10-K 1 d638898d10k.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, 2013

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

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 7, 2014, there were 8,219,376 shares of the registrant’s common stock issued and outstanding.

As of June 30, 2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $94.0 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 2014 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      ii   
PART I     
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     17   
Item 1B.  

Unresolved Staff Comments

     20   
Item 2.  

Properties

     21   
Item 3.  

Legal Proceedings

     21   
Item 4.  

Mine Safety Disclosures

     21   
PART II     
Item 5.  

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

     22   
Item 6.  

Selected Financial Data

     23   
Item 7.  

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

     23   
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

     44   
Item 9A  

Controls and Procedures

     44   
Item 9B.  

Other Information

     44   
PART III     
Item 10.  

Directors, Executive Officers and Corporate Governance

     44   
Item 11.  

Executive Compensation

     44   
Item 12.  

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

     44   
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

     45   

 

 

 

 

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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, Charter Holding Corp., McCrillis & Eldredge Insurance, Inc., Lake Sunapee Group, Inc. and Lake Sunapee Financial Services Corporation.

 

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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 association. 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 Charter Holding Corp. and its subsidiary, Charter Trust Company, we offer wealth management and trust services. 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.

Recent Acquisitions

On September 4, 2013, the Bank completed its purchase of all shares of common stock of Charter Holding Corp. (“Charter Holding”) held by Meredith Village Savings Bank (“MVSB”) for a total purchase price of $6.2 million in cash. Prior to the purchase, each of the Bank and MVSB owned 50% of Charter Holding’s outstanding shares of common stock. Following completion of the transaction, the Bank now owns 100% of the outstanding shares of Charter Holding and its subsidiary, Charter Trust Company (“Charter Trust”). Charter Holding is a wholly owned subsidiary of the Bank.

On October 25, 2013, we completed our previously announced acquisition of Central Financial Corporation (“CFC”). Under the terms of the agreement, CFC merged with and into us, with us being the surviving corporation of the merger. Additionally, The Randolph National Bank (“RNB”), a wholly owned subsidiary of CFC, merged with and into the Bank with the Bank continuing as the surviving entity. We issued approximately 1.1 million shares of its common stock to CFC shareholders in the transaction on the basis of 8.699 shares of our common stock for each share of CFC common stock. The total consideration payable to CFC shareholders was valued at approximately $15.9 million based on the October 25, 2013 closing price of $14.64 per share of our common stock.

Employees

At December 31, 2013, we had a total of 331 full-time employees, 30 part-time employees, and 21 per-diem employees. These employees are not represented by collective bargaining agents. We believe that our relationship with our employees is good.

Market Area

Our market area extends from the southern New Hampshire/Massachusetts border-city of Nashua to the north through central and western New Hampshire and central Vermont. It is concentrated in the counties of Hillsborough, Grafton, Merrimack, Sullivan and Cheshire in south, central and western New Hampshire, and the counties of Rutland, Windsor and Orange in central Vermont.

There are several distinct regions within our market area. The first region is centered in Nashua, New Hampshire, the second largest city in the three northern New England states of New Hampshire, Maine and Vermont. Nashua’s downtown is a regional commercial, entertainment, and dining destination. The city, bordering Massachusetts to the south, enjoys a vibrant high-tech industry and a robust retail industry due in part to New Hampshire’s absence of a sales tax. The Upper Valley region is located in the west-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 Lake Sunapee region is a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee.

 

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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, Windsor and Orange counties are located in 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.

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.

LENDING ACTIVITIES

Our net loan portfolio was $1.1 billion at December 31, 2013, representing approximately 80% of total assets. As of December 31, 2013, approximately 54% of the mortgage loan portfolio had adjustable rates. As of December 31, 2013, we had sold $417.3 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.

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 loans 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 similar terms and conditions of our conventional residential program.

 

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CONSUMER LOANS. We make various types of secured and unsecured consumer loans, including home improvement loans. We offer loans 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 are 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.

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

 

     2013     2012     2011  
     Amount     % of Total     Amount     % of Total     Amount     % of Total  
     ($ in thousands)  

Real estate loans

            

Conventional

 

 

   $ 602,270        52.82   $ 471,449        51.84   $ 397,010        55.04

Commercial

     287,813        25.24        234,264        25.76        148,424        20.58   

Home equity

 

 

     70,564        6.19        69,291        7.62        71,990        9.98   

Construction

     29,722        2.61        19,412        2.13        12,731        1.76   

Consumer loans

 

 

     9,817        0.86        7,304        0.80        7,343        1.02   

Commercial and municipal loans

     140,071        12.28        107,750        11.85        83,835        11.62   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

 

 

     1,140,257        100.00     909,470        100.00     721,333        100.00

Unamortized adjustment to fair value

     —           —           1,101     

Allowance for loan losses

 

 

     (9,757       (9,923       (9,131  

Deferred loan origination costs, net

     3,610          2,689          1,649     
  

 

 

     

 

 

     

 

 

   

Loans receivable, net

   $ 1,134,110        $ 902,236        $ 714,952     
  

 

 

     

 

 

     

 

 

   
     2010     2009  
     Amount     % of Total     Amount     % of Total  
     ($ in thousands)  

Real estate loans

        

Conventional

 

 

   $ 347,606        50.90   $ 327,691        52.24

Commercial

     143,768        21.05        135,839        21.66   

Home equity

 

 

 

     74,884        10.97        73,611        11.74   

Construction

     19,210        2.81        18,308        2.92   

Consumer loans

 

 

     8,079        1.18        9,372        1.49   

Commercial and municipal loans

     89,361        13.09        62,387        9.95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

 

 

     682,908        100.00     627,208        100.00

Unamortized adjustment to fair value

     1,202          1,303     

Allowance for loan losses

 

 

     (9,864       (9,519  

Deferred loan origination costs, net

     1,268          1,342     
  

 

 

     

 

 

   

Loans receivable, net

   $ 675,514        $ 620,334     
  

 

 

     

 

 

   

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

 

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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, $2.1 million, or 21.96% of the total allowance, was allocated to the originated commercial real estate portfolio at December 31, 2013. The originated commercial real estate portfolio represents 25.24% 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, $5.4 million, or 55.19% 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 62.98% 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, $1.6 million, or 16.00% of the total allowance, is allocated to the originated commercial and municipal loan portfolio. The originated commercial and municipal loan portfolio represents 12.72% 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 1.80% of the aggregate six-month average of delinquencies.

The following table sets forth the maturities of the loan portfolio at December 31, 2013, 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

   $ 13,264       $ 54,075       $ 345,357       $ 412,696   

Adjustable interest rates

     11,670         33,227         532,776         577,673   
  

 

 

    

 

 

    

 

 

    

 

 

 
     24,934         87,302         878,133         990,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

Collateral/Consumer Loans with:

 

           

Predetermined interest rates

     3,894         4,093         890         8,877   

Adjustable interest rates

     194         654         92         940   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,088         4,747         982         9,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial/Municipal Loans with:

 

           

Predetermined interest rates

     16,488         31,212         59,359         107,059   

Adjustable interest rates

     8,362         16,160         8,490         33,012   
  

 

 

    

 

 

    

 

 

    

 

 

 
     24,850         47,372         67,849         140,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals (1)

   $ 53,872       $ 139,421       $ 946,964       $ 1,140,257   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This table includes $21.2 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

 

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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”).

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 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, 2013 and 2012 were $30.3 million and $26.3 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.

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.

 

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The following table sets forth as of December 31, 2013, the maturities and the weighted-average yields of our debt securities, excluding mortgage-backed 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

   $ 20,041       $ 20,039         0.02
  

 

 

    

 

 

    

Total due in less than one year

     20,041         20,039         0.02   

U.S. Treasury notes

 

     30,642         29,977         0.69   

U.S. Government-sponsored enterprise bonds

     6,997         6,770         1.05   
  

 

 

    

 

 

    

Total due after one year through five years

     37,639         36,747         0.76   
  

 

 

    

 

 

    

Municipal bonds

     12,466         12,430         2.81   
  

 

 

    

 

 

    

Total due after five years through ten years

     12,466         12,430         2.81   
  

 

 

    

 

 

    

U.S. Government-sponsored enterprise bonds

     391         390         1.10   

Municipal bonds

 

     8,066         7,676         3.70   

Other bonds and debentures

     263         275         8.66   
  

 

 

    

 

 

    

Total due after ten years

     8,720         8,341         3.75   
  

 

 

    

 

 

    
   $ 78,866       $ 77,557         1.19
  

 

 

    

 

 

    

The amortized cost and approximate fair value for our available-for-sale securities portfolio are summarized as follows (dollars in thousands):

 

December 31, 2013    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

  

Bonds and notes-

 

           

U.S. Treasury notes

   $ 50,683       $ —         $ 667       $ 50,016   

U.S. Government-sponsored enterprise bonds

 

     7,388         4         232         7,160   

Mortgage-backed securities

     47,612         27         992         46,647   

Municipal bonds

 

     20,532         63         489         20,106   

Other bonds and debentures

     263         12         —          275   

Equity securities

     742         292         —          1,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 127,220       $ 398       $ 2,380       $ 125,238   
  

 

 

    

 

 

    

 

 

    

 

 

 
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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The amortized cost and approximate fair value for our available-for-sale securities portfolio are summarized as follows (dollars in thousands):

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 or wholesale funding strategy. We offer negotiated rates on some of our certificate accounts. At December 31, 2013, time deposits represented approximately 33% of total deposits. Time deposits included $177.0 million of certificates of deposit in excess of $100,000.

