Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operation
Highlights and Overview
Our profitability is derived primarily from the Bank. The Bank’s earnings in turn are generated from the net income from the earnings on its loan and investment portfolios less the cost of its
deposit accounts and borrowings. These core revenues are supplemented by gains on sales of loans originated for sale, retail banking service fees, gains on the sale of investment securities and brokerage fees. The following is a summary of key
financial results for the quarter and nine months ended September 30, 2012:
|
|
•
|
|
Total assets increased $76.5 million, or 7.34%, to $1.1 billion at September 30, 2012, from $1.0 billion at December 31, 2011.
|
|
|
•
|
|
Net loans increased $95.3 million, or 13.34%, to $810.3 million at September 30, 2012, from $715.0 million at December 31, 2011.
|
|
|
•
|
|
We originated $323.3 million in loans for the nine months ended September 30, 2012, compared to $195.8 million for the same period in 2011.
|
|
|
•
|
|
Our loan servicing portfolio was $361.1 million at September 30, 2012, compared to $365.8 million at December 31, 2011.
|
|
|
•
|
|
Total deposits increased $27.6 million, or 3.44%, to $830.7 million at September 30, 2012, from $803.0 million at December 31, 2011.
|
|
|
•
|
|
Net interest and dividend income for the nine months ended September 30, 2012, was $21.7 million compared to $21.5 million for the same period in
2011.
|
|
|
•
|
|
Net income available to common stockholders was $5.5 million for the nine months ended September 30, 2012, compared to $5.6 million for the same
period in 2011.
|
|
|
•
|
|
Our returns on average assets and average equity for the nine months ended September 30, 2012, were 0.82% and 7.24%, respectively, compared to
0.78% and 8.43%, respectively, for the same period in 2011.
|
|
|
•
|
|
As a percentage of total loans, non-performing loans decreased from 2.26% at December 31, 2011, to 2.04% at September 30, 2012.
|
The following discussion is intended to assist in understanding our financial condition and results of
operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.
Pending Merger
The Company announced on August 1, 2012, the execution of a definitive
agreement in which the Company will acquire The Nashua Bank (“TNB”) in an exchange of cash and stock (the “Merger”). TNB will merge with and into the Bank and will operate under the name “The Nashua Bank, a division of Lake
Sunapee Bank.” The terms of the merger agreement call for each outstanding share of TNB common stock to be converted into the right to receive $14.50 in cash or 1.136 shares of the Company’s common stock. TNB shareholders will have the
right to elect either cash or stock with the constraint that the overall transaction must be consummated with 80% of TNB shares being exchanged for Company stock and 20% being exchanged for cash. If there is an imbalance in elections, there will be
a proration of proceeds to achieve the 80/20 split. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approval and the approval of TNB’s shareholders. TNB’s shareholders approved
the Merger on October 25, 2012. The transaction is expected to close in the fourth quarter of 2012.
Recent Legislative Updates
In September 2012, the Federal Reserve Board, the OCC and the FDIC issued three proposals that would amend the existing
regulatory risk-based capital adequacy requirements of banks and bank holding companies. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The Basel III proposal would
increase the minimum levels of required capital, narrow the definition of capital, and places much greater emphasis on common equity. The proposed rules will be subject to a comment period through October 22, 2012.
The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the
definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to us and the Bank under the proposals would be: (i) a new common equity Tier 1 capital
ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also
establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity
Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and
would increase by that amount each year until fully implemented in January 2019. An institution would be subject
20
to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum
percentage of eligible retained income that could be utilized for such actions.
The proposed rules also implement revisions
and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, such as trust
preferred securities, which would be phased out over time. Although the Dodd-Frank Act only required the phase out of such instruments for institutions with total consolidated assets of $15 billion or more, the proposed rules would require almost
all institutions to phase out instruments that will no longer qualify as Tier 1 capital, albeit on a longer time frame than for institutions with total consolidated assets of $15 billion or more.
The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place
restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015.
We are still in the process of assessing the impacts of these complex proposals, however, we believe we will continue to exceed all
estimated well-capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis
.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with GAAP and practices within the banking industry. Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in 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 Notes A, B and C of the accompanying unaudited condensed consolidated financial statements and Note 1 of the consolidated
financial statements included in our 2011 Annual Report on Form 10-K.
Financial Condition and Results of Operations
Comparison of Financial Condition at September 30, 2012 and December 31, 2011
Total assets were $1.1 billion at September 30, 2012, compared to $1.0 billion at December 31, 2011, an increase of $76.5
million, or 7.34%. Securities available-for-sale decreased $36.1 million, or 17.15%, to $174.2 million at September 30, 2012 from $210.3 million at December 31, 2011. Net unrealized gains on securities available-for-sale were $3.4 million
at September 30, 2012, compared to net unrealized gains of $2.8 million at December 31, 2011. During the nine months ended September 30, 2012, we sold securities with a total book value of $156.1 million for a net gain on sales of
$2.9 million. During the same period, we purchased $15.0 million of other bonds and debentures and $140.7 million of mortgage-backed securities. Our net unrealized gain (after tax) on our investment portfolio was $2.1 million at September 30,
2012, compared to an unrealized gain (after tax) of $1.7 million at December 31, 2011. The investments in our securities portfolio that were temporarily impaired as of September 30, 2012, consisted primarily of equity securities issued.
Management does not intend to sell these securities in the near term. Since we have the ability to hold equity securities until recovery of cost basis, no declines are deemed to be other than temporary.
