UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

[X]  QUARTERLY Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2014

or

[  ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act OF 1934

 

For the transition period from _______ to __________

 

Commission File Number: 000-51832

SBT Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut	20-4346972
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

 

86 Hopmeadow Street, P.O. Box 248, Simsbury, CT	06070
(Address of Principal Executive Offices)	(Zip Code)

      

(860) 408-5493

(Registrant's Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]     No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of October 31, 2014, the registrant had 901,211 shares of its Common Stock, no par value per share, outstanding.

 

 

  

table of contents

 

SBT Bancorp, Inc. and Subsidiary

 

		Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	4
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements – (unaudited)	9 - 23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24 - 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3. Defaults Upon Senior Securities		33
Item 4. Mine Safety Disclosures		33
Item 5. Other Information		33
Item 6. Exhibits		33-34
SIGNATURES		35
EXHIBIT INDEX		36

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

 

 

		9/30/14				12/31/13
		(Unaudited)
ASSETS
Cash and due from banks		$	8,535			$	13,355
Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank			13,599				24,165
Money market mutual funds			486				346
Federal funds sold			53				724
Cash and cash equivalents			22,673				38,590
Investments in available-for-sale securities (at fair value)			85,051				87,449
Federal Home Loan Bank stock, at cost			1,260				2,196
Loans held-for-sale			7,140				2,861
Loans			282,593				279,667
Less allowance for loan losses			2,761				2,792
Loans, net			279,832				276,875
Premises and equipment, net			1,517				1,618
Accrued interest receivable			1,020				1,074
Other real estate owned			130				-
Bank owned life insurance			7,130				6,729
Other assets			4,613				4,456
Total assets		$	410,366			$	421,848
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits		$	100,685			$	116,015
Savings and NOW deposits			211,843				173,500
Time deposits			63,612				68,989
Total deposits			376,140				358,504
Securities sold under agreements to repurchase			3,845				4,390
Federal Home Loan Bank advances			-				30,000
Other liabilities			1,591				1,558
Total liabilities			381,576				394,452
Stockholders' equity:
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000 shares issued and outstanding at September 30, 2014 and December 31, 2013; liquidation value of $1,000 per share			8,985				8,976
Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 901,625 shares and 901,211 shares, respectively, at September 30, 2014 and 900,264 shares and 899,850 shares, respectively, at December 31, 2013			10,116				10,136
Retained earnings			10,345				10,347
Treasury stock, 414 shares			(7	)			(7	)
Unearned compensation-restricted stock awards			(235	)			(401	)
Accumulated other comprehensive loss			(414	)			(1,655	)
Total stockholders' equity			28,790				27,396
Total liabilities and stockholders' equity		$	410,366			$	421,848

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for per share amounts)

 

		For the three months ended								For the nine months ended
		9/30/2014				9/30/2013				9/30/2014				9/30/2013
Interest and dividend income:
Interest and fees on loans		$	2,599			$	2,541			$	7,753			$	7,195
Investment securities			431				522				1,351				1,612
Federal funds sold and overnight deposits			28				8				60				29
Total interest and dividend income			3,058				3,071				9,164				8,836
Interest expense:
Deposits			213				219				647				655
Federal Home Loan Bank advances			1				-				3				8
Repurchase agreements			2				7				9				3
Total interest expense			216				226				659				666
Net interest and dividend income			2,842				2,845				8,505				8,170
Provision for loan losses			25				120				55				230
Net interest and dividend income after provision for loan losses			2,817				2,725				8,450				7,940
Noninterest income:
Service charges on deposit accounts			119				118				353				368
(Loss) gain on sales and writedowns of available-for-sale securities, net			-				(6	)			96				98
Other service charges and fees			173				116				556				479
Increase in cash surrender value of life insurance policies			55				51				151				159
Gain on loans sold and commission fee income			261				111				382				1,203
Investment services fees and commissions			43				87				172				172
Other income			16				9				74				8
Total noninterest income			667				486				1,784				2,487
Noninterest expense:
Salaries and employee benefits			1,564				1,631				5,140				5,088
Occupancy expense			363				290				1,030				849
Equipment expense			112				69				340				188
Advertising and promotions			177				235				461				593
Forms and supplies			45				42				139				109
Professional fees			167				134				377				386
Directors’ fees			65				62				196				187
Correspondent charges			42				77				173				242
Postage			-				23				31				66
FDIC assessment			80				64				285				119
Data processing			170				156				490				434
Other expenses			388				377				1,187				939
Total noninterest expense			3,173				3,160				9,849				9,200
Income before income taxes			311				51				385				1,227
Income tax provision (benefit)			53				(34	)			(66	)			224
Net income		$	258			$	85			$	451			$	1,003
Net income available to common stockholders		$	233			$	56			$	375			$	923
Weighted average shares outstanding, basic			883,998				871,055				882,158				870,695
Earnings per common share, basic		$	0.26			$	0.06			$	0.42			$	1.06
Weighted average shares outstanding, assuming dilution			888,335				877,916				886,694				876,185
Earnings per common share, assuming dilution		$	0.26			$	0.06			$	0.42			$	1.05