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

 

     2013     2012      2011  
     (Dollars in thousands)  

Net (withdrawals) deposits

   $ (14,992   $ 43,458       $ 19,033   

Deposits assumed through acquisition

 

     149,684        98,479         —    

Interest credited on deposit accounts

     4,059        4,381         5,771   
  

 

 

   

 

 

    

 

 

 

Total increase in deposit accounts

   $ 138,751      $ 146,318       $ 24,804   
  

 

 

   

 

 

    

 

 

 

At December 31, 2013, we had approximately $177.0 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:

 

     Amount      Weighted Average Rate  
     (Dollars in thousands)         

Maturity Period

     

3 months or less

 

   $ 52,753         0.46

Over 3 through 6 months

     25,368         0.75

Over 6 through 12 months

 

     29,685         0.85

Over 12 months

     69,189         0.94
  

 

 

    

Total

   $ 176,995         0.76
  

 

 

    

 

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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:

 

     2013     2012     2011  
     Amount      % of Total     Amount      % of Total     Amount      % of Total  
     (Dollars in thousands)  

Checking accounts

   $ 101,446         9.3   $ 74,133         7.8   $ 64,356         8.0

NOW accounts

 

     303,054         27.9        248,329         26.2        209,150         26.1   

Money market accounts

     104,755         9.6        82,608         8.7        40,503         5.0   

Regular savings accounts

 

     22,020         2.0        10,112         1.1        9,812         1.2   

Treasury savings accounts

     195,887         18.0        180,253         18.9        142,682         17.8   

Club deposits

     193         —         102         —         96         —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     727,355         66.8        595,537         62.7        466,599         58.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Time deposits

 

               

Less than 12 months

     238,004         21.9        210,349         22.2        236,691         29.5   

Over 12 through 36 months

 

     100,394         9.2        96,316         10.1        44,015         5.5   

Over 36 months

     22,339         2.1        47,139         5.0        55,718         6.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total time deposits

     360,737         33.2        353,804         37.3        336,424         41.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Deposits

   $ 1,088,092         100.0   $ 949,341         100.0   $ 803,023         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,  
     2013     2012     2011  
     Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
 
     (Dollars in thousands)  

NOW

   $ 306,737         0.05   $ 270,574         0.09   $ 227,174         0.12

Savings deposits

 

     190,707         0.05        151,238         0.18        144,725         0.21   

Money market deposits

     81,682         0.21        40,872         0.34        38,672         0.42   

Time deposits

 

     338,920         1.04        332,545         1.13        348,730         1.45   

Demand deposits

     26,647         —         29,657         —         26,832         —    
  

 

 

      

 

 

      

 

 

    

Total Deposits

   $ 944,693         $ 824,886         $ 786,133      
  

 

 

      

 

 

      

 

 

    

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

 

Time Deposits

   2013      2012      2011  
     (Dollars in thousands)  

0.00% – 0.99%

   $ 219,507       $ 197,076       $ 190,949   

1.00% – 1.99%

 

     85,688         96,845         65,670   

2.00% – 2.99%

     27,656         30,879         46,428   

3.00% – 3.99%

 

     27,886         28,752         33,044   

4.00% – 4.99%

     —          252         833   

5.00% – 5.99%

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 360,737       $ 353,804       $ 336,924   
  

 

 

    

 

 

    

 

 

 

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, 2013, we had outstanding advances of $121.7 million from the FHLBB compared to advances outstanding of $142.7 million from the FHLBB at December 31, 2012.

 

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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:

 

     2013     2012     2011  
     (Dollars in thousands)  

Balance at year end

   $ 15,000      $ 30,500      $ 15,000   

Average amount outstanding

 

     20,573        26,745        24,096   

Maximum amount outstanding at any month-end

     65,000        35,000        35,000   

Average interest rate for the year

 

     0.29     0.27     0.28

Weighted average interest rate on year-end balance

     0.28     0.32     0.19

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, 2013, 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, and Charter Holding, which provides wealth management and trust services through its subsidiary, Charter Trust Company.

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 expired on June 17, 2013. For more information, see Note 2 of our Consolidated Financial Statements located elsewhere in this report.

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 association, 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.

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.

Recent Regulatory Reforms

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of insured depository institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations. Certain provisions of the Dodd-Frank Act applicable to the Company and the Bank are discussed herein.

 

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In July 2013, the Federal Reserve Board, the OCC and the FDIC approved final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules. The New Capital Rules are effective for the Company on January 1, 2015, subject to phase-in periods for certain components and other provisions.

In December, 2013, the federal banking agencies jointly adopted final rules implementing Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities, such as the Company, to engage in proprietary trading or to own, sponsor or have certain relationships with hedge funds or private equity funds—so-called “Covered Funds.” The final rule definition of Covered Fund includes certain investments such as collateralized debt obligation (“CDO”) securities. Compliance is generally required by July 21, 2015.

The requirements of the Dodd-Frank Act and other regulatory reforms continue to be implemented. It is difficult to predict at this time what specific impact certain provisions and yet to be finalized implementing rules and regulations will have on us, including any regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”). Financial reform legislation and rules could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of the regulatory reform including the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

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 association 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 association.

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 the New Capital Rules.

The New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, [including the Company,] the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements.

Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:

 

    4.5% CET1 to risk-weighted assets;

 

    6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

 

    8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

 

    4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

 

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The New Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to the Company will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including the Company, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of the Company’s periodic regulatory reports in the beginning of 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in a holding company’s Tier 1 capital. However, depository institution holding companies with total consolidated assets of less than $15 billion as of year-end 2009 are permitted to continue to count as Tier 1 capital trust preferred securities issued before May 19, 2010.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.

We believe that the Company will be able to comply with the targeted capital ratios upon implementation of the New Capital Rules.

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 insured depository institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution 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.

 

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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.

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 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, 2013, 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.

 

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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.

At December 31, 2013, 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, 2013:

 

     Bank      Capital Requirements      Excess Capital  
     ($ in thousands)  

Tangible capital

   $ 113,381       $ 20,508       $ 92,874   

Core capital

 

     113,381         54,688         58,694   

Risk-based capital

     123,555         76,675         46,881   

As with the Company, the Bank will be subject to the New Capital Rules on the same phase-in schedule. We believe that the Bank similarly will be able to comply with the targeted capital ratios upon implementation of the New Capital Rules.

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 2013.

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.

 

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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.

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 became 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, 2013, the Bank met the criteria for being considered “well capitalized.”

The New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.

 

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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.

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 2014, due December 30, 2013, was 0.0060% 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.

 

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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, 2013 of $9.8 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.

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). Federal Reserve regulations currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts up to $13.3 million, which are exempt. Transaction accounts greater than $13.3 million up to $89.0 million have a reserve requirement of 3%, and those greater than $89.0 million have a reserve requirement of $2.27 million plus 10% of the amount over $89.0 million. These tiered reserve 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.

Regulations Application to the Company and the Bank

Financial Privacy Laws. Federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the ability of insured depository institutions and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.

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;

 

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    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.

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.”

Other Legislative Initiatives. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank and savings and loan holding companies and/or insured depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on the business of the Company.

AVAILABLE INFORMATION

We maintain a website at www.nhthrift.com. The website contains information about us and our operations. Through a link to the SEC Filings section of our website, copies of each of our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports Form 10-Q and Current Reports on Form 8-K and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. In addition, copies of any document we file with or furnish to the SEC may be obtained from the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish such information electronically with the SEC. The information found on our website or the website of the SEC is not incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

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.

 

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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.

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

 

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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.

The Dodd-Frank Act 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 may be subject to more stringent capital requirements.

The Company and the Bank are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each of the Company and the Bank must maintain. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. In light of proposed changes to regulatory capital requirements contained in the Dodd-Frank Act and the regulatory accords on international banking institutions formulated by the Basel Committee and implemented by the Federal Reserve and the OCC, we may be required to satisfy additional, more stringent, capital adequacy standards. The ultimate impact of the new capital and liquidity standards on us cannot be determined at this time and will depend on a number of factors, including the treatment and implementation by the U.S. banking regulators. These requirements, however, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations.

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.

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

 

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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.

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

At December 31, 2013, we had 44 offices located in New Hampshire and Vermont as set forth in the following table. Lease expiration dates range from 1 to 10 years with renewal options of 1 to 10 years. We believe that our existing facilities are sufficient for our current needs.

 

Location

   Leased      Owned      Total  

New Hampshire:

        

1. Andover

 

     1         —          1   

2. Bradford

     —          1         1   

3. Claremont

 

     1         —          1   

4. Concord

     —          1         1   

5. Enfield

 

     1         —          1   

6. Grantham

     —          1         1   

7. Hanover (1)

 

     2         —          2   

8. Hillsboro

     —          1         1   

9. Lebanon

 

     1         2         3   

10. Meredith

     1         —          1   

10. Milford

 

     —          1         1   

10. New London (1) (2)

     —          3         3   

11. Newbury

 

     1         —          1   

12. Newport (3)

     —          3         3   

13. Peterborough (1)

 

     1         —          1   

15. Rochester

     1         —          1   

16. Sunapee

 

     —          1         1   

17. West Lebanon

     1         —          1   

18. Nashua

 

     1         1         2   

Vermont:

        

1. Brandon (2)

 

     1         2         3   

2. Pittsford

     —          1         1   

3. Quechee

 

     1         —          1   

4. Randolph

     2         1         3   

5. Rochester

 

     —          1         1   

6. Royalton

     —          1         1   

7. Rutland

 

     1         1         2   

8. South Royalton

     1         —          1   

9. West Rutland

 

     —          1         1   

10. Williamstown

     —          1         1   

11. Woodstock

     —          2         2   
  

 

 

    

 

 

    

 

 

 

Total Offices

     18         26         44   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes Charter Trust Company.
(2) Includes McCrillis & Eldredge Insurance, Inc.
(3) 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.

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.

 

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PART II.