Net loans held in portfolio increased $95.3 million, or 13.34%, to $810.3 million at September 30, 2012, from $715.0 million at
December 31, 2011. The allowance for loan losses increased $664 thousand to $9.8 million at September 30, 2012, from $9.1 million at December 31, 2011. The change in the allowance for loan losses is the net of the effect of provisions
of $2.3 million, charge-offs of $2.1 million, and recoveries of $500 thousand. As a percentage of total loans, non-performing loans decreased from 2.26% at December 31, 2011, to 2.04% at September 30, 2012. Total loan production for the
nine months ended September 30, 2012, was $323.3 million compared to $195.8 million for the same period in 2011. The increase of loans held in portfolio was primarily due to increases in residential mortgages and commercial real estate loans.
At September 30, 2012, our mortgage servicing loan portfolio was $361.1 million compared to $365.8 million at December 31, 2011. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary
market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At September 30, 2012, adjustable-rate mortgages comprised approximately 64.0% of
our real estate mortgage loan portfolio, which is lower than the mix at December 31, 2011 as more fixed rate real estate loans with terms of 10 years or less were originated during the nine months ended September 30, 2012.
Goodwill and other intangible assets amounted to $30.1 million, or 2.69% of total assets, as of September 30, 2012, compared to
$30.4 million, or 2.91% of total assets, as of December 31, 2011. The decrease was due to normal amortization of core deposit intangible and customer list assets.
21
We held no other real estate owned (“OREO”) and property acquired in settlement of
loans at September 30, 2012, compared to $1.3 million at December 31, 2011.
Total deposits increased $27.6 million,
or 3.44%, to $830.7 million at September 30, 2012, from $803.0 million at December 31, 2011. Non-interest bearing deposit accounts increased $4.1 million, or 6.38%, and interest-bearing deposit accounts increased $23.5 million, or 3.19%,
over the same period. The balances at September 30, 2012, included $20.0 million of brokered deposits and $7.0 million of deposits obtained through listing services which is an increase of $15.0 million and $747 thousand, respectively, compared
to December 31, 2011.
Securities sold under agreements to repurchase increased $2.8 million, or 18.15%, to $18.3 million
at September 30, 2012, from $15.5 million at December 31, 2011. Repurchase agreements are collateralized by some of our U.S. government and agency investment securities.
We maintained balances of $121.0 million in advances from the FHLB at September 30, 2012, an increase of $40.0 million from $81.0
million at December 31, 2011, as advances were utilized, in part, to fund loan growth.
Allowance and Provision for Loan Losses
We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance for
loan losses are charged to income through the provision for loan losses. We test the adequacy of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis stratifies
the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, we consider historical losses and market conditions. Loss factors may be adjusted
for qualitative factors that, in management’s judgment, affect the collectability of the portfolio.
The allowance for
loan losses incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with ASC 310-10-35, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent
Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not
collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair
value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated
for impairment.
Our commercial loan officers review the financial condition of commercial loan customers on a regular basis
and perform visual inspections of facilities and inventories. We also have loan review, internal audit and compliance programs with results reported directly to the Audit Committee of the Board of Directors.
The allowance for loan losses (not including allowance for losses from the overdraft program described below) at September 30, 2012
was 9.8 million and at December 31, 2011 was $9.1 million. At approximately $9.8 million, the allowance for loan losses represents 1.19% of total loans, down from 1.27% at December 31, 2011. Total non-performing assets at
September 30, 2012, were approximately $16.5 million, representing 168.23% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $2.2 million to the
allowance for loan and lease losses during the nine months ended September 30, 2012, compared to $950 thousand for the same period in 2011. Loan charge-offs (excluding the overdraft program) were $1.9 million during the nine month period ended
September 30, 2012, compared to $1.2 million for the same period in 2011. Recoveries were $390 thousand during the nine month period ended September 30, 2012, compared to $89 thousand for the same period in 2011. This activity resulted in
net charge-offs of $1.6 million for the nine month period ended September 30, 2012, compared to $1.1 million for the same period in 2011. One-to-four family residential mortgages, commercial real estate, land, commercial, and consumer loans
accounted for 51%, 20%, 7%, 21%, and 1%, respectively, of the amounts charged-off during the nine month period ended September 30, 2012.
The effects of national economic issues that continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to
maintain our allowance for loan losses of $9.8 million. The provisions made in 2012 reflect growth in the portfolio, loan loss experience and changes in economic conditions that affect the risk of loss inherent in the loan portfolio. Management
anticipates making additional provisions during the remainder of 2012 to maintain the allowance at an adequate level.
