10-K 1 d446052d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-17859

 

 

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Delaware   02-0430695

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

9 Main Street, PO Box 9

Newport, New Hampshire 03773-0009

(Address of principal executive offices)

Registrant’s telephone number, including area code: (603) 863-0886

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $.01 par value   The Nasdaq Stock Market, LLC
Title of class   Name of exchange on which registered

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark is the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

 

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

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

As of March 20, 2013, there were 7,064,489 shares of the registrant’s common stock issued and outstanding.

As of June 30, 2012, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $69.3 million based on the closing sale price as reported on the NASDAQ Global Market.

Documents Incorporated By Reference:

Portions of the proxy statement for the 2013 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report.

 

 

 


Table of Contents
  New Hampshire Thrift Bancshares, Inc.  

INDEX

 

Cautionary Note Regarding Forward-Looking Statements

     1   
PART I   
Item 1.     

Business

     2   
Item 1A.     

Risk Factors

     17   
Item 1B.     

Unresolved Staff Comments

     20   
Item 2.     

Properties

     20   
Item 3.     

Legal Proceedings

     20   
Item 4.     

Mine Safety Disclosures

     20   
PART II   
Item 5.     

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   
Item 6.     

Selected Financial Data

     21   
Item 7.     

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

     22   
Item 7A.     

Quantitative and Qualitative Disclosures about Market Risk

     43   
Item 8.     

Financial Statements and Supplementary Data

     43   
Item 9.     

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     43   
Item 9A     

Controls and Procedures

     43   
Item 9B.     

Other Information

     44   
PART III   
Item 10.     

Directors, Executive Officers and Corporate Governance

     45   
Item 11.     

Executive Compensation

     45   
Item 12.     

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     45   
Item 13.     

Certain Relationships and Related Transactions, and Director Independence

     45   
Item 14.     

Principal Accountant Fees and Services

     45   
PART IV   
Item 15.     

Exhibits and Financial Statement Schedules

     46   


Table of Contents

Cautionary Note Regarding Forward-Looking Statements

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

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

 

   

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

 

   

continued volatility and disruption in national and international financial markets;

 

   

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

 

   

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

 

   

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

 

   

inflation, interest rate, securities market and monetary fluctuations;

 

   

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

 

   

changes in consumer spending, borrowings and savings habits;

 

   

technological changes;

 

   

acquisitions and integration of acquired businesses;

 

   

the ability to increase market share and control expenses;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

 

1


Table of Contents

PART I.

Item 1. Business

GENERAL

Organization

New Hampshire Thrift Bancshares, Inc. (the “Company”), a Delaware holding company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank. The Bank was originally chartered by the State of New Hampshire in 1868 as the Newport Savings Bank. The Bank became a member of the Federal Deposit Insurance Corporation (“FDIC”) in 1959 and a member of the Federal Home Loan Bank of Boston (“FHLBB”) in 1978. On December 1, 1980, the Bank was the first bank in the United States to convert from a state-chartered mutual savings bank to a federally chartered mutual savings bank. In 1981, the Bank changed its name to “Lake Sunapee Savings Bank, fsb” and in 1994, refined its name to “Lake Sunapee Bank, fsb.” The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC.

The Bank is a thrift institution established for the purposes of providing the public with a convenient and safe place to invest funds, for the financing of housing, consumer-oriented products and commercial loans, and for providing a variety of other consumer-oriented financial services. The Bank is a full-service community institution promoting the ideals of thrift, security, home ownership and financial independence for its customers. The Bank’s operations are conducted from its home office located in Newport, New Hampshire and its branch offices located in Andover, Bradford, Claremont, Enfield, Grantham, Guild, Hillsboro, Lebanon, Milford, Nashua, Newbury, New London, Peterborough, Sunapee and West Lebanon, New Hampshire, and Brandon, Pittsford, Rutland, West Rutland, and Woodstock, Vermont.

Through McCrillis & Eldredge Insurance, Inc. (“McCrillis & Eldredge”) and Lake Sunapee Financial Services Corporation, we offer insurance services and brokerage services, respectively, to our customers. Lake Sunapee Group, Inc. owns and maintains the Bank’s buildings and investment properties.

Market Area

Our market area is concentrated in the counties of Cheshire, Hillsborough, Grafton, Merrimack and Sullivan in central and western New Hampshire and the counties of Rutland and Windsor in Vermont. These areas are best known for their recreational facilities and their resort/retirement environment.

There are several distinct regions within our market area. The Upper Valley region is located in the northwest-central area of New Hampshire, and includes the towns of Lebanon, a commerce and manufacturing center, home to Dartmouth-Hitchcock Medical Center, New Hampshire’s only academic medical center, and Hanover, home of Dartmouth College. The central and south-east portion of our market area in New Hampshire is Lake Sunapee, a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee. Finally, the Monadnock region, in southwestern New Hampshire, is named after Mount Monadnock, the major geographic landmark in the region, and consists of Cheshire, southern Sullivan and western Hillsborough counties.

Rutland and Windsor counties are located in south central Vermont. This region is home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information filed by us at the SEC’s public reference room in Washington, D.C., which is located at the following address: Public Reference Room, 100 F Street N.E., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC’s public reference room. Our SEC filings are also available to the public from document retrieval services and at the SEC’s website (www.sec.gov). We also make our filings available free of charge on our website (www.nhthrift.com) by clicking on “SEC Filings.”

LENDING ACTIVITIES

Our net loan portfolio was $902.2 million at December 31, 2012, representing approximately 71% of total assets. As of December 31, 2012, approximately 68% of the mortgage loan portfolio had adjustable rates. As of December 31, 2012, we had sold $385.4 million in fixed-rate mortgage loans in an effort to meet customer demands for fixed-rate loans, minimize our interest rate risk, provide liquidity and build a servicing portfolio.

 

2


Table of Contents

REAL ESTATE LOANS. Our loan origination team solicits conventional residential mortgage loans in the local real estate marketplace. Residential borrowers are frequently referred to us by our existing customers or real estate agents. Generally, we make conventional mortgage loans (loans of 80% of value or less that are neither insured nor partially guaranteed by government agencies) on one- to four-family owner occupied dwellings. We also make residential loans up to 95% of the appraised value if the top 20% of the loan is covered by private mortgage insurance. Residential mortgage loans typically have terms up to 30 years and are amortized on a monthly basis with principal and interest due each month. Currently, we offer one-year, three-year, five-year, seven-year, and ten-year adjustable-rate mortgage loans and long-term fixed-rate loans. Borrowers may prepay loans at their option or refinance their loans on terms agreeable to us. Management believes that, due to prepayments in connection with refinancing and sales of property, the average length of our long-term residential loans is approximately seven years.

The terms of conventional residential mortgage loans originated by us contain a “due-on-sale” clause, which permits us to accelerate the indebtedness of a loan upon the sale or other disposition of the mortgaged property. Due-on-sale clauses are an important means of increasing the turnover of mortgage loans in our portfolio.

Commercial real estate loans are solicited by our commercial banking team in our local real estate market. In addition, commercial borrowers are frequently referred to us by our existing customers, local accountants, and attorneys. Generally, we make commercial real estate loans up to 75% of value with terms up to 20 years, amortizing the loans on a monthly basis with principal and interest due each month. Debt service coverage (the amount of cash left over after expenses have been paid) required to cover our interest and principal payments generally must equal or exceed 125% of the loan payments.

REAL ESTATE CONSTRUCTION LOANS. We offer construction loan financing on one- to four-family owner occupied dwellings in our local real estate market. Generally, we make construction up to 80% of value with terms of up to nine months. During the construction phase, inspections are made to assess construction progress and monitor the disbursement of loan proceeds. We also offer a “one-step” construction loan, which provides construction and permanent financing with one loan closing. The “one-step” is provided under the same terms and conditions of our conventional residential program.

CONSUMER LOANS. We make various types of secured and unsecured consumer loans, including home improvement loans. We offers loan secured by automobiles, boats and other recreational vehicles. We believe that the shorter terms and the normally higher interest rates available on various types of consumer loans is helpful in maintaining a more profitable spread between our average loan yield and our cost of funds.

We provide home equity loans secured by liens on residential real estate located within our market area. These include loans with regularly scheduled principal and interest payments as well as revolving credit agreements. The interest rate on these loans is adjusted quarterly and tied to the movement of the prime rate.

COMMERCIAL LOANS. We offer commercial loans in accordance with regulatory requirements. Under current regulation, our commercial loan portfolio is limited to 20% of total assets.

MUNICIPAL LOANS. Our activity in the municipal lending market is limited to those towns and school districts located within our primary lending area and such loans are extended for the purposes of either tax anticipation, building improvements or other capital spending requirements. Municipal lending is considered to be an area of accommodation and part of our continuing involvement with the communities we serve.

 

3


Table of Contents

The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at December 31:

 

     2012     2011     2010  
     Amount     % of Total     Amount     % of Total     Amount     % of Total  
     ($ in thousands)  

Real estate loans

            

Conventional

   $ 471,449        51.84   $ 397,010        55.04   $ 347,606        50.90

Commercial

     234,264        25.76        148,424        20.58        143,768        21.05   

Home equity

     69,291        7.62        71,990        9.98        74,884        10.97   

Construction

     19,412        2.13        12,731        1.76        19,210        2.81   

Consumer loans

     7,304        0.80        7,343        1.02        8,079        1.18   

Commercial and municipal loans

     107,750        11.85        83,835        11.62        89,361        13.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     909,470        100.00     721,333        100.00     682,908        100.00

Unamortized adjustment to fair value

     —            1,101          1,202     

Allowance for loan losses

     (9,923       (9,131       (9,864  

Deferred loan origination costs, net

     2,689          1,649          1,268     
  

 

 

     

 

 

     

 

 

   

Loans receivable, net

   $ 902,236        $ 714,952        $ 675,514     
  

 

 

     

 

 

     

 

 

   
                 2009     2008  
                 Amount     % of Total     Amount     % of Total  
                 ($ in thousands)  

Real estate loans

            

Conventional

       $ 327,691        52.24   $ 347,186        54.32

Commercial

         135,839        21.66        136,508        21.36   

Home equity

         73,611        11.74        67,398        10.54   

Construction

         18,308        2.92        13,515        2.11   

Consumer loans

         9,372        1.49        12,070        1.89   

Commercial and municipal loans

         62,387        9.95        62,491        9.78   
      

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

         627,208        100.00     639,168        100.00

Unamortized adjustment to fair value

         1,303          1,400     

Allowance for loan losses

         (9,519       (5,594  

Deferred loan origination costs, net

         1,342          1,746     
      

 

 

     

 

 

   

Loans receivable, net

       $ 620,334        $ 636,720     
      

 

 

     

 

 

   

Each loan type represents different levels of general and inherent risk within the loan portfolio. We prepare an analysis of this risk by 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. The factors assessed include delinquency trends, charge-off experience, economic conditions, and portfolio change trends. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio. These factors are calculated and assessed independently within each identified loan category. Based on these loss factors, $3.6 million, or 36.44% of the total allowance, was allocated to the originated commercial real estate portfolio at December 31, 2012. The originated commercial real estate portfolio represents 21.76% of total originated loans. In particular, the commercial real estate portfolio has a higher delinquency trend and concentration assessment than the other categories resulting in an overall higher comparative loss factor. For the same period, $4.9 million, or 49.35% of the total allowance, is allocated to the originated residential real estate and originated home equity loan portfolio. The originated residential real estate and home equity loan portfolios represent 64.16% of total originated loans. Due to the volume of this category and the underlying collateral, the overall loss factor results in an allocation percentage that is below the percentage of the category to total loans. For the same period, $918 thousand, or 9.25% of the total allowance, is allocated to the originated commercial and municipal loan portfolio. The originated commercial and municipal loan portfolio represents 11.42% of total originated loans. The originated commercial and municipal loan portfolio has a moderate delinquency trend compared to other loan types within the loan portfolio, representing 7.17% of the six-month average of delinquencies, and moderate charge-off factors compared to other categories on average.

 

4


Table of Contents

The following table sets forth the maturities of the loan portfolio at December 31, 2012, and indicates whether such loans have fixed or adjustable interest rates:

 

(Dollars in thousands)    One year
or less
     One through
five years
     Over
five years
     Total  

Maturities

           

Real Estate Loans with:

           

Predetermined interest rates

   $ 13,211       $ 40,981       $ 283,841       $ 338,033   

Adjustable interest rates

     4,117         11,074         439,135         454,326   
  

 

 

    

 

 

    

 

 

    

 

 

 
     17,328         52,055         722,976         792,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

Collateral/Consumer Loans with:

           

Predetermined interest rates

     1,663         4,577         1,180         7,420   

Adjustable interest rates

     0         11         38         49   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,663         4,588         1,218         7,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial/Municipal Loans with:

           

Predetermined interest rates

     14,810         22,971         54,772         92,553   

Adjustable interest rates

     165         4,222         11,111         15,498   
  

 

 

    

 

 

    

 

 

    

 

 

 
     14,975         27,193         65,883         108,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unamortized adjustment to fair value

     —           —           1,591         1,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals (1)

   $ 33,966       $ 83,836       $ 791,668       $ 909,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This table includes $18.4 million of non-performing loans, which are categorized within the respective loan types.

Origination, Purchase and Sale of Loans

Our primary lending activity is the origination of conventional loans (i.e., loans of 80% of value or less that are neither insured nor partially guaranteed by government agencies) secured by first mortgage liens on residential properties, principally single-family residences, substantially all of which are located in the west-central area of New Hampshire and Rutland and Windsor counties in Vermont.

We evaluate the security for each new loan made. Appraisals, when required, are done by qualified sub-contracted appraisers. The appraisal of the real property upon which we make a mortgage loan is of particular significance to us in the event that the loan is foreclosed, since an improper appraisal may contribute to a loss by, or other financial detriment to, us in the disposition of the loan.

Detailed applications for mortgage loans are verified through the use of credit reports, financial statements and confirmations. Depending upon the size of the loan involved, a varying number of senior officers must approve the application before the loan can be granted. The Loan Review Committee of the Board of Directors reviews particularly large loans.

We require title certification on all first mortgage loans and the borrower is required to maintain hazard insurance on the security property.

Delinquent Loans, Classified Assets and Other Real Estate Owned

Reports listing delinquent accounts are generated and reviewed by management and the Board of Directors on a monthly basis. The procedures taken by us when a loan becomes delinquent vary depending on the nature of the loan. When a borrower fails to make a required loan payment, we take a number of steps to ensure that the borrower will cure the delinquency. We generally send the borrower a notice of non-payment and then follow up with telephone and/or written correspondence. When contact is made, we attempt to obtain full payment, work out a repayment schedule, or in certain instances obtain a deed in lieu of foreclosure. If foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the property securing the loan generally is sold at foreclosure. If we purchase the property, it becomes other real estate owned (“OREO”).