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

Market Information

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 7, 2014, we had approximately 930 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
 

2013

  

First Quarter

   $ 13.70       $ 12.70       $ 0.13   
  

Second Quarter

 

   $ 14.58       $ 12.50       $ 0.13   
  

Third Quarter

   $ 15.51       $ 13.08       $ 0.13   
  

Fourth Quarter

 

   $ 15.30       $ 13.46       $ 0.13   

2012

  

First Quarter

   $ 12.64       $ 11.12       $ 0.13   
  

Second Quarter

 

   $ 13.53       $ 12.05       $ 0.13   
  

Third Quarter

   $ 13.30       $ 12.31       $ 0.13   
  

Fourth Quarter

 

   $ 13.30       $ 12.15       $ 0.13   

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 10 anniversary, by 10% for each one percent increase in small business lending that qualifies over the baseline level.

Recent Sales of Unregistered Securities

There were no sales by us of unregistered securities during the year ended December 31, 2013.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth information with respect to purchases made by us of our common stock during the 12 months ended December 31, 2013.

 

Period

   Total Number
of Shares
Purchased
    Average
Price Paid
per Share

($)
     Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
     Maximum Number
of Shares that May
Yet Be Purchased
Under the Program
 

June 1 - 30, 2013

     18,496 (1)    $ 13.050         —           148,088   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

     57,412      $ 13.050         —           148,088   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Shares of common stock surrendered by option holder to satisfy the exercise price of options exercised.

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, 2013, 148,088 shares remained to be repurchased under the plan. During 2013, no shares were repurchased pursuant to the program.

Item 6. Selected Financial Data

As a smaller reporting company for the year-ended December 31, 2013, we are not required to provide the information required by this Item.

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 $153.4 million, or 12.07%, to $1.4 billion at December 31, 2013, from $1.3 billion at December 31, 2012.

 

    Net loans increased $231.9 million, or 25.70%, to $1.1 billion at December 31, 2013, from $902.2 million at December 31, 2012.

 

    In 2013, the Company originated $414.0 million in loans, compared to $426.8 million in 2012.

 

    The Company’s loan servicing portfolio was $417.3 million at December 31, 2013, compared to $385.4 million at December 31, 2012.

 

    Total deposits increased $138.8 million, or 14.62%, to $1.1 billion at December 31, 2013, from $949.3 million at December 31, 2012.

 

    Net interest and dividend income for the year ended December 31, 2013, was $33.8 million compared to $29.0 million for the same period in 2012.

 

    Net income available to common stockholders was $8.1 million for the year ended December 31, 2013, compared to $7.1 million for the same period in 2012

 

    As a percentage of total loans, non-performing loans decreased to 1.86% at December 31, 2013, from 2.22% at December 31, 2012.

 

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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 our Consolidated Financial Statements located elsewhere in this report.

Comparison of Years Ended December 31, 2013 and 2012

Financial Condition

Total assets increased $153.4 million, or 12.07%, to $1.4 billion at December 31, 2013 from $1.3 million at December 31, 2012, which reflects $184.2 million of total assets related to the acquisitions of CFC and Charter Holding. Cash and cash items decreased $5.6 million, or 14.26%, to $33.6 million at December 31, 2013 from $39.2 million at December 31, 2012.

Total net loans receivable excluding loans held-for-sale increased $231.9 million, or 25.70%, to $1.1 billion at December 31, 2013, compared to $902.2 million at December 31, 2012, including $127.7 million from CFC. Our conventional real estate loan portfolio increased $130.8 million, or 27.75%, to $602.3 million at December 31, 2013, from $471.4 million at December 31, 2012, including $52.4 million from CFC. The outstanding balances on home equity loans and lines of credit increased $1.3 million to $70.6 million over the same period, including $6.8 million acquired from CFC. Construction loans increased $10.3 million, or 53.11%, to $29.7 million, including $3.7 million acquired from CFC. Commercial real estate loans increased $53.5 million, or 22.86%, over the same period to $287.8 million. In addition to commercial real estate loans acquired from CFC, 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 increased $2.5 million, or 34.41%, to $9.8 million, including $3.0 million acquired from CFC, and commercial and municipal loans increased $32.3 million, or 30.00%, to $140.1 million, including $8.7 million acquired from CFC. Sold loans serviced by the Company, not including participations, totaled $417.3 million at December 31, 2013, an increase of $31.9 million, or 8.28%, compared to $385.4 million at December 31, 2012. This includes $14.4 million of sold loans assumed with the acquisition of CFC. 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, 2013, adjustable-rate mortgages comprised approximately 58.33% of our real estate mortgage loan portfolio, which is consistent with prior year, as we continued to originate shorter-term loans in 2013, 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 and experiencing higher refinancing from adjustable-rate products into fixed rate products. Impaired loans and non-performing assets were 1.58% of total assets and 2.36% of total loans originated at December 31, 2013, compared to 1.35% and 2.10%, respectively, at December 31, 2012.

The fair value of investment securities available-for-sale decreased $87.1 million, or 41.03%, to $125.2 million at December 31, 2013, from $212.4 million at December 31, 2012. We realized $964 thousand in the gains on the sales and calls of securities during 2013, compared to $3.8 million in gains on the sales and calls of securities recorded during 2012. At December 31, 2013, our investment portfolio had a net unrealized holding loss of $2.0 million, compared to a net unrealized holding gain of $2.0 million at December 31, 2012. The investments in our investment portfolio that are temporarily impaired as of December 31, 2013, consist primarily of financial institution equity securities, mortgage-backed securities issued by the Treasury, 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. 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.

 

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OREO and property acquired in settlement of loans was $1.3 million at December 31, 2013, including $1.5 million acquired from CFC, and representing two properties located in New Hampshire and seven properties located in Vermont, compared to $102 thousand at December 31, 2012, representing one property located in New Hampshire. At December 31, 2013, one commercial property in Vermont was carried at $846 thousand, or 62.99% of total OREO and property acquired in settlement of loans at that time.

Goodwill increased $9.2 million, or 26.10%, to $44.6 million at December 31, 2013, compared to $35.4 million at December 31, 2012. The change in goodwill represents $4.6 million related to the 2013 acquisition of Charter Holding, $4.6 million related to the 2013 acquisition of CFC, and a post-closing adjustment of $41 thousand related to the 2012 acquisition of The Nashua Bank (“TNB”). An independent third-party analysis of goodwill indicated no impairment at December 31, 2013.

Intangible assets increased $7.6 million to $11.0 million at December 31, 2013, compared to $3.4 million at December 31, 2012. Intangible assets include core deposit intangibles of $6.7 million, including $4.5 million from the acquisition of CFC, and customer list intangibles of $4.3 million, including $3.1 million from the acquisition of Charter Holding. We amortized $759 thousand of core deposit intangibles during 2013 utilizing the sum-of-the-years-digits method over 12 years, on average. We amortized $241 thousand of customer list intangibles during 2013 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, 2013.

Total deposits increased $138.8 million, or 14.62%, to $1.1 billion at December 31, 2013 from $949.3 million at December 31, 2012. This increase includes $149.7 million assumed from CFC. Total brokered deposits of $20.8 million represent 1.91% of total deposits.

Advances from the FHLBB decreased $21.0 million, or 14.71%, to $121.7 million from $142.7 million at December 31, 2012. The weighted average interest rate for the outstanding FHLBB advances was 1.15% at December 31, 2013 compared to 1.34% at December 31, 2012. At December 31, 2013, the Company had $46.3 million of stand-by letters of credit issued by FHLB to secure customer deposits.

Securities sold under agreements to repurchase increased $13.3 million, or 90.74%, to $27.9 million at December 31, 2013, from $14.6 million at December 31, 2012.

Comparison of Years Ended December 31, 2013 and 2012

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2013 increased $4.8 million, or 16.39%, to $33.8 million. The increase was a combination of a $5.4 million increase due to volume offset by a $649 thousand decrease related to rate adjustments. Total interest and dividend income increased $3.9 million, or 10.58%, to $40.3 million, and the yield on interest-earning assets decreased to 3.54% from 3.58% for the 12 months ended December 31, 2013. Interest and fees on loans increased $5.5 million, or 16.88%, to $38.0 million in 2013, due to an increase in average balances of $156.5 million offset by a decrease in the average yield on loans to 3.98% from 4.07%.

Interest on taxable investments decreased $1.9 million, or 58.64%, to $1.3 million in 2013 compared to $3.2 million in 2012, as a result of our deleveraging of the investment portfolio to fund loan growth. Dividends decreased $10 thousand, or 16.13%, to $52 thousand . Interest on other investments increased $263 thousand, or 44.28%, to $857 thousand. The yield on our investment portfolio declined to 1.23% for the year ended December 31, 2013 compared to 1.78% for the same period in 2012.

Total interest expense decreased $902 thousand, or 12.20%, to $6.5 million for the year ended December 31, 2013. The decrease is primarily due to the 22.08% decrease in the combined cost of funds on deposits and borrowings to 0.60% for the year ended December 31, 2013 from 0.77% for the year ended December 31, 2012. For the year ended December 31, 2013, interest on deposits decreased $326 thousand, or 7.45%, to $4.1 million despite an increase in average interest-bearing deposits of $122.8 million as the cost of deposits decreased to 0.44% from 0.55% compared to the same period in 2012. Interest on FHLBB advances and other borrowed money decreased $359 thousand, or 18.45%, for the 12 months ended December 31, 2013, to $1.6 million compared to the same period in 2012 as the average FHLBB advances outstanding and rate decreased in 2013 compared to 2012. Interest on debentures decreased $221 thousand, or 21.53%, for the 12 months ended December 31, 2013, due to the expiration of the interest rate swap on June 17, 2013, which had set a fixed rate of 6.65% on $10.0 million of the debenture.

