10-K 1 d834632d10k.htm 10-K 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, 2014

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, 2015, there were 8,263,068 shares of the registrant’s common stock issued and outstanding.

As of June 30, 2014, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $115.2 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 2015 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2014.

 

 

 


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 22
Item 1B. Unresolved Staff Comments 26
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosures 27
PART II

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

28
Item 6. Selected Financial Data 30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 54
Item 8. Financial Statements and Supplementary Data 56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 56
Item 9A Controls and Procedures 56
Item 9B. Other Information 59
PART III
Item 10. Directors, Executive Officers and Corporate Governance 60
Item 11. Executive Compensation 60

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

60
Item 13. Certain Relationships and Related Transactions, and Director Independence 60
Item 14. Principal Accountant Fees and Services 60
PART IV
Item 15. Exhibits and Financial Statement Schedules 61

 

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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.

 

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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, Quechee, Randolph, Rochester, Royalton, Rutland, South Royalton, West Rutland, Williamstown and Woodstock, Vermont.

The Bank has four wholly owned subsidiaries: Charter Holding Corp. (“Charter Holding”), McCrillis & Eldredge Insurance, Inc. (“McCrillis & Eldredge”), Lake Sunapee Group, Inc. and Lake Sunapee Financial Services Corporation.

Recent Acquisitions

On September 4, 2013, the Bank completed its purchase of all shares of common stock of 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”).

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.

Operating Segments

Our operations are managed along two reportable segments that represent our core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and

 

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services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through McCrillis & Eldredge and brokerage services through Lake Sunapee Financial Services Corporation. The Wealth Management segment provides trust and investment services through Charter Holding and Charter Trust. A summary of the financial results for each of our segments is included in Note 23—Operating Segments in the Notes to our Consolidated Financial Statements included elsewhere within this report.

Employees

At December 31, 2014, we had a total of 322 full-time employees, 40 part-time employees, and 20 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.

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, 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

 

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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 $1.2 billion at December 31, 2014, representing approximately 80% of total assets. As of December 31, 2014, approximately 54% of the mortgage loan portfolio had adjustable rates. As of December 31, 2014, we had sold $411.6 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 97% 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 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.

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.

 

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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 monthly 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:

 

     2014     2013     2012  
     Amount     % of Total     Amount     % of Total     Amount     % of Total  
     ($ in thousands)  

Real estate loans

            

Conventional

   $ 645,690        53.27   $ 602,270        52.82   $ 471,449        51.84

Home equity

     69,204        5.71        70,564        6.19        69,291        7.62   

Commercial

     313,017        25.83        287,813        25.24        234,264        25.76   

Construction

     36,445        3.01        29,722        2.61        19,412        2.13   

Commercial and municipal loans

     138,575        11.43        140,071        12.28        107,750        11.85   

Consumer loans

     9,149        0.75        9,817        0.86        7,304        0.80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  1,212,080      100.00   1,140,257      100.00   909,470      100.00

Allowance for loan losses

  (9,269   (9,757   (9,923

Deferred loan origination costs, net

  4,034      3,610      2,689   
  

 

 

     

 

 

     

 

 

   

Loans receivable, net

$ 1,206,845    $ 1,134,110    $ 902,236   
  

 

 

     

 

 

     

 

 

   

 

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

Real estate loans

             

Conventional

   $ 397,010        55.04   $ 347,606        50.90     

Home equity

     71,990        9.98        74,884        10.97        

Commercial

     148,424        20.58        143,768        21.05        

Construction

     12,731        1.76        19,210        2.81        

Commercial and municipal loans

     83,835        11.62        89,361        13.09        

Consumer loans

     7,343        1.02        8,079        1.18        
  

 

 

   

 

 

   

 

 

   

 

 

      

Total loans

  721,333      100.00   682,908      100.00

Unamortized adjustment to fair value

  1,101      1,202   

Allowance for loan losses

  (9,131   (9,864

Deferred loan origination costs, net

  1,649      1,268   
  

 

 

     

 

 

        

Loans receivable, net

$ 714,952    $ 675,514   
  

 

 

     

 

 

        

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

 

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portfolio change trends. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio. These factors are calculated and assessed independently within each identified loan category. Based on these loss factors, $2.7 million, or 29.68% of the total allowance, was allocated to the originated commercial real estate portfolio at December 31, 2014. The originated commercial real estate portfolio represents 22.26% of total originated loans. In particular, the commercial real estate portfolio has a higher delinquency trend and concentration assessment than the other categories resulting in an overall higher comparative loss factor. For the same period, $4.8 million, or 51.89% 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 61.92% 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, $640 thousand, or 6.92% of the total allowance, is allocated to the originated commercial and municipal loan portfolio. The originated commercial and municipal loan portfolio represents 11.82% 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 3.87% of the aggregate six-month average of delinquencies.

The following table sets forth the maturities of the loan portfolio at December 31, 2014 and indicates whether such loans have fixed or adjustable interest rates:

 

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

Maturities

           

Real Estate Loans with:

           

Predetermined interest rates

   $ 19,490       $ 54,355       $ 352,332       $ 426,177   

Adjustable interest rates

     1,558         3,406         633,214         638,178   
  

 

 

    

 

 

    

 

 

    

 

 

 
  21,048      57,761      985,546      1,064,355   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial/Municipal Loans with

Predetermined interest rates

  16,746      33,216      59,358      109,320   

Adjustable interest rates

  1,297      2,408      25,550      29,255   
  

 

 

    

 

 

    

 

 

    

 

 

 
  18,043      35,624      84,908      138,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Collateral/Consumer Loans with

Predetermined interest rates

  3,486      4,078      301      7,865   

Adjustable interest rates

  18      635      632      1,285   
  

 

 

    

 

 

    

 

 

    

 

 

 
  3,504      4,713      933      9,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals (1)

$ 42,595    $ 98,098    $ 1,071,387    $ 1,212,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) This table includes $7.3 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 southern and west-central areas of New Hampshire along with Addison, Orange, 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.

 

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

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

Delinquent Loans, Classified Assets and Other Real Estate Owned

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

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.

 

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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, 2014 and 2013 were $28.2 million and $30.3 million, respectively. For further discussion regarding non-performing assets, impaired loans and the allowance for loan losses, please see the section entitled “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.

The following table sets forth as of December 31, 2014 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 tax-equivalent basis (in thousands):

 

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

Available-for-sale securities

        

U.S. Treasury notes

   $ 10,075       $ 10,075         0.01

Municipal bonds

     934         945         2.80   
  

 

 

    

 

 

    

Total due in less than one year

  11,009      11,020      0.25   

U.S. Treasury notes

  30,437      30,048      0.69   

U.S. government-sponsored enterprise bonds

  6,998      6,906      1.05   

Municipal bonds

  4,512      4,509      3.55   

Other bonds and debentures

  85      97      7.95   
  

 

 

    

 

 

    

Total due after one year through five years

  42,032      41,560      1.07   
  

 

 

    

 

 

    

U.S. government-sponsored enterprise bonds

  186      188      1.79   

Municipal bonds

  2,913      2,932      3.89   
  

 

 

    

 

 

    

Total due after five years through ten years

  3,099      3,120      2.81   
  

 

 

    

 

 

    

U.S. government-sponsored enterprise bonds

  177      171      1.44   

Municipal bonds

  1,220      1,210      3.79   

Other bonds and debentures

  29      29      5.13   
  

 

 

    

 

 

    

Total due after ten years

  1,426      1,410      3.53   
  

 

 

    

 

 

    
$ 57,566    $ 57,110      1.12
  

 

 

    

 

 

    

 

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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, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale:

  

Bonds and notes-

           

U.S. Treasury notes

   $ 40,512       $ —        $ 389       $ 40,123   

U.S. government-sponsored enterprise bonds

     7,361         2         98         7,265   

Mortgage-backed securities

     58,439         112         271         58,280   

Municipal bonds

     9,579         103         86         9,596   

Other bonds and debentures

     114         12         —          126   

Equity securities

     258         51         1         308   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

$ 116,263    $ 280    $ 845    $ 115,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2014, time deposits represented approximately 31.5% of total deposits. Time deposits included $141.3 million of certificates of deposit in excess of $100,000.

 

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

 

     2014      2013      2012  
     (Dollars in thousands)  

Net deposits (withdrawals)

   $ 60,158       $ (14,992    $ 43,458   

Deposits assumed through acquisition

     —           149,684         98,479   

Interest credited on deposit accounts

     4,464         4,059         4,381   
  

 

 

    

 

 

    

 

 

 

Total increase in deposit accounts

$ 64,622    $ 138,751    $ 146,318   
  

 

 

    

 

 

    

 

 

 

At December 31, 2014, we had approximately $141.3 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:

 

Maturity Period

   Amount      Weighted
Average Rate
 
     (Dollars in thousands)         

3 months or less

   $ 57,090         0.45

Over 3 through 6 months

     27,716         1.20

Over 6 through 12 months

     21,351         0.95

Over 12 months

     35,143         1.45
  

 

 

    

Total

$ 141,300      0.92
  

 

 

    

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:

 

     2014     2013     2012  
     Amount      % of Total     Amount      % of Total     Amount      % of Total  
     (Dollars in thousands)  

Checking accounts

   $ 117,889         10.2   $ 101,446         9.3   $ 74,133         7.8

NOW accounts

     333,984         29.0        303,054         27.9        248,329         26.2   

Money market accounts

     103,817         9.0        104,755         9.6        82,608         8.7   

Regular savings accounts

     20,198         1.8        22,020         2.0        10,112         1.1   

Treasury savings accounts

     213,348         18.5        195,887         18.0        180,253         18.9   

Club deposits

     151         —          193         —          102         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

  789,387      68.5      727,355      66.8      595,537      62.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Time deposits