 

5


Table of Contents

Federal regulations and our Assets Classification Policy require that we utilize an internal asset classification system as a means of reporting problem assets and potential problem assets. We have incorporated the internal asset classifications of the Office of the Comptroller of the Currency (the “OCC”) as part of our credit monitoring system. We currently classify problem and potential problem assets as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain “some loss” if the deficiency is not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the additional characteristics that the weaknesses present make collection and liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated special mention.

When an insured institution classifies one or more assets or portions thereof as substandard or doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances, which have been established to recognize the inherent risk associated with activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets or portions thereof as loss, it is required to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC, which can order the classification of additional assets and establishment of additional general or specific loss allowances. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.

Although management believes that, based on information currently available to it at this time, our allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the allowance for loan losses may become necessary.

We classify assets in accordance with the guidelines described above. The total carrying value of classified loans, excluding special mention, as of December 31, 2012 and 2011 were $26.3 million and $25.1 million, respectively. For further discussion regarding nonperforming assets, impaired loans and the allowance for loan losses, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

SUBSIDIARY ACTIVITIES

Service Corporations

The Bank has an expanded service corporation authority because of its conversion from a state-chartered mutual savings bank to a federal institution in 1980. This authority, grandfathered in that conversion, permits the Bank to invest 15% of its deposits, plus an amount of approximately $825,000, in service corporation activities permitted by New Hampshire law. However, the first 3% of these activities is subject to federal regulation and the remainder is subject to state law. This permits a 3% investment in activities not permitted by state law.

As of December 31, 2012, the Bank owned two service corporations: the Lake Sunapee Group, Inc. and the Lake Sunapee Financial Services Corporation. The Lake Sunapee Group owns and maintains the Bank’s buildings and investment properties. The Lake Sunapee Financial Services Corporation sells brokerage, securities, and insurance products to its customers.

Additionally, the Bank owns McCrillis & Eldredge, a full-line independent insurance agency offering a complete range of commercial insurance services and consumer products, including life, health, auto and homeowner insurances.

 

6


Table of Contents

NHTB Capital Trust II and III

NHTB Capital Trust II (“Trust II”) and NHTB Capital Trust III (“Trust III”) are statutory business trusts formed under the laws of the State of Connecticut and are wholly owned subsidiaries of the Company. On March 30, 2004, Trust III issued $10.0 million of 6.06%, 5-year Fixed-Floating Capital Securities. On March 30, 2004, Trust II issued $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79%. On May 1, 2008, we entered into an interest rate swap agreement with PNC Bank to convert the floating-rate payments on Trust II to fixed-rate payments which expires on June 17, 2013. For more information, see Note 2 of our Consolidated Financial Statements located elsewhere in this report.

COMPETITION

We face strong competition in the attraction of deposits. Our most direct competition for deposits comes from other thrifts and commercial banks as well as credit unions located in our primary market areas. We face additional significant competition for investors’ funds from mutual funds and other corporate and government securities.

We compete for deposits principally by offering depositors a wide variety of savings programs, a market rate of return, tax-deferred retirement programs and other related services. We do not rely upon any individual, group or entity for a material portion of our deposits.

Our competition for real estate loans comes from mortgage banking companies, other thrift institutions and commercial banks. We compete for loan originations primarily through the interest rates and loan fees we charge and the efficiency and quality of services we provide borrowers, real estate brokers and builders. Our competition for loans varies from time to time depending upon the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, volatility in the mortgage markets and other factors which are not readily predictable. We have six loan originators on staff who call on real estate agents, follow leads, and are available seven days a week to service the mortgage loan market.

INVESTMENT ACTIVITIES

Federally chartered savings institutions have the authority to invest in various types of liquid assets including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.

We categorize our securities as held-to-maturity, available-for-sale, or held-for-trading according to management intent. Please refer to Note 3 of our Consolidated Financial Statements located elsewhere in this report for certain information regarding amortized costs, fair values and maturities of securities.

The following table sets forth as of December 31, 2012, the maturities and the weighted-average yields of our debt securities, which have been calculated on the basis of the amortized cost, weighted for scheduled maturity of each security, and adjusted to a fully tax-equivalent basis (in thousands):

 

(Dollars in thousands)    Amortized
Cost
     Fair Value      Weighted
Average
Yield
 

Available-for-sale securities

        

U.S. Treasury notes

   $ 40,852       $ 40,881         0.55

Municipal bonds

     3,672         3,775         1.84   
  

 

 

    

 

 

    

 

 

 

Total due after one year through five years

     44,524         44,656         0.65   
  

 

 

    

 

 

    

 

 

 

U.S. Treasury notes

     10,542         10,494         0.80   

Municipal bonds

     6,524         6,747         2.99   
  

 

 

    

 

 

    

 

 

 

Total due after five years through ten years

     17,066         17,241         1.63   
  

 

 

    

 

 

    

 

 

 

Municipal bonds

     11,916         12,160         3.37   

Other bonds and debentures

     70         70         6.79   
  

 

 

    

 

 

    

 

 

 

Total due after ten years

     11,986         12,230         3.39   
  

 

 

    

 

 

    

 

 

 
   $ 73,576       $ 74,127         1.30
  

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

The amortized cost and approximate fair value for our available-for-sale securities portfolio are summarized as follows:

 

December 31, 2012    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bonds and notes-

           

U.S. Treasury notes

   $ 51,394       $ 29       $ 48       $ 51,375   

Mortgage-backed securities

     136,342         1,569         70         137,841   

Municipal bonds

     22,112         570         —           22,682   

Other bonds and debentures

     70         —           —           70   

Equity securities

     490         2         91         401   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 210,408       $ 2,170       $ 209       $ 212,369   
  

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2011    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bonds and notes-

           

Mortgage-backed securities

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

Municipal bonds

     28,475         984         18         29,441   

Other bonds and debentures

     24,281         255         89         24,447   

Equity securities

     511         9         32         488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

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

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2010    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

           

Bonds and notes-

           

U.S. government, including agencies

   $ 6,000       $ —         $ 183       $ 5,817   

Mortgage-backed securities

     117,428         660         299         117,789   

Municipal bonds

     32,864         39         1,336         31,567   

Other bonds and debentures

     36,069         854         38         36,885   

Preferred stock with maturities

     3,446         —           43         3,403   

Equity securities

     495         30         1         524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 196,302       $ 1,583       $ 1,900       $ 195,985   
  

 

 

    

 

 

    

 

 

    

 

 

 

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of business checking, money market accounts, savings, NOW and certificate accounts. The flow of deposits is influenced by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are obtained predominantly from within our primary market areas. We use traditional means to advertise our deposit products, including print media. We generally do not solicit deposits from outside our primary market areas, although we may obtain these deposits from time to time as part of liquidity contingency plan testing. We offer negotiated rates on some of our certificate accounts. At December 31, 2012, time deposits represented approximately 37% of total deposits. Time deposits included $183.6 million of certificates of deposit in excess of $100,000.

 

8


Table of Contents

The following table presents our deposit activity for the years ended December 31:

 

     2012      2011      2010  
     (Dollars in Thousands)  

Net deposits (withdrawals)

   $ 43,458       $ 19,033       $ 37,157   

Deposits assumed through acquisition

     98,479         —           —     

Interest credited on deposit accounts

     4,381         5,771         6,634   
  

 

 

    

 

 

    

 

 

 

Total increase in deposit accounts

   $ 146,318       $ 24,804       $ 43,791   
  

 

 

    

 

 

    

 

 

 

At December 31, 2012, we had approximately $183.6 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:

 

      Amount      Weighted Average Rate  
     ($ in thousands)         

Maturity Period

     

3 months or less

   $ 47,047         0.49

Over 3 through 6 months

     27,829         0.51

Over 6 through 12 months

     19,621         0.87

Over 12 months

     89,083         1,79
  

 

 

    

Total

   $ 183,580         1.16
  

 

 

    

The following table sets forth the distribution of our deposit accounts as of December 31 of the years indicated and the percentage to total deposits:

 

     2012     2011     2010  
     Amount      % of Total     Amount      % of Total     Amount      % of Total  
     (Dollars in thousands)  

Checking accounts

   $ 74,133         7.8   $ 64,356         8.0   $ 53,265         6.8

NOW accounts

     248,329         26.2        209,150         26.1        201,469         25.9   

Money market accounts

     82,608         8.7        40,503         5.0        36,328         4.7   

Regular savings accounts

     10,112         1.1        9,812         1.2        10,956         1.4   

Treasury savings accounts

     180,253         18.9        142,682         17.8        124,004         15.9   

Club deposits

     102         —          96         —          95         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     595,537         62.7        466,599         58.1        426,117         54.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Time deposits

               

Less than 12 months

     210,349         22.2        236,691         29.5        261,854         33.7   

Over 12 through 36 months

     96,316         10.1        44,015         5.5        57,102         7.3   

Over 36 months

     47,139         5.0        55,718         6.9        33,146         4.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total time deposits

     353,804         37.3        336,424         41.9        352,102         45.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Deposits

   $ 949,341         100.0   $ 803,023         100.0   $ 778,219         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the average balance of each type of deposit and the average rate paid on each type of deposit for the year indicated.

 

     For the Years Ended December 31,  
     2012     2011     2010  
     Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
 
     (Dollars in thousands)  

NOW

   $ 270,574         0.09   $ 227,174         0.12   $ 196,566         0.12

Savings deposits

     151,238         0.18        144,725         0.21        132,166         0.28   

Money market deposits

     40,872         0.34        38,672         0.42        34,675         0.50   

Time deposits

     332,545         1.13        348,730         1.45        344,875         1.70   

Demand deposits

     29,657         —          26,832         —          26,517         —     
  

 

 

      

 

 

      

 

 

    

Total Deposits

   $ 824,886         $ 786,133         $ 734,799      
  

 

 

      

 

 

      

 

 

    

 

9


Table of Contents

The following table presents, by various rate categories, the amount of time deposits as of December 31:

 

Time Deposits

   2012      2011      2010  
     ($ in thousands)  

0.00% – 0.99%

   $ 197,076       $ 190,949       $ 106,804   

1.00% – 1.99%

     96,845         65,670         153,202   

2.00% – 2.99%

     30,879         46,428         41,668   

3.00% – 3.99%

     28,752         33,044         49,399   

4.00% – 4.99%

     252         833         1,026   

5.00% – 5.99%

     —           —           3   
  

 

 

    

 

 

    

 

 

 

Total

   $ 353,804       $ 336,924       $ 352,102   
  

 

 

    

 

 

    

 

 

 

Borrowings

We utilize advances from the FHLBB as a funding source alternative to retail deposits. By utilizing FHLBB advances, we can meet our liquidity needs without otherwise being dependent upon retail deposits. These advances are collateralized primarily by mortgage loans and mortgage-backed securities held by us and secondarily by our investment in capital stock of the FHLBB. The maximum amount that the FHLBB will advance to member institutions fluctuates from time-to-time in accordance with the policies of the FHLBB. At December 31, 2012, we had outstanding advances of $142.7 million from the FHLBB compared to advances outstanding of $81.0 million from the FHLBB at December 31, 2011.

The following table represents the balances, average amount outstanding, maximum outstanding, and average interest rates for short-term borrowings reported in Note 8 of our Consolidated Financial Statements included elsewhere in this report for the years indicated:

 

     2012     2011     2010  
     (Dollars in thousands)  

Balance at year end

   $ 30,500      $ 15,000      $ —     

Average amount outstanding

     26,745        24,096        14,822   

Maximum amount outstanding at any month-end

     35,000        35,000        30,000   

Average interest rate for the year

     0.27     0.28     0.33

Average interest rate on year-end balance

     0.32     0.19     —     

REGULATION

General. The Company is regulated as a savings and loan holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve” or “FRB”). The Company is required to file reports with, and otherwise comply with the rules and regulations of, the Federal Reserve and the SEC. The Bank, as a federal savings bank, is subject to regulation, examination and supervision by the OCC, as its primary regulator, and the FDIC as its deposit insurer. The Bank must file reports with the OCC and the FDIC concerning its activities and financial condition. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), enacted on July 21, 2010, the Office of Thrift Supervision (“OTS”) was be abolished as of July 21, 2011, and its rights and duties were transferred to the Federal Reserve, as to savings and loan holding companies, and to the OCC, as to savings banks. Therefore, as of that date (the “Transfer Date”), the Company became subject to regulation by the Federal Reserve rather than the OTS, and the Bank became subject to regulation by the OCC rather than the OTS. The Dodd-Frank Act also created a new Bureau of Consumer Financial Protection (“CFPB”) as an independent bureau of the Federal Reserve, to begin operations on the Transfer Date. The CFPB has broad authority to issue regulations implementing numerous consumer laws, and we will be subject to those regulations.

The following references to the laws and regulations under which the Company and the Bank are regulated are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such laws and regulations. The OCC, Federal Reserve and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies under the applicable laws and regulations. Any change in such laws by Congress or regulations or policies by the FDIC, the Federal Reserve, the OCC, the SEC or the CFPB, could have a material adverse impact on the Company and the Bank, and their operations and stockholders.

Regulation of Federal Savings Associations

Business Activities. The Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended (“HOLA”), and the regulations of the OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain

 

10


Table of Contents

other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments. The Bank’s authority to invest in certain types of loans or other investments is limited by federal law and regulation.

Loans to One Borrower. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank’s total loans or extensions of credit to a single borrower cannot exceed 15% of the Bank’s unimpaired capital and surplus, which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus, which does not include accumulated other comprehensive income, if the loans or extensions of credit are fully-secured by readily-marketable collateral. The Bank currently complies with applicable loans-to-one borrower limitations.

QTL Test. Under federal law, the Bank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, the Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, the Bank’s total assets less the sum of:

 

   

specified liquid assets up to 20% of total assets;

 

   

goodwill and other intangible assets; and

 

   

the value of property used to conduct the Bank’s business.

“Qualified thrift investments” include certain assets that are includable without limit, such as residential and manufactured housing loans, home equity loans, education loans, small business loans, credit card loans, mortgage backed securities, Federal Home Loan Bank stock and certain U.S. government obligations. In addition, certain assets are includable as “qualified thrift investments” in an amount up to 20% of portfolio assets, including, certain consumer loans and loans in “credit-needy” areas.

The Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended. The Bank met the QTL test at December 31, 2012, and in each of the prior 12 months, and, therefore, is a “qualified thrift lender.” Failure by the Bank to maintain its status as a QTL would result in restrictions on activities, including restrictions on branching and the payment of dividends. If the Bank were unable to correct that failure for a specified period of time, it must either continue to operate under those restrictions on its activities or convert to a bank charter.

Capital Requirements. OCC regulations require savings associations to meet three minimum capital standards:

 

  (1) a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OCC regulations;

 

  (2) a leverage ratio requirement of 3.0% of core capital to such adjusted total assets, if the Bank has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System; otherwise, the minimum leverage ratio for any other depository institution that does not have a composite rating of 1 will be a leverage ratio requirement of 4.0% of core capital to adjusted total assets; and

 

  (3) a risk-based capital ratio requirement of 8.0% of the Bank’s risk-weighted assets, provided that the amount of supplementary capital used to satisfy this requirement may not exceed 100% of the Bank’s core capital.

Higher capital ratios may be required if warranted by particular circumstances, including the risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must multiply its on-balance sheet assets and certain off-balance sheet items by the appropriate risk weights, which range from 0% for cash and obligations issued by the United States government or its agencies to 100% for consumer, commercial loans, home equity and construction loans and certain other assets as assigned by the OCC capital regulations based on the risks found by the OCC to be inherent in the type of asset.

Tangible capital is defined, generally, as common stockholder’s equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangible assets (other than certain servicing rights and nonsecurity financial instruments) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital (or tier 1 capital) is defined similarly to tangible capital. Supplementary capital (or tier 2 capital) includes cumulative perpetual and other perpetual preferred stock, mandatory convertible subordinated debt securities, perpetual subordinated debt and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values may be included in tier 2 capital. The allowance for loan and lease losses includable in tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets.

 

11


Table of Contents

At December 31, 2012, the Bank met each of its capital requirements. The table below presents the Bank’s regulatory capital as compared to the OCC regulatory capital requirements at December 31, 2012:

 

     Bank      Capital Requirements      Excess Capital  
     ($ in thousands)  

Tangible capital

   $ 108,546       $ 18,452       $ 90,094   

Core capital

     108,546         49,206         59,340   

Risk-based capital

     118,109         64,456         53,653   

Pursuant to Dodd-Frank, the Company, as a saving and loan holding company, will be subject to capital requirements to be determined by the Federal Reserve through its rulemaking authority. As mandated by Dodd-Frank, those requirements must be at least as stringent as those applicable to insured depository institutions, such as Bank.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, the Bank has a continuing and affirmative obligation consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for the Bank nor does it limit the Bank’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a savings association, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a “Satisfactory” rating in its most recent CRA examination, dated August 2012.

The CRA regulations establish an assessment system that bases an association’s rating on its actual performance in meeting community needs. The assessment system for institutions of the Bank’s size focuses on two tests:

 

   

a lending test, to evaluate the institution’s record of making loans in its assessment areas; and

 

   

a community development test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses in its assessment area or a broader area that includes its assessment area; and to evaluate the institution’s delivery of services through its retail banking channels and the extent and innovativeness of its community development services.

Transactions with Affiliates. The Bank’s authority to engage in transactions with its “affiliates” is limited by the Federal Reserve Board’s Regulation W and Sections 23A and 23B of the Federal Reserve Act (“FRA”). In general, these transactions must be on terms which are at least as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions referred to as “covered transactions” are subject to qualitative limits and certain quantitative limits based on a percentage of the Bank’s capital, thereby restricting the total dollar amount of transactions the Bank may engage in with each individual affiliate and with all affiliates in the aggregate. Affiliates must pledge qualifying collateral in amounts between 100% and 130% of the covered transaction in order to receive loans from the Bank. In addition, a savings association is prohibited from making a loan or other extension of credit to any of its affiliates that engage in activities that are not permissible for bank holding companies under section 4(c) of the Bank Holding Company Act and from purchasing or investing in the securities issued by any affiliate, other than with respect to shares of a subsidiary.

Loans to Insiders. The Bank’s authority to extend credit to its directors, executive officers and principal stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:

 

   

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with non-insiders and that do not involve more than the normal risk of repayment or present other features that are unfavorable to the Bank; and

 

   

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

The regulations allow small discounts on fees on residential mortgages for directors, officers and employees, but, generally, specialized terms must be made widely available to all employees rather than to a select subset of insiders, such as executive officers. In addition, extensions for credit to insiders in excess of certain limits must be approved by the Bank’s Board of Directors.

 

12


Table of Contents

Consumer Protection. The Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and established the CFPB.

On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule will become effective January 10, 2014.

Enforcement. The OCC has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

Prompt Corrective Action Regulations. Under the prompt corrective action (“PCA”) statute and regulations implemented by the OCC, the OCC is required to take certain, and is authorized to take other, supervisory actions against savings associations whose capital falls below certain levels. For this purpose, a savings association is placed in one of the following four categories based on the association’s capital:

 

   

well capitalized;

 

   

adequately capitalized;

 

   

undercapitalized; or

 

   

critically undercapitalized.

The PCA statute and regulations provide for progressively more stringent supervisory measures as a savings association’s capital category declines. At December 31, 2012, the Bank met the criteria for being considered “well capitalized.”

Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Act, the OCC has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to areas including internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

In addition, the OCC adopted regulations that authorize, but do not require, the OCC to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OCC must issue an order directing action to correct the deficiency. Further, the OCC may issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OCC may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Limitations on Capital Distributions. The OCC imposes various restrictions or requirements on the Bank’s ability to make capital distributions, including cash dividends. The Bank must file an application for prior approval with the OCC if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to the Bank’s net income for the year-to-date plus the Bank’s retained net income for the previous two years, or that would cause the Bank to be less than adequately capitalized.

 

13


Table of Contents

The OCC may disapprove a notice or application if:

 

   

the Bank would be undercapitalized following the distribution;

 

   

the proposed capital distribution raises safety and soundness concerns; or

 

   

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, Section 10(f) of the HOLA requires a subsidiary savings association of a saving and loan holding company, such as Bank, to file a notice with and receive the nonobjection of the Federal Reserve prior to declaring certain types of dividends. The Company’s ability to pay dividends, service debt obligations and repurchase common stock is dependent upon receipt of dividend payments from the Bank.

Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Insurance of Deposit Accounts. The deposits of the Bank are insured by the FDIC up to the applicable limits established by law and are subject to the deposit insurance premium assessments of the FDIC’s Deposit Insurance Fund (“DIF”). The FDIC currently maintains a risk-based assessment system under which assessment rates vary based on the level of risk posed by the institution to the DIF. The assessment rate may, therefore, change when that level of risk changes.

In February 2011, the FDIC adopted a final rule making certain changes to the deposit insurance assessment system, many of which were made as a result of provisions of the Dodd-Frank Act. The final rule also revised the assessment rate schedule effective April 1, 2011, and adopted additional rate schedules that will go into effect when the DIF reserve ratio reaches various milestones. The final rule changed the deposit insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the rule will suspend FDIC dividend payments if the DIF reserve ratio exceeds 1.5 percent at the end of any year but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds.

In calculating assessment rates, the rule adopts a new “scorecard” assessment scheme for insured depository institutions with $10 billion or more in assets. It retains the risk category system for insured depository institutions with less than $10 billion in assets, assigning each institution to one of four risk categories based upon the institution’s capital evaluation and supervisory evaluation, as defined by the rule. It is possible that our deposit insurance premiums may increase in the future.

In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (“FICO”), a mixed-ownership government corporation established as a funding vehicle for the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessment rate for the first quarter of 2013, due December 28, 2012, was 0.0064% of insured deposits. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the Deposit Insurance Fund.

Depositor Preference. The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Federal Home Loan Bank System. The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks (“FHLB”) comprising the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLBB. While the required percentages of stock ownership are subject to change by the FHLB, the Bank was in compliance with this requirement with an investment in FHLBB stock at December 31, 2012 of $9.5 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance.

The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, or if any developments caused the Bank’s investment in FHLB stock to become impaired, thereby requiring the Bank to write down the value of that investment, the Bank’s net interest income would be affected.

 

14


Table of Contents

Federal Reserve System. Under regulations of the FRB, the Bank is required to maintain non-interest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). A 3% reserve is required for transaction account balances over $12.4 million and up to and including $79.5 million, plus 10% on the excess over $79.5 million. These requirements are subject to adjustment annually by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in the form of a deposit with a Federal Reserve Bank, the effect of this reserve requirement is to reduce the Bank’s interest-earning assets. The Bank is in compliance with the foregoing reserve requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OCC. FHLB System members are also authorized to borrow from the Federal Reserve discount window, subject to applicable restrictions.

Prohibitions Against Tying Arrangements. The Bank is subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to certain exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional product or service from the institution or its affiliates or not obtain services of a competitor of the institution.

The Bank Secrecy Act. The Bank and the Company are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.

Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among financial institutions, bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, the USA PATRIOT Act imposes the following obligations on financial institutions:

 

   

financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program;

 

   

financial institutions must establish and meet minimum standards for customer due diligence, identification and verification;

 

   

financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) must establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering through those accounts;

 

   

financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and are subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks; and

 

   

bank regulators are directed to consider a bank’s or holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

Office of Foreign Assets Control. The Bank and the Company, like all United States companies and individuals, are prohibited from transacting business with certain individuals and entities named on the Office of Foreign Assets Control’s list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control has issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.

Holding Company Regulation

The Company is a savings and loan holding company regulated by the Federal Reserve. As such, the Company is registered with and subject to Federal Reserve examination and supervision, as well as certain reporting requirements. In addition, the Federal Reserve has enforcement authority over the Company and any of its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution.

 

15


Table of Contents

Capital. Prior to the enactment of Dodd-Frank, savings and loan holding companies were not subject to regulatory capital requirements. Pursuant to Dodd-Frank, the Company, as a saving and loan holding company, will be subject to capital requirements to be determined by the Federal Reserve through its rulemaking authority. Those requirements will be at least as stringent as those applicable to insured depository institutions. These rules are pending.

Source of Strength. Federal Reserve policy requires savings and loan holding companies to act as a source of financial and managerial strength to their subsidiary savings associations. The Dodd-Frank Act codified the requirement that holding companies act as a source of financial strength. As a result, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a savings and loan holding company to any of its subsidiary savings associations are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary savings associations. In the event of a savings and loan holding company’s bankruptcy, any commitment by the savings and loan holding company to a federal banking agency to maintain the capital of a subsidiary insured depository institution will be assumed by the bankruptcy trustee and entitled to priority of payment.

Control. HOLA and the Federal Reserve’s implementing regulations prohibit a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution without prior Federal Reserve approval. In addition, a savings and loan holding company is prohibited from directly or indirectly acquiring, through mergers, consolidation or purchase of assets, another savings association or a holding company thereof, or acquiring all or substantially all of the assets of such association or company without prior Federal Reserve approval.

Activity Restrictions. Laws governing savings and loan holding companies historically have classified such entities based upon the number of thrift institutions which they control. The Company is classified as a unitary savings and loan holding company because it controls only one thrift, the Bank. Under the Gramm Leach Bliley Act of 1999 (the “GLB Act”), any company which becomes a unitary savings and loan holding company pursuant to a charter application filed with the OTS after May 4, 1999, is prohibited from engaging in non-financial activities or affiliating with non-financial companies. All unitary savings and loan holding companies in existence prior to May 4, 1999, such as the Company, are “grandfathered” under the GLB Act and may continue to operate as unitary savings and loan holding companies without any limitations in the types of businesses with which they may engage at the holding company level, provided that the thrift subsidiary of the holding company continues to satisfy the QTL test.

Transactions with Affiliates. Transactions between the Bank and the Company and its other subsidiaries are subject to various conditions and limitations. See “Regulation of Federal Savings Associations - Transactions with Affiliates” and “Regulation of Federal Savings Associations - Limitation on Capital Distributions.”

Incentive Compensation. The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. In April 2011, the Federal Reserve, along with other federal banking agencies, issued a joint notice of proposed rulemaking implementing those requirements. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other significant matter. At the 2012 Annual Meeting of Stockholders, the Company’s stockholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of the named executive officers of the Company annually. In light of the results, the Board of Directors determined to hold the vote annually.

EMPLOYEES

At December 31, 2012, we had a total of 254 full-time employees, 31 part-time employees, and 19 per-diem employees. These employees are not represented by collective bargaining agents. We believe that our relationship with our employees is good.

 

16


Table of Contents

Item 1A. Risk Factors

There are risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected.

Changes in local economic conditions may affect our business.

Our current market area is principally located in Cheshire, Hillsborough, Grafton, Merrimack and Sullivan counties in central and western New Hampshire and in Rutland and Windsor counties in Vermont. Future growth opportunities depend on the growth and stability of the regional economy and our ability to expand our market area. A downturn in the local economy may limit funds available for deposit and may negatively affect borrowers’ ability to repay their loans on a timely basis, both of which could have an impact on our profitability and business.

Increases to the allowance for loan losses may cause our earnings to decrease.

Our business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. The current economic uncertainty will more than likely affect employment levels and could impact the ability of our borrowers to service their debt. Bank regulatory agencies also periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we may need, depending on an analysis of the adequacy of the allowance for loan losses, additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. We may suffer higher loan losses as a result of these factors and the resulting impact on our borrowers.

Changes in interest rates and spreads could have an impact on earnings and results of operations.

Our consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. While we have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability. For example, high interest rates could affect the amount of loans that we can originate, because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost, or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.

Strong competition within our industry and market area could limit our growth and profitability.

We face substantial competition in all phases of our operations from a variety of different competitors. Future growth and success will depend on the ability to compete effectively in this highly competitive environment. We compete for deposits, loans and other financial services with a variety of banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation. Many competitors have been in business for many years, have established customer bases, are larger, and have substantially higher lending limits. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

 

17


Table of Contents

We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.

We, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products, and/or limit pricing able to be charged on certain banking services, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Recent legislative reforms may result in our business becoming subject to significant and extensive additional regulations and/or can adversely affect our results of operations and financial condition.

On July 21, 2010, the President signed into law the Dodd-Frank Act. This law has significantly changed the current bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations. The process remains ongoing and with market litigation and continued legislative efforts, many of the details and much of the impact of the Dodd-Frank Act may not be known for months or years.

As a result of the Dodd-Frank Act, on July 21, 2011, the primary regulator of the Company and the Bank, the OTS, was abolished and its rights and duties were transferred to the Federal Reserve, as to savings and loan holding companies such as the Company, and to the OCC, as to federal savings banks such as the Bank. The Dodd-Frank Act also created the CFPB as an independent part of the Federal Reserve, which now has authority to issue regulations implementing numerous consumer laws, to which we will be subject. As a result of the change in our regulators and the creation of the CFPB, we may be subject to new or different regulations in the future.

