4 million or approximately $115.00 per share of CFC common stock, based on the 10-day average closing price of our common stock for the period ended April 2, 2013. The terms of the agreement call for
each outstanding share of CFC common stock to be converted into the right to receive 8.699 shares of our common stock. Following the merger, CFC’s wholly owned subsidiary, The Randolph National Bank, will be merged with and into the Bank, with
the Bank surviving. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approval and the approval of CFC’s shareholders. The transaction is expected to close in the fourth quarter of
2013.
Regulatory Updates
On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the Office of the Comptroller of the Currency issued interim final rules that revise the existing regulatory
capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III, and to implement certain provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act (“
Dodd Frank
Act
”). The final and interim final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final and interim
final rules, among other things:
|
|
•
|
|
revise minimum capital requirements and adjust prompt corrective action thresholds;
|
23
|
|
•
|
|
revise the components of regulatory capital, add a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, increase the minimum
Tier 1 capital ratio requirement from 4% to 6%;
|
|
|
•
|
|
retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;
|
|
|
•
|
|
permit most banking organizations, including us, to retain, through a one-time permanent election, the existing capital treatment for accumulated other
comprehensive income;
|
|
|
•
|
|
implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the
4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;
|
|
|
•
|
|
increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;
|
|
|
•
|
|
require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of
common equity Tier 1 capital in the aggregate; and
|
|
|
•
|
|
remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.
|
Under the final and interim rules, compliance is required beginning January 1, 2015, for most banking
organizations, subject to a transition period for several aspects of the rule, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. We are still in the process
of assessing the impacts of these complex final and interim final rules, however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements 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 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 six months ended June 30, 2013. 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 2012 Annual Report on Form 10-K.
Financial Condition and Results of Operations
Comparison of Financial Condition at
June 30, 2013 and December 31, 2012
Total assets were $1.2 billion at June 30, 2013, compared to $1.3
billion at December 31, 2012, a decrease of $50.5 million, or 3.97%. Securities available-for-sale decreased $61.1 million, or 28.78%, to $151.3 million at June 30, 2013, from $212.4 million at December 31, 2012. Net unrealized losses
on securities available-for-sale were $1.7 million at June 30, 2013, compared to net unrealized gains of $2.0 million at December 31, 2012. During the six months ended June 30, 2013, we sold securities with a total book value of
$111.3 million for a net gain on sales of $781 thousand. During the same period, we purchased securities totaling $52.7 million including U.S. Treasury notes, government agency bonds, and a municipal bond. Our net unrealized loss (after tax) on our
investment portfolio was $1.0 million at June 30, 2013, compared to an unrealized gain (after tax) of $1.2 million at December 31, 2012. The investments in our investment portfolio that are temporarily impaired as of June 30, 2013,
consist of U.S. Treasury notes, mortgage-backed securities issued by U.S. government sponsored enterprises, municipal bonds, other bonds and equity securities. The unrealized losses are primarily attributable to changes in market interest rates and
market inefficiencies. Management has determined that the Company has the intent and the ability to hold debt securities until maturity and equity securities until the recovery of cost basis, and therefore, no declines are deemed to be other than
temporary.
Net loans held in portfolio increased $7.3 million, or 0.81%, to $909.5 million at June 30, 2013, from $902.2
million at December 31, 2012. The allowance for loan losses decreased $407 thousand to $9.5 million at June 30, 2013, from $9.9 million at December 31, 2012. The change in the allowance for loan losses, excluding reserves for
overdrafts, is the net of the effect of provisions of $550 thousand, charge-offs of $1.2 million, and recoveries of 298 thousand. The increase of loans held in portfolio was primarily due to increases in conventional real estate loans of $11.3
million and commercial loans of $8.6 million offset in part by decreases in commercial real estate loans of $7.1 million and land and constructions loans of $3.3 million. As a percentage of total
24
loans, non-performing loans decreased from 2.22% at December 31, 2012, to 0.51% at June 30, 2013. During the six months ended June 30, 2013, we originated $177.5 million in loans
compared to $206.8 million for the same period in 2012. During the quarter ended June 30, 2013, we originated $99.8 million in loans compared to $134.1 million for the same period in 2012. At June 30, 2013, our mortgage servicing loan
portfolio was $405.1 million compared to $385.4 million at December 31, 2012. 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, 2013, adjustable-rate mortgages comprised approximately 65.7% of our real estate mortgage loan portfolio, which is consistent
with the mix at December 31, 2012.
Goodwill and other intangible assets amounted to $38.5 million, or 3.15% of total
assets, as of June 30, 2013, compared to $38.8 million, or 3.05% of total assets, as of December 31, 2012. The decrease was due to normal amortization of core deposit intangible and customer list assets.