Less than 12 months

  235,195      20.4      238,004      21.9      210,349      22.2   

Over 12 through 36 months

  91,551      7.9      100,394      9.2      96,316      10.1   

Over 36 months

  36,581      3.2      22,339      2.1      47,139      5.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total time deposits

  363,327      31.5      360,737      33.2      353,804      37.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Deposits

$ 1,152,714      100.0 $ 1,088,092      100.0 $ 949,341      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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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,  
     2014     2013     2012  
     Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
    Average
Balance
     Average
Rate Paid
 
     (Dollars in thousands)  

NOW

   $ 362,474         0.01   $ 306,737         0.05   $ 270,574         0.09

Savings deposits

     227,152         0.11        190,707         0.05        151,238         0.18   

Money market deposits

     101,094         0.31        81,682         0.21        40,872         0.34   

Time deposits

     366,200         0.99        338,920         1.04        332,545         1.13   

Demand deposits

     49,228         —          26,647         —          29,657         —     
  

 

 

      

 

 

      

 

 

    

Total Deposits

$ 1,106,148    $ 944,693    $ 824,886   
  

 

 

      

 

 

      

 

 

    

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

 

Time Deposits

   2014      2013      2012  
     (Dollars in thousands)  

0.00% – 0.99%

   $ 238,696       $ 219,507       $ 197,076   

1.00% – 1.99%

     73,378         85,688         96,845   

2.00% – 2.99%

     25,137         27,656         30,879   

3.00% – 3.99%

     26,116         27,886         28,752   

4.00% – 4.99%

     —           —           252   

5.00% – 5.99%

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

$ 363,327    $ 360,737    $ 353,804   
  

 

 

    

 

 

    

 

 

 

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, 2014, we had outstanding advances of $141.0 million from the FHLBB compared to advances outstanding of $121.7 million from the FHLBB at December 31, 2013.

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:

 

     2014     2013     2012  
     (Dollars in thousands)  

Balance at year end

   $ 70,000      $ 15,000      $ 30,500   

Average amount outstanding

     81,000        20,573        26,745   

Maximum amount outstanding at any month-end

     120,000        65,000        35,000   

Average interest rate for the year

     0.23     0.29     0.27

Weighted average interest rate on year-end balance

     0.33     0.28     0.32

 

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SUBSIDIARY ACTIVITIES

Service Corporations

The Bank has 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, 2014, 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 Consumer Financial Protection Bureau (“CFPB”), could have a material adverse impact on the Company and the Bank, and their operations and stockholders.

Recent Regulatory Reforms

The past four years have resulted in a significant increase in regulation and regulatory oversight for U.S. financial services firms, primarily resulting from the Dodd-Frank Wall Street Reform and Consumer Protection

 

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Act (the “Dodd-Frank Act”) enacted on July 21, 2010. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of a banking organization and represents a significant overhaul of many aspects of the regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial company, including bank holding companies and banks such as the Company and the Bank. Certain provisions of the Dodd-Frank Act applicable to the Company and the Bank are discussed herein.

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, however the Federal Reserve has granted extensions to the conformance period under certain circumstances for investments in Covered Funds (as defined under the Volcker Rule).

Many of the provisions of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the applicable federal banking agencies. 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 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 savings and loan holding company, will be subject to the New Capital Rules.

 

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Table of Contents

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, 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”).

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 stockholders’ 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.

 

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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. The Home Owners’ Loan Act (“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 qualified thrift lender (“QTL”) test.

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 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.

 

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Regulation of Federal Savings Associations

Business Activities. The Bank derives its lending and investment powers from the 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 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, 2014, 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 stockholders’ 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, 2014, 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, 2014:

 

     Bank      Capital Requirements      Excess Capital  
     ($ in thousands)  

Tangible capital

   $ 122,161       $ 21,726       $ 100,435   

Core capital

     122,161         57,937         64,224   

Risk-based capital

     131,597         79,283         52,314   

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 2012.

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

 

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

 

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

 

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

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

 

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

 

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

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

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

 

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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, 2014, 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.

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.

 

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In addition, Section 10(f) of the HOLA requires a subsidiary savings association of a savings 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 suspends 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 third quarter of 2014, due December 30, 2014, was 0.0060% of insured deposits. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the DIF.

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

Federal Home Loan Bank System. The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks (“FHLB”) comprising the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLBB. While the required percentages of stock ownership are subject to change by the FHLB, the Bank was in compliance with this requirement with an investment in FHLBB stock at December 31, 2014 of $10.8 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.

 

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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 required for 2014 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 Applicable 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 circumstances, 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;

 

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

 

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

 

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

 

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

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

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,

 

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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.

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, 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.

 

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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. Additionally, the Dodd-Frank Act has and will continue to change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation, some of which have yet to be implemented. We cannot be certain when final rules affecting us will be issued through such rulemakings and what the specific content of such rules will be. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. 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. Additionally, revised capital adequacy guidelines and prompt corrective action rules applicable to us became effective January 1, 2015. Compliance with these rules will impose additional costs.

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.

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

 

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

As of December 31, 2014, we had $8 million of Series B Preferred Stock outstanding under the SBLF program.

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

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

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

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives

 

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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.

A breach of information security, including as a result of cyber attacks, could disrupt our business and impact our earnings.

We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Despite existing safeguards, we cannot be certain that all of our systems are free from vulnerability to attack or other technological difficulties or failures. If information security is breached or difficulties or failures occur, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us, reputational harm or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

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 amended and restated certificate of incorporation and amended and restated 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

 

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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 our Board of Directors.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

At December 31, 2014, we had 43 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)

     1         —          1   

8. Hillsboro

     —          1         1   

9. Lebanon

     1         2         3   

10. Meredith

     1         —          1   

11. Milford

     —          1         1   

12. New London (1) (2)

     —          3         3   

13. Newbury

     1         —          1   

14. Newport (3)

     —          3         3   

15. Peterborough (1)

     1         —          1   

16. Rochester

     1         —          1   

17. Sunapee

     —          1         1   

18. West Lebanon

     1         —          1   

19. Nashua (1)

     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         1   

6. Royalton

     —          1         1   

7. Rutland

     —          1         1   

8. South Royalton

     1         —          1   

9. West Rutland

     —          1         1   

10. Williamstown

     —          1         1   

11. Woodstock

     —          2         2   
  

 

 

    

 

 

    

 

 

 

Total Offices

  16      26      42   
  

 

 

    

 

 

    

 

 

 

 

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(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 1, 2015, we had approximately 932 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
 

2014

   First Quarter    $ 15.39       $ 14.15       $ 0.13   
   Second Quarter    $ 15.41       $ 14.05       $ 0.13   
   Third Quarter    $ 15.58       $ 14.50       $ 0.13   
   Fourth Quarter    $ 16.12       $ 14.24       $ 0.13   

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   

Dividends

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

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

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

 

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Recent Sales of Unregistered Securities

There were no sales by us of unregistered securities during the year ended December 31, 2014.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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, 2014, 148,088 shares remained to be repurchased under the plan. During 2014, no shares were repurchased pursuant to the program.

Performance Graph

The following graph compares our total cumulative stockholder return by an investor who invested $100.00 on December 31, 2009 to December 31, 2014 to the total return by an investor who invested $100.00 in each of the S&P 500 index and the SNL U.S. Thrift NASDAQ index for the same period.

 

LOGO

 

            Period Ending December 31,         

Index

   2009      2010      2011      2012      2013      2014  

New Hampshire Thrift Bancshares, Inc.

     100.00         135.89         127.32         149.12         185.98         197.17   

S&P 500

     100.00         115.06         117.49         136.30         180.44         205.14   

SNL U.S. Thrift NASDAQ

     100.00         98.90         88.32         105.40         133.65         148.02   

 

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Item 6. Selected Financial Data

The summary information presented below at or for each of the years presented is derived in part from our Consolidated Financial Statements. The following information is only a summary, and you should read it in conjunction with our Consolidated Financial Statements and notes beginning on page F-1.

 

     At December 31,  
     2014      2013      2012      2011      2010  
     (in thousands)  

Selected Financial Condition Data:

  

Total assets

   $ 1,503,786       $ 1,423,870       $ 1,270,477       $ 1,041,819       $ 995,054   

Loans receivable, net

     1,206,845         1,134,110         902,236         714,952         675,514   

Deposits

     1,152,714         1,088,092         949,341         803,023         778,219   

Federal Home Loan Bank advances

     140,992         121,734         142,730         80,967         75,959   

Subordinated debentures

     37,620         20,620         20,620         20,620         20,620   

Total stockholders’ equity

     139,836         149,257         129,494         108,660         92,391   

Allowance for loan losses

     9,269         9,757         9,923         9,131         9,864   

Non-performing loans

     7,327         9,303         17,001         16,616         10,420   

 

     For the years ended December 31,  
     2014      2013      2012      2011      2010  
     (in thousands, except per share data)  

Selected Operating Data:

  

Total interest and dividend income

   $ 48,728       $ 40,276       $ 36,421       $ 37,188       $ 38,656   

Total interest expense

     6,799         6,497         7,399         8,689         9,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest and dividend income

  41,929      33,779      29,022      28,499      28,912   

Provision for loan losses

  905      962      2,705      1,351      2,182   

Net interest and dividend income after provision for loan losses

  41,024      32,817      26,317      27,148      26,730   

Total noninterest income

  19,226      15,715      14,551      10,458      10,274   

Total noninterest expense

  46,646      36,991      29,425      27,126      25,513   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

  13,604      11,541      11,443      10,480      11,491   

Provision for income taxes

  3,564      3,127      3,684      2,811      3,544   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

$ 10,040    $ 8,414    $ 7,759    $ 7,669    $ 7,947   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

$ 1.19    $ 1.11    $ 1.20    $ 1.20    $ 1.29   

Earnings per common share, assuming dilution

$ 1.19    $ 1.11    $ 1.20    $ 1.20    $ 1.29   

Dividends declared per common share

$ 0.52    $ 0.52    $ 0.52    $ 0.52    $ 0.52   

 