It is difficult to predict at this time with specificity the full range of the impact the Dodd-Frank Act and the implementing rules and regulations remaining to be written will have on the Company. The Dodd-Frank Act substantially increases regulation of the financial services industry and imposes restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

We rely on dividends from the Bank for most of our revenue.

We receive substantially all of our revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Federal laws and regulations limit the amount of dividends that the Bank may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our preferred or common stock. The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations.

The securities purchase agreement between us and the U.S. Department of Treasury in connection with our participation in the Small Business Lending Fund program limits our ability to pay dividends on and repurchase our common stock.

Under the terms of our Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per preferred share (the “Series B Preferred Stock”) issued under the Small Business Lending Fund (“SBLF”) program, our ability to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of common stock is subject to restrictions. No repurchases of common stock may be effected, and no dividends may be declared or paid on the common stock during the current quarter and for the next three quarters following the failure to declare and pay dividends on the Series B Preferred Stock.

Under the terms of the Series B Preferred Stock, we may only declare and pay a dividend on the common stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least 90% of the Signing Date Tier 1 Capital, as set forth in the Certificate of Designation relating to the Series B Preferred Stock, excluding any subsequent net charge-offs and any redemption of the Series B Preferred Stock (the “Tier 1 Dividend Threshold”). The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of issuance and ending on the tenth anniversary, by 10% for each one percent increase in small business lending that qualifies over the baseline level.

 

18


Table of Contents

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.

Management believes that our continued growth and future success will depend in large part upon the skills of the management team. The competition for qualified personnel in the financial services industry is intense, and the loss of key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect the business. We cannot assure you that we will be able to retain existing key personnel or attract additional qualified personnel. The loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy.

Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

The risks presented by acquisitions could adversely affect our financial condition and result of operations.

Our business strategy has included and may continue to include growth through acquisition from time to time. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things: our ability to realize anticipated cost savings, the difficulty of integrating operations and personnel, the loss of key employees, the potential disruption of our or the acquired company’s ongoing business in such a way that could result in decreased revenues, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management.

New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business.

From time to time, we may implement new lines of business, offer new products and services within existing lines of business or shift focus on our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or shifting focus of asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

Provisions of our certificate of incorporation and bylaws, as well as Delaware law and certain banking laws, could delay or prevent a takeover of us by a third party.

Provisions of our certificate of incorporation and bylaws, the corporate law of the State of Delaware and state and federal banking laws, including regulatory approval requirements, could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of our common stock. These provisions include: supermajority voting requirements for certain business combinations; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings. In addition, we are subject to Delaware law, which among other things prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discouraging bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than candidates nominated by the Board.

 

19


Table of Contents

Item 1B. Unresolved Staff Comments

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

Item 2. Properties

At December 31, 2012, we had 30 offices located in New Hampshire and Vermont as follows:

 

Location

   Leased    Owned    Total

New Hampshire:

        

1. Andover

   1    —      1

2. Bradford

   —      1    1

3. Claremont

   1    —      1

4. Enfield

   1    —      1

5. Grantham

   —      1    1

6. Hanover

   1    —      1

7. Hillsboro

   —      1    1

8. Lebanon

   1    2    3

9. Milford

   —      1    1

10. New London

   —      2    2

11. Newbury

   1    —      1

12. Newport*

   1    2    3

13. Peterborough

   1    —      1

14. Sunapee

   —      1    1

15. West Lebanon

   1    —      1

16. Nashua

   1    —      1

Vermont:

        

1. Brandon

   1    2    3

2. Pittsford

   —      1    1

3. Rutland

   1    1    2

4. West Rutland

   —      1    1

5. Woodstock

   —      2    2
  

 

  

 

  

 

Total Offices

   12    18    30
  

 

  

 

  

 

 

* Includes Lake Sunapee Group, Inc. and Lake Sunapee Financial Services Corp., which are headquartered in Newport, New Hampshire and have no other offices, and McCrillis & Eldredge, which is headquartered in Newport, New Hampshire.

Lease expiration dates range from 1 to 5 years with renewal options of 1 to 5 years.

The total net book value of premises and equipment at December 31, 2012 was $17.3 million. See Note 5 to our Consolidated Financial Statements located elsewhere in this report for additional information.

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

 

20


Table of Contents

PART II.

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Global Market under the symbol “NHTB.” The following table shows the high and low sales prices as reported on the NASDAQ Global Market during the periods indicated, as well as any dividends declared on our common stock. As of March 11, 2013, we had approximately 835 stockholders of record. The number of stockholders does not reflect the number of persons or entities who held their stock in nominee or street name through various brokerage firms.

 

    

Period

   High    Low    Dividend
Declared
2012    First Quarter    $12.64    $11.12    $0.1300
   Second Quarter    $13.53    $12.05    $0.1300
   Third Quarter    $13.30    $12.31    $0.1300
   Fourth Quarter    $13.30    $12.15    $0.1300
2011    First Quarter    $13.42    $12.30    $0.1300
   Second Quarter    $13.75    $12.55    $0.1300
   Third Quarter    $13.79    $10.80    $0.1300
   Fourth Quarter    $12.04    $10.85    $0.1300

Dividends

We have historically paid regular quarterly cash dividends on our common stock, and the Board of Directors presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and other purposes. However, because substantially all of the funds available for the payment of dividends are derived from the Bank, future dividends will depend upon the earnings of the Bank, its financial condition and its need for funds. Furthermore, there are a number of federal banking policies and regulations that restrict our ability to pay dividends. In particular, because the Bank is a depository institution whose deposits are insured by the FDIC, it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. Also, the Bank, as a federal savings bank, is subject to OCC regulations which impose certain minimum capital requirements that would affect the amount of cash available for distribution to us. In addition, under Federal Reserve policy, we are required to maintain adequate regulatory capital, are expected to serve as a source of financial strength to the Bank and to commit resources to support the Bank. These policies and regulations may have the effect of reducing the amount of dividends that we can declare to our stockholders.

Our ability to pay dividends on our common stock is also restricted by the provisions of the Series B Preferred Stock issued under the SBLF program. Under the Series B Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the Series B Preferred Stock, junior preferred shares, or other junior securities (including our common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the Series B Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

Under the terms of the Series B Preferred Stock, we may only declare and pay a dividend on our common stock or other stock junior to the Series B Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least the Tier 1 Dividend Threshold. The Tier 1 Dividend Threshold is subject to reduction, beginning on the second anniversary of issuance and ending on the tenth anniversary, by 10% for each one percent increase in small business lending that qualifies over the baseline level.

Item 6. Selected Financial Data

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

 

21


Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Highlights and Overview

Our profitability is derived from the Bank. The Bank’s earnings are primarily generated from the difference between the yield on its loans and investments and the cost of its deposit accounts and borrowings. Loan origination fees, retail-banking service fees, and gains on security and loan transactions supplement these core earnings.

 

   

Total assets increased $228.7 million, or 21.95%, to $1.3 billion at December 31, 2012, from $1.0 billion at December 31, 2011.

 

   

Net loans increased $187.3 million, or 26.20%, to $902.2 million at December 31, 2012, from $715.0 million at December 31, 2011.

 

   

In 2012, we originated $426.8 million in loans, compared to $289.1 million in 2011.

 

   

Our loan servicing portfolio was $385.4 million at December 31, 2012, compared to $365.8 million at December 31, 2011.

 

   

Total deposits increased $146.3 million, or 18.22%, to $949.3 million at December 31, 2012, from $803.0 million at December 31, 2011.

 

   

Net interest and dividend income for the year ended December 31, 2012, was $29.0 million compared to $28.5 million for the same period in 2011.

 

   

Net income available to common stockholders was $7.1 million for the year ended December 31, 2012, compared to $7.0 million for the same period in 2011

 

   

Our returns on average assets and average equity for the 12 months ended December 31, 2012, were 0.69% and 6.99%, respectively, compared to 0.74% and 7.96%, respectively, for the same period in 2011.

 

   

As a percentage of total loans, non-performing loans decreased to 2.22% at December 31, 2012, from 2.29% at December 31, 2011.

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

Critical Accounting Policies

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the Consolidated Financial Statements located elsewhere in this report.

 

22


Table of Contents

Comparison of Years Ended December 31, 2012 and 2011

Financial Condition

Total assets increased $228.7 million, or 21.95%, to $1.3 billion at December 31, 2012, from $1.0 million at December 31, 2011. This increase includes an increase of $122.5 million from the acquisition of The Nashua Bank (“TNB”). Cash and cash items increased $14.7 million, or 59.30%.

Total net loans receivable excluding loans held-for-sale increased $187.3 million, or 26.20%, to $902.2 million at December 31, 2012, compared to $715.0 million at December 31, 2011, including $89.0 million from TNB. Our conventional real estate loan portfolio increased $74.4 million, or 18.75%, to $471.4 million at December 31, 2012, from $397.0 million at December 31, 2011, including $13.2 million from TNB. The outstanding balances on home equity loans and lines of credit decreased $2.7 million to $69.0 million over the same period, net of $1.1 million acquired from TNB. Construction loans increased $6.7 million, or 52.48%, to $19.4 million including $4.2 million acquired from TNB. Commercial real estate loans increased $85.8 million, or 57.83%, over the same period to $234.3 million. In addition to $55.7 million of commercial real estate loans acquired from TNB, the increase in commercial real estate loans represents loans to existing commercial customers and new commercials customers offset by normal amortizations and prepayments as well as principal pay-downs. Additionally, consumer loans decreased $39 thousand, or 0.53%, to $7.3 million including $709 thousand from TNB, and commercial and municipal loans increased $23.9 million, or 28.53%, to $107.8 million including $14.0 million acquired from TNB. Sold loans totaled $385.4 million at December 31, 2012, an increase of $19.6 million, or 5.36%, compared to $365.8 million at December 31, 2011. Sold loans are loans originated by us and sold to the secondary market with the Company retaining the majority of servicing of these loans. We expect to continue to sell fixed-rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk and control growth. Typically, we hold adjustable-rate loans in portfolio. At December 31, 2012, adjustable-rate mortgages comprised approximately 57% of our real estate mortgage loan portfolio, which is lower than in prior years as we originated shorter-term loans in 2012, such as the ten-year fixed mortgage loan, which are held in portfolio as well as holding a portion of 15-year fixed mortgage loans and experiencing higher refinancing from adjustable-rate products into fixed rate products. Non-performing assets were 1.35% of total assets and 2.10% of total loans originated at December 31, 2012, compared to 1.70% and 2.45%, respectively, at December 31, 2011.

The fair value of investment securities available-for-sale increased $2.1 million, or 0.98%, to $212.4 million at December 31, 2012, from $210.3 million at December 31, 2011. We realized $3.8 million in the gains on the sales and calls of securities during 2012, compared to $2.6 million in gains on the sales and calls of securities recorded during 2011. At December 31, 2012, our investment portfolio had a net unrealized holding gain of $2.0 million, compared to a net unrealized holding gain of $2.8 million at December 31, 2011. The investments in our investment portfolio that are temporarily impaired as of December 31, 2012, consist primarily of financial institution equity securities, mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, municipal bonds and other bonds and debentures. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The unrealized losses on equity securities are primarily attributable to lack of trading activity related to the security and are not considered credit related losses. As management has the ability and intent to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

OREO and property acquired in settlement of loans was $102 thousand at December 31, 2012, representing one residential property located in New Hampshire, compared to $1.3 million at December 31, 2011, representing five properties, four located in New Hampshire and one in Vermont. At December 31, 2011, one commercial property in Vermont was carried at $950 thousand, or 70.70% of total OREO and property acquired in settlement of loans at that time.

Goodwill increased $6.8 million, or 23.77%, to $35.4 million at December 31, 2012, compared to $28.6 million at December 31, 2011. The change in goodwill represents $6.7 million related to the 2012 acquisition of TNB and post-closing adjustment of $52 thousand related to the 2011 acquisition of McCrillis & Eldredge. Additionally, goodwill includes $7.5 million related to the acquisition of First Brandon Financial Corporation and $7.7 million related to the acquisition of First Community Bank, both of which occurred in 2007. Goodwill also includes $2.5 million relating to the acquisition of Landmark Bank in 1998 and $9.7 million relating to the acquisition of three branch offices of New London Trust in 2001. An independent third-party analysis of goodwill indicates no impairment at December 31, 2012.

Intangible assets increased $1.7 million, or 94.63%, to $3.4 million at December 31, 2012, compared to $1.8 million at December 31, 2011. Intangible assets include core deposit intangibles of $2.9 million, including $2.1 million from the acquisition of TNB, and customer list intangibles of $538 thousand. We amortized $348 thousand of core deposit intangibles during 2012 utilizing the sum-of-the-years-digits method over 10 years. We amortized $78 thousand of customer list intangibles during 2012 utilizing the sum-of-the-years-digits method over 15 years. An independent third-party analysis of core deposit intangibles indicates no impairment at December 31, 2012.

 

23


Table of Contents

Total deposits increased $146.3 million, or 18.22%, to $949.3 million at December 31, 2012 from $803.0 million at December 31, 2011. This increase includes $98.5 million assumed from TNB. During 2012, in addition to retaining and attracting deposits, we obtained $15.0 million of additional brokered deposits as part of ongoing liquidity planning and contingency testing and $5 million of brokered deposits were assumed through the acquisition of TNB. Total brokered deposits of $25.0 million represent 2.67% of total deposits.

Advances from the FHLBB increased $61.8 million, or 76.28%, to $142.7 million from $81.0 million at December 31, 2011, including $1.8 million of advances assumed from TNB. The weighted average interest rate for the outstanding FHLBB advances was 1.34% at December 31, 2012 compared to 2.09% at December 31, 2011.

Securities sold under agreements to repurchase decreased $895 thousand, or 5.77%, to $14.6 million at December 31, 2012, from $15.5 million at December 31, 2011.

There were no other borrowings at December 31, 2012, compared to $543 thousand at December 31, 2011. The balance at December 31, 2011, reflected a note payable issued to the principals of McCrillis & Eldredge as part of the was paid in full by December 31, 2012.

Liquidity and Capital Resources

We are required to maintain sufficient liquidity for safe and sound operations. At year-end 2011, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $39.8 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 FHLBB. At December 31, 2012, we had approximately $154.0 million in additional borrowing capacity from the FHLBB.