We had no other real estate owned at June 30, 2013, and we held $102 thousand, representing a single property, of other real estate
owned (“OREO”) and property acquired in settlement of loans at December 31, 2012.
Total deposits decreased
$36.9 million, or 3.89%, to $912.4 million at June 30, 2013, from $949.3 million at December 31, 2012. Non-interest bearing deposit accounts increased $6.1 million, or 8.27%, and interest-bearing deposit accounts decreased $43.0 million,
or 4.92%, over the same period. The balances at June 30, 2013, included $5.8 million of brokered deposits, which is a decrease of $16.0 million compared to December 31, 2012. This decrease includes the call by us of $15.0 million of
brokered deposits. Deposit balances at June 30, 2013, also includes $7.0 million of deposits obtained through listing services, which is unchanged compared to December 31, 2012.
Securities sold under agreements to repurchase increased $4.3 million, or 29.48%, to $18.9 million at June 30, 2013, from $14.6
million at December 31, 2012. Repurchase agreements are collateralized by some of our U.S. government and agency investment securities and letters of credit issued by FHLB.
We maintained balances of $127.2 million in advances from the FHLB at June 30, 2013, a decrease of $15.5 million from $142.7 million
at December 31, 2012.
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 Acquired with Deteriorated Credit Quality-Subsequent
Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not
collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair
value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated
for impairment.
Our commercial loan officers review the financial condition of commercial loan customers on a regular basis
and perform visual inspections of facilities and inventories. We also have loan review, internal audit and compliance programs with results reported directly to the Audit Committee of the Board of Directors.
The allowance for loan losses (not including allowance for losses from the overdraft program described below) at June 30, 2013, was
$9.5 million and at December 31, 2012, was $9.9 million. At approximately $9.5 million, the allowance for loan losses represents 1.04% of total loans, compared to 1.08% at December 31, 2012. Total non-performing assets at June 30,
2013, were approximately $4.7 million, representing 49.51% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $550 thousand to the allowance for loan
losses during the six months ended June 30, 2013, compared to $1.2 million for the same period in 2012. Loan charge-offs (excluding the overdraft program) were $1.2 million during the six month period ended June 30, 2013, compared to $1.3
thousand for the same period in 2012. Recoveries were $298 thousand during the six month period ended June 30, 2013, compared to $99 thousand for the same period in 2012. This activity resulted in net charge-offs of $949 thousand for the six
month period ended June 30, 2013, compared to $1.2 million for the same period in 2012. One-to-four family residential mortgages, commercial real estate, commercial, and consumer loans accounted for 43%, 36%, 19%, and 2%, respectively, of the
amounts charged-off during the six month period ended June 30, 2013.
25
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 $9.5 million. The provisions made in 2013 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 2013 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, 2013, the overdraft allowance was $11 thousand, compared to $14 thousand at year-end 2012. Provisions for overdraft losses in the amount of $26 thousand were recorded during the six month period ended June 30, 2013, compared to
provisions of $29 thousand that were recorded for the same period during 2012. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the
aggregate negative balance of accounts remaining negative for 30 days or more.
26
The following is a summary of activity in the allowance for loan losses account (excluding
overdraft allowances) for the six month period ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
|
|
Originated
|
|
|
Acquired
|
|
|
Total
|
|
|
Total
|
|
|
Balance, beginning of year
|
|
$
|
9,909
|
|
|
$
|
—
|
|
|
$
|
9,909
|
|
|
$
|
9,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
(541
|
)
|
|
|
—
|
|
|
|
(541
|
)
|
|
|
(556
|
)
|
|
Commercial real estate
|
|
|
(344
|
)
|
|
|
(102
|
)
|
|
|
(446
|
)
|
|
|
(393
|
)
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer loans
|
|
|
(24
|
)
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
(8
|
)
|
|
Commercial loans
|
|
|
(236
|
)
|
|
|
—
|
|
|
|
(236
|
)
|
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charged-off loans
|
|
|
(1,145
|
)
|
|
|
(102
|
)
|
|
|
(1,247
|
)
|
|
|
(1,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
181
|
|
|
|
—
|
|
|
|
181
|
|
|
|
65
|
|
|
Commercial real estate
|
|
|
101
|
|
|
|
—
|
|
|
|
101
|
|
|
|
10
|
|
|
Land and construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Consumer loans
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
5
|
|
|
Commercial loans
|
|
|
13
|
|
|
|
—
|
|
|
|
13
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
298
|
|
|
|
—
|
|
|
|
298
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(847
|
)
|
|
|
(102
|
)
|
|
|
(949
|
)
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
Provision for loan loss charged to income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
279
|
|
|
|
—
|
|
|
|
279
|
|
|
|
788
|
|
|
Commercial real estate
|
|
|
180
|
|
|
|
—
|
|
|
|
180
|
|
|
|
264
|
|
|
Land and construction
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
24
|
|
|
Consumer loans