     For the years ended December 31,  
     2014     2013     2012     2011     2010  

Selected financial ratios and other data (1):

  

Return on average assets

     0.68     0.66     0.69     0.74     0.79

Return on average common equity

     8.07        6.98        6.99        7.96        8.71   

Average equity to average assets

     8.44        9.51        8.13        7.27        8.11   

Interest rate spread

     3.03        2.94        2.81        3.01        3.18   

Net interest margin

     3.08        2.97        2.85        3.05        3.23   

Average interest-bearing assets to average interest-earning liabilities

     108.75        105.01        105.74        104.57        105.05   

Total noninterest expense to average assets

     3.17        2.90        2.63        2.61        2.55   

Efficiency ratio (2)

     73.51        72.72        66.55        68.54        63.90   

Dividend payout ratio

     43.70        46.85        43.33        43.33        40.31   

 

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     For the years ended December 31,  
     2014      2013      2012      2011      2010  

Regulatory Capital Ratios:

              

Total risk-based capital

     13.28         12.89         14.66         15.01         12.67   

Tier 1 risk-based capital

     12.33         11.83         13.47         14.35         12.04   

Tier 1 leverage capital

     8.43         8.29         8.82         9.58         8.28   

Asset Quality Ratios:

              

Non-performing loans to total loans

     0.49         0.65         1.34         1.59         1.05   

Non-performing assets to total assets

     0.60         0.82         1.86         2.29         1.52   

Allowance for loan losses to total loans (3)

     0.87         1.02         1.09         1.26         1.44   

Non-performing loans to total allowance

     174.27         217.35         172.73         182.34         101.86   

Number of:

              

Banking offices

     42         44         30         30         28   

Full-time equivalent employees

     351         360         278         234         231   

 

(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios
(2) The efficiency ratio represents the ratio of operating expenses less intangible amortization divided by the sum of net interest and dividend income and non-interest income.
(3) GAAP requires that loans acquired in a business combination be recorded at fair value, whereas originated loans are recorded at cost. The fair value of loans acquired includes expected loan losses and there is no allowance for loan losses recorded for these loans at the time of acquisition. Accordingly, the ratio of allowance for loan losses to total loans is not directly comparable from year to year due to acquisition activity in 2012 and 2013.

 

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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. The following information should be considered in connection with our results for the fiscal year ended December 31, 2014:

 

    net income available to common stockholders increased 21.14% compared to 2013;

 

    return on average common equity of 8.07% and return on average assets of 0.68%;

 

    book value per common share increased 3.90% to $15.97 as of December 31, 2014;

 

    loans increased $72.7 million, or 6.41%, to $1.2 billion as of December 31, 2014;

 

    net loan charge-offs were $1.4 million, or 0.11%, of average loans for the year ended December 31, 2014;

 

    deposits increased $64.6 million, or 5.94%, to $1.2 billion;

 

    net interest margin increased to 3.08% in 2014 from 2.97% in 2013; and

 

    noninterest income increased 22.34% to $19.2 million in 2014.

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.

Operating Segments

Our operations are managed along two reportable segments that represent our core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through McCrillis & Eldredge and brokerage services through Lake Sunapee Financial Services Corporation. The Wealth Management segment provides trust and investment services through Charter Holding and Charter Trust. A summary of the financial results for each of our segments is included in Note 23—Operating Segments in the Notes to our Consolidated Financial Statements located elsewhere within this report.

 

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Average Balance Sheet and Analysis of Net Interest and Dividend Income

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,   2014     2013     2012  
    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)

  $ 1,201,839      $ 46,647        3.88   $ 956,796      $ 38,034        3.98   $ 800,290      $ 32,542        4.07

Investment securities and other

    161,233        2,081        1.29     182,358        2,242        1.23     217,390        3,879        1.78
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

  1,363,072      48,728      3.57   1,139,154      40,276      3.54   1,017,680      36,421      3.58
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-earning assets:

Cash

  11,928      21,350      19,751   

Other noninterest-earning assets (3)

  98,434      106,722      81,775   
 

 

 

       

 

 

       

 

 

     

Total noninterest-earning assets

  110,362      128,072      101,526   
 

 

 

       

 

 

       

 

 

     

Total

$ 1,473,434    $ 1,267,226    $ 1,119,206   
 

 

 

       

 

 

       

 

 

     

Liabilities and Stockholders’ Equity:

Interest-bearing liabilities:

Savings, NOW and MMAs

$ 690,720    $ 829      0.12 $ 579,126    $ 386      0.07 $ 462,684    $ 619      0.13

Time deposits

  366,200      3,635      0.99   338,920      3,669      1.08   332,545      3,762      1.13

Repurchase agreements

  20,005      63      0.31   20,050      52      0.25   16,449      47      0.29

Capital securities and other borrowed funds

  176,506      2,272      1.29   146,663      2,390      1.63   150,750      2,971      1.97
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

  1,253,431      6,799      0.54   1,084,759      6,497      0.60   962,428      7,399      0.77
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities:

Demand deposits

  49,228      26,647      29,657   

Other

  23,436      12,313      16,086   
 

 

 

       

 

 

       

 

 

     

Total noninterest-bearing liabilities

  72,664      38,960      45,743   
 

 

 

       

 

 

       

 

 

     

Stockholders’ equity

  147,339      143,507      111,035   
 

 

 

       

 

 

       

 

 

     

Total

$ 1,473,434    $ 1,267,226    $ 1,119,206   
 

 

 

       

 

 

       

 

 

     

Net interest income/Net interest rate spread

$ 41,929      3.03 $ 33,779      2.94 $ 29,022      2.81
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net interest margin

  3.08   2.97   2.85
     

 

 

       

 

 

       

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

  108.75   105.01   105.74
     

 

 

       

 

 

       

 

 

 

 

(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, 2014 vs. 2013
Increase (Decrease)

due to

 
         Volume              Rate              Total      
     (Dollars in thousands)  

Interest income on loans

   $ 8,853       $ (240    $ 8,613   

Interest income on investments

     (231      70         (161
  

 

 

    

 

 

    

 

 

 

Total interest income

  8,622      (170   8,452   
  

 

 

    

 

 

    

 

 

 

Interest expense on savings, NOW and MMAs

  453      (10   443   

Interest expense on time deposits

  (31   (3   (34

Interest expense on repurchase agreements

  (1   12      11   

Interest expense on capital securities and other borrowings

  253      (371   (118
  

 

 

    

 

 

    

 

 

 

Total interest expense

  674      (372   302   
  

 

 

    

 

 

    

 

 

 

Net interest income

$ 7,948    $ 202    $ 8,150   
  

 

 

    

 

 

    

 

 

 

 

    

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      (467   (233

Interest expense on time deposits

  75      (168   (93

Interest expense on repurchase agreements

  9      (4   5   

Interest expense on capital securities and other borrowings

  (79   (502   (581
  

 

 

    

 

 

    

 

 

 

Total interest expense

  239      (1,141   (902
  

 

 

    

 

 

    

 

 

 

Net interest income

$ 5,405    $ (648 $ 4,757   
  

 

 

    

 

 

    

 

 

 

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,  
     2014     2013     2012     2011     2010  

Yield on loans

     3.88     3.98     4.07     4.42     4.87

Yield on investment securities

     1.29     1.23     1.78     2.54     2.80

Combined yield on loans and investments

     3.57     3.54     3.58     3.98     4.32

Cost of deposits, including repurchase agreements

     0.42     0.44     0.55     0.75     0.93

other borrowed funds

     1.29     1.63     1.97     2.40     2.33

Combined cost of deposits and borrowings

     0.54     0.60     0.77     0.97     1.14

Interest rate spread

     3.03     2.94     2.81     3.01     3.18

Net interest margin

     3.08     2.97     2.85     3.05     3.23

 

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Comparison of Financial Condition at December 31, 2014 and December 31, 2013

Total assets increased $79.9 million, or 5.61%, to $1.5 billion at December 31, 2014 from $1.4 billion at December 31, 2013. Cash and cash equivalents increased $17.5 million to $51.1 million at December 31, 2014 from $33.6 million at December 31, 2013.

Total net loans receivable excluding loans held-for-sale increased $72.7 million, or 6.41%, to $1.2 billion at December 31, 2014, compared to $1.1 billion at December 31, 2013. Our conventional real estate loan portfolio increased $43.4 million, or 7.21%, to $645.7 million at December 31, 2014 from $602.3 million at December 31, 2013. The outstanding balances on home equity loans and lines of credit decreased $1.4 million to $69.2 million over the same period. Construction loans increased $6.7 million, or 22.62%, to $36.4 million. Commercial real estate loans increased $25.2 million, or 8.76%, over the same period to $313.0 million. Consumer loans decreased $667 thousand, or 6.79%, to $9.2 million, and commercial and municipal loans decreased $1.5 million, or 1.07%, to $138.6 million. Sold loans serviced by us, not including participations, totaled $411.6 million at December 31, 2014, a decrease of $5.7 million, or 1.36%, compared to $417.3 million at December 31, 2013. 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 conventional real estate 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, 2014, adjustable-rate mortgages comprised approximately 59.96% of our real estate mortgage loan portfolio, which is consistent with prior years. Impaired loans and non-performing assets were 1.09% of total assets and 1.54% of total loans originated at December 31, 2014, compared to 1.58% and 2.36%, respectively, at December 31, 2013.

The fair value of investment securities available-for-sale decreased $9.6 million, or 7.62%, to $115.7 million at December 31, 2014, from $125.2 million at December 31, 2013. We realized $950 thousand in the gains on the sales and calls of securities during 2014, compared to $964 thousand in gains on the sales and calls of securities recorded during 2013. At December 31, 2014, our investment portfolio had a net unrealized holding loss of $565 thousand, compared to a net unrealized holding loss of $2.0 million at December 31, 2013. The investments in our investment portfolio that are temporarily impaired as of December 31, 2014, consist primarily of bonds issued by the Treasury, U.S. government sponsored enterprises and agencies, mortgage-backed securities, and municipal bonds. 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.