For the year ended December 31, 2013, our combined cost of funds decreased to 0.60% as compared to 0.77% for 2012, due primarily to the downward repricing of maturing time deposits and advances combined with increases in lower-costing checking accounts and the expiration of the previously referenced interest rate swap agreement.

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, increased to 2.94% in 2013 from 2.81% in 2012. Our net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 2.97% during 2013, from 2.85% during 2012.

 

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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,  
     2013     2012     2011     2010     2009  

Yield on loans

     3.98     4.07     4.42     4.87     5.16

Yield on investment securities

 

     1.23     1.78     2.54     2.80     3.94

Combined yield on loans and investments

     3.54     3.58     3.98     4.32     4.92

Cost of deposits, including repurchase agreements

 

     0.44     0.55     0.75     0.93     1.34

Cost of other borrowed funds

     1.63     1.97     2.40     2.33     3.29

Combined cost of deposits and borrowings

 

     0.60     0.77     0.97     1.14     1.60

Interest rate spread

     2.94     2.81     3.01     3.18     3.32

Net interest margin

 

     2.97     2.85     3.05     3.23     3.41

 

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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,    2013     2012     2011  
     Average
Balance(1)
     Interest      Yield/
Cost
    Average
Balance(1)
     Interest      Yield/
Cost
    Average
Balance(1)
     Interest      Yield/
Cost
 
     (dollars in thousands)  

Assets:

  

Interest-earning assets:

 

                        

Loans (2)

   $ 956,796       $ 38,034         3.98   $ 800,290       $ 32,542         4.07   $ 715,637       $ 31,640         4.42

Investment securities and other

     182,358         2,242         1.23     217,390         3,879         1.78     218,127         5,548         2.54
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,139,154         40,276         3.54     1,017,680         36,421         3.58     933,764         37,188         3.98
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets:

 

                        

Cash

     21,351              19,751              18,490         

Other noninterest-earning assets (3)

     106,722              81,775              88,228         
  

 

 

         

 

 

         

 

 

       

Total noninterest-earning assets

     128,072              101,526              106,718         
  

 

 

         

 

 

         

 

 

       

Total

   $ 1,267,226            $ 1,119,206            $ 1,040,482         
  

 

 

         

 

 

         

 

 

       

Liabilities and Stockholders’ Equity:

  

                  

Interest-bearing liabilities:

 

                        

Savings, NOW and MMAs

   $ 579,126       $ 386         0.07   $ 462,684       $ 619         0.13   $ 410,571       $ 727         0.18

Time deposits

 

     338,920         3,669         1.08     332,545         3,762         1.13     348,730         5,044         1.45

Repurchase agreements

     20,050         52         0.25     16,449         47         0.29     14,250         47         0.33

Capital securities and other borrowed funds

     146,663         2,390         1.63     150,750         2,971         1.97     119,421         2,871         2.40
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,084,759         6,497         0.60     962,428         7,399         0.77     892,972         8,689         0.97
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

 

                        

Demand deposits

     26,647              29,657              26,832         

Other

 

     12,313              16,086              30,047         
  

 

 

         

 

 

         

 

 

       

Total noninterest-bearing liabilities

     38,960              45,743              56,879         
  

 

 

         

 

 

         

 

 

       

Stockholders’ equity

     143,507              111,035              90,631         
  

 

 

         

 

 

         

 

 

       

Total

   $ 1,267,226            $ 1,119,206            $ 1,040,482         
  

 

 

         

 

 

         

 

 

       

Net interest income/Net interest rate spread

      $ 33,779         2.94      $ 29,022         2.81      $ 28,499         3.01
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Net interest margin

           2.97           2.85           3.05
        

 

 

         

 

 

         

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

           105.01           105.74           104.57
        

 

 

         

 

 

         

 

 

 

 

(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.

 

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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,
2013 vs. 2012
Increase (Decrease)

due to

 
     Volume     Rate     Total  
     (Dollars in thousands)  

Interest income on loans

   $ 6,203      $ (711   $ 5,492   

Interest income on investments

     (559     (1,078     (1,637
  

 

 

   

 

 

   

 

 

 

Total interest income

     5,644        (1,789     3,855   
  

 

 

   

 

 

   

 

 

 

Interest expense on savings, NOW and MMAs

 

     234        (471     (237

Interest expense on time deposits

     75        (164     (89

Interest expense on repurchase agreements

 

     8        (4     4   

Interest expense on capital securities and other borrowings

     (79     (501     (580
  

 

 

   

 

 

   

 

 

 

Total interest expense

     238        (1,140     (902
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 5,406      $ (649   $ 4,757   
  

 

 

   

 

 

   

 

 

 
    

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

due to

 
     Volume     Rate     Total  
     (Dollars 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   
  

 

 

   

 

 

   

 

 

 

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-homogeneous 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 homogeneous 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.

 

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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, 2013, was $9.7 million compared to $9.9 million at December 31, 2012. At $9.7 million, the allowance for loan losses represents 0.85% of total loans held, down from 1.09% at December 31, 2012. Total impaired loans and non-performing assets at December 31, 2013, were $22.5 million, representing 231.15% of the allowance for loan losses. Modestly improving economic and market conditions coupled with internal risk rating changes offset by portfolio growth resulted in us adding $888 thousand to the allowance for loan and lease losses during 2013 compared to $2.7 million in 2012. The provisions during the 12 months ended December 31, 2013, have been offset by loan charge-offs of $1.8 million and recoveries of $712 thousand during the same period. Modestly improving economic conditions and decreases in delinquencies and charge-offs, resulted in our decision to decrease the provision for loan losses during 2013 compared to 2012. The provisions made in 2013 reflect loan loss experience in 2013 and changes in economic conditions that decreased the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions in 2014 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, 2013, the overdraft allowance was $24 thousand compared to $14 thousand at year-end 2012. Provisions for overdraft losses were $74 thousand during the 12 month period ended December 31, 2013, compared to $55 thousand for the same period during 2012. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

Loan charge-offs (excluding the overdraft program) were $1.8 million during the 12 months ended December 31, 2013 compared to $2.3 million for the same period in 2012. Recoveries (excluding the overdraft program) were $712 thousand during the 12 months ended December 31, 2013, compared to $455 thousand for the same period in 2012. This activity resulted in net charge-offs of $1.1 million for the 12 months ended December 31, 2013, compared to $1.9 million for the same period in 2012. One-to-four family residential mortgages, commercial real estate mortgages, commercial loans, and consumer loans accounted for 48%, 33%, 2%, and 17%, respectively, of the amounts charged-off during the 12 months ended December 31, 2013.

 

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The following is a summary of activity in the allowance for loan losses account (excluding the overdraft program) for the years ended December 31:

 

(Dollars in thousands)    2013     2012     2011     2010     2009  

Balance, beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

 

          

Residential real estate

     851        1,239        1,187        999        297   

Commercial real estate

 

     593        474        548        324        1,388   

Construction

     —          138        303        45        45   

Consumer loans

 

     30        20        38        46        105   

Commercial loans

     302        438        147        213        297   

Acquired loans (discounts to related credit quality)

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charged-off loans

     1,776        2,309        2,223        1,627        2,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries

 

          

Residential real estate

     268        167        132        9        100   

Commercial real estate

 

     284        56        —         —         1   

Construction

     —          68        —         —         —    

Consumer loans

 

     6        22        2        14        11   

Commercial loans

     154        142        61        26        100   

Acquired loans (discounts to related credit quality)

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     712        455        195        49        212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

 

     1,064        1,854        2,028        1,578        1,920   

Allowance from acquisitions

     —         —         —         —         —    

Transfer

 

     —         —         —         (175     —    

Provision for loan loss charged to income

     888        2,650        1,300        2,100        5,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 9,733      $ 9,909      $ 9,113      $ 9,841      $ 9,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average loans

     0.11     0.23     0.28     0.25     0.30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(Dollars in thousands)    2013      2012      2011      2010      2009  

Beginning balance

   $ 14       $ 18       $ 23       $ 25       $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Overdraft charge-offs

 

     200         200         226         251         313   

Overdraft recoveries

     136         141         170         167         206   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net overdraft losses

     64         59         56         84         107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provisions for overdrafts

     74         55         51         82         106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 24       $ 14       $ 18       $ 23       $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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:

 

(Dollars in thousands)    2013     2012     2011  

Real estate loans -

                     

Residential, 1-4 family and home equity loans

 

   $ 5,221         54     58   $ 4,665         47     64   $ 4,768         52     64

Residential, 5 or more units

     93         1     1     109         1     2     102         1     2

Commercial

 

     2,027         21     25     3,378         34     20     2,813         31     19

Construction

     353         3     3     208         2     2     222         2     2

Collateral and consumer loans

 

     51         1     1     44         1     1     40         1     1

Commercial and municipal loans

     1,551         16     12     918         9     11     721         8     12

Impaired loans

 

     197         2     —         361         4     —         308         3     —    

Acquired loans (discounts to related credit quality)

     —          —         —         —          —         —         —          —         —    

Unallocated

     240         2     —         226         2     —         139         2     —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 9,733         100     100   $ 9,909         100     100   $ 9,113         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total originated loans

        1.02          1.09          1.26  
     

 

 

        

 

 

        

 

 

   

Non-performing loans as a percentage of allowance

        217.35          172.73          182.34  
     

 

 

        

 

 

        

 

 

   
     2010     2009  

Real estate loans -

              

Residential, 1-4 family and home equity loans

 

   $ 3,887         40     64   $ 3,984         42     64

Residential, 5 or more units

     142         1     2     151         2     2

Commercial

 

     2,683         27     19     2,855         30     20

Construction

     575         6     3     227         2     3

Collateral and consumer loans

 

     70         1     1     100         1     2

Commercial and municipal loans

     2,004         20     11     2,012         21     9

Impaired loans

 

     480         5     —         165         2     —    

Unallocated

     —          —         —         —          —         —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 9,841         100     100   $ 9,494         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total loans

        1.44          1.51  
     

 

 

        

 

 

   

Non-performing loans as a percentage of allowance

        101.86          64.87  
     

 

 

        

 

 

   

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 $30.3 million at December 31, 2013, compared to $26.3 million at December 31, 2012. The increase comes primarily from an increase of $2.3 million of the net carrying value of loans identified as impaired at December 31, 2013. Additional information on troubled debt restructurings can be found in Note 4 of our Consolidated Financial Statements. In addition, we had $1.3 million of OREO at December 31, 2013, representing six residential properties and one commercial property acquired during the 12 months ended December 31, 2013, compared to $102 thousand at December 31, 2012, representing one residential property acquired during the 12 months ended December 31, 2012. During the 12 months ended December 31, 2013, we sold five properties, one of which was classified as OREO at December 31, 2012, while the other four were acquired during 2013. Losses were incurred in the acquisition and 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. Ten loans considered impaired at December 31, 2013, had specific reserves identified and assigned. The 10 loans are secured by real estate, business assets or a combination of both. At December 31, 2013, the allowance included $197 thousand allocated to impaired loans compared to $361 thousand at December 31, 2012.