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
10
|
|
|
Commercial loans
|
|
|
73
|
|
|
|
—
|
|
|
|
73
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
550
|
|
|
|
—
|
|
|
|
550
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,612
|
|
|
$
|
(102
|
)
|
|
$
|
9,510
|
|
|
$
|
9,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of activity in the allowance for overdraft privilege account for the six month
periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June
30,
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
Beginning balance
|
|
$
|
14
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdraft charge-offs
|
|
|
(110
|
)
|
|
|
(105
|
)
|
|
Overdraft recoveries
|
|
|
81
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
Net overdraft losses
|
|
|
(29
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for overdrafts
|
|
|
26
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
The 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential, 1-4 family and home equity loans
|
|
$
|
4,640
|
|
|
|
49
|
%
|
|
|
60
|
%
|
|
$
|
5,073
|
|
|
|
52
|
%
|
|
|
62
|
%
|
|
Commercial
|
|
|
3,004
|
|
|
|
31
|
%
|
|
|
25
|
%
|
|
|
3,305
|
|
|
|
33
|
%
|
|
|
26
|
%
|
|
Land and construction
|
|
|
259
|
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
208
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
Collateral and consumer loans
|
|
|
48
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
44
|
|
|
|
—
|
|
|
|
1
|
%
|
|
Commercial and municipal loans
|
|
|
1,224
|
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
918
|
|
|
|
9
|
%
|
|
|
9
|
%
|
|
Impaired loans
|
|
|
335
|
|
|
|
3
|
%
|
|
|
—
|
|
|
|
361
|
|
|
|
4
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
9,510
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
9,909
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of total loans
|
|
|
|
|
|
|
1.04
|
%
|
|
|
|
|
|
|
|
|
|
|
1.08
|
%
|
|
|
|
|
|
Non-performing loans as a percentage of allowance
|
|
|
|
|
|
|
49.51
|
%
|
|
|
|
|
|
|
|
|
|
|
171.57
|
%
|
|
|
|
|
27
The following table shows total allowances including overdraft allowances:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Allowance for loan and lease losses
|
|
$
|
9,510
|
|
|
$
|
9,909
|
|
|
Overdraft allowance
|
|
|
11
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
9,521
|
|
|
$
|
9,923
|
|
|
|
|
|
|
|
|
|
|
|
Classified loans include non-performing loans and performing loans that have been adversely classified,
net of specific reserves. Total classified loans were $25.5 million at June 30, 2013, compared to $25.9 million at December 31, 2012. There was no other real estate owned at June 30, 2013, compared to $102 thousand at
December 31, 2012. 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. Fourteen loans considered to be impaired loans at June 30, 2013,
have specific allowances identified and assigned. The 14 loans are secured by real estate, business assets or a combination of both. At June 30, 2013, the allowance included $335 thousand allocated to impaired loans. The portion of the
allowance allocated to impaired loans at December 31, 2012, was $361 thousand.
At June 30, 2013, we had 56 loans
totaling $12.7 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” included in impaired loans. At June 30, 2013, 45 of the “troubled
debt restructurings” were performing under contractual terms. Of the loans classified as troubled debt restructured, 11 were more than 30 days past due at June 30, 2013. The balances of these past due loans were $1.8 million. At
December 31, 2012, we had 65 loans totaling $13.1 million considered to be “troubled debt restructurings.”
Loans over 90 days past due were $2.2 million at June 30, 2013, compared to $3.2 million at December 31, 2012. Loans 30 to 89
days past due were $3.3 million at June 30, 2013, compared to $10.1 million at December 31, 2012. As a percentage of assets, the recorded investment in non-performing loans decreased from 1.60% at December 31, 2012, to 0.39% at
June 30, 2013, and, as a percentage of total loans, decreased from 2.22% at December 31, 2012, to 0.51% at June 30, 2013.
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, 2013, 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 June 30, 2013, 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 amount of non-performing assets and non-performing assets as a percentage of the total
allowance and total assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
(Dollars in thousands)
|
|
Value
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of Total
Assets
|
|
|
Value
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of
TotalAssets
|
|
|
Non-accrual loans
(1)
|
|
$
|
4,708
|
|
|
|
49.51
|
%
|
|
|
0.39
|
%
|
|
$
|
17,001
|
|
|
|
171.57
|
%
|
|
|
1.34
|
%
|
|
Other real estate owned and chattel
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
102
|
|
|
|
1.03
|
%
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
4,708
|
|
|
|
49.51
|
%
|
|
|
0.39
|
%
|
|
$
|
17,103
|
|
|
|
172.60
|
%
|
|
|
1.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All loans 90 days or more delinquent are placed on non-accruing status.
|
28
The following table sets forth the recorded investment in nonaccrual loans by category at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
2,103
|
|
|
$
|
6,250
|
|
|
Commercial
|
|
|
2,380
|
|
|
|
9,304
|
|
|
Home equity
|
|
|
41
|
|
|
|
158
|
|
|
Land and construction
|
|
|
—
|
|
|
|
887
|
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
Commercial and municipal
|
|
|
184
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,708
|
|
|
$
|
17,001
|
|
|
|
|
|
|
|
|
|
|
|
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.