OREO and property acquired in settlement of loans was $251 thousand at December 31, 2014, representing one property located in New Hampshire and one property located in Vermont, compared to $1.3 million at December 31, 2013 representing two properties located in New Hampshire and seven properties located in Vermont. During 2014, we acquired six properties and sold eleven properties recognizing net gains on sales of OREO of $185 thousand on proceeds of $2.1 million.

Goodwill decreased $56 thousand, or 0.13%, to $44.6 million at December 31, 2014, compared to $44.6 million at December 31, 2013. The change in goodwill represents net post-closing adjustments of $56 thousand related to the 2013 acquisitions of CFC and Charter Holding. An independent third-party analysis of goodwill indicated no impairment at December 31, 2014.

Intangible assets decreased $1.7 million to $9.3 million at December 31, 2014, compared to $11.0 million at December 31, 2013. Intangible assets include core deposit intangibles of $5.6 million and customer list intangibles of $3.7 million. We amortized $1.1 million of core deposit intangibles during 2014 utilizing the sum-of-the-years-digits method over 12 years, on average. We amortized $560 thousand of customer list intangibles during 2014 utilizing the sum-of-the-years-digits method over 15 years. An independent third-party analysis of core deposit intangibles indicated no impairment at December 31, 2014.

 

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Total deposits increased $64.6 million, or 5.94%, to $1.2 billion at December 31, 2014 from $1.1 billion at December 31, 2013. Total brokered deposits of $51.1 million represent 4.43% of total deposits.

Advances from the FHLBB increased $19.3 million, or 15.82%, to $141.0 million from $121.7 million at December 31, 2013. The weighted average interest rate for the outstanding FHLBB advances was 0.90% at December 31, 2014 compared to 1.15% at December 31, 2013. At December 31, 2014, the Company had $44.2 million of stand-by letters of credit issued by FHLB to secure customer deposits.

Securities sold under agreements to repurchase decreased $11.1 million, or 39.91%, to $16.8 million at December 31, 2014, from $27.9 million at December 31, 2013.

Comparison of Operating Results for Years Ended December 31, 2014 and 2013

General

We earned $10.0 million, or $1.19 per common share, assuming dilution, for the year ended December 31, 2014, compared to $8.4 million, or $1.11 per common share, assuming dilution, for the year ended December 31, 2013.

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2014 increased $8.2 million, or 24.13%, to $41.9 million. The increase was a combination of an increase of $8.0 million due to volume and an increase of $202 thousand related to rate adjustments. Total interest and dividend income increased $8.5 million, or 20.98%, to $48.7 million, and the yield on interest-earning assets increased to 3.57% for the year ended December 31, 2014 from 3.54% for the same period in 2013. Interest and fees on loans increased $8.6 million, or 22.65%, to $46.6 million in 2014, due to an increase in average balances of $245.0 million offset by a decrease in the average yield on loans to 3.88% from 3.98%.

Interest on taxable investments increased $29 thousand, or 2.18%, to $1.4 million in 2014 compared to $1.3 million in 2013. Dividends increased $113 thousand to $165 thousand. Interest on other investments decreased $303 thousand to $554 thousand. The yield on our investment portfolio increased to 1.29% for the year ended December 31, 2014 compared to 1.23% for the same period in 2013.

Total interest expense increased $302 thousand, or 4.65%, to $6.8 million for the year ended December 31, 2014. The increase was primarily driven by an increase of $168.7 million in average interest-bearing liabilities offset in part by a decrease in the combined cost of funds on deposits and borrowings to 0.54% for the year ended December 31, 2014 from 0.60% for the year ended December 31, 2014. For the year ended December 31, 2014, interest on deposits increased $409 thousand, or 10.09%, to $4.5 million as average interest-bearing deposits increased $138.9 million and the cost of deposits decreased to 0.42% from 0.44% compared to the same period in 2013. Interest on FHLBB advances and other borrowed money decreased $168 thousand, or 10.60%, for the year ended December 31, 2014, to $1.4 million compared to the same period in 2013 as the average FHLBB advances outstanding rate decreased in 2014 compared to 2013 while average balances outstanding increased. Interest on debentures increased $49 thousand, or 6.08%, for the year ended December 31, 2014 representing a decrease of $162 thousand of Trust II & Trust III interest expense offset by the addition of $211 thousand of interest expense on the Subordinated Debenture issued in October 2014.

For the year ended December 31, 2014, our combined cost of funds decreased to 0.54% as compared to 0.60% for 2013, due primarily to the downward repricing of maturing 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, increased to 3.03% in 2014 from 2.94% in 2013. Our net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 3.08% during 2014, from 2.97% during 2013.

 

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For additional information relating to our net interest and dividend income, please review the section entitled “Average Balance Sheet and Analysis of Net Interest and Dividend Income” above.

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-Overall Subsequent-Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest 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 most residential mortgage, home equity, or installment loans that are collectively evaluated for impairment. Please refer to Note 4 to our Consolidated Financial Statements located elsewhere in this report for information regarding impaired loans.

Our commercial loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. We also have loan review, internal audit, and compliance programs with results reported directly to the Audit Committee of the Board of Directors.

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at December 31, 2014, was $9.2 million compared to $9.7 million at December 31, 2013. At $9.2 million, the allowance for loan losses represents 0.76% of total loans held, down from 0.85% at December 31, 2013. Total impaired loans and non-performing assets at December 31, 2014, were $16.4 million, representing 176.98% 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 $850 thousand to the allowance for loan and lease losses during 2014 compared to $888 million in 2013. The provisions during the year ended December 31, 2014, have been offset by loan charge-offs of $1.7 million and recoveries of $389 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 2014 compared to 2013. The provisions made in 2014 reflect loan loss experience in 2014 and changes in economic conditions that decreased the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions in 2015 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, 2014, the overdraft allowance was $20 thousand compared to $24 thousand at year-end 2013. Provisions for overdraft losses were $55 thousand during the 12-month period ended December 31, 2014, compared to $74 thousand for the same period during 2013. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

 

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Table of Contents

Loan charge-offs (excluding the overdraft program) were $1.7 million during the year ended December 31, 2014 compared to $1.8 million for the same period in 2013. Recoveries (excluding the overdraft program) were $389 thousand during the year ended December 31, 2014, compared to $712 thousand for the same period in 2013. This activity resulted in net charge-offs of $1.3 million for the year ended December 31, 2014, compared to $1.1 million for the same period in 2013. One-to-four family residential mortgages, commercial real estate mortgages, commercial loans, and consumer loans accounted for 40%, 31%, 25%, and 4%, respectively, of the amounts charged off during the year ended December 31, 2014.

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)    2014     2013     2012     2011     2010  

Balance, beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

Residential real estate

  681      851      1,239      1,187      999   

Commercial real estate

  533      593      474      548      324   

Construction

  —       —       138      303      45   

Consumer loans

  64      30      20      38      46   

Commercial loans

  445      302      438      147      213   

Acquired loans (discounts to related credit quality)

  —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charged-off loans

  1,723      1,776      2,309      2,223      1,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

Residential real estate

  314      268      167      132      9   

Commercial real estate

  1      284      56      —       —    

Construction

  —       —       68      —       —    

Consumer loans

  17      6      22      2      14   

Commercial loans

  57      154      142      61      26   

Acquired loans (discounts to related credit quality)

  —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

  389      712      455      195      49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

  1,334      1,064      1,854      2,028      1,578   

Allowance from acquisitions

  —       —       —       —       —    

Transfer to off-balance sheet reserve

  —       —       —       —       (175

Provision for loan loss charged to income

  850      888      2,650      1,300      2,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

$ 9,249    $ 9,733    $ 9,909    $ 9,113    $ 9,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average loans

  0.11   0.11   0.23   0.28   0.25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(Dollars in thousands)    2014      2013      2012      2011      2010  

Beginning balance

   $ 24       $ 14       $ 18       $ 23       $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Overdraft charge-offs

  155      200      200      226      251   

Overdraft recoveries

  96      136      141      170      167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net overdraft losses

  59      64      59      56      84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Provisions for overdrafts

  55      74      55      51      82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

$ 20    $ 24    $ 14    $ 18    $ 23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)   2014     2013     2012  

Real estate loans -

             

Residential, 1-4 family and home equity loans

  $ 4,713        51     58   $ 5,314        55     59   $ 4,774        48     66

Commercial

    2,707        29     26     2,027        21     25     3,378        34     20

Construction

    991        11     3     353        3     3     208        2     2

Collateral and consumer loans

    66        —          1     51        1     1     44        1     1

Commercial and municipal loans

    635        7     12     1,551        16     12     918        9     11

Impaired loans

    67        1     —          197        2     —          361        4     —     

Acquired loans (discounts to related credit quality)

    —          —          —          —          —          —          —          —          —     

Unallocated

    70        1     —          240        2     —          226        2     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance

$ 9,249      100   100 $ 9,733      100   100 $ 9,909      100   100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance as a percentage of total originated loans

  0.87   1.02   1.09
   

 

 

       

 

 

       

 

 

   

Non-performing loans as a percentage of allowance

  174.27   217.35   172.73
   

 

 

       

 

 

       

 

 

   

 

     2011     2010  

Real estate loans -

              

Residential, 1-4 family and home equity loans

   $ 4,870         53     66   $ 4,029         41     66

Commercial

     2,813         31     19     2,683         27     19

Construction

     222         2     2     575         6     3

Collateral and consumer loans

     40         1     1     70         1     1

Commercial and municipal loans

     721         8     12     2,004         20     11

Impaired loans

     308         3     —          480         5     —     

Unallocated

     139         2     —          —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

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

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of total loans

  1.26   1.44
     

 

 

        

 

 

   

Non-performing loans as a percentage of allowance

  182.34   101.86
     

 

 

        

 

 

   

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 $28.2 million at December 31, 2014, compared to $30.3 million at December 31, 2013. The decrease comes primarily from a decrease of $5.0 million of the net carrying value of loans identified as impaired at December 31, 2014. Additional information on troubled debt restructurings can be found in Note 4 of our Consolidated Financial Statements. In addition, we had $251 thousand of OREO at December 31, 2014, representing one residential property and one commercial property acquired during the year ended December 31, 2014, compared to $1.3 million at December 31, 2013, representing six residential properties and one commercial property acquired during the year ended December 31, 2013. During the year ended December 31, 2014, we sold eleven properties, seven of which were classified as OREO at December 31, 2013, while the other four were acquired during 2014. 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

 

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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. Six loans considered impaired at December 31, 2014 had specific reserves identified and assigned. The six loans are secured by real estate, business assets or a combination of both. At December 31, 2014, the allowance included $67 thousand allocated to impaired loans compared to $197 thousand at December 31, 2013.