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013

 

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
		(unaudited)								(unaudited)
Net income		$	258			$	85			$	451			$	1,003
Other comprehensive (loss) income, net of tax:
Net change in unrealized holding gain/loss on securities available-for-sale			(250	)			(6	)			1,977				(3,241	)
Reclassification adjustment for net realized losses (gains) in net income			-				6				(96	)			(98	)
Other comprehensive (loss) income, before tax			(250	)			-				1,881				(3,339	)
Income tax benefit (expense) related to items of other comprehensive (loss) income			85				-				(640	)			1,136
Other comprehensive (loss) income, net of tax			(165	)			-				1,241				(2,203	)
Comprehensive income (loss)		$	93			$	85			$	1,692			$	(1,200	)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

 

																		Unearned				Accumulated
		Preferred																Compensation-				Other
		Stock				Common				Treasury				Retained				Restricted				Comprehensive
		Series C				Stock				Stock				Earnings				Stock Awards				(Loss) Income				Total
Balance, December 31, 2012		$	8,964			$	9,901			$	(7	)		$	9,819			$	(368	)		$	1,128			$	29,437
Net income			-				-				-				1,003				-				-				1,003
Other comprehensive loss, net of tax			-				-				-				-				-				(2,203	)			(2,203	)
Preferred stock dividend-SBLF			-				-				-				(71	)			-				-				(71	)
Preferred stock amortization (accretion)			9				-				-				(9	)			-				-				-
Stock based compensation			-				-				-				-				117				-				117
Dividends declared common stock			-				-				-				(376	)			-				-				(376	)
Common stock issued			-				28				-				-				-				-				28
Balance, September 30, 2013		$	8,973			$	9,929			$	(7	)		$	10,366			$	(251	)		$	(1,075	)		$	27,935
Balance, December 31, 2013		$	8,976			$	10,136			$	(7	)		$	10,347			$	(401	)		$	(1,655	)		$	27,396
Net income			-				-				-				451				-				-				451
Other comprehensive income, net of tax			-				-				-				-				-				1,241				1,241
Preferred stock dividend-SBLF			-				-				-				(67	)			-				-				(67	)
Preferred stock amortization (accretion)			9				-				-				(9	)			-				-				-
Stock based compensation			-				-				-				-				117				-				117
Dividends declared common stock			-				-				-				(377	)			-				-				(377	)
Forfeited restricted stock awards			-				(90	)			-				-				90				-				-
Restricted stock awards			-				41				-				-				(41	)			-				-
Common stock issued			-				29				-				-				-				-				29
Balance, September 30, 2014		$	8,985			$	10,116			$	(7	)		$	10,345			$	(235	)		$	(414	)		$	28,790