Liquidity and Capital Resources
We are required to maintain sufficient liquidity for safe and sound operations. At June 30, 2013, our liquidity was sufficient to
cover our anticipated needs for funding new loan commitments of approximately $82.9 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, 2013, we had approximately $164.9 million in additional borrowing capacity from the FHLB.
At
June 30, 2013, stockholders’ equity totaled $129.4 million, compared to $129.5 million at December 31, 2012. This reflects net income of $3.8 million, the declaration and payment of $1.8 million in common stock dividends, the
declaration of $199 thousand in preferred stock dividends, and an increase of $2.1 million in accumulated other comprehensive loss.
At June 30, 2013, 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 three and six
months ended June 30, 2013, no shares were repurchased.
At June 30, 2013, we had unrestricted funds available in
the amount of $4.7 million. As of June 30, 2013, our total cash needs for the remainder of 2013 are estimated to be approximately $2.7 million with $1.7 million projected to be used to pay dividends on our common stock, $310 thousand to pay
interest on our capital securities, $118 thousand to pay dividends on our Series B Preferred Stock (as defined below), and approximately $480 thousand for ordinary operating expenses, including approximately $350 thousand related to completing the
acquisition of CFC. 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 the additional Company cash requirements for 2013, if needed, as long as earnings at the Bank are sufficient to maintain adequate leverage capital.
For the six months ended June 30, 2013, net cash provided by operating activities increased $16.6 million to $13.0 million compared to cash used of $3.6 million for the same period in 2012. The
change in loans held for sale increased $15.7 million for the six months ended June 30, 2013, compared to the same period in 2012, with a decrease of $9.4 million in loans held for the period in 2013 compared to an increase of $6.2 million in
2012. Net gain on sales and calls of securities decreased $1.5 million for the six months ended June 30, 2013, compared to the same period in 2012, as a result of the sale and settlement of approximately $110.5 million of securities during the
six months ended June 30, 2013, with lower net gains compared to approximately $102.5 million of securities during the same period in 2012. The provision for loan losses decreased $653 thousand for the six months ended June 30, 2013,
compared to the same period in 2012 which is consistent with significantly higher loan growth during the period in 2012. The decrease in accrued interest receivable and other assets increased $605 thousand while the decrease in accrued expenses and
liabilities increased $112 thousand.
Net cash provided by investing activities was $48.2 million for the six months ended
June 30, 2013, compared to cash used of $77.3 million for the same period in 2012, a change of $125.5 million. The cash provided by net securities activities was $57.8 million for the six months ended June 30, 2013, compared to cash
provided by net securities activities of $6.4 million for the same period in 2012. Cash provided by the redemption of FHLB stock was $213 thousand for the six months ended June 30, 2013, compared to cash used for the purchase of FHLB stock of
$1.5 million for the same period in 2012. Cash used in loan originations and principal collections, net, was $8.0 million for the six months ended June 30, 2013, a decrease of $69.2 million, compared to cash used of $77.2 million for the same
period in 2012. Additionally, no cash was used in the purchase of life insurance policies during the six months ended June 30, 2013, compared to $5.0 million of cash used for this purpose for the same period in 2012.
29
For the six months ended June 30, 2013, net cash flows used in financing activities
increased $146.5 million to cash used of $49.9 million compared to net cash provided by financing activities of $96.6 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, we experienced a net increase of
$62.2 million in cash used by deposits and securities sold under agreements to repurchase comparing cash used of $32.6 million to cash provided of $29.6 million for the same period in 2012. For the six months ended June 30, 2013, we had an
increase of $85.2 million of cash used in FHLB advances and other borrowings comparing cash used of $15.5 million for the six months ended June 30, 2013 to cash provided of $69.7 million for the same period in 2012.
On August 25, 2011, as part of the U.S. Treasury’s (“Treasury”) 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.
On March 20, 2013, we entered into the First Amendment to the Securities Purchase Agreement (the “SPA Amendment”) with the Secretary of the Treasury, pursuant to which we issued an
additional 3,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation preference of $1,000 per share (“SBLF Preferred Stock”). The SBLF Preferred Stock was issued in exchange for the cancellation of the
outstanding shares of The Nashua Bank’s Senior Non-Cumulative Perpetual Preferred Stock, Series A, that was assumed in the merger that was completed on December 21, 2012.