Loans over 90 days past due were $3.3 million at December 31, 2014, compared to $3.9 million at December 31, 2013. Loans 30 to 89 days past due were $9.6 million at December 31, 2014, compared to $5.7 million at December 31, 2013. 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 0.65% at December 31, 2013 to 0.49% at December 31, 2014, and as a percentage of total originated loans, decreased from 0.98% at the end of 2013 to 0.69% at the end of 2014.

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, 2014, 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, 2014, we had 59 loans with net carrying values of $11.0 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” At December 31, 2014, the majority of troubled debt restructurings were performing under contractual terms and are included in impaired loans. Of the 59 loans classified as troubled debt restructured, 15 were 30 days or more past due at December 31, 2014. The balances of these loans were $2.3 million, and the loans have no assigned specific allowance. Forty-three loans were considered troubled debt restructured at both December 31, 2014 and 2013. These 43 loans include 10 commercial real estate loans totaling $4.6 million, 25 residential loans totaling $3.4 million, 3 construction loans totaling $1.1 million and 5 commercial loans for $430 thousand. These loans, independently measured for impairment, carry a combined specific allowance of $53 thousand. At December 31, 2013, we had 57 loans with net carrying values of $12.5 million considered to be troubled debt restructurings.

Non-performing loans include loans which are on nonaccrual. Troubled debt restructured loans of $8.8 million are performing within their restructured terms and are accruing interest at December 31, 2014. These accruing troubled debt restructured loans account for the difference of $8.8 million between impaired loans of $16.1 million and non-accrual loans of $7.3 million December 31, 2014.

At December 31, 2014, 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.

 

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

 

(Dollars in thousands)   December 31, 2014     December 31, 2013  
    Carrying
Value
    Percentage
to Total
Allowance
    Percentage
to Total
Assets
    Carrying
Value
    Percentage
to Total
Allowance
    Percentage
to Total
Assets
 

Impaired loans (excluding TDRs)

  $ 5,072        54.84     0.34   $ 8,701        89.40     0.61

Trouble debt restructured loans

    11,046        119.43     0.73     12,454        127.96     0.88

OREO and chattel

    251        2.71     0.02     1,343        13.80     0.09
 

 

 

       

 

 

     

Total impaired loans and non-performing assets

$ 16,369      176.98   1.09 $ 22,498      231.16   1.58
 

 

 

       

 

 

     

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

 

(Dollars in thousands)    2014      2013      2012      2011      2010  

Nonaccrual loans (1)

   $ 7,327       $ 9,303       $ 17,001       $ 16,616       $ 10,420   

Real estate and chattel property owned

     251         1,343         102         1,344         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-performing assets (2)

$ 7,578    $ 10,646    $ 17,103    $ 17,960    $ 10,495   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) Amount reflected for December 31, 2012 excludes acquired loans.

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

 

(Dollars in thousands)    2014      2013      2012      2011      2010  

Real estate loans -

              

Conventional

   $ 2,426       $ 3,821       $ 6,250       $ 5,578       $ 1,645   

Commercial

     3,926         4,512         9,304         8,484         7,449   

Home equity

     181         104         158         —           120   

Construction

     15         230         887         1,006         140   

Consumer loans

     —           15         —          8         18   

Commercial and municipal loans

     779         621         402         1,540         1,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

$ 7,327    $ 9,303    $ 17,001    $ 16,616    $ 10,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All loans 90 days or more delinquent are placed on a nonaccrual status.
(2) Amount reflected for December 31, 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 $3.5 million, or 22.34%, to $19.2 million for the year ended December 31, 2014, compared to the same period in 2013 due, in part, to twelve months of revenue in 2014 from the Charter Trust Company and Central Financial Corp. compared to partial year inclusion in 2013. Customer service fees increased $818 thousand, or 15.61%, primarily driven by the acquired operations.

 

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Net gain on sales and calls of securities decreased $14 thousand, or 14.52%, compared to 2013. Income from mortgage banking activities decreased $1.4 million, or 61.57%, as we sold $44.4 million of 1-4 family conventional mortgage loans into the secondary market during 2014, down $44.3 million from $88.7 million of loans sold during 2013. 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 2014, resulting in balance sheet increases related to net originated loans of $43.4 million and $25.2 million of conventional real estate loans and commercial real estate loans, respectively. Net gains on sales of OREO and fixed assets increased $176 thousand during 2014 as we recognized net gains of $181 thousand compared to $5 thousand for the same period in 2013.

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 $294 thousand to no recognition for the year ended December 31, 2014, from $294 thousand for the same period in 2013. As 100% owner of Charter Holding, effective September 4, 2013, the Bank no longer records income from equity interest in Charter Holding as all activity is now included in consolidated earnings as trust income and related expense categories. Trust income was $8.3 million for the year ended December 31, 2014, an increase of $5.6 million compared to $2.7 million reported for the period of September 4, 2013 through December 31, 2013, representing the period of the Bank’s 100% ownership of Charter Holding.

Rental income decreased $29 thousand as revenue within this category remained relatively unchanged. Bank-owned life insurance income increased $9 thousand to $635 thousand. Insurance commissions increased $9 thousand to $1.5 million for the year ended December 31, 2014, compared to $1.5 million in 2013 representing an increase in premium commissions of $74 thousand, or 6.04%, offset in part by a decrease of $65 thousand in contingency commission.

Total noninterest expenses increased $9.7 million, or 26.10%, to $46.6 million for the year ended December 31, 2014, from $37.0 million for the same period in 2013. This increase includes an increase of $4.8 million of noninterest expenses from the wealth management operating segment. Please see note 23 for more information on operating segments. Salaries and employee benefits increased $5.8 million, or 30.36%, to $25.0 million for the year ended December 31, 2014, from $19.2 million for the same period in 2013. Gross salaries and benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $5.5 million, or 25.99%, to $26.7 million for the year ended December 31, 2014, from $21.2 million for the same period in 2013. Gross salaries increased $4.3 million, or 26.71%, to $20.4 million for the year ended December 31, 2014, compared $16.1 million for the same period in 2013. In addition to ordinary staffing additions, promotions, and salary increases, salary expenses related to Charter Trust operations accounted for approximately $2.4 million, or 57.56% of the increase, while staffing related to a full year of RNB salaries amounted to approximately $659 thousand. Average full time equivalents decreased to 351 at December 31, 2014, compared to 360 at December 31, 2013; this change reflects the impact of additional staff from CFC and Charter Holding. Benefits costs increased $1.2 million including $616 thousand of increases related to Charter Trust. The increase in overall benefits costs includes increases of $243 thousand related to retirement costs and $433 thousand in health insurance costs. The deferral of expenses associated with the origination of loans decreased $327 thousand, or 16.60%, to $1.6 million for the year ended December 31, 2014, from $2.0 million for the same period in 2013. 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 originations year over year.

Occupancy and equipment expenses increased $1.1 million, or 24.80%, to $5.6 million for the year ended December 31, 2014, from $4.5 million for the same period in 2013, due primarily to a higher number of locations during 2014 including increases of $1.0 million for former RNB locations and $196 thousand for Charter Holding locations. Advertising and promotion increased $250 thousand, or 37.76%, to $912 thousand for the year

 

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ended December 31, 2014, from $662 thousand for the same period in 2013, due primarily to increases in promotions related to the eight additional banking locations and Charter Holding increases of $85 thousand. Depositors’ insurance increased $218 thousand to $994 thousand at December 31, 2014, compared to $776 thousand at December 31, 2013, due primarily to an increase in assessed deposits.

Professional fees decreased $11 thousand, or 0.87%, to $1.3 million for the year ended December 31, 2014 from $1.3 million for the same period in 2013. Data processing and outside services fees increased $1.1 million, or 76.24%, to $2.5 million for the year ended December 31, 2014 compared to the same period in 2013 due to increases in correspondent services, core processing, online banking, and collection expenses. ATM processing fees increased $213 thousand, or 33.81%, to $843 thousand for the year ended December 31, 2014, from $630 thousand for the same period in 2013, which is consistent with the impact increased volume had within customer service fees.

Merger related expenses decreased $1.6 million with no expenses recorded for the year ended December 31, 2014, compared to $1.6 million for the same period in 2013. 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.

Amortization of intangible assets increased $688 thousand with the additions of the customer list intangible from Charter Holding and the core deposit intangible from CFC.