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		For the nine months ended
		9/30/2014				9/30/2013
Cash flows from operating activities:
Net income		$	451			$	1,003
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Interest capitalized on interest-bearing time deposits with other banks			-				(100	)
Amortization of securities, net			301				482
Amortization of mortgage servicing rights			285				185
Writedown of available-for-sale securities			7				14
Gain on sales of available-for-sale securities			(103	)			(112	)
Change in deferred loan origination costs, net			(79	)			(295	)
Provision for loan losses			55				230
Loans originated for sale			(28,920	)			(55,814	)
Proceeds from sales of loans			24,979				56,728
Gains on sales of loans			(338	)			(914	)
Writedown on other real estate owned			25				96
Loss on sale of other real estate owned			1				-
Depreciation and amortization			294				163
Accretion on impairment of operating lease			(33	)			(22	)
Increase in other assets			(953	)			(195	)
Decrease in interest receivable			54				18
(Increase) decrease in taxes receivable			(67	)			154
Increase in cash surrender value of bank owned life insurance			(151	)			(160	)
Stock-based compensation			117				117
Increase (decrease) in other liabilities			14				(288	)
Increase in interest payable			49				19
Net cash (used in) provided by operating activities			(4,012	)			1,309
Cash flows from investing activities:
Maturities and redemptions of interest-bearing time deposits with other banks			-				1,075
Redemption (purchases) of Federal Home Loan Bank stock			936				(1,218	)
Purchases of available-for-sale securities			(3,011	)			(35,184	)
Proceeds from maturities of available-for-sale securities			5,946				21,373
Proceeds from sales of available-for-sale securities			1,139				5,649
Loan originations and principal collections, net			8,283				(36,762	)
Loans purchased			(11,925	)			(4,925	)
Recoveries of loans previously charged off			14				6
Proceeds from sale of other real estate owned			539				-
Premium paid on bank owned life insurance			(250	)			-
Capital expenditures			(255	)			(909	)
Net cash provided by (used in) investing activities			1,416				(50,895	)
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts			23,013				24,063
Decrease in time deposits			(5,377	)			(657	)
Net (decrease) increase in securities sold under agreements to repurchase			(545	)			362
(Paydown of) proceeds from Federal Home Loan Bank advances			(30,000	)			10,000
Proceeds from issuance of common stock			29				28
Dividends paid - preferred stock			(67	)			(71	)
Dividends paid - common stock			(374	)			(363	)
Net cash (used in) provided by financing activities			(13,321	)			33,362
Net decrease in cash and cash equivalents			(15,917	)			(16,224	)
Cash and cash equivalents at beginning of period			38,590				34,100
Cash and cash equivalents at end of period		$	22,673			$	17,876
Supplemental disclosures:
Interest paid		$	610			$	647
Income taxes paid			1				70
Loans transferred to other real estate owned			695				-

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(Dollars in thousands)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments, consisting of only normal recurring accruals, to present fairly the financial position, results of operations, cash flows and changes in stockholders’ equity of SBT Bancorp, Inc. (the “Company”) for the periods presented. The Company’s only business is its investment in The Simsbury Bank & Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The interim results of operations are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

 

While management believes that the disclosures presented are adequate so as to not make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2013.

 

NOTE 2 – STOCK-BASED COMPENSATION

 

At September 30, 2014, the Company maintained a stock-based employee compensation plan. The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements. During the nine months ended September 30, 2014, the Company recognized $117 thousand in stock-based employee compensation expense. During the nine months ended September 30, 2013, the Company recognized $117 thousand in stock-based employee compensation expense.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

 

1.

For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

 

2.

For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

 

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

 

 

In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU was to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860):  Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The amendments in this ASU require two accounting changes. First, the amendments in this ASU change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. This ASU also includes new disclosure requirements. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application for a public business entity is prohibited. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.

 

 

 

In August 2014, the FASB issued ASU 2014-13, “Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.” This ASU applies to entities that meet the following criteria:

 

1.

they are required to consolidate a collateralized entity under the Variable Interest Entities guidance;

2.

they measure all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other FASB rules; and

3.

those changes in fair value are reflected in earnings.