22
In addition to the allowance for loan losses, there is an allowance for losses from the fee
for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has
remained negative for 60 consecutive days. At September 30, 2012, the overdraft allowance was $35 thousand, compared to $17 thousand at year-end 2011. Provisions for overdraft losses in the amount of $61 thousand were recorded during the nine
month period ended September 30, 2012, compared to provisions of $34 thousand that were recorded for the same period during 2011. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an
allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more. The following is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for
the nine month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Balance, beginning of year
|
|
$
|
9,113
|
|
|
$
|
9,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
(993
|
)
|
|
|
(454
|
)
|
|
Commercial real estate
|
|
|
(393
|
)
|
|
|
(407
|
)
|
|
Land and construction
|
|
|
(138
|
)
|
|
|
(209
|
)
|
|
Consumer loans
|
|
|
(13
|
)
|
|
|
(25
|
)
|
|
Commercial loans
|
|
|
(406
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total charged-off loans
|
|
|
(1,943
|
)
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
164
|
|
|
|
54
|
|
|
Commercial real estate
|
|
|
24
|
|
|
|
—
|
|
|
Land and construction
|
|
|
65
|
|
|
|
—
|
|
|
Consumer loans
|
|
|
6
|
|
|
|
5
|
|
|
Commercial loans
|
|
|
131
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
390
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(1,553
|
)
|
|
|
(1,103
|
)
|
|
|
|
|
|
Provision for loan loss charged to income:
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
1,106
|
|
|
|
445
|
|
|
Commercial real estate
|
|
|
791
|
|
|
|
315
|
|
|
Land and construction
|
|
|
77
|
|
|
|
26
|
|
|
Consumer loans
|
|
|
11
|
|
|
|
11
|
|
|
Commercial loans
|
|
|
215
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
2,200
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,760
|
|
|
$
|
9,688
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of activity in the allowance for overdraft privilege account for the nine
month period ended September 30:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Beginning balance
|
|
$
|
18
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdraft charge-offs
|
|
|
(155
|
)
|
|
|
(174
|
)
|
|
Overdraft recoveries
|
|
|
111
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
Net overdraft losses
|
|
|
(44
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for overdrafts
|
|
|
61
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
35
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the allocation of the allowance for loan losses (excluding overdraft
allowances), the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential, 1-4 family and home equity loans
|
|
$
|
4,848
|
|
|
|
50
|
%
|
|
|
65
|
%
|
|
$
|
4,907
|
|
|
|
54
|
%
|
|
|
64
|
%
|
|
Commercial
|
|
|
3,485
|
|
|
|
36
|
%
|
|
|
21
|
%
|
|
|
2,915
|
|
|
|
32
|
%
|
|
|
21
|
%
|
|
Land and construction
|
|
|
340
|
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
222
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
Collateral and consumer loans
|
|
|
82
|
|
|
|
—
|
|
|
|
1
|
%
|
|
|
40
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
Commercial and municipal loans
|
|
|
949
|
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
721
|
|
|
|
8
|
%
|
|
|
12
|
%
|
|
Impaired loans
|
|
|
91
|
|
|
|
1
|
%
|
|
|
—
|
|
|
|
308
|
|
|
|
3
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
9,795
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
9,113
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of total loans
|
|
|
|
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
1.26
|
%
|
|
|
|
|
|
Non-performing loans as a percentage of allowance
|
|
|
|
|
|
|
168.23
|
%
|
|
|
|
|
|
|
|
|
|
|
178.98
|
%
|
|
|
|
|
23
The following table shows total allowances including overdraft allowances:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Allowance for loan and lease losses
|
|
$
|
9,760
|
|
|
$
|
9,113
|
|
|
Overdraft allowance
|
|
|
35
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
9,795
|
|
|
$
|
9,131
|
|
|
|
|
|
|
|
|
|
|
|
Classified loans include non-performing loans and performing loans that have been adversely classified,
net of specific reserves. Total classified loans at carrying value (substandard loans less specific allowance) were $23.7 million at September 30, 2012, compared to $25.1 million at December 31, 2011. In addition, we had no OREO at
September 30, 2012, compared to $1.3 million at December 31, 2011. During the nine month period ended September 30, 2012, we sold five properties which were classified as OREO at December 31, 2011. Losses are incurred in the
liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we
anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Five loans considered to be impaired loans at September 30, 2012, have specific allowances identified and assigned.
The five loans are secured by real estate, business assets or a combination of both. At September 30, 2012, the allowance included $91 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at
December 31, 2011 was $308 thousand.
At September 30, 2012, we had 56 loans with net carrying values of $11.1
million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors” included in impaired loans. At September 30, 2012, 40 of the “troubled debt
restructurings” were performing under contractual terms. Of the loans classified as troubled debt restructured, sixteen were more than 30 days past due at September 30, 2012. The balances of these past due loans were $2.1 million and have
no assigned specific allowances. At December 31, 2011, we had 50 loans with net carrying values of $12.0 million considered to be “troubled debt restructurings.”
Loans over 90 days past due were $4.5 million at September 30, 2012, compared to $3.3 million at December 31, 2011. Loans 30 to
89 days past due were $5.3 million at September 30, 2012, compared to $5.6 million at December 31, 2011. As a percentage of assets, the recorded investment in non-performing loans decreased from 1.59% at December 31, 2011, to 1.47% at
September 30, 2012, and, as a percentage of total loans, decreased from 2.26% at December 31, 2011, to 2.02% at September 30, 2012.
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which we reasonably expect will materially impact future operating
results, liquidity, or capital resources. For the period ended September 30, 2012, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with
present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.
At September 30, 2012, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to
have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.
The following table shows the breakdown of the carrying value of non-performing assets and non-performing assets as a percentage of the total allowance and total assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
(Dollars in thousands)
|
|
Carrying
Value
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of Total
Assets
|
|
|
Carrying
Value
|
|
|
Percentage
of Total
Allowance
|
|
|
Percentage
of Total
Assets
|
|
|
90 days or more delinquent loans
(1)
|
|
$
|
72
|
|
|
|
0.74
|
%
|
|
|
0.01
|
%
|
|
$
|
100
|
|
|
|
1.10
|
%
|
|
|
0.01
|
%
|
|
Non-accrual impaired loans
|
|
|
4,640
|
|
|
|
47.37
|
%
|
|
|
0.41
|
%
|
|
|
4,173
|
|
|
|
45.70
|
%
|
|
|
0.40
|
%
|
|
Troubled debt restructured
|
|
|
11,130
|
|
|
|
113.63
|
%
|
|
|
1.00
|
%
|
|
|
12,037
|
|
|
|
131.83
|
%
|
|
|
1.16
|
%
|
|
Other real estate owned and chattel
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,365
|
|
|
|
14.95
|
%
|
|
|
0.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
15,842
|
|
|
|
161.74
|
%
|
|
|
1.42
|
%
|
|
$
|
17,675
|
|
|
|
193.58
|
%
|
|
|
1.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All loans 90 days or more delinquent are placed on non-accruing status.