Other expenses increased $1.4 million, or 29.57%, to $6.2 million for the year ended December 31, 2014 from $4.8 million compared to the same period in 2013. This includes an increase of $961 thousand of other expenses related to the operations of Charter Holding. Other increases included $156 thousand in contributions, including an increase of $95 thousand in state tax-qualified contributions; $142 thousand in postage driven in part by the additional deposit accounts acquired in 2013 and the regulatory requirement to now provide monthly mortgage statements; $104 thousand in expenses related to non-earning assets; $140 thousand in debit card charge-offs related to the increased volume of fraudulent transactions demonstrated throughout the industry; and $111 thousand in Vermont state franchise tax which is based on Vermont-based deposit levels.

Income Taxes

The provision for income taxes for the years ended December 31 includes net deferred income tax expense of $1.2 million in 2014, $592 thousand in 2013, and $479 thousand in 2012. 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 Financial Condition at December 31, 2013 and December 31, 2012

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, 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%,

 

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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.

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.

 

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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, we 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 Operating Results for Years Ended December 31, 2013 and 2012

General

We earned $8.4 million, or $1.11 per common share, assuming dilution, for the year ended December 31, 2013, compared to $7.7 million, or $1.20 per common share, assuming dilution, for the year ended December 31, 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 year 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 year 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 year 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.

 

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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.

For additional information relating to our net interest and dividend income, please review the section entitled “Average Balance Sheet and Analysis of Net Interest and Dividend Income” above.

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, 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 year 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 year 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 year 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 year 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 year ended December 31, 2013.

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 year ended December 31, 2013, compared to $102 thousand at December 31, 2012, representing one residential property acquired during the year ended December 31, 2012. During the year 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.

 

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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.

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 which are on nonaccrual. Troubled debt restructured loans of $11.9 million are performing within their restructured terms and are accruing interest at December 31, 2013. These accruing troubled debt restructured loans account for the difference of $11.9 million between impaired loans of $21.2 million and non-accrual loans of $9.3 million at December 31, 2013.

At December 31, 2013, there were no other loans excluded in the tables set forth in the section entitled “Comparison of Operating Results for Years Ended December 31, 2014 and 2013—Allowance and Provision for Loan Losses” 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.

 

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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 (excluding TDRs)

    8,701        89.40     0.61     5,799        58.52     0.45

Trouble debt restructured

    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     0.01
 

 

 

       

 

 

     

Total impaired loans and non-performing assets (2)

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

 

 

       

 

 

     

Noninterest Income and Expense

Total noninterest income increased $1.0 million, or 7.05%, to $15.7 million for the year 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 year 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 the year ended December 31, 2013, from $15.0 million for the same

 

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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 year 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 year 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 year 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 year 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 year 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 year 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 year 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 year 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 year 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.

 

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Other expenses increased $759 thousand, or 18.88%, to $4.8 million for the year 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.

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.

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 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034, or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part, at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by 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 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034, or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures III, in whole or in part, at the liquidation amount plus any accrued but unpaid interest to the redemption date.

 

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Contractual Obligations

A summary of lease obligations, borrowings and credit commitments at December 31, 2014 is as follows:

 

(Dollars in thousands)    Within 1
Year
     After 1
year but
within 3
years
     After 3
years but
within 5
years
     After 5
years
     Total  

Lease obligations

  

Operating leases

   $ 655       $ 1,025       $ 744       $ 590       $ 3,014   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings and other debt

Federal Home Loan Bank advances

$ 95,992    $ 15,000    $ 30,000    $ —      $ 140,992   

Securities sold under agreements to repurchase

  16,756      —        —        —        16,756   

Subordinated debentures

  —        —        —        37,620      37,620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings and other debt

  112,748      15,000      30,000      37,620      195,368   

Credit commitments

Available lines of credit and unadvanced construction loans

$ 28,148    $ 18,393    $ 12,014    $ 73,906    $ 132,461   

Commitments to extend credit

  25,503      —        —        —        25,503   

Letters of credit

  972      110      64      —        1,146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit commitments

  54,623      18,503      12,078      73,906      159,110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 168,026    $ 34,528    $ 42,822    $ 112,116    $ 357,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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%.

Liquidity and Capital Resources

Liquidity

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. At year-end 2014, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $25.5 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, 2014, we had approximately $214.0 million in additional borrowing capacity from the FHLBB.

At December 31, 2014, stockholders’ equity totaled $139.8 million compared to $149.3 million at December 31, 2013. The decrease of $9.4 million primarily reflects the redemption of $15.0 million of preferred stock, net income of $10.0 million, the payout of $4.3 million in common stock dividends, $230 thousand in preferred stock dividends declared, other comprehensive loss in the amount of $442 thousand, $135 thousand for vesting of restricted stock awards, $263 thousand for stock issued under the dividend reinvestment plan, and $94 thousand from the exercise of stock options.

At December 31, 2014, we had unrestricted funds in the amount of $3.1 million. Our total cash needs during 2015 are estimated to be approximately $6.7 million with $4.1 million projected to be used to pay cash dividends on our common stock, $600 thousand to pay interest on our capital securities, $1.1 million to pay interest on our

 

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subordinated debenture, $80 thousand to pay dividends on our Series B Preferred Stock, and approximately $800 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 2015 as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

Net cash provided by operating activities was $11.2 million for 2014 compared to net cash provided by operating activities of $20.5 million in 2013. The change includes a decrease in the amount of $57 thousand in provision for loan losses, a decrease in gains on sales and calls of securities of $14 thousand, a decrease in amortization of securities, net, of $351 thousand, a change in mortgage servicing rights of $835 thousand, an increase in the amortization of intangible assets of $688 thousand, a change in the activity of loans held-for sale of $12.6 million, an increase of $16 thousand in impairment losses on OREO, an increase in the change in accrued interest receivable and other assets of $388 thousand, and a change of $4.0 million in the decrease in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $63.8 million in 2014, compared to net cash flows used in investing activities of $2.0 million in 2013, a change of $61.8 million as we utilized investment cash flows and sales to fund loan originations. During 2014, net cash used by loan originations and net principal collections decreased by $29.7 million while our loans held in portfolio increased, and cash provided by sales of securities available-for-sale decreased by $29 thousand.

Net cash flows provided by financing activities totaled $70.0 million in 2014, compared to net cash flows used in financing activities of $24.1 million in 2013, a change of $94.2 million. Net cash provided by deposits decreased $75.2 million. Net cash used in repayment of advances from FHLBB decreased $40.3 million as we increased our advances outstanding compared to a decrease in advances outstanding during 2013. Net cash provided by the repurchased agreements decreased $21.8 million during 2014.

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, 2014, approximately $25.5 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.

U.S. Treasury’s SBLF Program

On August 25, 2011, as part of the SBLF program, we entered into a Purchase Agreement with Treasury pursuant to which we issued and sold to the U.S. Department of Treasury (“Treasury”) 20,000 shares of our Series B Preferred Stock. We used $10.0 million of the SBLF proceeds to repurchase the Series A Preferred Stock previously issued under Treasury’s Capital Purchase Program. With the acquisition of TNB in 2013, we assumed $3.0 million of preferred stock issued to Treasury. We used a portion of the net proceeds from the sale of the subordinated notes (as discussed below) to redeem a portion of our outstanding shares of Series B Preferred Stock. At December 31, 2014 and 2013, we had 8,000 shares and 23,000 shares, respectively, of Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per preferred share, issued and outstanding to the Treasury.

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 10% or more. Banks that increase their lending by less than 10% pay rates between 2% and 4%. If a bank’s lending does not increase in the first two years, however, the rate increases to 7%, and after 4.5 years total, the rate for all banks increases to 9% (if the bank has not already repaid the SBLF funding). The dividend will be paid only when declared by our Board of Directors.

 

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Subordinated Notes

On October 29, 2014, we entered into a Subordinated Note Purchase Agreement with certain accredited investors under which we issued an aggregate of $17.0 million of subordinated notes to the accredited investors. The Notes have a maturity date of November 1, 2024, and bear interest at a fixed rate of 6.75% per annum. We may, at our option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the noteholders. The notes are not subject to repayment at the option of the noteholders. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to our senior indebtedness and to our obligations to our general creditors.

The notes are intended to qualify as Tier 2 capital for regulatory purposes. We used a portion of the net proceeds from the sale of the notes to redeem a portion of our Series B Preferred Stock and we plan to use the remainder of the net proceeds for general corporate purposes. The notes were offered and sold in reliance on the exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

Capital Ratios

Consistent with its goal to operate a sound and profitable financial institution, we actively seek to maintain a “well-capitalized” institution in accordance with regulatory standards. 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, 2014, the Bank’s ratios were 8.43%, 8.43%, and 13.28%, respectively, well in excess of the OCC requirements for well capitalized banks. Additional information on these requirements can be found under the section entitled “Regulation” located elsewhere in this report.

Tangible Book Value

Book value per common share was $15.97 at December 31, 2014, compared to $15.37 per common share at December 31, 2013. Tangible book value per common share was $9.44 at December 31, 2014 compared to $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 stockholders’ equity. We believe that tangible book value per common share provides information to investors that is useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

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

 

(Dollars in thousands)    December 31,
2014
     December 31,
2013
 

Stockholders’ equity

   $ 139,836       $ 149,257   

Less goodwill

     44,576         44,632   

Less other intangible assets

     9,332         11,020   

Less preferred stock

     8,000         23,000   
  

 

 

    

 

 

 

Tangible common equity

$ 77,928    $ 70,605   
  

 

 

    

 

 

 

Ending common shares outstanding

  8,258,031      8,216,747   

Tangible book value per common share

$ 9.44    $ 8.59   

 

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Stock Repurchase Plan

The Board of Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity; three performing benchmarks against which bank and thrift holding companies are measured. 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, 2014, 148,088 shares remained to be repurchased under the plan. During 2014, no shares were repurchased.

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.