At December 31, 2012, stockholders’ equity totaled $129.5 million compared to $108.7 million at December 31, 2011. The increase of $20.8 million reflects net income of $7.8 million, the payout of $3.1 million in common stock dividends, $666 thousand in preferred stock dividends declared, the repurchase of $652 thousand of warrants, the assumption of $3.0 million of preferred stock, other comprehensive loss in the amount of $557 thousand, and $14.7 million from the acquisition of TNB.

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. At December 31, 2012, 148,088 shares remained to be repurchased under the plan. The Board of Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity; 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 2011, no shares were repurchased. As a participant in the Capital Purchase Program (“CPP”) established by the United States Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2009 (the “EESA”), we were prohibited from repurchasing shares of our common stock prior to exiting the program on August 25, 2011.

At December 31, 2012, we had unrestricted funds in the amount of $3.3 million. Our total cash needs during 2013 are estimated to be approximately $5.4 million with $3.7 million projected to be used to pay dividends on our common stock, $1.0 million to pay interest on our capital securities, $230 thousand to pay dividends on our Series B Preferred Stock (as defined below), and approximately $500 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 additional cash requirements for 2013, if needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

Net cash provided by operating activities were $1.1 million for 2012 compared to net cash provided by operating activities of $10.6 million in 2011. The change includes an increase in the amount of $1.4 million in provision for loan losses, an increase in gains on sales and calls of securities of $1.2 million, a decrease in amortization of securities, net, of $142 thousand, a change in mortgage servicing rights of $510 thousand, an increase in loans held-for sale of $11.0 million, a decrease in deferred tax benefit of $312 thousand, an increase of $183 thousand in impairment losses on other real estate owned, an increase in accrued interest receivable and other assets of $492 thousand, and an increase of $2.7 million in the change in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $88.6 million in 2012, compared to net cash flows used in investing activities of $54.8 million in 2011, an increase of $33.8 million. During 2012, net cash used by loan originations and net principal collections decreased by $61.0 million while our loans held in portfolio increased and net cash provided by securities available-for-sale increased $30.5 million.

 

24


Table of Contents

Net cash flows provided by financing activities totaled $102.1 million in 2012, compared to net cash flows provided by financing activities of $35.7 million in 2011, a change of $66.4 million. Net cash provided by deposits increased $23.0 million. Net cash provided by net change in advances from FHLBB increased $55.0 million. Net cash provided by the issuance of preferred stock, net of redemptions, decreased $10.0 million.

We expect to be able to fund loan demand and other investing activities during 2012 by continuing to utilize the FHLBB’s advance program and cash flows from securities and loans. On December 31, 2012, approximately $32.0 million in commitments to fund loans had been made. Management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have, a material effect on our liquidity, capital resources or results of operations.

On August 25, 2011, as part of the SBLF program, we entered into a Purchase 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 $0.01 per preferred share, having a liquidation preference of $1,000 per preferred share (the “Series B Preferred Stock”). The SBLF is Treasury’s effort to bring main street banks and small businesses together to help create jobs and promote economic growth in local communities. We used $10.0 million of the SBLF proceeds to repurchase the Series A Preferred Stock issued under Treasury’s CPP.

The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be paid only when declared by our Board of Directors. The Series B Preferred Stock has no maturity date and ranks senior to our 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. Please refer to Note 20 of our Consolidated Financial Statements located elsewhere in this report for further discussion.

The OCC requires that the Bank maintain tangible, level, and total risk-based capital ratios of 1.50%, 4.00% (or 3.00% under certain conditions), and 8.00%, respectively. At December 31, 2012, the Bank’s ratios were 8.82%, 8.82%, and 14.66%, respectively, well in excess of the OCC requirements for well capitalized banks. Additional information on these requirements can be found under “Regulations” of this report.

Book value per common share was $15.09 at December 31, 2012, compared to $15.20 per common share at December 31, 2011. Tangible book value per common share was $9.59 at December 31, 2012. Tangible book value per common share is a non-GAAP financial measure. Tangible book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of shareholder’s equity. We believe that tangible book value per common share provides information to investors that is useful in understanding 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)    December 31, 2012      December 31, 2011  

Shareholders’ equity

   $ 129,494       $ 108,660   

Less goodwill

     35,395         28,597   

Less other intangible assets

     3,416         1,755   

Less preferred stock

     23,000         20,000   
  

 

 

    

 

 

 

Tangible common equity

   $ 67,683       $ 58,308   
  

 

 

    

 

 

 

Ending common shares outstanding

     7,055,946         5,832,360   

Tangible book value per common share

   $ 9.59       $ 10.00   

Impact of Inflation

The financial statements and related data presented elsewhere herein are prepared in accordance with GAAP, which require the measurement of our financial position and operating results generally in terms of historical dollars and current market value, for certain loans and investments, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations.

 

25


Table of Contents

Unlike other companies, nearly all of the assets and liabilities of a bank are monetary in nature. As a result, interest rates have a far greater impact on a bank’s performance than the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, since such prices are affected by inflation. Liquidity and the maturity structure of our assets and liabilities are important to the maintenance of acceptable performance levels.

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 the Board of Director’s approved guidelines. The Board of Directors has established an Asset/Liability Committee to review our asset/liability policies and interest rate position. Trends and interest rate positions are reported to the Board of Directors monthly.

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

Our one-year cumulative interest-rate gap at December 31, 2012, was negative 0.80% compared to the December 31, 2011 gap of positive 1.65%. At December 31, 2012, repricing liabilities over the next 12 months were $9.1 million more than repricing assets for the same period compared to $15.3 million lower than assets repricing at December 31, 2011. With a liability sensitive (negative) gap, if rates were to rise, net interest margin would likely decrease and if rates were to fall, the net interest margin would likely increase. At negative 0.80%, the assets and liabilities scheduled to reprice during 2013 are fairly well-matched.

We continue to offer adjustable-rate mortgages, which reprice at one, three, five, seven- and ten-year intervals. In addition, we sell most fixed-rate mortgages with terms of 20 or more years into the secondary market in order to minimize interest rate risk and provide liquidity.

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

 

26


Table of Contents

The following table shows our interest rate sensitivity (gap) table at December 31, 2012:

 

     0-3
Months
    3-6
Months
    6 Months-
1 Year
    1-3
Years
    Beyond
3 Years
    Total  
     (Dollars in thousands)  

Interest-earning assets:

            

Loans

   $ 147,350      $ 98,124      $ 125,929      $ 268,089      $ 269,978      $ 909,470   

Investments and overnight deposit

     24,172        10,597        19,377        58,271        113,217        225,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     171,522        108,721        145,306        326,360        383,195        1,135,104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Deposits

     220,488        62,428        56,139        98,984        511,302        949,341   

Repurchase agreements

     14,619        —          —          —          —          14,619   

Borrowings

     50,500        10,000        20,500        36,750        24,980        142,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     285,607        72,428        76,639        135,734        536,282        1,106,690   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period sensitivity gap

     (114,085     36,293        68,667        190,626        (153,087   $ 28,414   

Cumulative sensitivity gap

   $ (114,085   $ (77,792   $ (9,125   $ 181,501      $ 28,414     

Cumulative sensitivity gap as a percentage of interest-earning assets

     -10.05     -6.85     -0.80     15.99     2.50     2.50

The following table sets forth our NPV at December 31, 2012:

 

Change    Net Portfolio Value     NPV as % of PV Assets  

in Rates

   $ Amount      $ Change     % Change     NPV Ratio     Change  
     (Dollars in thousands)              

+400 bp

   $ 94,637       $ (31,614     -25     8.43     -176 bp 

+300 bp

     104,579         (21,672     -17     9.09     -111 bp 

+200 bp

     114,463         (11,788     -9     9.70     -50 bp 

+100 bp

     122,403         (3,848     -3     10.11     -8 bp 

      0 bp

     126,251         —          —          10.19     —     

-100 bp

     110,564         (15,687     -12     8.86     -133 bp 

Comparison of Years Ended December 31, 2012 and 2011

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2012, increased $523 thousand, or 1.84%, to $29.0 million. The increase was a combination of a $2.5 million increase due to volume offset by a $2.0 million decrease related to rate adjustments. Total interest and dividend income decreased $767 thousand, or 2.06%, to $36.4 million, despite higher average balances on interest-earning assets during 2012, as the yield on interest-earning assets decreased to 3.58% from 3.98%. Interest and fees on loans increased $902 thousand, or 2.85%, to $32.5 million in 2012, due to an increase in average balances of $84.7 million offset by a decrease in the average yield on loans to 4.07% from 4.42%.

Interest on taxable investments decreased $1.4 million, or 29.95%, to $3.2 million in 2012 compared to $4.6 million in 2011. Dividends increased $27 thousand, or 77.14%, to $62 thousand. Interest on other investments decreased $318 thousand, or 34.87%, to $594 thousand due primarily to a decrease in tax-exempt municipal bonds through calls and maturities. The yield on our investment portfolio declined from 2.54% for the year ended December 31, 2011, to 1.78% for the year ended December 31, 2012, due to lower yielding investments purchased and accelerated prepayment amortization on mortgage-backed securities.

Total interest expense decreased $1.3 million, or 14.85%, to $7.4 million for the year ended December 31, 2012. The decrease is primarily due to the 20.62% decrease in the combined cost of funds on deposits and borrowings to 0.77% for the year ended December 31, 2012, from 0.97% for the year ended December 31, 2011. For the year ended December 31, 2012, interest on

 

27


Table of Contents

deposits decreased $1.4 million, or 24.09%, to $4.4 million despite an increase in average interest-bearing deposits of $35.9 million as the cost of deposits decreased to 0.55% from 0.75% compared to the same period in 2011. Interest on FHLBB advances and other borrowed money increased $81 thousand, or 4.35%, for the 12 months ended December 31, 2012, to $1.9 million compared to the same period in 2011 as the average FHLBB advances outstanding increased in 2012 compared to 2011.

For the year ended December 31, 2012, our combined cost of funds decreased to 0.77% as compared to 0.97% for 2011. The cost of deposits, including repurchase agreements, decreased 20 basis points for 2011 to 0.55 % compared to 0.75% in 2011, due primarily to the downward repricing of maturing time deposits and advances combined with increases in lower-costing checking accounts.

Our interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, decreased to 2.81% in 2012 from 3.01% in 2011. Our net interest margin, representing net interest income as a percentage of average interest-earning assets, decreased to 2.85% during 2012, from 3.05% during 2011.

The following table sets forth the average yield on loans and investments, the average interest rate paid on deposits and borrowings, the interest rate spread, and the net interest rate margin:

 

     For the Years Ended December 31,  
     2012     2011     2010     2009     2008  

Yield on loans

     4.07     4.42     4.87     5.16     5.86

Yield on investment securities

     1.78     2.54     2.80     3.94     4.67

Combined yield on loans and investments

     3.58     3.98     4.32     4.92     5.69

Cost of deposits, including repurchase agreements

     0.55     0.75     0.93     1.34     2.07

Cost of other borrowed funds

     1.97     2.40     2.33     3.29     4.19

Combined cost of deposits and borrowings

     0.77     0.97     1.14     1.60     2.32

Interest rate spread

     2.81     3.01     3.18     3.32     3.37

Net interest margin

     2.85     3.05     3.23     3.41     3.46

 

28


Table of Contents

The following table presents, for the years indicated, the total dollar amount of interest income from interest-earning assets and the resultant yields as well as the interest paid on interest-bearing liabilities, and the resultant costs:

 

Years ended December 31,    2012     2011     2010  
     Average
Balance(1)
     Interest      Yield/
Cost
    Average
Balance(1)
     Interest      Yield/
Cost
    Average
Balance(1)
     Interest      Yield/
Cost
 
     ($ in thousands)  

Assets:

  

Interest-earning assets:

                        

Loans (2)

   $ 800,290       $ 32,542         4.07   $ 715,637       $ 31,640         4.42   $ 656,355       $ 31,956         4.87

Investment securities and other

     217,390         3,879         1.78     218,127         5,548         2.54     238,897         6,701         2.80
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,017,680         36,421         3.58     933,764         37,188         3.98     895,252         38,657         4.32
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets:

                        

Cash

     19,751              18,490              18,259         

Other noninterest-earning assets (3)

     81,775              88,228              87,321         
  

 

 

         

 

 

         

 

 

       
                        

Total noninterest-earning assets

     101,526              106,718              105,580         
  

 

 

         

 

 

         

 

 

       

Total

   $ 1,119,206            $ 1,040,482            $ 1,000,832         
  

 

 

         

 

 

         

 

 

       

Liabilities and Stockholders’ Equity:

  

          

Interest-bearing liabilities:

                        

Savings, NOW and MMAs

   $ 462,684       $ 619         0.13   $ 410,571       $ 727         0.18   $ 363,407       $ 766         0.21

Time deposits

     332,545         3,762         1.13     348,730         5,044         1.45     344,875         5,869         1.70

Repurchase agreements

     16,449         47         0.29     14,250         47         0.33     13,182         59         0.45

Capital securities and other borrowed funds

     150,750         2,971         1.97     119,421         2,871         2.40     130,718         3,051         2.33
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     962,428         7,399         0.77     892,972         8,689         0.97     852,182         9,745         1.14
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                        

Demand deposits

     29,657              26,832              26,517         

Other

     16,086              30,047              30,936         
  

 

 

         

 

 

         

 

 

       

Total noninterest-bearing liabilities

     45,743              56,879              57,453         
  

 

 

         

 

 

         

 

 

       

Stockholders’ equity

     111,035              90,631              91,197         
  

 

 

         

 

 

         

 

 

       

Total

   $ 1,119,206            $ 1,040,482            $ 1,000,832         
  

 

 

         

 

 

         

 

 

       

Net interest income/Net interest rate spread

      $ 29,022         2.81      $ 28,499         3.01      $ 28,912         3.18
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Net interest margin

           2.85           3.05           3.23
        

 

 

         

 

 

         

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

           105.74           104.57           105.05
        

 

 

         

 

 

         

 

 

 

 

(1) Monthly average balances have been used for all periods.
(2) Loans include 90-day delinquent loans which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans in loans caused any material difference in the information presented.
(3) Other noninterest-earning assets include non-earning assets and OREO.