The initial rate payable on SBLF capital is, at most, 5%, 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, 2013, the Bank’s ratios were 9.27% and 15.05%, respectively, well in excess of the regulators’ requirements.
Book value per common share was $15.01 at June 30, 2013, compared to $15.09 per common share at December 31, 2012. Tangible book value per common share was $9.58 at June 30, 2013, compared
to $9.59 per common share at December 31, 2012. 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 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.
A reconciliation of
these non-GAAP financial measures is provided below:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands except for per share data)
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Shareholders’ equity
|
|
$
|
129,409
|
|
|
$
|
129,494
|
|
|
Less goodwill
|
|
|
35,395
|
|
|
|
35,395
|
|
|
Less other intangible assets
|
|
|
3,076
|
|
|
|
3,416
|
|
|
Less preferred stock
|
|
|
23,000
|
|
|
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
67,938
|
|
|
$
|
67,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending common shares outstanding
|
|
|
7,088,896
|
|
|
|
7,055,946
|
|
|
Tangible book value per common share
|
|
$
|
9.58
|
|
|
$
|
9.59
|
|
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.
30
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, 2013, was positive 2.52%, compared to the December 31, 2012, gap of negative 0.80%. 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.
The following table sets forth our EVE at June 30, 2013, as calculated by an independent third party agent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Book
Value
|
|
|
-100 bp
|
|
|
0 bp
|
|
|
+100 bp
|
|
|
+200 bp
|
|
|
+300 bp
|
|
|
+400 bp
|
|
|
EVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
143,550
|
|
|
$
|
120,625
|
|
|
$
|
124,502
|
|
|
$
|
117,832
|
|
|
$
|
110,782
|
|
|
$
|
103,767
|
|
|
$
|
96,946
|
|
|
Percent of Change
|
|
|
|
|
|
|
-3.1
|
%
|
|
|
|
|
|
|
-5.4
|
%
|
|
|
-11.0
|
%
|
|
|
-16.7
|
%
|
|
|
-22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
EVE Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
|
|
|
11.78
|
%
|
|
|
10.05
|
%
|
|
|
10.54
|
%
|
|
|
10.22
|
%
|
|
|
9.85
|
%
|
|
|
9.43
|
%
|
|
|
9.01
|
%
|
|
Change in basis points
|
|
|
|
|
|
|
-50
|
|
|
|
|
|
|
|
-32
|
|
|
|
-70
|
|
|
|
-111
|
|
|
|
-154
|
|
Comparison of the Operating Results for the Six months Ended June 30, 2013 and June 30, 2012
Consolidated net income for the six months ended June 30, 2013, was $3.8 million, or $0.52 per common share (assuming dilution),
compared to $4.1 million, or $0.61 per common share (assuming dilution), for the same period in 2012, a decrease of $247 thousand, or 6.04%. Our net interest margin decreased to 2.88% at June 30, 2013, from 3.00% at June 30, 2012. Our
return on average assets and average equity for the six months ended June 30, 2013, were 0.76% and 6.37%, respectively, compared to 0.82% and 6.94%, respectively, for the same period in 2012.
Net interest and dividend income increased $1.5 million, or 10.53%, to $15.4 million for the six month period ended June 30, 2013,
from $13.2 million for the six month period ended June 30, 2012, as a result of the increase in interest-earning assets including the assets acquired from The Nashua Bank in December of 2012 and originated portfolio growth since June 30,
2012, offset in part by the overall decline in net interest margin.
For the six months ended June 30, 2013, total
interest and dividend income decreased $1.2 million, or 6.44%, to $19.4 million from $18.2 million for the same period in 2012. Interest and fees on loans increased $2.5 million, or 15.60%, for the six month period ended June 30, 2013, to $18.2
million from $15.7 million at June 30, 2012, due primarily to increased portfolio balances, including The Nashua Bank loans acquired in December 2012, offset in part by loans repricing to lower rates. Interest on investments and other interest
decreased $1.3 million, or 52.05%, for the six month period ended June 30, 2013, due primarily to a decreased position in investments as the Company implemented a deleveraging strategy in the first half of 2013 coupled with lower yields on
investments held comparing periods.
For the six months ended June 30, 2013, total interest expense decreased $348
thousand, or 9.23%, to $3.4 million from $3.8 million for the same period in 2012. Interest on deposits decreased $177 thousand, or 7.76%, due to the overall decline in short-term interest rates comparing periods as well as a transition to lower
cost non-maturity deposits. Interest on advances and other borrowed money decreased $171 thousand, or 11.50%, to $1.3 million from $1.5 million for the same period in 2012 due to lower costs coupled with a lower average outstanding balance in 2013.