 

Under ASU 2014-13, entities that meet these criteria are provided an alternative under which they can choose to eliminate the difference between the fair value of financial assets and financial liabilities of a consolidated collateralized financing entity. If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured in accordance with ASC 820, “Fair Value Measurement,” and differences between the fair value of the financial assets and the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

1.

the loan has a government guarantee that is not separable from the loan before foreclosure;

2.

at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and

3.

at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

 

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

NOTE 4 – FAIR VALUE MEASUREMENT DISCLOSURES

 

In accordance with ASC 820, the Company groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

 

Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

Level 3 Inputs – Unobservable inputs for determining the fair value of the assets or liabilities that are based on the entity’s own assumption about the assumptions that market participants would use to price the assets or liabilities.

 

 

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value for September 30, 2014 and December 31, 2013. The Company did not have any significant transfers of assets or liabilities to and from Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2014.

 

The Company’s cash instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

The Company’s investment in obligations of states and municipalities, mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information, and the instrument’s terms and conditions.

 

Loans held-for-sale: Fair values for the loans held-for-sale are estimated based on outstanding investor commitments, or in the absence of such commitments, are based on current investor yield requirements.

 

The Company’s fair values of loans and deposits, as reported in this footnote, are classified within level 3 of the fair value hierarchy. Fair values for these assets and liabilities are based on management estimates derived from revaluing these securities at prevailing current interest rates.

 

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

Other real estate owned values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

The following summarizes assets measured at fair value at September 30, 2014 and December 31, 2013.

 

Assets Measured at Fair Value on a Recurring Basis

 

						Fair Value Measurements at Reporting Date Using:
						Quoted prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				Level 1				Level 2				Level 3
		(Dollars In Thousands)
September 30, 2014:
Debt securities issued by U.S. government corporations and agencies		$	18,543			$	-			$	18,543			$	-
Obligations of states and municipalities			16,021				-				16,021				-
Mortgage-backed securities			49,962				-				49,962				-
SBA loan pools			525				-				525				-
		$	85,051			$	-			$	85,051			$	-
December 31, 2013:
Debt securities issued by U.S. government corporations and agencies		$	18,247			$	-			$	18,247			$	-
Obligations of states and municipalities			13,973				-				13,973				-
Mortgage-backed securities			54,568				-				54,568				-
SBA loan pools			661				-				661				-
		$	87,449			$	-			$	87,449			$	-

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

		Fair Value Measurements at Reporting Date Using:
						Quoted prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				Level 1				Level 2				Level 3
		(Dollars In Thousands)
September 30, 2014:
Other real estate owned		$	130			$	-			$	-			$	130
		$	130			$	-			$	-			$	130

 

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
Financial assets:
Cash and cash equivalents		$	22,673			$	22,673			$	-			$	-			$	22,673
Available-for-sale securities			85,051				-				85,051				-				85,051
Federal Home Loan Bank stock			1,260				1,260				-				-				1,260
Loans held-for-sale			7,140				-				-				7,247				7,247
Loans, net			279,832				-				-				286,942				286,942
Accrued interest receivable			1,020				1,020				-				-				1,020
Financial liabilities:
Deposits			376,140				-				376,472				-				376,472
Securities sold under agreements to repurchase			3,845				-				3,845				-				3,845

 

		December 31, 2013
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(Dollars in thousands)
Financial assets:
Cash and cash equivalents		$	38,590			$	38,590			$	-			$	-			$	38,590
Available-for-sale securities			87,449				-				87,449				-				87,449
Federal Home Loan Bank stock			2,196				2,196				-				-				2,196
Loans held-for-sale			2,861				-				-				2,909				2,909
Loans, net			276,875				-				-				277,539				277,539
Accrued interest receivable			1,074				1,074				-				-				1,074
Financial liabilities:
Deposits			358,504				-				358,961				-				358,961
Securities sold under agreements to repurchase			4,390				-				4,390				-				4,390
Federal Home Loan Bank advances			30,000				-				30,000				-				30,000

 

 

NOTE 5 – EARNINGS PER COMMON SHARE

 

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the entity.