 

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Loans over 90 days past due were $3.9 million at December 31, 2013, compared to $3.2 million at December 31, 2012. Loans 30 to 89 days past due were $5.7 million at December 31, 2013, compared to $9.7 million at December 31, 2012. The level of loan losses and loan delinquencies, combined with moderately improving 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. 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 1.34% at December 31, 2012 to 0.65% at December 31, 2013, and as a percentage of total originated loans, decreased from 2.07% at the end of 2012 to 0.98% at the end of 2013.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which we reasonably expect will materially impact future operating results, liquidity, or capital resources. For the period ended December 31, 2013, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At December 31, 2013, we had 57 loans with net carrying values of $12.3 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2013, the majority of “troubled debt restructurings” were performing under contractual terms and are included in impaired loans. Of the 57 loans classified as troubled debt restructured, 8 were 30 days or more past due at December 31, 2013. The balances of these loans were $799 thousand, and the loans have assigned specific allowances of $20 thousand. Thirty loans were considered troubled debt restructured at both December 31, 2013 and 2012. These 30 loans include 13 commercial real estate loans totaling $3.8 million, 15 residential loans totaling $1.4 million, 1 construction loan totaling $609 thousand and 1 commercial loan for $23 thousand. These loans, independently measured for impairment, carry a combined specific allowance of $47 thousand. 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.”

Non-performing loans include loans classified as impaired loans and troubled debt restructured loans. Troubled debt restructured loans of $11.9 million are performing within their restructured terms and are accruing interest. These accruing troubled debt restructured loans account for the difference of $11.9 million between non-performing loans of $21.2 million and non-accrual loans of $9.3 million.

At December 31, 2013, 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, 2013     December 31, 2012  
     Carrying
Value
     Percentage
to Total
Allowance
    Percentage
to Total
Assets
    Carrying
Value
     Percentage
to Total
Allowance
    Percentage
to Total
Assets
 

Impaired loans

   $ 8,701         89.40     0.61   $ 5,799         58.52     0.45

Trouble debt restructured loans

 

     12,454         127.96     0.88     11,202         113.05     0.88

Other real estate owned and chattel

     1,343         13.80     0.09     102         1.03     0.02
  

 

 

        

 

 

      

Total impaired loans and non-performing assets(2)

   $ 22,498         231.16     1.58   $ 17,103         172.60     1.35
  

 

 

        

 

 

      

 

(1) All loans 90 days or more delinquent are placed on nonaccrual status.
(2) 2012 excludes acquired loans.

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

 

(Dollars in thousands)    2013      2012      2011      2010      2009  

Nonaccrual loans (1)

   $ 9,303       $ 17,001       $ 16,616       $ 10,420       $ 6,059   

Real estate and chattel property owned

     1,343         102         1,344         75         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming assets(2)

   $ 10,646       $ 17,103       $ 17,960       $ 10,495       $ 6,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) 2012 excludes acquired loans.

 

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

 

(Dollars in thousands)    2013      2012      2011      2010      2009  

Real estate loans -

              

Conventional

 

   $ 3,821       $ 6,250       $ 5,578       $ 1,645       $ 3,161   

Commercial

     4,512         9,304         8,484         7,449         2,845   

Home equity

 

     104         158         0         120         42   

Construction

     230         887         1,006         140         140   

Consumer loans

 

     15         —          8         18         36   

Commercial and municipal loans

     621         402         1,540         1,048         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(2)

   $ 9,303       $ 17,001       $ 16,616       $ 10,420       $ 6,224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) 2012 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 $1.0 million, or 7.05%, to $15.7 million for the 12 months ended December 31, 2013, compared to the same period in 2012. Customer service fees increased $172 thousand, or 3.39%, due in part to increased volume and related revenue from ATM and debit card usage.

Net gain on sales and calls of securities decreased $2.9 million, or 74.76%, due in part to a 22.79% decrease in the volume of sales of securities coupled with lower market values in 2013, compared to 2012, which resulted in lower gains recorded. During 2013, as part of our long-term investment planning, we sold investments to fund loans returning to investment levels closer to those held prior to our participation in Treasury capital programs. Net gain on sales of loans decreased $643 thousand, or 22.44%, as we sold $88.7 million of 1-4 family conventional mortgage loans into the secondary market during 2013, down $44.8 million from $133.5 million of loans sold during 2012. In addition to decreased volume, the rate valuation, and subsequent gains added to the reduction in overall revenue for the category. We also retained a higher portion of originated mortgage loans within our portfolio during 2013, resulting in balance sheet increases related to net originated loans of $78.4 million and $20.2 million of conventional real estate loans and commercial real estate loans, respectively, excluding increases due to the acquisitions of CFC and Charter Holding. Net gains on sales of OREO and fixed assets increased $155 thousand during 2013 as we recognized net gains of $5 thousand compared to a net loss of $150 thousand on other real estate and chattel property owned in 2012.

The remeasurement gain recorded for the year ended December 31, 2013, was a gain of $1.4 million related to the write-up of the Bank’s investment in Charter Holding at acquisition date from $4.8 million to the market value of $6.2 million. The market value was based on the purchase price paid to MVSB to assume its 50% ownership of Charter Holding on September 4, 2013. Income from equity interest in Charter Holding decreased $150 thousand to $294 thousand for the year ended December 31, 2013, from $444 thousand for the same period in 2012. As 100% owner of Charter Holding, effective September 4, 2013, the Bank will not record additional income from equity interest in Charter Holding going forward as future activity will be included in consolidated earnings as trust income and related expense categories. Trust income was $2.7 million for the year ended December 31, 2013, and represents trust income since September 4, 2013, when the Bank became 100% owner of Charter Holding.

Rental income increased $10 thousand, or 1.36%, as revenue within this category remained relatively unchanged. Bank-owned life insurance income increased $81 thousand to $626 thousand. Insurance commissions increased $152 thousand to $1.5 million for the year ended December 31, 2013, compared to $1.3 million in 2012.

Total noninterest expenses increased $7.5 million, or 25.23%, to $37.0 million for the 12 months ended December 31, 2013, from $29.5 million for the same period in 2012. Salaries and employee benefits increased $4.2 million, or 27.94%, to $19.2 million for

 

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the 12 months ended December 31, 2013, from $15.0 million for the same period in 2012. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $4.0 million, or 23.25%, to $21.2 million for the 12 months ended December 31, 2013, from $17.2 million for the same period in 2012. Gross salaries increased $3.7 million, or 29.83%, to $16.1 million for the 12 months ended December 31, 2013, compared to the same period in 2012. In addition to ordinary staffing additions, salary expenses related to Charter Trust operations accounted for approximately $1.1 million, or 41.72% of the increase, while staffing related to a full year of TNB salaries amounted to approximately $979 thousand, and RNB salaries since acquisition date of October 25, 2013 added approximately $373 thousand to the overall expense. Average full time equivalents increased to 360 at December 31, 2013, compared to 278 at December 31, 2012; this change reflects the impact of additional staff from CFC and Charter Holding. Benefits costs increased $1.3 million. This increase includes increases of $292 thousand related to retirement costs and $233 thousand in health insurance costs. The deferral of expenses associated with the origination of loans decreased $247 thousand, or 11.14%, to $2.0 million for the 12 months ended December 31, 2013, from $2.2 million for the same period in 2012. This deferral represents salary and employee benefits expenses associated with origination costs which are recognized over the life of the loan. The decrease is a direct result of the change in the volume of loan origination year over year.

Occupancy and equipment expenses increased $852 thousand, or 23.35%, to $4.5 million for the 12 months ended December 31, 2013, from $3.6 million for the same period in 2012, due primarily to a higher number of locations during 2013 including TNB, RNB, and Charter Holding locations assumed and the opening of a second location in Nashua, New Hampshire. Advertising and promotion increased $181 thousand, or 37.63%, to $662 thousand for the 12 months ended December 31, 2013, from $481 thousand for the same period in 2012, due primarily to increases in promotions related to the acquisition of RNB, an increase in print advertising of $51 thousand, and the additional marketing expense at Charter Holding of $75 thousand for approximately four months of their operations. Depositors’ insurance decreased $26 thousand to $776 thousand at December 31, 2013, compared to $802 thousand at December 31, 2013, due primarily to modifications made by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates during 2013 despite an overall increase in assessed deposits.