31
The provision for loan losses (not including overdraft allowances) was $550 thousand for the
six months ended June 30, 2013, and $1.2 million for the same period in 2012; the volume of provisions is consistent with activity in the portfolio during the related periods and allowance adequacy models. We made adjustments to the provisions
for overdraft losses in the six months ended June 30, 2013, and 2012, recording provisions of $26 thousand and $29 thousand, respectively. For additional information on provisions and adequacy, please refer to the section on Allowances for Loan
Losses.
For the six months ended June 30, 2013, total noninterest income decreased $354 thousand, or 5.11%, to $6.6
million from $6.9 million for the same period in 2012, as discussed below. The decrease was primarily due to decreases in net gains on sales and calls of securities, net, offset in part by an increase on gains on loans and an increase insurance
commission income.
For the six month period ended June 30, 2013:
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Customer service fees
decreased $7 thousand, or 0.29%, to $2.5 from $2.5 million for the six months ended June 30, 2013. This decrease
includes decreases of $46 thousand in mortgage life administration income, $32 thousand of overdraft fees, and $19 thousand in ATM related fees for the six months ended June 30, 2013, compared to the same period in 2012 offset in part by
increases of $28 thousand in funds transfer fees, $21 of account service fees primarily due to additional accounts, and $25 thousand in aggregate increases related to other services including the issuance of bank checks and money orders as well as
recording fees.
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Net gain on sales of loans
increased $852 thousand, or 112.80%, compared to the same period in 2012, represented by an increase of $21.8 million
in loans sold into the secondary market, to $63.4 million for the six months ended June 30, 2013, from $41.6 million for the six months ended June 30, 2012. The increase in volume was coupled with an increase in the valuation of the loans
and the subsequent gain.
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Gain on sales and calls of securities, net
decreased $1.5 million, or 66.38%, to $781 thousand for the six months ended June 30, 2013, from
$2.3 million for the six months ended June 30, 2012. This reflects the recognition of gains on the sales of approximately $110.5 million of securities sold during the six months ended June 30, 2013, compared to $102.5 million of securities
sold during the same period in 2012.
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The
gain on sales of other real estate and property owned, net
recorded for the six months ended June 30, 2013, was a net gain of $28
thousand compared to a net loss of $150 thousand for the same period in 2012. The loss in 2012 included the recognition of $190 thousand write-down on a commercial real estate property owned during the six months ended June 30, 2012.
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Rental income
decreased $6 thousand, or 1.60%, to $368 thousand for the six months ended June 30, 2013, from $374 thousand for the six
months ended June 30, 2012.
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Income from equity interest in Charter Holding
increased $15 thousand to $241 thousand for the six months ended June 30, 2013, from $226
thousand for the same period in 2012.
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Insurance commission income
increased $113 thousand, or 16.00%, to $819 thousand for the six months ended June 30, 2013, compared to the
same period in 2012 due to primarily to an increase of $88 thousand in contingency commissions received during the six months ended June 30, 2013.
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Bank-owned life insurance income
increased $43 thousand to $276 thousand from $233thousand for the six months ended June 30, 2012.
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For the six months ended June 30, 2013, total noninterest expenses increased $2.0 million, or 14.18%,
to $16.3 million, from $14.3 million for the same period in 2012, discussed as follows. In summary, the increase was primarily due to increases in salary and employee benefits, occupancy expense, and non-deductible expenses related to the pending
acquisition of CFC.
For the six month period ended June 30, 2013:
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Salaries and employee benefits
increased $937 thousand, or 12.56%, compared to the six months ended June 30, 2012. Gross salaries and
benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $800 thousand, or 9.42%, from $8.5 million for the six months ended June 30, 2012, to $9.3 million for the six months ended June 30,
2013. Salary expense increased $678 thousand, or 11.22%, reflecting ordinary cost-of-living adjustments and additional staffing primarily in the lending and compliance departments as well as the addition of staff related to The Nashua Bank
acquisition. The deferral of expenses in conjunction with the origination of loans decreased $136 thousand, or 13.21%, to $896 thousand from $1.0 million for the same period in 2012.
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Occupancy and equipment
increased $205 thousand, or 10.52 %, to $2.2 million compared to $2.0 million for the same period in 2012 which
includes $160 thousand related to the cost of additional buildings in Nashua and the surrounding area.
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Advertising and promotion
increased $57 thousand, or 22.35%, to $312 thousand from $255 thousand for the same period in 2012. This includes a
net increase in print media, web media, radio broadcasting, ad agencies, public relations, and production expenses for the six months ended June 30, 2013, compared to the same period in 2012, partially offset by a decrease in collateral
material.
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Depositors’ insurance
decreased $20 thousand, or 5.01%, to $379 thousand from $399 thousand for the same period in 2012 due primarily to
lower assessment rates despite increased aggregate account balances.