|
24
The following table sets forth the breakdown of non-performing assets at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Nonaccrual loans
(1)
|
|
$
|
16,479
|
|
|
$
|
16,617
|
|
|
Real estate and chattel property owned
|
|
|
—
|
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
16,479
|
|
|
$
|
17,982
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All loans 90 days or more delinquent are placed on a non-accruing status.
|
The following table sets forth the recorded investment in nonaccrual loans by category at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
$
|
5,341
|
|
|
$
|
5,578
|
|
|
Commercial
|
|
|
9,510
|
|
|
|
8,485
|
|
|
Home equity
|
|
|
3
|
|
|
|
—
|
|
|
Land and construction
|
|
|
912
|
|
|
|
1,006
|
|
|
Consumer loans
|
|
|
—
|
|
|
|
8
|
|
|
Commercial and municipal loans
|
|
|
713
|
|
|
|
1,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,479
|
|
|
$
|
16,617
|
|
|
|
|
|
|
|
|
|
|
|
We believe the allowance for loan losses is at a level sufficient to cover inherent losses, given the
current level of risk in the loan portfolio. At the same time, we recognize that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary if economic, real estate, and other
conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through
the provision for loan losses.
Liquidity and Capital Resources
We are required to maintain sufficient liquidity for safe and sound operations. At September 30, 2012, our liquidity was sufficient
to cover our anticipated needs for funding new loan commitments of approximately $51.0 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances
from the FHLB. At September 30, 2012, we had approximately $179.0 million in additional borrowing capacity from the FHLB.
At September 30, 2012, stockholders’ equity totaled $112.0 million, compared to $108.7 million at December 31, 2011. This
reflects net income of $6.1 million, the declaration and payment of $2.3 million in common stock dividends, the declaration of $738 thousand in preferred stock dividends, the purchase of $737 thousand of stock warrants outstanding, proceeds of $392
thousand from stock options exercised, and a decrease of $498 thousand in accumulated other comprehensive loss.
At
September 30, 2012, 148,088 shares remained to be repurchased under the repurchase plan previously approved by the Board of Directors. The repurchase plan permits the repurchase of up to 253,776 shares of our common stock. The Board of
Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity, which are three performing benchmarks
against which bank and thrift holding companies are measured. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. During the nine months ended September 30, 2012, no
shares were repurchased.
On September 14, 2012, we awarded 5,000 restricted shares of NHTB common stock to each of the
Bank’s seven non-employee directors. These shares, issued from treasury stock, represent restricted common shares which vest 1,000 common shares per year beginning on September 14, 2013. On August 9, 2012, one director resigned
effectively forfeiting all unvested (5,000) shares awarded.
At September 30, 2012, we had unrestricted funds
available in the amount of $1.7 million. As of September 30, 2012, our total cash needs for the remainder of 2012 are estimated to be approximately $6.3 million with $768 thousand projected to be used to pay dividends on our common stock, $251
thousand to pay interest on our capital securities, $117 thousand to pay dividends on our Series B Preferred Stock (as defined below), $272 thousand to pay-off notes payable, approximately $375 thousand for ordinary operating expense, and $4.5
million to complete the acquisition of The Nashua Bank. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC. Since the Bank is well-capitalized and has capital in excess of regulatory requirements,
it is anticipated that funds will be available to cover the additional Company cash requirements for 2012, if needed, as long as earnings at the Bank are sufficient to maintain adequate leverage capital.
For the nine months ended September 30, 2012, net cash provided by operating activities decreased $6.8 million to $1.8 million
compared to $8.6 million for the same period in 2011. The change in loans held for sale increased $7.9 million for the nine months ended September 30, 2012, compared to the same period in 2011, with $7.3 million increase in loans held for the
period in 2012
25
compared to a decrease of $600 thousand in 2011. Net gain on sales and calls of securities increased $1.2 million for the nine months ended September 30, 2012, compared to the same period in
2011, as a result of the sale and settlement of approximately $192.7 million of securities during the nine months ended September 30, 2012, compared to approximately $113.3 million of securities during the same period in 2011. The provision for
loan losses increased $1.3 million for the nine months ended September 30, 2012, compared to the same period in 2011. The decrease in accrued interest receivable and other assets decreased $321 thousand while the increase in accrued expenses
and liabilities increased $1.7 million.
Net cash used in investing activities was $64.5 million for the nine months ended
September 30, 2012, compared to $46.6 million for the same period in 2011, an increase of $17.9 million. The cash provided by net securities activities was $39.2 million for the nine months ended September 30, 2012, compared to cash used
in net securities activities of $12.4 million for the same period in 2011. Cash used to purchase FHLB stock was $1.5 million for the nine months ended September 30, 2012, compared to no related cash activity for the same period in 2011. Cash
used in loan originations and principal collections, net, was $97.0 million for the nine months ended September 30, 2012, an increase of $65.8 million, compared to the same period in 2011. Additionally, $5.0 million of cash was used in the
purchase of life insurance policies during the nine months ended September 30, 2012, compared to $2.5 million for this purpose in the same period in 2011.