Professional fees increased $57 thousand, or 4.75%, to $1.3 million for the 12 months ended December 31, 2013 from $1.2 million for the same period in 2012, reflecting among other things increased legal expenses and consulting fees including $30 thousand related to Charter Holding operations, offset in part by a decrease in audit expenses. Data processing and outside services fees increased $276 thousand, or 24.70%, to $1.4 million for the 12 months ended December 31, 2013 compared to the same period in 2012 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 $132 thousand, or 26.53%, to $630 thousand for the 12 months ended December 31, 2013, from $498 thousand for the same period in 2012 which is consistent with the impact increased volume had within customer service fees. Net amortization (benefit) of mortgage servicing rights (“MSR”) and mortgage servicing income increased $132 thousand to a net benefit of $40 thousand for the 12 months ended December 31, 2013, from a net amortization of $92 thousand for the same period in 2012.

Merger related expenses increased $453 thousand, or 38.78%, to $1.6 million for the year ended December 31, 2013, compared to $1.2 million for the same period in 2012. These expenses reflect the non-deductible legal and investment banking expenses recorded by us related to the acquisition of CFC that are not qualified tax deductions. As a result, the impact of these expenses was a reduction to net income of $792 thousand with no offsetting tax benefit. Other merger related expenses included $827 thousand of system conversion and other operations related expenses related to the conversion and integrations of CFC and Charter Holding.

Amortization of customer list intangibles increased $164 thousand with the addition of the customer list intangible from Charter Holding and amortization of core deposit intangibles increased $411 thousand with the addition of the core deposit intangible from CFC.

Other expenses increased $759 thousand, or 18.88%, to $4.8 million for the 12 months ended December 31, 2013 from $4.0 million compared to the same period in 2012. This includes the addition of $462 thousand of other expenses related to the operations of Charter Holding since September 4, 2013. In the fourth quarter of 2013, we recorded an off-balance sheet loss provision of $140 thousand related to an identified liability under our seller’s agreement with to Federal Home Loan Mortgage Corp. requiring us to repurchase bad debt under certain circumstances.

 

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Selected Financial Highlights and Ratios

 

For the Years Ended December 31,    2013     2012     2011     2010     2009  
     (In thousands, except per share and percentage data)  

Net Income

   $ 8,414      $ 7,759      $ 7,669      $ 7,947      $ 6,598   

Per Share Data:

 

          

Basic Earnings (1)

     1.11        1.20        1.20        1.29        1.06   

Diluted Earnings

 

     1.11        1.20        1.20        1.29        1.06   

Dividends Paid

     0.52        0.52        0.52        0.52        0.52   

Dividend Payout Ratio

 

     46.85        43.33        43.33        40.31        49.06   

Return on Average Assets

     0.66     0.69     0.74     0.79     0.73

Return on Average Common Equity

 

     6.98     6.99     7.96     8.71     7.75
As of December 31,    2013     2012     2011     2010     2009  
     (In thousands, except per share, percentage and branch data)  

Total Assets

   $ 1,423,870      $ 1,270,477      $ 1,041,819      $ 994,536      $ 962,601   

Total Securities (2)

 

     134,998        221,875        217,933        203,599        224,469   

Loans, Net

     1,134,110        902,236        714,952        675,514        620,333   

Total Deposits

 

     1,088,092        949,341        803,023        778,219        734,429   

Federal Home Loan Bank Advances

     121,734        142,730        80,967        75,959        95,962   

Stockholders’ Equity

 

     149,257        129,494        108,660        92,391        87,776   

Book Value per Common Share

   $ 15.37      $ 15.09      $ 15.20      $ 14.26      $ 13.48   

Average Common Equity to Average Assets

 

     9.51     8.13     7.27     8.11     9.45

Shares Outstanding

     8,216,747        7,055,946        5,832,360        5,773,772        5,771,772   

Number of Office Locations

 

     44        30        30        28        28   

 

(1) See Note 17 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 31 includes net deferred income tax expense of $592 thousand in 2013, $479 thousand in 2012 and $791 thousand in 2011. 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, 2012 and 2011

We earned $7.8 million, or $1.20 per common share, assuming dilution, for the year ended December 31, 2012, compared to $7.7 million, or $1.20 per common share, assuming dilution, for the year ended December 31, 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 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 commercial customers offset by normal amortizations and prepayments as well as principal pay-downs. Additionally, consumer loans decreased $39 thousand, or 0.53%, to

 

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$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. 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.

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 acquisition, which was paid in full by December 31, 2012.

 

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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 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.

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, 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 2012 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.

 

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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 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.

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 property 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 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.

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 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.”

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. 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.

 

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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 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 Charter Holding. 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.

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.

 

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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, 2011 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, 2011 at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Liquidity and Capital Resources

We are required to maintain sufficient liquidity for safe and sound operations. At year-end 2013, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $20.7 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, 2013, we had approximately $168.2 million in additional borrowing capacity from the FHLBB.

At December 31, 2013, stockholders’ equity totaled $149.3 million compared to $129.5 million at December 31, 2012. The increase of $19.8 million primarily reflects net income of $8.4 million, the payout of $3.7 million in common stock dividends, $316 thousand in preferred stock dividends declared, other comprehensive loss in the amount of $1.5 million, $544 thousand from the exercise of stock options, and $16.0 million from the acquisition of CFC.

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. On June 12, 2007, the Board of Directors reactivated a previously adopted but incomplete stock repurchase program to repurchase up to 253,776 shares of common stock. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. At December 31, 2013, 148,088 shares remained to be repurchased under the plan. During 2013, no shares were repurchased.

At December 31, 2013, we had unrestricted funds in the amount of $2.6 million. Our total cash needs during 2014 are estimated to be approximately $5.7 million with $4.2 million projected to be used to pay dividends on our common stock, $587 thousand to pay interest on our capital securities, $230 thousand to pay dividends on our Series B Preferred Stock (as defined below), and approximately $615 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 2014, if needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

 

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Net cash provided by operating activities was $20.5 million for 2013 compared to net cash provided by operating activities of $1.1 million in 2012. The change includes a decrease in the amount of $1.7 million in provision for loan losses, a decrease in gains on sales and calls of securities of $2.9 million, a decrease in amortization of securities, net, of $257 thousand, a change in mortgage servicing rights of $195 thousand, an increase in the amortization of intangible assets of $575 thousand, a change in the activity of loans held-for sale of $19.8 million, a decrease of $183 thousand in impairment losses on other real estate owned, a decrease in the change in accrued interest receivable and other assets of $1.1 million, and a change of $378 thousand in the increase in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $2.0 million in 2013, compared to net cash flows used in investing activities of $88.8 million in 2012, a change of $86.9 million as we utilized investment cash flows and sales to fund loan originations. During 2013, net cash used by loan originations and net principal collections decreased by $2.4 million while our loans held in portfolio increased, and net cash provided by securities available-for-sale increased $69.8 million.

Net cash flows used by financing activities totaled $24.2 million in 2013, compared to net cash flows provided by financing activities of $102.1 million in 2012, a change of $126.3 million. Net cash provided by deposits decreased $58.4 million. Net cash used in net change in advances from FHLBB increased $81.0 million as we reduced our advances outstanding compared to an increase in advances outstanding during 2012. Net cash provided by the repurchased agreements increased $11.6 million during 2013.

We expect to be able to fund loan demand and other investing activities during 2014 by continuing to utilize the FHLBB’s advance program and cash flows from securities and loans. On December 31, 2013, approximately $20.7 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, 2012, as part of the SBLF program, we entered into a Purchase Agreement with Treasury pursuant to which we issued and sold to the U.S. Department of Treasury (“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”). We used $10.0 million of the SBLF proceeds to repurchase the Series A Preferred Stock previously issued under Treasury’s Capital Purchase Program. With the acquisition of TNB in 2012, we assumed $3.0 million of preferred stock issued to Treasury resulting in a total of 23,000 shares of Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per preferred share, issued and outstanding to the Treasury at December 31, 2013 and 2012.

The initial rate payable on SBLF capital is, at most, 5%, and the rate falls to 1% 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, core, and total risk-based capital ratios of 1.50%, 4.00% (or 3.00% under certain conditions), and 8.00%, respectively. At December 31, 2013, the Bank’s ratios were 8.39%, 8.39%, and 13.03%, 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 $15.37 at December 31, 2013, compared to $15.09 per common share at December 31, 2012. Tangible book value per common share was $8.59 at December 31, 2013. 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 shareholders’ 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.

 

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

 

(Dollars in thousands)    December 31,
2013
     December 31,
2012
 

Shareholders’ equity

   $ 149,257       $ 129,494   

Less goodwill

 

     44,632         35,395   

Less other intangible assets

     11,020         3,416   

Less preferred stock

     23,000         23,000   
  

 

 

    

 

 

 

Tangible common equity

   $ 70,605       $ 67,683   
  

 

 

    

 

 

 

Ending common shares outstanding

 

     8,216,747         7,055,946   

Tangible book value per common share

   $ 8.59       $ 9.59   

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.

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, 2013 was positive 0.58% compared to the December 31, 2012 gap of negative 0.80%. At December 31, 2013, repricing assets over the next 12 months were $7.4 million more than repricing liabilities for the same period compared to $9.1 million more repricing liabilities than repricing assets at December 31, 2012. With an asset sensitive positive gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease. At positive 0.58%, the assets and liabilities scheduled to reprice during 2014 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 economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The EVE ratio, under any rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the EVE model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the EVE measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on our net interest income and will likely differ from actual results.