 

29


Table of Contents

The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates. The net change attributable to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

 

    

Year ended December 31, 2012 vs. 2011
Increase (Decrease)

due to

 
     Volume     Rate     Total  
     ($ in thousands)  

Interest income on loans

   $ 2,789      $ (1,887   $ 902   

Interest income on investments

     (19     (1,650     (1,669
  

 

 

   

 

 

   

 

 

 

Total interest income

     2,770        (3,537     (767
  

 

 

   

 

 

   

 

 

 

Interest expense on savings, NOW and MMAs

     106        (214     (108

Interest expense on time deposits

     (223     (1,059     (1,282

Interest expense on repurchase agreements

     —          —          —     

Interest expense on capital securities and other borrowings

     314        (214     100   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     197        (1,487     (1,290
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2,573      $ (2,050   $ 523   
  

 

 

   

 

 

   

 

 

 
    

Year ended December 31, 2011 vs. 2010
Increase (Decrease)

due to

 
     Volume     Rate     Total  
     ($ in thousands)  

Interest income on loans

   $ 2,755      $ (3,071   $ (316

Interest income on investments

     (556     (596     (1,152
  

 

 

   

 

 

   

 

 

 

Total interest income

     2,199        (3,667     (1,468
  

 

 

   

 

 

   

 

 

 

Interest expense on savings, NOW and MMAs

     169        (207     (38

Interest expense on time deposits

     66        (891     (825

Interest expense on repurchase agreements

     6        (18     (12

Interest expense on capital securities and other borrowings

     (276     96        (180
  

 

 

   

 

 

   

 

 

 

Total interest expense

     (35     (1,020     (1,055
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2,234      $ (2,647   $ (413
  

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

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 collectibility of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 are 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. Please refer to Note 4 to our Consolidated Financial Statements located elsewhere in this report for information regarding impaired loans.

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 December 31, 2012, was $9.9 million compared to $9.1 million at December 31, 2011. At $9.9 million, the allowance for loan losses represents 1.09% of total loans held, down from 1.26% at December 31, 2011. Total non-performing assets at December 31, 2012, were $17.1 million, representing 172.73% of the allowance for loan losses. Modestly improving economic and market conditions coupled internal risk rating changes offset by portfolio growth resulted in us adding $2.7 million to the allowance for loan and lease losses during 2012 compared to $1.3 million in 2011. The provisions during the 12 months ended December 31, 2012, have been offset by loan charge-offs of $2.3 million and recoveries of $455 thousand during the same period. Portfolio performance, growth, and charge-offs resulted in our decision to increase the provision for loan losses during 2012 while the majority of growth was in real estate-collateralized loans resulting in an overall lower allowance to total originated portfolio loans. The provisions made in 2012 reflect loan loss experience in 2012 and changes in economic conditions that increase the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions in 2013 as needed to maintain the allowance at an adequate level.

Acquired loans are generally accounted for on a pool basis, with pools formed based on the loans’ common risk characteristics, such as loan collateral type and accrual status. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Loans acquired in 2012 have an assigned credit mark valuation which reflects the estimated credit risk in the pool and reducing the carrying value of this pool. As such, there are no additional provisions for the pool of acquired loans unless a loan credit deteriorates subsequent to the acquisition. Following measurable deterioration, the individual acquired loan will assessed for additional provisions. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses. For additional information on accounting for acquired loans, please see Note 1 of our Consolidated Financial Statements.

In addition to the allowance for loan losses, there is an allowance for losses from the fee for service overdraft program. We seek 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 December 31, 2012, the overdraft allowance was $14 thousand compared to $18 thousand at year-end 2011. Provisions for overdraft losses were $55 thousand during the 12 month period ended December 31, 2012, compared to $51 thousand for the same period during 2011. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

Loan charge-offs (excluding the overdraft program) were $2.3 million during the 12 months ended December 31, 2012 compared to $2.2 million for the same period in 2011. Recoveries were $455 thousand during the 12 months ended

 

31


Table of Contents

December 31, 2012, compared to $195 thousand for the same period in 2011. This activity resulted in net charge-offs of $1.9 million for the 12 months ended December 31, 2012, compared to $2.0 million for the same period in 2011. One-to-four family residential mortgages, commercial real estate mortgages, land and construction, commercial loans, and consumer loans accounted for 54%, 20%, 6%, 19%, and 1%, respectively, of the amounts charged-off during the 12 months ended December 31, 2012.

The following is a summary of activity in the allowance for loan losses account for the years ended December 31:

 

(Dollars in thousands)    2012     2011     2010     2009     2008  

Balance, beginning of year

   $ 9,113      $ 9,841      $ 9,494      $ 5,568      $ 5,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

          

Residential real estate

     1,239        1,187        999        297        243   

Commercial real estate

     474        548        324        1,388        134   

Land and Construction

     138        303        45        45        —     

Consumer loans

     20        38        46        105        79   

Commercial loans

     438        147        213        297        90   

Acquired loans (discounts to related credit quality)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charged-off loans

     2,309        2,223        1,627        2,132        546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries

          

Residential real estate

     167        132        9        100        32   

Commercial real estate

     56        —          —          1        —     

Construction

     68        —          —          —          —     

Consumer loans

     22        2        14        11        11   

Commercial loans

     142        61        26        100        —     

Acquired loans (discounts to related credit quality)

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     455        195        49        212        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     1,854        2,028        1,578        1,920        503   

Allowance from acquisitions

     —          —          —          —          —     

Transfer

     —          —          (175     —          —     

Provision for loan loss charged to income

     2,650        1,300        2,100        5,846        910   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 9,909      $ 9,113      $ 9,841      $ 9,494      $ 5,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average loans

     0.23     0.28     0.25     0.30     0.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of activity in the allowance for overdraft privilege account for the years ended December 31:

 

(Dollars in thousands)    2012      2011      2010      2009      2008  

Beginning balance

   $ 18       $ 23       $ 25       $ 26       $ 21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Overdraft charge-offs

     200         226         251         313         374   

Overdraft recoveries

     141         170         167         206         188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net overdraft losses

     59         56         84         107         186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provisions for overdrafts

     55         51         82         106         191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 14       $ 18       $ 23       $ 25       $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

The following table sets forth the allocation of the loan loss allowance (excluding overdraft allowances), the percentage of allowance to the total allowance and the percentage of loans in each category to total loans at December 31 ($ in thousands):

 

     2012     2011     2010  

Real estate loans -

                     

Residential, 1-4 family and home equity loans

   $ 4,665         47     64   $ 4,768         52     64   $ 3,887         40     64

Residential, 5 or more units

     109         1     2     102         1     2     142         1     2

Commercial

     3,378         34     20     2,813         31     19     2,683         27     19

Land and construction

     208         2     2     222         2     2     575         6     3

Collateral and consumer loans

     44         1     1     40         1     1     70         1     1

Commercial and municipal loans

     918         9     11     721         8     12     2,004         20     11

Impaired loans

     361         4     —          308         3     —          480         5     —     

Acquired loans (discounts to related credit quality)

     —           —          —          —           —          —          —           —          —     

Unallocated

     226         2     —          139         2     —          —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 9,909         100     100   $ 9,113         100     100   $ 9,841         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total loans

        1.09          1.26          1.44     
     

 

 

        

 

 

        

 

 

   

Non-performing loans as a percentage of allowance

        172.73          182.34          101.86  
     

 

 

        

 

 

        

 

 

   

 

     2009     2008  

Real estate loans -

              

Residential, 1-4 family and home equity loans

   $ 3,984         42     64   $ 1,965         35     64

Residential, 5 or more units

     151         2     2     74         1     2

Commercial

     2,855         30     20     1,408         25     20

Land and construction

     227         2     3     421         8     2

Collateral and consumer loans

     100         1     2     139         2     2

Commercial and municipal loans

     2,012         21     9     1,376         25     9

Impaired loans

     165         2     —          210         4     1

Unallocated

     —           —          —          —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 9,494         100     100   $ 5,593         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total loans

        1.51          0.87  
     

 

 

        

 

 

   

Non-performing loans as a percentage of allowance

        64.87          131.38  
     

 

 

        

 

 

   

Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans at carrying value were $26.3 million at December 31, 2012, compared to $25.1 million at December 31, 2011. The increase comes primarily from an increase of $2.3 million of the net carrying value of loans identified as impaired of at December 31, 2012. This increase includes two commercial real estate loans from one relationship totaling $1.7 million with no impairment. Additional information on troubled debt restructurings can be found in Note 4 of our Consolidated Financial Statements. In addition, we had $102 thousand of OREO at December 31, 2012, representing one residential properties acquired during the 12 months ended December 31, 2012, compared to $1.3 million at December 31, 2011, representing two commercial properties and three residential properties acquired during the 12 months ended December 31, 2011. During the 12 months ended December 31, 2012, we sold four properties, three of which was classified as OREO at December 31, 2011, while the other was acquired during 2011. Losses are incurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved due to the inherent risks in providing credit. The impaired loans meet the criteria established under ASC 310-10-35. Eleven loans considered impaired loans at December 31, 2012, had specific reserves identified and assigned. The 11 loans are secured by real estate, business assets or a combination of both. At

 

33


Table of Contents

December 31, 2012, the allowance included $361 thousand allocated to impaired loans compared to $308 thousand at December 31, 2011. Eighteen loans considered impaired at December 31, 2012, had identified losses and recorded charge-offs of $855 thousand, or 37.04% of total charge-offs, during the 12 months ended December 31, 2012.

Originated loans over 90 days past due were $3.2 million at December 31, 2012, compared to $3.3 million at December 31, 2011. Loans 30 to 89 days past due were $9.7 million at December 31, 2012, compared to $5.6 million at December 31, 2011. The level of loan losses and loan delinquencies and changes in loan risk ratings resulting in more classified loans, combined with weaker economic and commercial and residential real estate market conditions are factors considered in determining the adequacy of the loan loss allowance and assessing the need for additional provisions. As previously indicated, we anticipate more charge-offs as loan issues are resolved due to the normal course of credit risk. As a percentage of assets, non-performing loans decreased from 1.59% at December 31, 2011, to 1.34% at December 31, 2012, and as a percentage of total originated loans, decreased from 2.45% at the end of 2011 to 2.07% at the end of 2012.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which we reasonably expect will materially impact future operating results, liquidity, or capital resources. For the period ended December 31, 2012, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At December 31, 2012, we had 65 loans with net carrying values of $12.8 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2012, the majority of “troubled debt restructurings” were performing under contractual terms and are included in impaired loans. Of the 65 loans classified as troubled debt restructured, 19 were 30 days or more past due at December 31, 2012. The balances of these loans were $4.5 million, and the loans have assigned specific allowances of $11 thousand. Thirty-three loans were considered troubled debt restructured at both December 31, 2012 and 2011. These 33 loans include 14 commercial real estate loans totaling $6.4 million, 14 residential loans totaling $1.6 million, and 6 commercial loans for $243 thousand. These loans, independently measured for impairment, carry a combined specific allowance of $11 thousand. At December 31, 2011, we had 50 loans with net carrying values of $12.0 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.”

At December 31, 2012, there were no other loans excluded in the tables below or discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

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

 

     December 31, 2012     December 31, 2011  
     Carrying
Value
     Percentage
to Total
Allowance
    Percentage
to Total
Assets
    Carrying
Value
     Percentage
to Total
Allowance
    Percentage
to Total
Assets
 

90 day delinquent loans (1)

   $ 163         1.65     0.01   $ 100         1.10     0.01

Nonaccrual impaired loans

     5,636         56.87     0.44     4,173         45.79     0.40

Trouble debt restructured

     11,202         113.05     0.88     12,037         132.09     1.16

Other real estate owned and chattel

     102         1.03     0.01     1,365         14.98     0.13
  

 

 

        

 

 

      

Total non-performing assets(2)

   $ 17,103         172.60     1.35   $ 17,675         193.96     1.70
  

 

 

        

 

 

      

 

(1) All loans 90 days or more delinquent are placed on nonaccrual status.
(2) Excludes acquired loans.

The following table sets forth the breakdown of non-performing assets at December 31:

 

(Dollars in thousands)    2012      2011      2010      2009      2008  

Nonaccrual loans (1)

   $ 17,001       $ 16,616       $ 10,420       $ 6,059       $ 7,027   

Real estate and chattel property owned

     102         1,344         75         100         288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming assets(2)

   $ 17,103       $ 17,960       $ 10,495       $ 6,159       $ 7,315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) Excludes acquired loans.

 

34


Table of Contents

The following table sets forth nonaccrual (1) loans by category at December 31:

 

(Dollars in thousands)    2012      2011      2010      2009      2008  

Real estate loans -

              

Conventional

   $ 6,250       $ 5,578       $ 1,645       $ 3,161       $ 2,249   

Commercial

     9,304         8,484         7,449         2,845         4,199   

Home equity

     158         0         120         42         47   

Land and construction

     887         1,006         140         140         —     

Consumer loans

     —           8         18         36         8   

Commercial and municipal loans

     402         1,540         1,048         —           524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(2)

   $ 17,001       $ 16,616       $ 10,420       $ 6,224       $ 7,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) Excludes acquired loans.

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, deterioration in the credit quality of acquired loans, 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.

Noninterest Income and Expense

Total noninterest income increased $4.2 million, or 40.02%, to $14.6 million for the 12 months ended December 31, 2012, compared to the same period in 2011, as discussed below.

 

   

Customer service fees decreased $4 thousand, or 0.08%, due primarily to a reduction of $170 thousand, or 7.43%, in fees assessed on our overdraft protection program during 2012 partially offset by increased volume and related revenue from ATM and debit card usage.

 

   

Net gain on sales and calls of securities increased $1.2 million, or 47.57%, due in part to an 89.36% increase in the volume of sales of securities in 2012 compared to 2011, which resulted in higher gains recorded. During 2012, we were able to take advantage of the market conditions, which resulted in higher gains as we rebalanced the portfolio for duration and interest rate risk.

 

   

Net gain on sales of loans increased $1.9 million, or 207.95%, as we sold $133.5 million of 1-4 family conventional mortgage loans into the secondary market during 2012, up from $68.8 million of loans sold during 2011 resulting in higher resulting revenue. In addition to increased volume, the rate valuation, and subsequent gains, increased. We also retained a higher portion of originated mortgage loans within their portfolio during 2012, resulting in balance sheet increases of $61.4 million and $30.2 million of conventional real estate loans and commercial real estate loans, respectively, excluding increases due to the acquisition of TNB.

 

   

Net loss on sale of OREO and fixed assets increased $177 thousand during 2012 as we recognized a net loss of $150 thousand on other real estate and chattel property owned during 2012 compared to gains of $27 thousand in 2011.

 

   

Rental income increased $22 thousand, or 3.08%, as revenue within this category remained relatively unchanged.

 

   

The realized gain in Charter Holding Corp. (“CHC”) decreased $129 thousand, or 22.51%, to $444 thousand for the 12 months ended December 31, 2012, from $573 thousand for the same period in 2011, as a direct reflection of earnings reported by CHC.

 

   

Brokerage service income decreased from $3 thousand to no recorded earnings for the year ended December 31, 2012, as the Bank focused on other non-deposit products including products offered by its insurance agency.