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.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Asset-Liability Management

Market risk and interest rate risk management is governed by the Asset/Liability Committee (“ALCO”). The ALCO establishes exposure limits that define our tolerance for interest rate risk. The ALCO manages the composition of the balance sheet over a range of potential fluctuations in interest rates while responding, as appropriate, to market demand for loan and deposit products. Current exposures versus limits are reported to the Board of Directors at least quarterly. The policy limits and guidelines serve as benchmarks for measuring interest rate risk and for providing a framework for evaluation and interest rate risk-management decision-making.

Market Risk

Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

 

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Interest Rate Risk

The principal market risk facing us is interest rate risk, which may include repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk exists when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. A change in sensitivity could reflect an imbalance in the repricing opportunities of our assets and liabilities. Yield curve risk reflects the possibility that the changes in the shape of the yield curve could have different effects on our assets and liabilities. Basis risk exists when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity often at a time of disadvantage to the person selling the option; this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.

Interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities is mismatched to create an interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.

Income simulation is the primary tool for measuring the interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over a 12-month period, of a variety of interest rate shocks. These simulations take into account repricing, maturity and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether the exposure resulting from changes in market interest rates remains within established tolerance levels over a 12-month horizon, and develops appropriate strategies to manage this exposure.

Our one-year cumulative interest-rate gap at December 31, 2014 was negative 2.34% compared to the December 31, 2013 gap of positive 0.58%. At December 31, 2014, repricing assets over the next 12 months were $31.5 million less than repricing liabilities for the same period compared to $7.4 million more repricing assets than repricing liabilities at December 31, 2013. The change in our interest rate gap position is due, in part, to our decision to replace a portion of maturing advances with short-term advances coupled with the addition of $20.0 million of short-term advances to the outstanding advances. At December 31, 2014, our advance portfolio included $96.0 million of advances maturing within one year compared to $70.8 million at December 31, 2013. With a liability sensitive positive gap, if rates were to rise, net interest margin would likely decrease and if rates were to fall, the net interest margin would likely increase.

As another part of 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 sets forth our EVE at December 31, 2014, as calculated by an independent third party agent:

 

Change    Net Portfolio Value     EVE as % of PV Assets  

in Rates

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

+400 bp

   $ 94,103       $ (42,884     -31.31     7.22     -228bp   

+300 bp

     104,777         (32,210     -23.51     7.85     -165bp   

+200 bp

     115,711         (21,276     -15.53     8.46     -104bp   

+100 bp

     126,787         (10,200     -7.44     9.03     -47bp   

  0 bp

     136,987         —         —         9.50 %     —     

-100 bp

     132,284         (4,703     -3.43     8.99     -51bp   

The following table shows our interest rate sensitivity (gap) table at December 31, 2014:

 

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

Interest-earning assets:

            

Loans

   $ 197,495      $ 93,054      $ 153,544      $ 328,053      $ 434,699      $ 1,206,845   

Investments and overnight deposit

     40,250        3,255        6,544        45,110        47,449        142,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  237,745      96,309      160,088      373,163      482,148      1,349,453   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

Deposits

  267,022      65,540      59,736      91,554      668,862      1,152,714   

Repurchase agreements

  16,756      —        —        —        —        16,756   

Borrowings

  30,000      35,000      31,000      15,000      29,992      140,992   

Subordinated Debt

  20,620      —        —        —        17,000      37,620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  334,398      100,540      90,736      106,554      715,854      1,348,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period sensitivity gap

  (96,653   (4,231   69,352      266,609      (233,706 $ 1,371   

Cumulative sensitivity gap

$ (96,653 $ (100,884 $ (31,532 $ 235,077    $ 1,371   

Cumulative sensitivity gap as a percentage of interest-earning assets

  -7.16   -7.48   -2.34   17.42   0.10   0.10

 

Item 8. Financial Statements

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

 

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

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the

 

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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’s Annual 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 (2013). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2014.

Attestation Report of the Registered Public Accounting Firm

The attestation report of Shatswell, MacLeod & Company, P.C., our independent registered public accounting firm, regarding our internal control over financial reporting as of December 31, 2014 is included on pages 58 and 59 of this report.

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.

 

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LOGO

To the Board of Directors of

New Hampshire Thrift Bancshares, Inc.

Newport, New Hampshire

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited New Hampshire Thrift Bancshares, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). New Hampshire Thrift Bancshares, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, New Hampshire Thrift Bancshares, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income,

 

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changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2014 and our report dated March 16, 2015 expressed an unqualified opinion thereon.

LOGO

SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 16, 2015

 

LOGO

 

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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,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in our Proxy Statement.

 

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

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

 

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

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

 

Item 14. Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the section entitled “Principal Accounting Fees and Services” in our Proxy Statement.

 

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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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LOGO

The Board of Directors

New Hampshire Thrift Bancshares, Inc.

Newport, New Hampshire

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of New Hampshire Thrift Bancshares, Inc. and Subsidiaries as of December 31, 2014 and 2013 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, 2014. 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, 2014 and 2013 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, 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 16, 2015

 

LOGO

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

As of December 31,

  2014     2013  

ASSETS

   

Cash and due from banks

  $ 24,957      $ 12,005   

Interest-bearing deposit with the Federal Reserve Bank

    26,163        21,573   
 

 

 

   

 

 

 

Cash and cash equivalents

  51,120      33,578   

Interest-bearing time deposits with other banks

  747      1,743   

Securities available-for-sale

  115,698      125,238   

Federal Home Loan Bank stock

  10,762      9,760   

Loans held-for-sale

  2,000      680   

Loans receivable, net of the allowance for loan losses of $9.3 million as of December 31, 2014 and $9.8 million as of December 31, 2013

  1,206,845      1,134,110   

Accrued interest receivable

  2,576      2,628   

Premises and equipment, net

  24,391      23,842   

Investment in real estate

  3,533      3,681   

Other real estate owned

  251      1,343   

Goodwill

  44,576      44,632   

Intangible assets

  9,332      11,020   

Bank owned life insurance

  20,187      19,544   

Other assets

  11,768      12,071   
 

 

 

   

 

 

 

Total assets

$ 1,503,786    $ 1,423,870   
 

 

 

   

 

 

 

LIABILITIES

Deposits:

Noninterest-bearing

$ 117,889    $ 101,446   

Interest-bearing

  1,034,825      986,646   
 

 

 

   

 

 

 

Total deposits

  1,152,714      1,088,092   

Federal Home Loan Bank advances

  140,992      121,734   

Securities sold under agreements to repurchase

  16,756      27,885   

Subordinated debentures

  37,620      20,620   

Accrued expenses and other liabilities

  15,868      16,282   
 

 

 

   

 

 

 

Total liabilities

  1,363,950      1,274,613   
 

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

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

Series B, non-cumulative perpetual, 8,000 shares issued and outstanding at December 31, 2014 and 23,000 issued and outstanding at December 31, 2013, liquidation value $1,000 per share

  —        —     

Common stock, $.01 par value: 10,000,000 shares authorized, 8,692,360 shares issued and 8,258,031 shares outstanding as of December 31, 2014 and 8,651,076 shares issued and 8,216,747 shares outstanding as of December 31, 2013

  87      87   

Paid-in capital

  86,561      100,961   

Retained earnings

  63,876      58,347   

Unearned restricted stock awards

  (598   (490

Accumulated other comprehensive loss

  (3,339   (2,897

Treasury stock, at cost, 434,329 shares as of December 31, 2014 and December 31, 2013

  (6,751   (6,751
 

 

 

   

 

 

 

Total stockholders’ equity

  139,836      149,257   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 1,503,786    $ 1,423,870   
 

 

 

   

 

 

 

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

 

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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,

  2014     2013     2012  

INTEREST AND DIVIDEND INCOME

     

Interest and fees on loans

  $ 46,647      $ 38,034      $ 32,542   

Interest on debt securities:

     

Taxable

    1,362        1,333        3,223   

Dividends

    165        52        62   

Other

    554        857        594   
 

 

 

   

 

 

   

 

 

 

Total interest and dividend income

    48,728        40,276        36,421   
 

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

     

Interest on deposits

    4,464        4,055        4,381   

Interest on advances and other borrowed money

    1,417        1,585        1,944   

Interest on debentures

    855        806        1,027   

Interest on securities sold under agreements to repurchase

    63        51        47   
 

 

 

   

 

 

   

 

 

 

Total interest expense

    6,799        6,497        7,399   
 

 

 

   

 

 

   

 

 

 

Net interest and dividend income

    41,929        33,779        29,022   

PROVISION FOR LOAN LOSSES

    905        962        2,705   
 

 

 

   

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

    41,024        32,817        26,317   
 

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

     

Customer service fees

    6,057        5,239        5,067   

Net gain on sales and calls of securities

    950        964        3,819   

Mortgage banking activities

    870        2,264        2,775   

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

    181        5        (150

Remeasurement gain of equity interest in Charter Holding Corp.

    —          1,369        —     

Rental income

    717        746        736   

Realized gain in Charter Holding Corp.

    —          294        444   

Bank owned life insurance income

    635        626        545   

Trust and management fees

    8,340        2,741        —     

Insurance commissions

    1,476        1,467        1,315   
 

 

 

   

 

 

   

 

 

 

Total noninterest income

    19,226        15,715        14,551   
 

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSES

     

Salaries and employee benefits

    25,037        19,206        15,022   

Occupancy and equipment expenses

    5,616        4,500        3,648   

Depositors’ insurance

    994        776        802   

Professional services

    1,254        1,265        1,208   

Data processing and outside services fees

    2,455        1,393        1,117   

ATM processing fees

    843        630        498   

Telephone expense

    1,087        706        664   

Supplies

    568        454        373   

Advertising and promotion

    912        662        481   

Merger related expense

    —          1,620        1,167   

Amortization of intangible assets

    1,688        1,000        425   

Other expenses

    6,192        4,779        4,020   
 

 

 

   

 

 

   

 

 

 

Total noninterest expenses

    46,646        36,991        29,425   
 

 

 

   

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

    13,604        11,541        11,443   

PROVISION FOR INCOME TAXES

    3,564        3,127        3,684   
 

 

 

   

 

 

   

 

 

 

NET INCOME

  $ 10,040      $ 8,414      $ 7,759   
 

 

 

   

 

 

   

 

 

 

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

  $ 9,810      $ 8,098      $ 7,093   
 

 

 

   

 

 

   

 

 

 

Earnings per common share

  $ 1.19      $ 1.11      $ 1.20   
 

 

 

   

 

 

   

 

 

 

Earnings per common share, assuming dilution

  $ 1.19      $ 1.11      $ 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.