 

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The following table shows our interest rate sensitivity (gap) table at December 31, 2013:

 

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

Interest-earning assets:

            

Loans

 

   $ 196,506      $ 85,656      $ 152,447      $ 164,442      $ 535,059      $ 1,134,110   

Investments and overnight deposit

     44,472        2,479        5,507        17,080        77,273        146,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     240,978        88,135        157,954        181,522        612,332        1,280,921   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Deposits

 

     250,056        59,649        71,296        63,569        643,522        1,088,092   

Repurchase agreements

     27,885        —         —         —         —         27,885   

Borrowings

     25,750        45,000        —         40,000        10,984        121,734   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     303,691        104,649        71,296        103,569        654,506        1,237,711   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period sensitivity gap

 

     (62,713     (16,514     86,658        77,953        (42,174   $ 43,210   

Cumulative sensitivity gap

   $ (62,713   $ (79,227   $ 7,431      $ 85,384      $ 43,210     

Cumulative sensitivity gap as a percentage of interest-earning assets

 

     -4.90     -6.19     0.58     6.67     3.37     3.37

The following table sets forth our EVE at December 31, 2013:

 

Change    Net Portfolio Value     EVE as % of PV Assets  

in Rates

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

+400 bp

   $ 93,061       $ (44,500     -32.35     7.55     -255bp   

+300 bp

 

     103,541         (34,020     -24.73     8.20     -190bp   

+200 bp

     114,453         (23,108     -16.80     8.85     -125bp   

+100 bp

 

     125,731         (11,830     -9.41     9.48     -62bp   

      0 bp

     137,561         —         —         10.10     —    

-100 bp

 

     142,138         4,577        3.33     10.20     10bp   

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 converted Trust II’s interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement had a notional amount of $10.0 million and matured on June 17, 2013. Under the swap agreement, we received quarterly interest payments at a floating rate based on three month LIBOR plus 2.79% and were obligated to make quarterly interest payments at a fixed-rate of 6.65%.

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 for the year ended December 31, 2013, 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.

 

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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. Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (1992). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2013.

Attestation Report of the Registered Public Accounting Firm

As a smaller reporting company for the year ended December 31, 2013, 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 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.

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 Our Board of Directors,” “Information About Our Executive Officers Who Are Not Directors,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance – Code of Ethics,” “Corporate Governance – Committees of the Board – Nominating Committee” and “Corporate Governance – Committees of the Board – 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 “Director 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.

 

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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 “Principal Accounting Fees and Services” in our Proxy Statement.

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.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

New Hampshire Thrift Bancshares, Inc.

 

By:  

/s/ Stephen R. Theroux

     President and Chief Executive Officer   March 17, 2014                    
  Stephen R. Theroux      (Principal Executive Officer)  

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Stephen R. Theroux and Laura Jacobi, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 17, 2014.

 

Name

  

Title

/s/ Stephen W. Ensign

Stephen W. Ensign

   Executive Chairman of the Board

/s/ Stephen R. Theroux

Stephen R. Theroux

  

Vice Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

/s/ Laura Jacobi

Laura Jacobi

   First Senior Vice President, Chief Financial Officer, Chief Accounting Officer and Corporate Secretary (Principal Financial and Accounting Officer)

/s/ Leonard R. Cashman

Leonard R. Cashman

   Director

/s/ Stephen P. Dimick

Stephen P. Dimick

   Director

/s/ Catherine A. Feeney

Catherine A. Feeney

   Director

/s/ Stephen J. Frasca

Stephen J. Frasca

   Director

/s/ William C. Horn

William C. Horn

   Director

/s/ Peter R. Lovely

Peter R. Lovely

   Director

/s/ Jack H. Nelson

Jack H. Nelson

   Director

/s/ John P. Stabile II

John P. Stabile II

   Director

/s/ Joseph B. Willey

Joseph B. Willey

   Director


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, 2013 and 2012 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, 2013. 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. 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, 2013 and 2012 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), New Hampshire Thrift Bancshares, Inc. and Subsidiaries’ internal controls over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated expressed an unqualified opinion thereon.

 

LOGO

SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 17, 2014

 

LOGO


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

As of December 31,

   2013     2012  

ASSETS

    

Cash and due from banks

 

   $ 12,005      $ 25,897   

Interest-bearing deposit with the Federal Reserve Bank

     21,573        13,265   
  

 

 

   

 

 

 

Cash and cash equivalents

 

     33,578        39,162   

Interest-bearing time deposits with other banks

     1,743        250   

Securities available-for-sale

 

     125,238        212,369   

Federal Home Loan Bank stock

     9,760        9,506   

Loans held-for-sale

 

     680        11,983   

Loans receivable, net of the allowance for loan losses of $9.8 million as of December 31, 2013 and $9.9 million as of December 31, 2012

     1,134,110        902,236   

Accrued interest receivable

 

     2,628        2,845   

Premises and equipment, net

     23,842        17,261   

Investments in real estate

 

     3,681        4,074   

Other real estate owned

     1,343        102   

Goodwill

 

     44,632        35,395   

Intangible assets

     11,020        3,416   

Investment in partially owned Charter Holding Corp., at equity

 

     —          4,909   

Bank owned life insurance

     19,544        18,905   

Other assets

     12,071        8,064   
  

 

 

   

 

 

 

Total assets

   $ 1,423,870      $ 1,270,477   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing

 

   $ 101,446      $ 74,133   

Interest-bearing

     986,646        875,208   
  

 

 

   

 

 

 

Total deposits

 

     1,088,092        949,341   

Federal Home Loan Bank advances

     121,734        142,730   

Securities sold under agreements to repurchase

 

     27,885        14,619   

Subordinated debentures

     20,620        20,620   

Accrued expenses and other liabilities

     16,282        13,673   
  

 

 

   

 

 

 

Total liabilities

     1,274,613        1,140,983   
  

 

 

   

 

 

 

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, 2013 and December 31, 2012, liquidation value $1,000 per share

 

     —          —     

Common stock, $.01 par value: 10,000,000 shares authorized, 8,651,076 shares issued and 8,216,747 shares outstanding as of December 31, 2013 and 7,486,225 shares issued and 7,055,946 shares outstanding as of December 31, 2012

     87        75   

Paid-in capital

 

     100,961        83,977   

Retained earnings

     58,347        53,933   

Unearned restricted stock awards

 

     (490     (377

Accumulated other comprehensive loss

     (2,897     (1,444

Treasury stock, at cost, 434,329 shares as of December 31, 2013 and 430,279 as of December 31, 2012

     (6,751     (6,670
  

 

 

   

 

 

 

Total stockholders’ equity

 

     149,257        129,494   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

 

   $ 1,423,870      $ 1,270,477   
  

 

 

   

 

 

 

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

 

F-2


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Dollars in thousands, except for per share data)

For the years ended December 31,

   2013     2012     2011  

INTEREST AND DIVIDEND INCOME

      

Interest and fees on loans

 

   $ 38,034      $ 32,542      $ 31,640   

Interest on debt securities:

      

Taxable

 

     1,333        3,223        4,601   

Dividends

     52        62        35   

Other

     857        594        912   
  

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     40,276        36,421        37,188   
  

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

      

Interest on deposits

     4,055        4,381        5,771   

Interest on advances and other borrowed money

 

     1,585        1,944        1,863   

Interest on debentures

     806        1,027        1,008   

Interest on securities sold under agreements to repurchase

     51        47        47   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     6,497        7,399        8,689   
  

 

 

   

 

 

   

 

 

 

Net interest and dividend income

     33,779        29,022        28,499   

PROVISION FOR LOAN LOSSES

     962        2,705        1,351   
  

 

 

   

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     32,817        26,317        27,148   
  

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

      

Customer service fees

 

     5,239        5,067        5,071   

Net gain on sales and calls of securities

     964        3,819        2,588   

Net gain on sales of loans

 

     2,224        2,867        931   

Net gain (loss) on sales of other real estate owned, other assets and fixed assets

     5        (150     27   

Remeasurement gain of equity interest in Charter Holding Corp.

 

 

     1,369        —          —     

Rental income

     746        736        714   

Realized gain in Charter Holding Corp.

 

     294        444        573   

Brokerage service income

     —          —          3   

Bank owned life insurance income

 

     626        545        432   

Trust commissions and fees

     2,741        —          —     

Insurance commissions

     1,467        1,315        119   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     15,675        14,643        10,458   
  

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSES

      

Salaries and employee benefits

     19,206        15,022        14,306   

Occupancy and equipment expenses

 

     4,500        3,648        3,806   

Depositors’ insurance

     776        802        793   

Professional services

 

     1,265        1,208        1,122   

Data processing and outside services fees

     1,393        1,117        1,048   

ATM processing fees

 

     630        498        481   

Telephone expense

     706        664        799   

Net (benefit) amortization of mortgage servicing rights and mortgage servicing income

 

     (40     92        (117

Supplies

     454        373        344   

Advertising and promotion

 

     662        481        510   

Merger related expense

     1,620        1,167        —     

Amortization of intangible assets

 

     1,000        425        424   

Other expenses

     4,779        4,020        3,610   
  

 

 

   

 

 

   

 

 

 

Total noninterest expenses

     36,951        29,517        27,126   
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     11,541        11,443        10,480   

PROVISION FOR INCOME TAXES

     3,127        3,684        2,811   
  

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 8,414      $ 7,759      $ 7,669   
  

 

 

   

 

 

   

 

 

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

   $ 8,098      $ 7,093      $ 6,956   
  

 

 

   

 

 

   

 

 

 

Earnings per common share

   $ 1.11      $ 1.20      $ 1.20   
  

 

 

   

 

 

   

 

 

 

Earnings per common share, assuming dilution

   $ 1.11      $ 1.20      $ 1.20   
  

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.52      $ 0.52      $ 0.52   
  

 

 

   

 

 

   

 

 

 

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

 

F-3


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

For the years ended December 31,

   2013     2012     2011  

Net income

   $ 8,414      $ 7,759      $ 7,669   

Net change in unrealized (loss) gain on available-for-sale securities, net of tax effect

 