For the nine months ended September 30, 2012, net cash flows provided by financing activities increased $30.9 million to $66.8 million compared to net cash provided by financing activities of $35.9
million for the nine months ended September 30, 2011. We experienced a net increase of $21.9 million in cash provided by deposits and securities sold under agreements to repurchase comparing the nine months ended September 30, 2012, to the
same period in 2011. We had an increase of $19.7 million cash provided by FHLBB advances and other borrowings comparing the nine months ended September 30, 2012 to the same period in 2011. During the nine months ended September 30, 2011,
we used $10.0 million to redeem Series A Preferred Stock and received $20.0 million for the issuance of Series B Preferred Stock (as defined below.)
On August 25, 2011, as part of the Small Business Lending Fund (“SBLF”) program, we entered into a letter agreement with Treasury pursuant to which we issued and sold to Treasury 20,000
shares of our Non-Cumulative Perpetual Preferred Stock, Series B, par value $.01 per preferred share, having a liquidation preference of $1,000 per preferred share (the “Series B Preferred Stock”.) We used $10.0 million of the proceeds to
redeem the Series A Preferred Stock issued under CPP.
The initial rate payable on SBLF capital is, at most, five percent, and
the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not
increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be paid only when
declared by our Board of Directors. The Series B Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of
the Company.
The Series B Preferred Stock generally is non-voting, other than class voting on certain matters that could
adversely affect the Series B Preferred Stock.
Banks are required to maintain tier one leverage capital and total risk based
capital ratios of 4.00% and 8.00%, respectively. As of September 30, 2012, the Bank’s ratios were 9.21% and 14.16%, respectively, well in excess of the regulators’ requirements.
Book value per common share was $15.58 at September 30, 2012, compared to $15.20 per common share at December 31, 2011.
Tangible book value per common share was $10.49 at September 30, 2012 compared to $10.00 per common share at December 31, 2011. Tangible book value per common share is a non-GAAP financial measure calculated using GAAP amounts. Tangible
book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and
preferred stock from the calculation of shareholder’s equity. We believe that tangible book value per common share provides information to investors that is useful in understanding its 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.
26
A reconciliation of these non-GAAP financial measures is provided below:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands except for per share data)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
Shareholders’ equity
|
|
$
|
111,986
|
|
|
$
|
108,660
|
|
|
Less goodwill
|
|
|
28,650
|
|
|
|
28,597
|
|
|
Less other intangible assets
|
|
|
1,427
|
|
|
|
1,755
|
|
|
Less preferred stock
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
61,909
|
|
|
$
|
58,308
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending common shares outstanding
|
|
|
5,902,402
|
|
|
|
5,832,360
|
|
|
Tangible book value per common share
|
|
$
|
10.49
|
|
|
$
|
10.00
|
|
Interest Rate Sensitivity
The principal objective of our interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given our
business strategies, operating environment, capital and liquidity requirements and performance objectives, and to manage the risk consistent with our Board of Directors’ approved guidelines. The Board of Directors has established an
Asset/Liability Committee (“ALCO”) to review our asset/liability policies and interest rate position. Trends and interest rate positions are reported to the Board of Directors monthly.
Gap analysis is used to examine the extent to which assets and liabilities are “rate sensitive.” An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature or reprice within that time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a
specified period of time and the amount of interest-bearing liabilities maturing or repricing within the same specified period of time. The strategy of matching rate sensitive assets with similar liabilities stabilizes profitability during periods
of interest rate fluctuations.
Our one-year cumulative interest-rate gap at September 30, 2012, was positive 2.65%,
compared to the December 31, 2011, gap of positive 1.65%. With an asset sensitive (positive) gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease.
We continue to offer adjustable-rate mortgages, which reprice at one, three, five and seven year intervals. In addition, we
sell most fixed-rate mortgages with terms of 15 years or longer into the secondary market in order to minimize interest rate risk and provide liquidity.
As another part of its interest rate risk analysis, we use an interest rate sensitivity model, which generates estimates of the change in our economic value of equity (EVE) over a range of interest rate
scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The EVE ratio, under any rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same
scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the EVE model assumes that the composition of
our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although
the EVE measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in
market rates on our net interest income and will likely differ from actual results.
The following table sets forth our EVE at
September 30, 2012, as calculated by an independent third party agent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Book
Value
|
|
|
-100 bp
|
|
|
0 bp
|
|
|
+100 bp
|
|
|
+200 bp
|
|
|
+300 bp
|
|
|
+400 bp
|
|
|
EVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
130,059
|
|
|
$
|
96,663
|
|
|
$
|
113,343
|
|
|
$
|
113,273
|
|
|
$
|
107,526
|
|
|
$
|
99,346
|
|
|
$
|
90,970
|
|
|
Percent of Change
|
|
|
|
|
|
|
-14.7
|
%
|
|
|
|
|
|
|
-0.1
|
%
|
|
|
-5.1
|
%
|
|
|
-12.3
|
%
|
|
|
-19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
EVE Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
|
|
|
11.65
|
%
|
|
|
8.67
|
%
|
|
|
10.22
|
%
|
|
|
10.42
|
%
|
|
|
10.14
|
%
|
|
|
9.61
|
%
|
|
|
9.03
|
%
|
|
Change in basis points
|
|
|
|
|
|
|
-155
|
|
|
|
|
|
|
|
21
|
|
|
|
-7
|
|
|
|
-60
|
|
|
|
-119
|
|
Comparison of the Operating Results for the Nine Months Ended September 30, 2012 and September 30, 2011
Consolidated net income for the nine months ended September 30, 2012, was $6.1 million, or $0.94 per common share
(assuming dilution), compared to $6.0 million, or $0.96 per common share (assuming dilution), for the same period in 2011, an increase of $86 thousand, or 1.42%. Our net interest margin decreased to 2.90% at September 30, 2012, from 3.22% at
September 30, 2011. Our return on average assets and average equity for the nine months ended September 30, 2012, were 0.82% and 7.23%, respectively, compared to 0.88% and 7.91%, respectively, for the same period in 2011.