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

For the years ended December 31,

   2014     2013     2012  

Net income

   $ 10,040      $ 8,414      $ 7,759   

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

     857        (2,382     (530

Net change in unrecognized pension plan costs, net of tax effect

     (1,299     860        (217

Net change in derivatives, net of tax effect

     —          101        182   

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

     —          (32     8   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

$ 9,598    $ 6,961    $ 7,202   
  

 

 

   

 

 

   

 

 

 

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands)

 

For the years ended December 31,

  2014     2013     2012  

PREFERRED STOCK

     

Balance, beginning of year

  $ —        $ —        $ —     

Issuance of preferred stock

    —          —          —     

Redemption of preferred stock

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

 

COMMON STOCK

     

Balance, beginning of year

  $ 87      $ 75      $ 63   

Issuance of common shares

    —          —          12   

Acquisition of Central Financial Corporation

    —          11        —     

Exercise of stock options (7,000 in 2014, 103,400 in 2013, and 40,042 in 2012)

    —          1        —     
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ 87      $ 87      $ 75   
 

 

 

   

 

 

   

 

 

 

WARRANTS

     

Balance, beginning of year

  $ —        $ —        $ 85   

Repurchase of warrants

    —          —          (85
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

 

PAID-IN CAPITAL

     

Balance, beginning of year

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

Increase on issuance of common stock from the exercise of stock options

    92        513        365   

Tax benefit for stock options and awards

    2        30        25   

Issuance of common stock from dividend reinvestment plan

    263        202        —     

Shares surrendered to treasury stock

    —          265     

Restricted stock awards, issued from treasury stock, net

    —          —          (104

Restricted stock awards issued

    243        —          —     

Acquisition of Central Financial Corporation

    —          15,974     

Acquisition of McCrillis & Eldredge Insurance

    —          —          53   

Acquisition of The Nashua Bank

    —          —          14,632   

Repurchase of warrants

    —          —          (652

Assumption of preferred stock

    —          —          3,000   

Redemption of preferred stock

    (15,000     —          —     
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ 86,561      $ 100,961      $ 83,977   
 

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS

     

Balance, beginning of year

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

Net income

    10,040        8,414        7,759   

Cash dividends declared, preferred stock

    (230     (316     (666

Cash dividends paid, common stock

    (4,281     (3,684     (3,052
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ 63,876      $ 58,347      $ 53,933   
 

 

 

   

 

 

   

 

 

 

UNEARNED RESTRICTED STOCK AWARDS

     

Balance, beginning of year

  $ (490   $ (377   $ —     

Shares awarded (16,500 in 2014, 14,500 in 2013, and 35,000 in 2012)

    (243     (189     (440

Shares forfeited (no shares in 2014 and 2013, 5,000 in 2012)

    —          —          63   

Shares vested (10,400 in 2014, 6,000 in 2013, and no shares in 2012)

    135        76        —     
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ (598   $ (490   $ (377
 

 

 

   

 

 

   

 

 

 

ACCUMULATED OTHER COMPREHENSIVE LOSS

     

Balance, beginning of year

  $ (2,897   $ (1,444   $ (887

Net change in accumulated other comprehensive loss, net of tax effect

    (442     (1,453     (557
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ (3,339   $ (2,897   $ (1,444
 

 

 

   

 

 

   

 

 

 

TREASURY STOCK

     

Balance, beginning of year

  $ (6,751   $ (6,670   $ (7,151

Issuance of restricted stock awards (no shares in 2014, 14,500 shares in 2013, and 35,000 shares in 2012)

    —          189        544   

Surrender of outstanding shares (no shares in 2014, 18,854 shares in 2013, no shares in 2012)

    —          (270     —     

Shares repurchased (no shares in 2014 and 2013, 5,000 shares in 2012)

    —          —          (63
 

 

 

   

 

 

   

 

 

 

Balance, end of year

  $ (6,751   $ (6,751   $ (6,670
 

 

 

   

 

 

   

 

 

 

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

 

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New Hampshire Thrift Bancshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

For the years ended December 31,

  2014     2013     2012  

Cash flows from operating activities:

     

Net income

  $ 10,040      $ 8,414      $ 7,759   

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

     

Depreciation and amortization

    2,396        1,806        1,431   

Net decrease (increase) in mortgage servicing rights

    303        (532     (337

Amortization of securities, net

    430        781        1,038   

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

    20        11        11   

Amortization (accretion) of fair value adjustments, net (loans, deposits and borrowings)

    304        (761     122   

Amortization of intangible assets

    1,688        1,000        425   

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

    (1,320     11,303        (8,549

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

    (197     (6     (40

Impairment losses on other real estate owned

    16        —          183   

Net gain on sales and calls of securities

    (950     (964     (3,819

Remeasurement gain in equity interest of Charter Holding Corp.

    —          (1,369     —     

Equity in gain of partially owned Charter Holding Corp.

    —          (294     (444

Provision for loan losses

    905        962        2,705   

Deferred tax expense

    1,154        592        479   

Tax benefit for stock options and awards

    (2     (30     (25

Increase in cash surrender value of life insurance

    (635     (626     (545

Decrease in accrued interest receivable and other assets

    414        26        1,082   

Change in deferred loan origination costs, net

    (424     (921     (1,118

(Decrease) increase in accrued expenses and other liabilities

    (2,902     1,091        713   
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  11,240      20,483      1,071   
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

Capital expenditures—investment in real estate

  —        (5   (503

Capital expenditures—software

  (141   (286   (70

Capital expenditures—premises and equipment

  (2,670   (4,312   (1,297

Purchases of interest-bearing time deposits with other banks

  (747   —        (250

Maturities of interest-bearing time deposits with other banks

  1,743      499   

Proceeds from sales of securities available-for-sale

  125,802      125,773      194,347   

Purchases of securities available-for-sale

  (204,318   (124,587   (223,664

Proceeds from maturities of securities available-for-sale

  89,993      89,312      50,022   

Redemption of Federal Home Loan Bank stock

  1,373      213      119   

Purchases of Federal Home Loan Bank stock

  (2,375   —        (1,627

Capital distribution—Charter Holding Corp., at equity

  —        340      438   

Loan originations and principal collections, net

  (64,821   (94,515   (96,888

Purchases of loans

  (9,702   (10,479   (4,799

Recoveries of loans previously charged off

  485      848      596   

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

  1,673      874      1,409   

Investment in bank owned life insurance

  —        —        (5,000

Cash paid to acquire Charter Holding Corporation, net

  —        (3,105   —     

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, net of expenses and cash paid

  —        17,512      —     

Premiums paid on life insurance policies

  (8   (13   (13
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (63,713   (1,931   (88,803
 

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

For the years ended December 31,

  2014     2013     2012  

Cash flows from financing activities:

     

Net increase in demand deposits, savings and NOW accounts

    62,032        19,985        64,159   

Net increase (decrease) in time deposits

    2,636        (30,531     (16,320

Increase (decrease) in short-term advances from Federal Home Loan Bank

    35,000        (15,000     15,000   

Principal advances from Federal Home Loan Bank

    40,000        45,000        45,000   

Repayment of advances from Federal Home Loan Bank

    (55,750     (51,000     —     

Repayment of other borrowed funds

    —          —          (543

Net (decrease) increase in repurchase agreements

    (11,129     10,664        (895

Issuance of common stock from dividend reinvestment plan

    109        202        —     

Redemption of stock warrants

    —          —          (737

Proceeds from issuance of subordinated debentures, net of issuance costs

    16,380        —          —     

Redemption of preferred stock

    (15,000     —          —     

Dividends paid on preferred stock

    (230     (316     (848

Dividends paid on common stock

    (4,127     (3,684     (3,052

Proceeds from exercise of stock options

    92        514        365   

Tax benefit for stock options and awards

    2        30        25   
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  70,015      (24,136   102,154   
 

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  17,542      (5,584   14,422   

CASH AND CASH EQUIVALENTS, beginning of year

  33,578      39,162      24,740   
 

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of year

$ 51,120    $ 33,578    $ 39,162   
 

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid

$ 6,610    $ 6,588    $ 7,396   
 

 

 

   

 

 

   

 

 

 

Income taxes paid

$ 3,963    $ 2,902    $ 3,633   
 

 

 

   

 

 

   

 

 

 

Loans transferred to other real estate owned

$ 838    $ 330    $ 547   
 

 

 

   

 

 

   

 

 

 

Loans originated from sales of other real estate owned

$ 496    $ —      $ 237   
 

 

 

   

 

 

   

 

 

 

Goodwill adjustments, net

$ 56    $ 41      —     
 

 

 

   

 

 

   

 

 

 

 

    2013     2012  
    Central Financial
Corporation
    Charter Holding
Corporation
    The Nashua Bank  

Acquisitions:

     

Cash and cash equivalents acquired

  $ 17,512      $ 3,095      $ 2,790   

Interest-bearing time deposits with other banks

    1,992        —          —     

Available-for-sale securities

    6,494        633        20,852   

Federal Home Loan Bank stock

    467        —          383   

Net loans acquired

    127,721        —          88,203   

Premises and equipment acquired

    2,532        1,365        729   

Investment in real estate

    —          —          249   

Other real estate owned

    1,477        —          —     

Accrued interest receivable

    23        —          375