 

   

Bank-owned life insurance increased $113 thousand to $545 thousand due primarily to increased investment of $5.0 million in bank-owned life insurance.

 

   

Insurance commissions increased $1.3 million for the year ended December 31, 2012, compared to $119 thousand in 2011. The insurance commissions for 2011 reflect earnings from the acquisition of McCrillis & Eldredge on November 10, 2011 through year end.

 

35


Table of Contents

Total noninterest expenses increased $2.4 million, or 8.81%, to $29.5 million for the 12 months ended December 31, 2012, from $27.1 million for the same period in 2011.

 

   

Salaries and employee benefits increased $716 thousand, or 5.00%, to $15.0 million for the 12 months ended December 31, 2012, from $14.3 million for the same period in 2011. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $1.6 million, or 10.03%, to $17.2 million for the 12 months ended December 31, 2012, from $15.7 million for the same period in 2011. Gross salaries increased $1.4 million, or 13.15%, to $12.4 million for the 12 months ended December 31, 2012, compared to the same period in 2011. In addition to ordinary staffing additions, the full year of McCrillis & Eldredge salary expense accounted for $525 thousand, or 36.41% of the increase. Average full time equivalents increased to 278 for the 12 months ended December 31, 2012, compared to 234 for the same period in 2011. Benefits costs increased $361 thousand. This increase includes increases of $90 thousand related to retirement costs and $175 thousand, or 21.21%, increase in health insurance costs. The deferral of expenses associated with the origination of loans increased $856 thousand, or 62.80%, to $2.2 million for the 12 months ended December 31, 2012, from $1.4 million for the same period in 2011. This deferral represents salary and employee benefits expenses associated with origination costs which are recognized over the life of the loan. The increase is a direct result of the higher volume of loan origination year over year.

 

   

Occupancy and equipment expenses decreased $158 thousand, or 4.15%, to $3.6 million for the 12 months ended December 31, 2012, from $3.8 million for the same period in 2011, due primarily lower costs incurred for snow removal and general maintenance during 2012.

 

   

Advertising and promotion decreased $29 thousand, or 5.69%, to $481 thousand for the 12 months ended December 31, 2012, from $510 thousand for the same period in 2011, due primarily to decreases in the utilization of print, radio, and television web media.

 

   

Depositors’ insurance increased $9 thousand to $802 thousand at December 31, 2012, compared to $793 thousand at December 31, 2012, due primarily to modifications made by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates during 2012 despite an overall increase in assessed deposits.

 

   

Professional fees increased $86 thousand, or 7.66%, to $1.2 million for the 12 months ended December 31, 2012 from $1.1 million for the same period in 2011, reflecting among other things increased legal expenses and consulting fees, primarily attributable to audit expenses.

 

   

Data processing and outside services fees increased $69 thousand, or 6.58%, to $1.1 million for the 12 months ended December 31, 2012 compared to the same period in 2011 due to increases in core processing, online banking, and collection expenses offset in part by decreases in correspondent expenses as well as expenses associated with the overdraft protection program.

 

   

ATM processing fees increased $17 thousand, or 3.53%, to $498 thousand for the 12 months ended December 31, 2012, from $481 thousand for the same period in 2011.

 

   

Net amortization (benefit) of mortgage servicing rights (MSR) and mortgage servicing income increased $209 thousand to a net amortization of $92 thousand for the 12 months ended December 31, 2012, from a benefit of $117 thousand for the same period in 2011.

 

   

Other expenses including merger expenses increased $1.6 million, or 39.12%, to $5.6 million for the 12 months ended December 31, 2012 from $4.0 million for the same period in 2011. In particular, expenses related to non-earning assets and OREO increased $35 thousand and $89 thousand, respectively; corporate legal expenses increased $446 thousand related to the acquisition of TNB, compensation guidance, and shelf registration in addition to other routine corporate legal needs; expenses associated with SEC filings increased $44 thousand; deposit account charges-offs including check charge-offs and debit card charge-offs increase $71 thousand; amortization of customer list intangible increased $65 thousand with the recognition of 12 months in 2012 versus 2 months in 2011; and expenses related to the conversion of TNB’s core system to our core system in addition to other acquisition and integrations costs was $444 thousand compared to no related expenses in 2011. The total cost of the acquisition and conversion of TNB was approximately $1.2 million; approximately $725 thousand of this cost was related to the stock purchase and not excludable from taxable income.

 

36


Table of Contents

Selected Financial Highlights and Ratios

 

For the Years Ended December 31,

   2012     2011     2010     2009     2008  
     (In thousands, except per share and percentage data)  

Net Income

   $ 7,759      $ 7,669      $ 7,947      $ 6,598      $ 5,725   

Per Share Data:

          

Basic Earnings (1)

     1.20        1.20        1.29        1.06        1.00   

Diluted Earnings

     1.20        1.20        1.29        1.06        0.99   

Dividends Paid

     0.52        0.52        0.52        0.52        0.52   

Dividend Payout Ratio

     43.33        43.33        40.31        49.06        52.00   

Return on Average Assets

     0.69     0.74     0.79     0.73     0.69

Return on Average Equity

     6.99     7.96     8.71     7.75     7.84
As of December 31,    2012     2011     2010     2009     2008  
     (In thousands, except per share, percentage and branch data)  

Total Assets

   $ 1,270,477      $ 1,041,819      $ 994,536      $ 962,601      $ 843,198   

Total Securities (2)

     221,875        217,933        203,599        224,469        86,935   

Loans, Net

     902,236        714,952        675,514        620,333        636,720   

Total Deposits

     949,341        803,023        778,219        734,429        653,353   

Federal Home Loan Bank Advances

     142,730        80,967        75,959        95,962        66,317   

Stockholders’ Equity

     129,494        108,660        92,391        87,776        74,677   

Book Value per Common Share

   $ 15.09      $ 15.20      $ 14.26      $ 13.48      $ 12.99   

Average Common Equity to Average Assets

     8.13     7.27     8.11     9.45     8.76

Shares Outstanding

     7,055,946        5,832,360        5,773,772        5,771,772        5,747,772   

Number of Office Locations

     30        30        28        28        28   

 

(1) See Note 1 to our Consolidated Financial Statements located elsewhere in this report for additional information regarding earnings per share.
(2) Includes available-for-sale securities shown at fair value, held-to-maturity securities at cost and FHLBB stock at cost.

Accounting for Income Taxes

The provision for income taxes for the years ended December 31includes net deferred income tax expense of $479 thousand in 2012 and $791 thousand in 2011 and benefits of $105 thousand in 2010. These amounts were determined by the asset and liability method in accordance with generally accepted accounting principles for each year.

We have provided deferred income taxes on the difference between the provision for loan losses permitted for income tax purposes and the provision recorded for financial reporting purposes.

Comparison of Years Ended December 31, 2011 and 2010

We earned $7.7 million, or $1.20 per common share, assuming dilution, for the year ended December 31, 2011, compared to $7.9 million, or $1.29 per common share, assuming dilution, for the year ended December 31, 2010.

Financial Condition

Total assets increased $46.8 million, or 4.70%, to $1.0 billion at December 31, 2011 from $995.1 million at December 31, 2010. Cash and FHLBB overnight deposits decreased $8.5 million, or 25.51%, as cash was used to partially fund loan growth.

 

37


Table of Contents

Total net loans receivable excluding loans held-for-sale increased $39.5 million, or 5.85%, to $715.0 million at December 31, 2011, compared to $675.5 million at December 31, 2010. Our conventional real estate loan portfolio increased $49.4 million, or 14.21%, to $397.0 million at December 31, 2011, from $347.6 million at December 31, 2010. The outstanding balances on home equity loans and lines of credit decreased $2.9 million to $72.0 million over the same period. Construction loans decreased $6.5 million, or 33.86%, to $12.7 million. Commercial real estate loans increased $4.7 million, or 3.27%, over the same period to $148.4 million. The increase in commercial real estate loans represents loans to existing commercial customers and new commercials customers offset by normal amortizations and prepayments as well as principal pay-downs. Additionally, consumer loans decreased $736 thousand, or 9.11%, to $7.3 million and commercial and municipal loans decreased $5.5 million, or 6.18%, to $83.8 million. Sold loans totaled $365.8 million at December 31, 2011, a decrease of $4.5 million, or 1.22%, compared to $370.3 million at December 31, 2010. Sold loans are loans originated by us and sold to the secondary market with the Company retaining the majority of servicing of these loans. We expect to continue to sell fixed-rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk and control growth. Typically, we hold adjustable-rate loans in portfolio. At December 31, 2011, adjustable-rate mortgages comprised approximately 68% of our real estate mortgage loan portfolio, which is slightly lower than in prior years as we originated shorter-term loans in 2011, such as the 10-year fixed mortgage loan, which are held in portfolio as well as holding a portion of 15-year fixed mortgage loans. Non-performing assets were 1.70% of total assets and 2.45% of total loans at December 31, 2011, compared to 1.01% and 1.46%, respectively, at December 31, 2010, primarily due to an increase of $3.8 million in loans classified as troubled debt restructured.

The fair value of investment securities available-for-sale increased $14.3 million, or 7.30%, to $210.3 million at December 31, 2011, from $196.0 million at December 31, 2010. We realized $2.6 million in the gains on the sales and calls of securities during 2011, compared to $2.0 million in gains on the sales and calls of securities recorded during 2010. At December 31, 2011, our investment portfolio had a net unrealized holding gain of $2.8 million, compared to a net unrealized holding loss of $317 thousand at December 31, 2010. The securities in our investment portfolio that are temporarily impaired at December 31, 2011, consist of mortgage-backed securities issued by U.S. government agencies, corporate debt with investment-grade credit ratings, and municipal bonds. Management does not intend to sell these securities in the near term. As management has the ability to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

OREO and property acquired in settlement of loans was $1.4 million at December 31, 2011, representing five properties, four located in New Hampshire and one in Vermont, compared to $75 thousand at December 31, 2010, representing one property located in New Hampshire. At December 31, 2011, one commercial property in Vermont was carried at $950 thousand, or 70.70% of total OREO and property acquired in settlement of loans at that time.

Goodwill increased $1.3 million, or 4.78%, to $28.6 million at December 31, 2011, compared to $27.3 million at December 31, 2010. The change in goodwill represents $1.3 million related to the 2011 acquisition of McCrillis & Eldredge. Additionally, goodwill includes $7.5 million related to the acquisition of First Brandon Financial Corporation and $7.7 million related to the acquisition of First Community Bank, both of which occurred in 2007. Goodwill also includes $2.5 million relating to the acquisition of Landmark Bank in 1998 and $9.7 million relating to the acquisition of three branch offices of New London Trust in 2001. An independent third-party analysis of goodwill indicates no impairment at December 31, 2011.

Intangible assets increased $205 thousand, or 13.22%, to $1.8 million at December 31, 2011, compared to $1.6 million at December 31, 2010. Intangible assets include core deposit intangibles of $1.1 million and customer list intangibles of $615 thousand. We amortized $410 thousand of core deposit intangibles during 2011 utilizing the sum-of-the-years-digits method over 10 years. We amortized $13 thousand of customer list intangibles during 2011 utilizing the sum-of-the-years-digits method over 15 years. An independent third-party analysis of core deposit intangibles indicates no impairment at December 31, 2011.

Total deposits increased $24.8 million, or 3.19%, to $803.0 million at December 31, 2011 from $778.2 million at December 31, 2010. We were able to retain and attract deposits as customers continued to lean towards the safety and guarantee of FDIC insurance resulting from uncertain credit markets and a lingering national recession.

Advances from the FHLBB increased $5.0 million, or 6.59%, to $81.0 million from $76.0 million at December 31, 2010. The weighted average interest rate for the outstanding FHLBB advances was 2.09% at December 31, 2011, compared to 2.40% at December 31, 2010.

 

38


Table of Contents

Other borrowings increased $543 thousand to $543 thousand at December 31, 2011. This reflected a note payable issued to the principals of McCrillis & Eldredge as part of the acquisition in 2011 and that was paid in full by December 31, 2012.

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2011, decreased $412 thousand, or 1.43%, to $28.5 million. The decrease was primarily due to our lower interest rate spread and margin during 2011. Total interest and dividend income decreased $1.5 million, or 3.80%, to $37.2 million, despite higher average balances on interest-earning assets during 2011, as the yield on interest-earning assets decreased to 3.98% from 4.32%. Interest and fees on loans decreased $315 thousand, or 0.99%, to $31.6 million in 2011, despite an increase in average balances of $59.3 million, due primarily to a decrease in the average yield on loans to 4.42% from 4.87%.

Interest on taxable investments decreased $1.5 million, or 24.39%, to $4.6 million in 2011 compared to $6.1 million in 2010. Dividends increased $18 thousand, or 105.88%, to $35 thousand. Interest on other investments increased $313 thousand, or 52.25%, to $912 thousand due primarily to the increase in tax-exempt municipal bonds of $35.5 (fair value) during 2010 with earnings for 12 months during 2011. The yield on our investment portfolio declined from 2.80% for the year ended December 31, 2010, to 2.54% for the year ended December 31, 2011, due to lower average portfolio and lower yielding investments purchased.

Total interest expense decreased $1.1 million, or 10.83%, to $8.7 million for the year ended December 31, 2011. The decrease is primarily due to the 14.91% decrease in the combined cost of funds on deposits and borrowings to 0.97% for the year ended December 31, 2011, from 1.14% for the year ended December 31, 2010. For the year ended December 31, 2011, interest on deposits decreased $863 thousand, or 13.01%, to $5.8 million despite an increase in average deposits as the cost of deposits decreased to 0.75% from 0.94% compared to the same period in 2010. Interest on FHLBB advances and other borrowed money decreased $177 thousand, or 8.68%, for the 12 months ended December 31, 2011 to $1.9 million compared to the same period in 2010 as the average cost of FHLBB advances outstanding decreased for 2011 compared to 2010.

For the year ended December 31, 2011, our combined cost of funds decreased to 0.97% as compared to 1.14% for 2010. The cost of deposits, including repurchase agreements, decreased 18 basis points for 2011 to 0.75 % compared to 0.94% in 2010, due primarily to the downward repricing of maturing time deposits and advances combined with increases in lower-costing checking accounts.

Our interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, decreased to 3.01% in 2011 from 3.18% in 2010. Our net interest margin, representing net interest income as a percentage of average interest-earning assets, decreased to 3.05% during 2011, from 3.23% during 2010.