27
Net interest and dividend income increased $196 thousand, or 0.91%, to $21.7 million for the
nine month period ended September 30, 2012, from $21.5 million for the nine month period ended September 30, 2011, as a result of the increase in interest-earning assets offset by the overall decline in net interest margin.
For the nine months ended September 30, 2012, total interest and dividend income decreased $817 thousand, or 2.91%, to $27.3 million
from $28.1 million for the same period in 2011. Interest and fees on loans increased $256 thousand, or 1.08%, for the nine month period ended September 30, 2012, to $24.1 million from $23.8 million at September 30, 2011, due primarily to
increased portfolio balances offset by loans repricing. Interest on investments and other interest decreased $1.1 million, or 24.84%, for the nine month period ended September 30, 2012, due primarily to a decreased position in investments
coupled with lower yields on investments held comparing periods.
For the nine months ended September 30, 2012, total
interest expense decreased $1.0 million, or 15.31%, to $5.6 million from $6.6 million for the same period in 2011. Interest on deposits decreased $1.1 million, or 23.87%, due to the overall decline in short-term interest rates comparing periods as
well as a transition from time deposits to lower cost non-maturity deposits. Interest on advances and other borrowed money increased $40 thousand, or 1.82%, to $2.2 million from $2.2 million for the same period in 2011.
The provision for loan losses (not including overdraft allowances) was $2.2 million for the nine months ended September 30, 2012,
and $950 thousand for the same period in 2011. We made adjustments to the provisions for overdraft losses in the nine months ended September 30, 2012, and 2011, recording provisions of $61 thousand and $34 thousand, respectively. For additional
information on provisions and adequacy, please refer to the section on Allowances for Loan Losses.
For the nine months ended
September 30, 2012, total noninterest income increased $2.9 million, or 36.12%, to $10.8 million, from $8.0 million for the same period in 2011, as discussed below. The increase was primarily due to increases in net gains on sales of loans,
gains on sales and calls of securities, net, and insurance commission income.
For the nine month period ended
September 30, 2012:
|
|
•
|
|
Customer service fees
decreased $49 thousand, or 1.29%, to $3.8 million from $3.8 million for the nine months ended September 30, 2012.
This decrease includes an increase of $124 thousand in ATM-related income for the nine months ended September 30, 2012, compared to the same period in 2011 offset in part by decreases of $138 thousand in overdraft fees.
|
|
|
•
|
|
Net gain on sales of loans
increased $971 thousand, or 172.48%, compared to the same period in 2011, represented by an increase of $25.2 million
in loans sold into the secondary market, to $80.9 million for the nine months ended September 30, 2012, from $39.2 million for the nine months ended September 30, 2011.
|
|
|
•
|
|
Gain on sales and calls of securities, net
increased $1.2 million to $3.4 million for the nine months ended September 30, 2012, from $2.2
million for the nine months ended September 30, 2011. This reflects the recognition of gains on the sales of approximately $153.1 million of securities sold during the nine months ended September 30, 2012, compared to $78.4 million of
securities sold during the same period in 2011.
|
|
|
•
|
|
Gain
(loss) on sales of other real estate and property owned, net of write-down
changed $177 thousand to a loss of $150 thousand for the nine
months ended September 30, 2012, from a gain of $27 thousand for the nine months ended September 30, 2011. This reflects the recognition of $190 thousand write-down on a commercial real estate property owned during the nine months ended
September 30, 2012.
|
|
|
•
|
|
Rental income
increased $9 thousand, or 1.63%, to $560 thousand for the nine months ended September 30, 2012, from $551 thousand for the
nine months ended September 30, 2011. This reflects additional lease arrangements coupled with normal annual increases.
|
|
|
•
|
|
Income from equity interest in Charter Holding Corp.
decreased $161 thousand to $298 thousand for the nine months ended September 30, 2012,
from $459 thousand for the same period in 2011. During the nine months ended September 30, 2011, there was non-recurring revenue at Charter Holding Corp. coupled with non-recurring expenses for the same period in 2012 which accounts for the
majority of the change in revenue comparing periods.
|
|
|
•
|
|
Insurance commission income
increased $1.0 million to $1.0 million for the nine months ended September 30, 2012, compared to the same
period in 2011 due to commissions recorded related to McCrillis & Eldredge operations which were acquired during the fourth quarter of 2011.
|
|
|
•
|
|
Bank-owned life insurance income
increased $60 thousand to $374 thousand from $314 thousand for the nine months ended September 30, 2011,
which reflects the addition of $5.0 million Bank-owned life insurance during the first quarter of 2012.
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For
the nine months ended September 30, 2012, total noninterest expenses increased $1.5 million, or 7.49%, to $21.5 million, from $20.0 million for the same period in 2011, discussed as follows. In summary, the increase was primarily due to
increases in salary and employee benefits and other expenses.