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Outside services
increased $117 thousand, or 21.35%, to $665 thousand compared to $548 thousand for the same period in 2012. This primarily
reflects increases in expenses associated with our core processing system, e-banking services, and payroll-related services.
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Professional services
increased $138 thousand, or 26.81%, to $653 thousand compared to $515 thousand for the same period in 2012, reflecting
increases in ordinary regulatory assessments, legal fees, and valuation services.
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ATM processing fees
increased $76 thousand to $313 thousand compared to $237 thousand for the same period in 2012.
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Supplies
increased $63 thousand to $313 thousand compared to $237 thousand for the same period in 2012.
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Telephone expense
decreased $30 thousand to $335 thousand for the six months ended June 30, 2013, from $365 thousand in 2013 due to
non-recurring upgrade expenses in the six months ended June 30, 2012.
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Non-deductible acquisition expenses
were $454 thousand for the six months ended June 30, 2013, compared to no related expenses for the same
period in 2012. These expenses reflect the legal and investment banking expenses recorded by us related to the acquisition of CFC that are not qualified tax deductions. As a result, the impact of these expenses is $454 thousand reduction to net
income with no offsetting tax benefit.
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Other expenses
increased $28 thousand, or 1.18%, to $2.4 million for the six months ended June 30, 2013, compared to $2.4 million for the
same period in 2012.
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Comparison of the Operating Results for the Three Months Ended June 30, 2013 and June 30,
2012
Consolidated net income for the three months ended June 30, 2013, was $1.8 million, or $0.25 per common share
(assuming dilution), compared to $2.0 million, or $0.30 per common share (assuming dilution), for the same period in 2012, a decrease of $217 thousand, or 10.78%.
Net interest and dividend income increased $479 thousand, or 6.54%, to $7.8 million for the three month period ended June 30, 2013, from $7.3 million for the three month period ended June 30,
2012, as a result of the increase in interest-earning assets including the assets acquired from The Nashua Bank in December of 2012 and originated portfolio growth since June 30, 2012, offset in part by the reduction of investment holdings and
the overall decline in net interest margin.
For the three months ended June 30, 2013, total interest and dividend income
increased $348 thousand, or 3.79%, to $9.5 million from $9.2 million for the same period in 2012. Interest and fees on loans increased $984 thousand, or 12.23%, for the three month period ended June 30, 2013, to $9.0 million from $8.0 million
at June 30, 2012, due primarily to increased portfolio balances offset by loans repricing. Interest on investments and other interest decreased $636 thousand, or 55.64%, for the three month period ended June 30, 2013, due primarily to a
decreased position in investments coupled with lower yields on investments held comparing periods.
For the three months ended
June 30, 2013, total interest expense decreased $131 thousand, or 7.09%, to $1.7 million from $1.8 million for the same period in 2012. Interest on deposits decreased $15 thousand, or 1.38%. Interest on advances and other borrowed money
decreased $116 thousand, or 15.42%, to $636 thousand from $752 thousand for the same period in 2012.
The provision for loan
losses (not including overdraft allowances) was $150 thousand for the three months ended June 30, 2013, and $1.0 million for the same period in 2012 which is consistent with portfolio activity during the periods. We made adjustments to the
provisions for overdraft losses in the three months ended June 30, 2013, and 2012, recording provisions of $12 thousand and $24 thousand, respectively. For additional information on provisions and adequacy, please refer to the section on
Allowances for Loan Losses.
For the three months ended June 30, 2013, total noninterest income decreased $195 thousand,
or 5.45%, to $3.4 million, from $3.6 million for the same period in 2012, as discussed below. The decrease was primarily due to decreases in net gains on sales of sales and calls of securities, net, offset in part by an increase on gains on loans.
For the three month period ended June 30, 2013:
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Customer service fees
increased $13 thousand, or 1.04%, to $1.3 from $1.3 million for the three months ended June 30, 2013. This increase
includes increases of $13 thousand in funds transfer fees, $6 of account service fees primarily due to additional accounts, and $16 thousand in aggregate increases related to other services including the issuance of bank checks and money orders as
well as recording fees for the three months ended June 30, 2013, compared to the same period in 2012 offset in part by decreases of $12 thousand in mortgage life administration income and $21 thousand of overdraft fees.
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Net gain on sales of loans
increased $265 thousand, or 64.79%, compared to the same period in 2012, represented by an increase of $8.2 million
in loans sold into the secondary market, to $32.0 million for the three months ended June 30, 2013, from $23.8 million for the three months ended June 30, 2012. The increase in volume was coupled with an increase in the valuation of the
loans and the subsequent gain.