 

 

 

The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended September 30, 2014 and September 30, 2013:

 

		For the three months ended
		9/30/14				9/30/13
		(In Thousands, Except Share and Per Share Data)
Basic earnings per share computation:
Net income		$	258			$	85
Preferred stock net accretion			(3	)			(3	)
Cumulative preferred stock dividends			(22	)			(26	)
Net income available to common stockholders		$	233			$	56
Weighted average shares outstanding, basic			883,998				871,055
Basic earnings per share		$	0.26			$	0.06
Diluted earnings per share computation:
Net income		$	258			$	85
Preferred stock net accretion			(3	)			(3	)
Cumulative preferred stock dividends			(22	)			(26	)
Net income available to common stockholders		$	233			$	56
Weighted average shares outstanding, before dilution			883,998				871,055
Dilutive potential shares			4,337				6,861
Weighted average shares outstanding, assuming dilution			888,335				877,916
Diluted earnings per share		$	0.26			$	0.06

 

		For the nine months ended
		9/30/14				9/30/13
		(In Thousands, Except Share and Per Share Data)
Basic earnings per share computation:
Net income		$	451			$	1,003
Preferred stock net accretion			(9	)			(9	)
Cumulative preferred stock dividends			(67	)			(71	)
Net income available to common stockholders		$	375			$	923
Weighted average shares outstanding, basic			882,158				870,695
Basic earnings per share		$	0.42			$	1.06
Diluted earnings per share computation:
Net income		$	451			$	1,003
Preferred stock net accretion			(9	)			(9	)
Cumulative preferred stock dividends			(67	)			(71	)
Net income available to common stockholders		$	375			$	923
Weighted average shares outstanding, before dilution			882,158				870,695
Dilutive potential shares			4,536				5,490
Weighted average shares outstanding, assuming dilution			886,694				876,185
Diluted earnings per share		$	0.42			$	1.05

 

 

 

NOTE 6 – INVESTMENT SECURITIES

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, were as follows: 

			Less than 12 Months								12 Months or Longer								Total
			Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
			Value				Losses				Value				Losses				Value				Losses
			(Dollars in thousands)
September 30, 2014
Debt securities issued by U.S. government corporations and agencies		$	1,060			$	3			$	17,483			$	219			$	18,543			$	222
Obligations of states and municipalities			1,014				24				1,757				56				2,771				80
Mortgage-backed securities			3,292				15				39,741				1,178				43,033				1,193
Total temporarily impaired securities			5,366				42				58,981				1,453				64,347				1,495
Other-than-temporarily impaired securities
Mortgage-backed securities			-				-				319				29				319				29
Total temporarily impaired and other-than-temporarily impaired securities		$	5,366			$	42			$	59,300			$	1,482			$	64,666			$	1,524
December 31, 2013:
Debt securities issued by U.S. government corporations and agencies		$	18,247			$	520			$	-			$	-			$	18,247			$	520
Obligations of states and municipalities			3,340				198				-				-				3,340				198
Mortgage-backed securities			42,185				1,958				6,240				359				48,425				2,317
Total temporarily impaired securities			63,772				2,676				6,240				359				70,012				3,035
Other-than-temporarily impaired securities
Mortgage-backed securities			-				-				331				40				331				40
Total temporarily impaired and other- than-temporarily impaired securities		$	63,772			$	2,676			$	6,571			$	399			$	70,343			$	3,075

 

The investments in the Company’s investment portfolio that were temporarily impaired as of September 30, 2014 consisted of debt issued by states and municipalities and U.S. government agencies and sponsored enterprises. The Company’s management anticipates that the fair value of securities that are currently impaired will recover to cost basis. As the Company has the ability and intent to hold securities for the foreseeable future, no declines are deemed to be other than temporary.

 

The following table summarizes the amounts and distribution of the Bank’s investment securities held as of September 30, 2014 and December 31, 2013:

 