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For the nine month period ended September 30, 2012:
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Salaries and employee benefits
increased $628 thousand, or 5.97%, compared to the nine months ended September 30, 2011. Gross salaries and
benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $1.4 million, or 12.28%, from $11.4 million for the nine months ended September 30, 2011, to $12.8 million for the nine months ended
September 30, 2012. Salary expense increased $1.2 million, or 14.37%, reflecting ordinary cost-of-living adjustments and additional staffing primarily in the lending and compliance departments as well as the addition of staff related to
McCrillis & Eldredge which accounts for approximately 40% of the increase. The deferral of expenses in conjunction with the origination of loans increased $703 thousand, or 77.05%, to $1.6 million from $912 thousand for the same period in
2011 due to the increase in loan originations in 2012.
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Occupancy and equipment
decreased $83 thousand, or 2.90 %, to $2.8 million compared to the same period in 2011.
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Advertising and promotion
decreased $19 thousand, or 5.14%, to $350 thousand from $369 thousand for the same period in 2011. This includes a net
increase in print media expenses for the nine months ended September 30, 2012, compared to the same period in 2011, partially offset by decreases in radio and television media expenses.
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Depositors’ insurance
decreased $7 thousand, or 1.14%%, to $603 thousand from $610 thousand for the same period in 2011 due primarily to
modifications made by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates despite increase account balances.
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Data processing and outside services
increased $85 thousand, or 11.14%, to $848 thousand compared to $763 thousand for the same period in 2011.
This primarily reflects increases in expenses associated with our core processing system.
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Professional services
increased $111 thousand, or 13.74%, to $919 thousand compared to $808 thousand for the same period in 2011, reflecting an
increase in ordinary regulatory assessments and consulting fees related to the transaction to acquire The Nashua Bank.
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ATM processing fees
increased $4 thousand, or 1.16%, to $367 thousand compared to $363 thousand for the same period in 2011.
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Supplies
increased $28 thousand, or 11.16%, to $279 thousand compared to $251 thousand for the same period in 2011.
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Mortgage servicing net of amortization of mortgage servicing rights
increased $224 thousand from a net benefit of $128 thousand for the nine
months ended September 30, 2011, to a net expense of $96 thousand in 2012 as amortization expense increased $195 thousand during 2012 while mortgage serving income remained relatively flat.
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Other expenses
increased $530 thousand, or 14.59%, to $4.2 million for the nine months ended September 30, 2012, compared to $3.6 million
for the same period in 2011. This primarily reflects increases of holding company expenses of $318 thousand, non-performing assets and other real estate owned expenses of $150 thousand, and mortgage service impairment of $80 thousand.
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Comparison of the Operating Results for the Three Months Ended September 30, 2012, and September 30, 2011
Consolidated net income for the three months ended September 30, 2012, was $2.0 million, or $0.32 per common share
(assuming dilution), compared to $2.0 million, or $0.31 per common share (assuming dilution), for the same period in 2011, an increase of $17 thousand, or 0.84%. Net interest and dividend income increased $97 thousand, or 1.36%, to $7.3 million for
the three month period ended September 30, 2012, from $7.2 million for the three month period ended September 30, 2011.
For the three months ended September 30, 2012, total interest and dividend income decreased $254 thousand, or 2.72%, to $9.1 million from $9.3 million for the same period in 2011. Interest and fees
on loans increased $358 thousand, or 4.51%, for the three month period ended September 30, 2012, to $8.3 million from $7.9 million for the same period in 2011 due to the increase in new loans booked offsetting the impact of lower market rates.
Interest on investments and other interest decreased $611 thousand, or 43.99%, for the three month period ended September 30, 2012, due primarily to reduced holdings and overall lower yields on the investment portfolio in the period during
2012.
For the three months ended September 30, 2012, total interest expense decreased $351 thousand, or 16.1%, to $1.8
million from $2.2 million for the same period in 2011. Interest on deposits decreased $394 thousand, or 26.86%, due to the overall decline in short-term interest rates coupled with a migration to lower cost deposits from time deposits comparing
periods. Interest on advances and other borrowed money increased $43 thousand, or 6.04%, to $755 thousand from $712 thousand for the same period in 2011.
The provision for loan losses (not including overdraft allowances) was $1.0 million for the three months ended September 30, 2012, and $550 thousand for the same period in 2011. We made adjustments
to the provisions for overdraft losses in the three months ended September 30, 2012, and 2011, recording provisions of $32 thousand and $24 thousand, respectively. For additional information on provisions and adequacy, please refer to the
section on Allowances for Loan Losses.
For the three months ended September 30, 2012, total noninterest income increased
$1.0 million, or 36.43%, to $3.9 million, from $2.9 million for the same period in 2011, as discussed below. In summary, the increase was primarily due to increases in net gains on sales of loans and insurance commission income.
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For the three month period ended September 30, 2012:
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Customer service fees
decreased $41 thousand, or 3.04%, to $1.3 million from $1.3 million for the three months ended September 30, 2012,
compared to the same period in 2011. This decrease includes a decrease of $59 thousand in overdraft fees for the three months ended September 30, 2012, compared to the same period in 2011.
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Net gain on sales of loans
increased $645 thousand, or 484.96%, compared to the same period in 2011, represented by an increase of $26.4 million
in loans sold into the secondary market, to $39.3 million for the three months ended September 30, 2012, from $12.9 million for the three months ended September 30, 2011 coupled with higher valuations during the period in 2012.
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Gain on sales and calls of securities, net
increased $162 thousand to $1.1 million for the three months ended September 30, 2012, from $929
thousand for the three months ended September 30, 2011. This reflects the recognition of gains on the sales of approximately $90.3 million of securities sold during the three months ended September 30, 2012, compared to $41.5 million of
securities sold during the same period in 2011.