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Gain on sales and calls of securities, net
decreased $559 thousand, or 47.67%, to $614 thousand for the three months ended June 30, 2013,
from $1.2 million for the three months ended June 30, 2012. This reflects the recognition of gains on the sales of approximately $91.9 million of securities sold during the three months ended June 30, 2013, compared to $62.0 million of
securities sold during the same period in 2012.
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The net
gain on sales of other real estate and property owned, net of write-down
recorded for the three months ended June 30, 2013,
decreased $3 thousand to $28 thousand compared to a net gain of $31 thousand for the same period in 2012.
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Rental income
increased $6 thousand, or 3.33%, to $186 thousand for the three months ended June 30, 2013, from $180 thousand for the three
months ended June 30, 2012.
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Income from equity interest in Charter Holding
increased $28 thousand to $143 thousand for the three months ended June 30, 2013, from $115
thousand for the same period in 2012.
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Insurance commission income
increased $37 thousand, or 12.51%, to $333 thousand for the three months ended June 30, 2013, compared to $296
thousand for the same period in 2012 due to increases in contingency commissions of $25 thousand received and an increase of $13 thousand, or 4.83%, in premium commission revenue during the three months ended June 30, 2013.
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Bank-owned life insurance income
increased $18 thousand to $147 thousand from $129 thousand for the three months ended June 30, 2012.
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For the three months ended June 30, 2013, total noninterest expenses increased $1.3 million, or
18.95%, to $8.3 million, from $7.0 million for the same period in 2012, discussed as follows. In summary, the increase was primarily due to increases in salary and employee benefits, occupancy expense, and non-deductible expenses related to the
pending acquisition of CFC.
For the three month period ended June 30, 2013:
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Salaries and employee benefits
increased $425 thousand, or 11.57%, compared to the three months ended June 30, 2012. Gross salaries and
benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $264 thousand, or 6.11%, from $4.3 million for the three months ended June 30, 2012, to $4.6 million for the three months ended
June 30, 2013. Salary expense increased $275 thousand, or 8.95%, reflecting ordinary cost-of-living adjustments and additional staffing primarily in the lending and compliance departments as well as the addition of staff related to The Nashua
Bank acquisition. The deferral of expenses in conjunction with the origination of loans decreased $161 thousand, or 25.04%, to $482 thousand from $643 thousand for the same period in 2012.
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Occupancy and equipment
increased $120 thousand, or 12.88 %, to $1.1 million compared to $932 thousand for the same period in 2012 and
primarily reflects the occupancy costs related to operations in Nashua.
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Advertising and promotion
increased $85 thousand, or 66.41%, to $213 thousand from $128 thousand for the same period in 2012. This includes a
net increase in print media, web media, radio broadcasting, ad agencies, public relations, and production expenses for the three months ended June 30, 2013, compared to the same period in 2012.
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Depositors’ insurance
decreased $3 thousand, or 1.46%, to $202 thousand from $205 thousand for the same period in 2012.
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Outside services
increased $79 thousand, or 29.58%, to $346 thousand compared to $267 thousand for the same period in 2012. This primarily
reflects increases in expenses associated with our core processing system, e-banking services, and payroll-related services.
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Professional services
increased $44 thousand, or 16.12%, to $317 thousand compared to $273 thousand for the same period in 2012, reflecting an
increase in ordinary regulatory assessments, legal fees, and valuation services.
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ATM processing fees
increased $41 thousand to $162 thousand compared to $121 thousand for the same period in 2012.
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Supplies
increased $26 thousand to $120 thousand compared to $94 thousand for the same period in 2012.
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Telephone expense
increased $21 thousand to $172 thousand for the three months ended June 30, 2013, from $151 thousand in 2013.
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Non-deductible acquisition expenses
were $344 thousand for the three months ended June 30, 2013, compared to no related expenses for the
same period in 2012. These expenses reflect the legal and investment banking expenses recorded by the Company related to the acquisition of CFC that are not qualified tax deductions. As a result, the impact of these expenses is $344 thousand
reduction to net income with no offsetting tax benefit.
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Other expenses
increased $136 thousand, or 12.31%, to $1.2 million for the three months ended June 30, 2013, compared to $1.1 million for
the same period in 2012. This increase includes increases of $54 thousand in net periodic impairment
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on mortgage servicing rights from a benefit of $39 thousand in 2012 to an impairment of $15 thousand in 2013, $51 thousand of deposit account-related charge-offs, and $78 thousand in intangible
amortizations with the addition of core deposit intangibles from The Nashua Bank in December 2012 offset in part by a net decrease of $42 thousand in expenses related to non-earning assets and other real estate owned.
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Capital Securities
On
March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79%
(“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures (“Debentures II”). Debentures
II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.
Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10.00 per capital security. We
have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds
necessary to make these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on
March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.
On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed
the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities 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.
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.