Allowance and Provision for Loan Losses

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at December 31, 2011 was $9.1 million compared to $9.9 million at December 31, 2010. At $9.1 million, the allowance for loan losses represents 1.26% of total loans, down from 1.45% at December 31, 2010. Total non-performing assets at December 31, 2011 were $17.7 million, representing 193.96% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $1.3 million to the allowance for loan and lease losses during 2011 compared to $2.1 million in 2010. The provisions during the 12 months ended December 31, 2011 have been offset by loan charge-offs of $2.2 million and recoveries of $195 thousand during the same period. Portfolio performance and charge-offs resulted in our decision to decrease the provision for loan losses during 2011. The provisions made in 2011 reflect loan loss experience in 2011 and changes in economic conditions that increase the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions in 2012 as needed 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. We seek 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 December 31, 2011, the overdraft allowance was $18 thousand compared to $23 thousand at year-end 2010. Provisions for overdraft losses were $51 thousand during the 12 month period ended December 31, 2011, compared to $82 thousand for the same period during 2010. 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.

 

39


Table of Contents

Loan charge-offs (excluding the overdraft program) were $2.2 million during the 12 months ended December 31, 2011, compared to $1.6 million for the same period in 2010. Recoveries were $195 thousand during the 12 months ended December 31, 2011, compared to $49 thousand for the same period in 2010. This activity resulted in net charge-offs of $2.0 million for the 12 months ended December 31, 2011, compared to $1.6 million for the same period in 2010. One-to-four family residential mortgages, commercial real estate mortgages, land and construction, and commercial loans accounted for 53%, 25%, 14%, and 7%, respectively, of the amounts charged-off during the 12 months ended December 31, 2011.

Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans at carrying value were $25.1 million at December 31, 2011, compared to $19.5 million at December 31, 2010. The increase comes primarily from an increase of troubled debt restructured as we provide concessions to some borrowers due to the weaker cash flows those borrowers are experiencing. The modifications were provided to both residential mortgage borrowers and commercial relationship. Additional information on troubled debt restructurings can be found in Note 4 of our Consolidated Financial Statements located elsewhere in this report. In addition, we had $1.3 million of OREO at December 31, 2011 representing two commercial properties and three residential properties acquired during the 12 months ended December 31, 2011, compared to $75 thousand at December 31, 2010. Of the five properties, one commercial and one residential property were voluntarily relinquished by the borrowers as in-substance foreclosures. During the 12 months ended December 31, 2011, we sold five properties, one of which was classified as OREO at December 31, 2010, while the others were acquired during 2011. Losses are incurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved due to the inherent risks in providing credit. The impaired loans meet the criteria established under ASC 310-10-35. Fourteen loans considered impaired loans at December 31, 2011, have specific reserves identified and assigned. The 14 loans are secured by real estate, business assets or a combination of both. At December 31, 2011, the allowance included $308 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2010, was $480 thousand.

Loans over 90 days past due were $3.3 million at December 31, 2011, compared to $2.1 million at December 31, 2010. Loans 30 to 89 days past due were $5.6 million at December 31, 2011, compared to $9.0 million at December 31, 2010. The level of loan losses and loan delinquencies and changes in loan risk ratings resulting in more classified loans, combined with weaker economic and commercial and residential real estate market conditions are factors considered in determining the adequacy of the loan loss allowance and assessing the need for additional provisions. As previously noted, we anticipate more charge-offs as loan issues are resolved due to the normal course of credit risk. As a percentage of assets, non-performing loans increased from 1.01% at December 31, 2010 to 1.59% at December 31, 2011, and as a percentage of total loans, increased from 1.46% at the end of 2010 to 2.45% at the end of 2011.

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 December 31, 2011, 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 December 31, 2011, we had 50 loans with net carrying values of $12.0 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2011, the majority of “troubled debt restructurings” were performing under contractual terms and are included in impaired loans. Of the 50 loans classified as troubled debt restructured, 12 were 30 days or more past due at December 31, 2011. The balances of these loans were $1.9 million and the loans have assigned specific allowances of $43 thousand. Thirteen loans were considered troubled debt restructured at both December 31, 2011 and 2010. These thirteen loans include ten commercial real estate loans totaling $4.8 million, two residential loans totaling $528 thousand and one commercial loan for $231 thousand. These loans, independently measured for impairment, carry a combined specific allowance of $29 thousand. At December 31, 2010, we had 21 loans with net carrying values of $8.0 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.”

Noninterest Income and Expense

Total noninterest income increased $184 thousand, or 1.79%, to $10.5 million for the 12 months ended December 31, 2011, as discussed below.

 

40


Table of Contents
   

Customer service fees decreased $127 thousand, or 2.44%%, due primarily to a reduction of 12.91% in fees assessed on our overdraft protection program during 2011 partially offset by increased volume and related revenue from ATM and debit card usage.

 

   

Net gain on sales and calls of securities increased $505 thousand, or 24.24%, despite a lower volume of sales of securities in 2011 compared to 2010 which resulted in higher gains recorded, respectively. During 2011, we were able to take advantage of the market conditions which resulted in higher gains.

 

   

Net gain on sales of loans decreased $761 thousand, or 44.98%, as we sold $68.8 million of 1-4 family conventional mortgage loans into the secondary market during 2011, down from $96.3 million of loans sold during 2010 resulting in lower resulting revenue. We retained a higher portion of originated mortgage loans within their portfolio during 2011, resulting in balance sheet increases of $49.4 million and $4.7 million of conventional real estate loans and commercial real estate loans, respectively.

 

   

Net loss on sale of OREO and fixed assets decreased $23 thousand during 2011 as we recognized gains of $27 thousand on other real estate and chattel property owned during 2011 compared to $50 thousand in 2010.

 

   

Rental income increased $13 thousand, or 1.85%, as revenue within this category remained relatively unchanged.

 

   

The realized gain in CHC increased $381 thousand, or 198.44%, to $573 thousand for the 12 months ended December 31, 2011, from $192 thousand for the same period in 2010, as a direct reflection of earnings reported by CHC and our increased investment in CHC from a one-third owner to one-half owner.

 

   

Brokerage service income increased from $2 thousand to $3 thousand for the year ended December 31, 2011.

 

   

Bank-owned life insurance increased $76 thousand to $432 thousand due primarily to increased investment of $2.5 million in bank-owned life insurance.

 

   

Insurance commissions increased $119 thousand for the year ended December 31, 2011, compared to no activity in 2010. The insurance commissions recorded reflect earnings from the acquisition of McCrillis & Eldredge on November 10, 2011 through year end.

Total noninterest expenses increased $1.6 million, or 6.32%, to $27.1 million for the 12 months ended December 31, 2011, from $25.5 million for the same period in 2010.

 

   

Salaries and employee benefits increased $936 thousand, or 7.00%, to $14.3 million for the 12 months ended December 31, 2011 from $13.4 million for the same period in 2010. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $995 thousand, or 6.78%, to $15.7 million for the 12 months ended December 31, 2011, from $14.7 million for the same period in 2010. Gross salaries increased $914 thousand, or 8.06%, to $12.3 million for the 12 months ended December 31, 2011, compared to the same period in 2010. Average full time equivalents increased to 234 for the 12 months ended December 31, 2011, compared to 231 for the same period in 2010. Benefits costs increased $31 thousand. This increase includes decreases related to retirement costs offset in part by increases in health insurance costs. The deferral of expenses associated with the origination of loans increased $59 thousand, or 4.53%, to $1.4 million for the 12 months ended December 31, 2011, from $1.3 million for the same period in 2010. This deferral represents salary and employee benefits expenses associated with origination costs which are recognized over the life of the loan.

 

   

Occupancy and equipment expenses increased $63 thousand, or 1.69%, to $3.8 million for the 12 months ended December 31, 2011, from $3.7 million for the same period in 2010, due primarily higher costs for seasonal expenses such as snow removal and heating fuel during 2011.

 

   

Advertising and promotion increased $78 thousand, or 18.06%, to $510 thousand for the 12 months ended December 31, 2011, from $432 thousand for the same period in 2010, due primarily to increases in the utilization of print, television, and web media.

 

   

Depositors’ insurance decreased $227 thousand to $793 thousand at December 31, 2011, compared to $1.0 million at December 31, 2010, due primarily to modifications made by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates during 2011.

 

   

Professional fees increased $169 thousand, or 17.73% to $1.1 million for the 12 months ended December 31, 2011 from $953 thousand for the same period in 2010, reflecting among other things increased legal expenses and consulting fees, primarily attributable to audit expenses.

 

   

Data processing and outside services fees increased $29 thousand, or 2.85%, to $1.0 million for the 12 months ended December 31, 2011, compared to the same period in 2010 due to increases in core processing, statement rendering and service expenses offset in part by decreases in correspondent expenses as well as expenses associated with the overdraft protection program.

 

41


Table of Contents
   

ATM processing fees decreased $39 thousand, or 7.48%, to $481 thousand for the 12 months ended December 31, 2011, from $520 thousand for the same period in 2010, due in part to reduced processing costs.

 

   

Net (benefit) amortization of mortgage servicing rights (MSR) and mortgage servicing income increased $4 thousand to a benefit of $117 thousand for the 12 months ended December 31, 2011, from a benefit of $113 thousand for the same period in 2010.

 

   

Other expenses increased $549 thousand, or 15.75%, to $4.0 million for the 12 months ended December 31, 2011, from $3.5 million for the same period in 2010. In particular, periodic impairment expenses associated with mortgage servicing rights increased $110 thousand to $13 thousand for the 12 months ended December 31, 2011, compared to periodic impairment benefits of $97 thousand for the same period in 2010; expenses related to non-earning assets and OREO increased $55 thousand and $79 thousand, respectively; corporate legal expenses increased $280 thousand related to the acquisition of McCrillis & Eldredge, compensation guidance, and shelf registration in addition to other routine corporate legal needs; and tax-qualified contributions decreased $167 thousand as fewer tax credit-qualified contribution opportunities were presented.

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by us, 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 $160,402 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 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, on or after March 30, 2010 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 us, 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 $160,402 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 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, on or after March 30, 2010 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Interest Rate Swap

On May 1, 2008, we entered into an interest rate swap agreement with PNC Bank, effective on June 17, 2008. The interest rate agreement converts Trust II’s interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement has a notional amount of $10.0 million maturing June 17, 2013. Under the swap agreement, we receive quarterly interest payments at a floating rate based on three month LIBOR plus 2.79% and is obligated to make quarterly interest payments at a fixed-rate of 6.65%.

 

42


Table of Contents

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Further detail on the financial instruments with off-balance sheet risk to which we are a party is contained in Note 21 to our Consolidated Financial Statements located elsewhere in this report.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

Item 8. Financial Statements

Our Consolidated Financial Statements and accompanying notes may be found beginning on page F-1 of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework, management concluded that our internal control over financial reporting was effective as of December 31, 2012. In addition, based on our assessment, management has determined that there were no material weaknesses in our internal controls over financial reporting.

Attestation Report of the Registered Public Accounting Firm

This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

We regularly assess the adequacy of our internal control over financial reporting and enhance our controls in response to internal control assessments and internal and external audit and regulatory recommendations. There have been no

 

43


Table of Contents

changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

Item  9B. Other Information

None.

 

44


Table of Contents

PART III.

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated by reference to the sections entitled “Information about Nominees and Continuing Directors,” “Information About Our Executive Officers Who Are Not Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” “Corporate Governance – Committees of the Board of Directors – Nominating and Corporate Governance Committee” and “Corporate Governance – Committees of the Board of Directors – Audit Committee” in our Proxy Statement.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated by reference to the sections entitled “Executive Compensation” and “Directors’ Compensation” in our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

The information required by this Item 12 is incorporated by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in our Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is incorporated by reference to the sections entitled “Transactions with Related Persons” and “Corporate Governance – Board of Directors Independence” in our Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the section entitled “Proposal 2 – Information About Our Relationship with Our Independent Registered Public Accounting Firm” in our Proxy Statement.

 

45


Table of Contents

PART IV.

Item 15. Exhibits and Financial Statement Schedules

The financial statement schedules and exhibits filed as part of this form 10-K are as follows:

(a)(1)     Financial Statements

Reference is made to the Consolidated Financial Statements included in Item 8 of Part II hereof.

(a)(2)     Financial Statement Schedules

Consolidated financial statement schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the consolidated financial statements or notes thereto.

(a)(3)     Exhibits

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

 

46


Table of Contents

 

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

New Hampshire Thrift Bancshares, Inc.

Newport, New Hampshire

We have audited the accompanying consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2012 and 2011 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

LOGO

SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 27, 2013

 

LOGO

 

F-1


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

(Dollars in thousands, except per share data)             

As of December 31,

   2012     2011  

ASSETS

    

Cash and due from banks

   $ 26,147      $ 21,841   

Interest-bearing deposit with the Federal Reserve Bank

     13,265        2,899   
  

 

 

   

 

 

 

Cash and cash equivalents

     39,412        24,740   

Securities available-for-sale

     212,369        210,318   

Federal Home Loan Bank stock

     9,506        7,615   

Loans held-for-sale

     11,983        3,434   

Loans receivable, net of the allowance for loan losses of $9.9 million as of December 31, 2012 and $9.1 million as of December 31, 2011

     902,236        714,952   

Accrued interest receivable

     2,845        2,669   

Premises and equipment, net

     17,261        16,450   

Investments in real estate

     4,074        3,451   

Other real estate owned

     102        1,344   

Goodwill

     35,395        28,597   

Intangible assets

     3,416        1,755   

Investment in partially owned Charter Holding Corp., at equity

     4,909        4,895   

Bank owned life insurance

     18,905        13,347   

Other assets

     8,064        8,252   
  

 

 

   

 

 

 

Total assets

   $ 1,270,477      $ 1,041,819   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 74,133      $ 64,356   

Interest-bearing

     875,208        738,667   
  

 

 

   

 

 

 

Total deposits

     949,341        803,023   

Federal Home Loan Bank advances

     142,730        80,967   

Notes payable

     —          543   

Securities sold under agreements to repurchase

     14,619        15,514   

Subordinated debentures

     20,620        20,620   

Accrued expenses and other liabilities

     13,673        12,492   
  

 

 

   

 

 

 

Total liabilities

     1,140,983        933,159   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, $.01 par value, per share: 2,500,000 shares authorized:

    

Series B, non-cumulative perpetual, 23,000 shares issued and outstanding at December 31, 2012 and 20,000 shares issued and outstanding at December 31, 2011, liquidation value $1,000 per share

     —         —     

Common stock, $.01 par value: 10,000,000 shares authorized, 7,486,225 shares issued and 7,055,946 shares outstanding as of December 31, 2012 and 6,292,639 shares issued and 5,832,360 shares outstanding as of December 31, 2011

     75        63   

Warrants

     —          85   

Paid-in capital

     83,977        66,658   

Retained earnings

     53,933