			Investment Portfolio
			(Dollars in thousands)
			September 30, 2014
		Amortized				Gross Unrealized				Gross Unrealized				Fair
		Cost				Gains				Losses				Value				Yield
Available-for-sale securities:
U.S government and agency securities
Due after one year through five years		$	16,265			$	-			$	172			$	16,093				1.19	%
Due after five years through ten years			2,500				-				50				2,450				1.71	%
Total U.S government and agency securities			18,765				-				222				18,543				1.26	%
State and municipal securities
Due after one year through five years			562				27				-				589				2.26	%
Due after five years through ten years			4,283				162				42				4,403				3.16	%
Due after ten years through fifteen years			8,766				513				31				9,248				3.37	%
Due beyond fifteen years			1,777				11				7				1,781				3.41	%
Total state and municipal securities			15,388				713				80				16,021				3.33	%
Mortgage-backed securities
Due within one year			1				-				-				1				3.45	%
Due after one year through five years			646				16				-				662				2.94	%
Due after five years through ten years			1,993				34				4				2,023				2.22	%
Due after ten years through fifteen years			29,670				33				689				29,014				1.77	%
Due beyond fifteen years			18,727				64				529				18,262				2.33	%
Total mortgage-backed securities			51,037				147				1,222				49,962				2.01	%
SBA loan pools
Due after ten years through fifteen years			488				37				-				525				4.97	%
Total SBA loan pools			488				37				-				525				4.97	%
Total available-for-sale securities		$	85,678			$	897			$	1,524			$	85,051				2.34	%

  

 

 

		Investment Portfolio
		(Dollars in thousands)
		December 31, 2013
		Amortized				Gross Unrealized				Gross Unrealized				Fair
		Cost				Gains				Losses				Value				Yield
Available-for-sale securities:
U.S government and agency securities
Due after one year through five years		$	13,061			$	-			$	245			$	12,816				1.08	%
Due after five to ten years			5,706				-				275				5,431				1.46	%
Total U.S government and agency securities			18,767				-				520				18,247				1.20	%
State and municipal securities
Due after one year through five years			301				2				-				303				3.00	%
Due after five years through ten years			3,412				86				98				3,400				3.08	%
Due after ten years through fifteen years			10,067				303				100				10,270				3.47	%
Due beyond fifteen years			-				-				-				-				-
Total state and municipal securities			13,780				391				198				13,973				3.36	%
Mortgage-backed securities
Due within one year			9				-				-				9				3.98	%
Due after one year through five years			761				14				-				775				2.60	%
Due after five years through ten years			2,660				49				11				2,698				2.39	%
Due after ten years through fifteen years			32,886				31				1,281				31,636				1.85	%
Due beyond fifteen years			20,483				32				1,065				19,450				2.44	%
Total mortgage-backed securities			56,799				126				2,357				54,568				2.10	%
SBA loan pools
Due after one year through five years			611				50				-				661				4.60	%
Total SBA loan pools			611				50				-				661				4.99	%
Total available-for-sale securities		$	89,957			$	567			$	3,075			$	87,449				2.25	%

 

During the nine months ended September 30, 2014, there were proceeds of $1.1 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $103 thousand. The tax expense applicable to these gross realized gains amounted to $35 thousand.

 

During the nine months ended September 30, 2013, there were proceeds of $5.6 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $112 thousand. The tax expense applicable to these gross realized gains amounted to $38 thousand.

 

NOTE 7 – LOAN INFORMATION

 

Loans consisted of the following as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014				December 31, 2013
		(In Thousands)
Commercial and industrial		$	19,906			$	18,432
Real estate - construction and land development			11,312				7,773
Real estate - residential			131,879				137,539
Real estate - commercial			46,772				48,814
Municipal			9,218				8,488
Home equity			46,167				46,742
Consumer			16,045				10,664
			281,299				278,452
Allowance for loan losses			(2,761	)			(2,792	)
Deferred loan origination costs, net			1,294				1,215
Net loans		$	279,832			$	276,875

 

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

 

 

General component:

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2014.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80% without obtaining private mortgage insurance for any amounts over 80% and does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate: Loans in this segment are primarily owner occupied properties throughout the Farmington Valley in Connecticut. Management continually monitors the financial performance of these loans and the related operating entities.

 

Construction loans: Loans in this segment primarily include real estate development loans for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at adequate prices, and market conditions.

 

Commercial loans: Loans in this segment are made to businesses and are generally secured by the assets of the businesses. Repayment is expected from the cash flows of the businesses. A weakened economy will have an effect on the credit quality in this segment.

 

Consumer loans: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Allocated component:

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.