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Gain (loss) on sales of other real estate and property owned, net of write-down
decreased $18 thousand to no activity for the three months ended
September 30, 2012, from $18 thousand for the three months ended September 30, 2011.
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Rental income
decreased $24 thousand, or 11.43%, to $186 thousand for the three months ended September 30, 2012, from $210 thousand for the
three months ended September 30, 2011. This reflects a reduction in safe deposit box rental income.
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Income from equity interest in Charter Holding Corp.
decreased $52 thousand to $72 thousand for the three months ended September 30, 2012,
from $124 thousand for the same period in 2011. During the three months ended September 30, 2012, there was non-recurring expense at Charter Holding Corp. accounting for the majority of the change in revenue comparing periods.
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Insurance commission income
increased $343 thousand to $343 thousand for the three months ended September 30, 2012, compared to the same
period in 2011 due to commissions recorded related to McCrillis & Eldredge operations, which were acquired during the fourth quarter of 2011.
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Bank-owned life insurance income
increased $31 thousand to $141 thousand from $110 thousand for the three months ended September 30, 2011,
which reflects the addition of $5.0 million bank-owned life insurance during the first quarter of 2012.
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For
the three months ended September 30, 2012, total noninterest expense increased $513 thousand, or 7.61%, to $7.3 million, from $6.8 million for the same period in 2011, discussed as follows. In summary, the increase was primarily due to
increases in depositor’s insurance and professional services.
For the three month period ended September 30, 2012:
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Salaries and employee benefits
increased $3 thousand, or 0.08%, compared to the three months ended September 30, 2011. Gross salaries and
benefits paid, which exclude the deferral of expenses associated with the origination of loans, increased $283 thousand, or 7.08%, from $4.0 million for the three months ended September 30, 2011, to $4.3 million for the three months ended
September 30, 2012. Salary expense increased $340 thousand, or 12.16%, reflecting ordinary cost-of-living adjustments and additional staffing primarily in the lending and compliance departments as well as the addition of staff related to
McCrillis & Eldredge which accounts for approximately 45% of the increase. The deferral of expenses in conjunction with the origination of loans increased $280 thousand, or 92.39%, to $583 thousand from $303 thousand for the same period in
2011 due to the increase in loan originations in 2012.
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Occupancy and equipment
decreased $5 thousand, or 0.57 %, to $876 thousand compared to the same period in 2011.
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Advertising and promotion
decreased $15 thousand, or 13.51%, to $96 thousand from $111 thousand for the same period in 2011. This includes
decreases of $9 thousand in radio media expenses and $11 thousand in print media expenses offset by increases in web media expenses and production expenses.
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Depositors’ insurance
increased $231 thousand to $204 thousand from a benefit of $27 thousand for the same period in 2011 due primarily to
a non-recurring adjustment during the period in 2011 as a result of changes by the FDIC to the risk-based assessment model and calculation which resulted in lower assessment rates.
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Data processing and outside services
increased $35 thousand, or 13.16%, to $301 thousand compared to $266 thousand for the same period in 2011.
This primarily reflects increases in expenses associated with our core processing system and collection expenses partially offset by decreases in correspondent services.
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Professional services
increased $174 thousand, or 75.65%, to $404 thousand from $230 thousand for the same period in 2011, reflecting an
increase in ordinary regulatory assessments and consulting fees related to the transaction to acquire The Nashua Bank.
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ATM processing fees
increased $23 thousand, or 21.50%, to $130 thousand compared to $107 thousand for the same period in 2011.
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Supplies
increased $8 thousand, or 9.41%, to $93 thousand compared to $85 thousand for the same period in 2011.
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Mortgage servicing net of amortization of mortgage servicing rights
increased $117 thousand from a net benefit of $67 thousand for the three
months ended September 30, 2011, to a net expense of $50 thousand in 2012 as amortization expense increased $88 thousand during 2012 while mortgage serving income decreased $30 thousand.
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Other expenses
decreased $58 thousand, or 3.93%, to $1.4 million for the three months ended September 30, 2012, compared to $1.5 million
for the same period in 2011. This primarily reflects increases of stockholder expenses of $133 thousand offset by decreases in non-performing assets and other real estate owned expenses of $19 thousand and mortgage service impairment of $229
thousand.
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Capital Securities
On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable
every nine months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures
(“Debentures II”). Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.
Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10.00 per capital
security. We have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has
funds necessary to make these payments.
Capital Securities II are mandatorily redeemable upon the maturing of Debentures II
on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.
On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed
the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities and used the net proceeds from the offering to purchase a like amount of our 6.06% Junior
Subordinated Deferrable Interest Debentures (“Debentures III”). Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a
straight-line basis over the life of Debentures III.
Capital Securities III accrue and pay distributions quarterly at an
annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments
on liquidation or redemption of Capital Securities III, but only to the extent that the Trust has funds necessary to make these payments.
Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures
III, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.
Interest Rate Swap
On May 1, 2008, we entered into an interest rate swap agreement with PNC Bank, effective on September 17, 2008.
The interest rate agreement converts Trust II’s interest rate from a floating rate to a fixed-rate basis. The interest rate swap agreement has a notional amount of $10 million maturing September 17, 2013. Under the swap agreement, we are
to receive quarterly interest payments at a floating rate based on three month LIBOR and are obligated to make quarterly interest payments at a fixed-rate of 6.65%.
Off Balance Sheet Arrangements
We do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.