     (2,382     (530     1,906   

Net change in pension plan, net of tax effect

     860        (217     (381

Net change in derivatives, net of tax effect

 

     101        182        146   

Net change in unrealized gain on equity investment, net of tax effect

     (32     8        (31
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 6,961      $ 7,202      $ 9,309   
  

 

 

   

 

 

   

 

 

 

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

 

F-4


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

For the years ended December 31,

   2013     2012     2011  

PREFERRED STOCK

      

Balance, beginning of year

 

   $ —        $ —        $ —     

Issuance of preferred stock

     —          —          —     

Redemption of preferred stock

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

COMMON STOCK

      

Balance, beginning of year

   $ 75      $ 63      $ 62   

Issuance of common shares

 

     —          12        1   

Issuance of common shares from dividend reinvestment plan

     —          —          —     

Acquisition of Central Financial Corporation

 

     11        —          —     

Exercise of stock options (103,400 in 2013, 40,042 in 2012 and no shares in 2011)

     1        —          —     
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 87      $ 75      $ 63   
  

 

 

   

 

 

   

 

 

 

WARRANTS

      

Balance, beginning of year

 

   $ —        $ 85      $ 85   

Repurchase of warrants

 

     —          (85     —     
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ —        $ —        $ 85   
  

 

 

   

 

 

   

 

 

 

PAID-IN CAPITAL

      

Balance, beginning of year

 

   $ 83,977      $ 66,658      $ 55,921   

Issuance of common stock from exercise of stock options

     513        365        —     

Tax benefit for stock options and awards

 

     30        25        —     

Issuance of common stock from dividend reinvestment plan

     202        —          —     

Shares surrendered to treasury stock

 

     265        —          —     

Restricted stock awards, issued from treasury stock, net

     —          (104     —     

Acquisition of Central Financial Corporation

 

     15,974        —          —     

Acquisition of McCrillis & Eldredge Insurance

     —          53        684   

Acquisition of The Nashua Bank

 

     —          14,632        —     

Repurchase of warrants

     —          (652     —     

Issuance/assumption of preferred stock

 

     —          3,000        20,000   

Redemption of preferred stock

     —          —          (10,000

Preferred stock net accretion

     —          —          53   
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 100,961      $ 83,977      $ 66,658   
  

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS

      

Balance, beginning of year

   $ 53,933      $ 49,892      $ 46,001   

Net income

 

     8,414        7,759        7,669   

Preferred stock net accretion

     —          —          (53

Cash dividends declared, preferred stock

 

 

     (316     (666     (723

Cash dividends paid, common stock

     (3,684     (3,052     (3,002
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 58,347      $ 53,933      $ 49,892   
  

 

 

   

 

 

   

 

 

 

UNEARNED RESTRICTED STOCK AWARDS

      

Balance, beginning of year

 

   $ (377   $ —        $ —     

Shares awarded (14,500 in 2013, 35,000 in 2012 and no shares in 2011)

     (189     (440     —     

Shares forfeited (no shares in 2013, 5,000 in 2012 and no shares in 2011)

 

     —          63        —     

Shares vested

     76        —          —     
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ (490   $ (377   $ —     
  

 

 

   

 

 

   

 

 

 

 

 

F-5


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(continued)

 

(Dollars in thousands)

For the years ended December 31,

   2013     2012     2011  

ACCUMULATED OTHER COMPREHENSIVE LOSS

      

Balance, beginning of year

 

   $ (1,444   $ (887   $ (2,527

Other comprehensive (loss) income, net of tax effect

     (1,453     (557     1,640   
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ (2,897   $ (1,444   $ (887
  

 

 

   

 

 

   

 

 

 

TREASURY STOCK

      

Balance, beginning of year

 

   $ (6,670   $ (7,151   $ (7,151

Issuance of restricted stock awards (14,500 shares in 2013, 35,000 shares in 2012 and no shares in 2011)

     189        544        —     

Surrender of outstanding shares

 

     (270     —          —     

Shares repurchased (5,000 shares in 2012)

     —          (63     —     
  

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ (6,751   $ (6,670   $ (7,151
  

 

 

   

 

 

   

 

 

 

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

 

F-6


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

(Dollars in thousands)

For the years ended December 31,

   2013     2012     2011  

Cash flows from operating activities:

      

Net income

 

   $ 8,414      $ 7,759      $ 7,669   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

 

     1,806        1,431        1,410   

Net (increase) decrease in mortgage servicing rights

     (532     (337     173   

Amortization of securities, net

 

     781        1,038        1,180   

Amortization of deferred expenses relating to issuance of capital securities and subordinated debentures

     11        11        11   

(Accretion) amortization of fair value adjustments, net (loans, deposits and borrowings)

 

     (761     122        109   

Amortization of intangible assets

     1,000        425        424   

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

 

     11,303        (8,549     2,453   

Net gain on sales of premises, equipment, investment in real estate, other real estate owned and other assets

     (6     (40     (27

Impairment losses on other real estate owned

 

     —          183        —     

Net gain on sales and calls of securities

     (964     (3,819     (2,588

Remeasurement gain of equity interest in Charter Holding Corp.

 

     (1,369     —          —     

Equity in gain of partially owned Charter Holding Corp.

 

     (294     (444     (573

Provision for loan losses

 

     962        2,705        1,351   

Deferred tax expense

     592        479        791   

Tax benefit for stock options and awards

 

     (30     (25     —     

Change in cash surrender value of life insurance

     (626     (545     (462

Decrease in accrued interest receivable and other assets

 

     26        1,082        590   

Change in deferred loan origination costs, net

     (921     (1,118     (381

Increase (decrease) in accrued expenses and other liabilities

     1,091        713        (1,509
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     20,483        1,071        10,621   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures—investment in real estate

     (5     (503     —     

Capital expenditures—software

 

     (286     (70     (192

Capital expenditures—premises and equipment

     (4,312     (1,297     (925

Purchases of interest-bearing time deposits with other banks

 

     —          (250     —     

Maturities of interest-bearing time deposits with other banks

     499        —          —     

Proceeds from sales of securities available-for-sale

 

     125,773        194,347        102,632   

Purchases of securities available-for-sale

     (124,587     (223,664     (156,667

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

 

     89,312        50,022        44,290   

Redemption of Federal Home Loan Bank stock

 

     213        119        —     

Purchases of Federal Home Loan Bank stock

     —          (1,627     —     

Capital distribution—Charter Holding Corp., at equity

 

     340        438        545   

Loan originations and principal collections, net

 

     (94,515     (96,888     (35,885

Purchases of loans

 

     (10,479     (4,799     (6,372

Recoveries of loans previously charged off

 

     848        596        365   

Proceeds from sales of premises, equipment, investment in real estate, other real estate owned and other assets

 

     874        1,409        135   

Investment in bank owned life insurance

     —          (5,000     (2,500

Cash paid to acquire Charter Holding Corporation, net

 

     (3,105     —          —     

Cash paid to acquire McCrillis & Eldredge, net

 

     —          —          (175

Cash and cash equivalents acquired from The Nashua Bank, net of expenses and cash paid

 

     —          (1,623     —     

Cash and cash equivalents acquired from Central Financial Corporation

 

     17,512        —          —     

Premium paid on life insurance policies

 

     (13     (13     (12
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,931     (88,803     (54,761
  

 

 

   

 

 

   

 

 

 

 

F-7


Table of Contents

New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

 

(Dollars in thousands)

For the years ended December 31,

   2013     2012     2011  

Cash flows from financing activities:

      

Net increase in demand deposits, savings and NOW accounts

 

     19,985        64,159        40,482   

Net decrease in time deposits

     (30,531     (16,320     (15,678

(Decrease) increase in short-term advances from Federal Home Loan Bank

 

     (15,000     15,000        15,000   

Principal advances from Federal Home Loan Bank

 

     45,000        45,000        5,000   

Repayment of advances from Federal Home Loan Bank

 

     (51,000     —          (15,000

Repayment of other borrowed funds

     —          (543     —     

Net increase (decrease) in repurchase agreements

 

     10,664        (895     (651

Issuance of common stock from dividend reinvestment plan

     202        —          —     

Redemption of stock warrants

 

     —          (737     —     

Proceeds from issuance of preferred stock

     —          —          20,000   

Redemption of preferred stock

 

     —          —          (10,000

Dividends paid on preferred stock

     (316     (848     (484

Dividends paid on common stock

 

     (3,684     (3,052     (3,002

Proceeds from exercise of stock options

     514        365        —     

Tax benefit for stock options and awards

 

     30        25        —     
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (24,136     102,154        35,667   
  

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (5,584     14,422        (8,473

CASH AND CASH EQUIVALENTS, beginning of year

     39,162        24,740        33,213   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of year

   $ 33,578      $ 39,162      $ 24,740   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      

Interest paid

   $ 6,588      $ 7,396      $ 8,763   
  

 

 

   

 

 

   

 

 

 

Income taxes paid

 

   $ 2,902      $ 3,633      $ 1,850   
  

 

 

   

 

 

   

 

 

 

Loans transferred to other real estate owned

   $ 330      $ 547      $ 1,891   
  

 

 

   

 

 

   

 

 

 

Loans originated from sales of other real estate owned

   $ —        $ 237      $ 508   
  

 

 

   

 

 

   

 

 

 

Write-off of assets acquired to goodwill

   $ 41      $      $   
  

 

 

   

 

 

   

 

 

 

Acquisitions:

   Charter Holding
Corporation
    The Nashua Bank     McCrillis
& Eldredge
 

Cash and cash equivalents acquired

   $ 3,095      $ 2,790      $ 97   

Securities available-for-sale

 

     633        20,852        25   

Federal Home Loan Bank stock

     —          383        —     

Net loans acquired

 

     —          88,203        —     

Premises and equipment acquired

     1,365        729