 

 

 

Unallocated component:

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

The following table presents the allowance for loan losses activity by portfolio segment for the nine months ended September 30, 2014 and September 30, 2013:

 

			Real Estate:
											Construction and								Commercial
			Residential				Commercial				Land Development				Home Equity				&  Industrial				Consumer				Unallocated				Total
			(Dollars in thousands)
September 30, 2014:
Allowance for loan losses:
Beginning balance		$	1,189			$	748			$	211			$	303			$	239			$	102			$	-			$	2,792
Charge-offs			(98	)			-				-				-				-				(2	)			-				(100	)
Recoveries			11				-				-				-				3				-				-				14
(Benefit) provision			(114	)			(16	)			145				(26	)			3				45				18				55
Ending balance		$	988			$	732			$	356			$	277			$	245			$	145			$	18			$	2,761

 

 

			Real Estate:
											Construction  and								Commercial
			Residential				Commercial				Land  Development				Home  Equity				&  Industrial				Consumer				Unallocated				Total
			(Dollars in thousands)
September 30, 2013:
Allowance for loan losses:
Beginning balance		$	1,051			$	586			$	142			$	362			$	219			$	99			$	135			$	2,594
Charge-offs			(44	)			-				-				-				-				(22	)			-				(66	)
Recoveries			2				-				-				-				4				-				-				6
Provision (benefit)			165				173				26				(37	)			(14	)			40				(123	)			230
Ending balance		$	1,174			$	759			$	168			$	325			$	209			$	117			$	12			$	2,764

 

 

 

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of September 30, 2014 and December 31, 2013:

 

		Real Estate:
										Construction  and								Commercial
		Residential				Commercial				Land  Development				Home  Equity				&  Industrial				Consumer				Unallocated				Total
		(Dollars in thousands)
September 30, 2014:
Allowance for loan losses:
Ending balance: Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Ending balance: Collectively evaluated for  impairment			988				732				356				277				245				145				18				2,761
Total allowance for loan losses ending balance		$	988			$	732			$	356			$	277			$	245			$	145			$	18			$	2,761
Loans:
Ending balance: Individually evaluated for  impairment		$	-			$	873			$	-			$	-			$	460			$	-			$	-			$	1,333
Ending balance: Collectively evaluated for impairment			131,879				53,399				11,312				46,167				21,164				16,045				-				279,966
Total loans ending balance		$	131,879			$	54,272			$	11,312			$	46,167			$	21,624			$	16,045			$	-			$	281,299

 

 

		Real Estate:
										Construction  and								Commercial
		Residential				Commercial				Land Development				Home Equity				& Industrial				Consumer				Unallocated				Total
		(Dollars in thousands)
December 31, 2013
Allowance for loan losses:
Ending balance: Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Ending balance: Collectively evaluated for  impairment			1,189				748				211				303				239				102				-				2,792
Total allowance for loan  losses ending balance		$	1,189			$	748			$	211			$	303			$	239			$	102			$	-			$	2,792
Loans:
Ending balance: Individually evaluated for  impairment		$	175			$	924			$	222			$	4			$	-			$	-			$	-			$	1,325
Ending balance: Collectively evaluated for impairment			137,364				54,234				7,551				46,738				20,576				10,664				-				277,127
Total loans ending balance		$	137,539			$	55,158			$	7,773			$	46,742			$	20,576			$	10,664			$	-			$	278,452

 

 

 

The following tables present the Company’s loans by risk rating as of September 30, 2014 and December 31, 2013:

 

		Real Estate
										Construction
										and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Total
		(Dollars in thousands)
September 30, 2014
Grade:
Pass		$	-			$	49,387			$	10,852			$	-			$	18,519			$	-			$	78,758
Special mention			-				4,012				-				-				3,105				-				7,117
Substandard			479				873				460				-				-				90				1,902
Loans not formally rated			131,400				-				-				46,167				-				15,955				193,522
Total		$	131,879			$	54,272			$	11,312			$	46,167			$	21,624			$	16,045			$	281,299
December 31, 2013:
Grade:
Pass		$	-			$	50,520			$	6,042			$	-			$	18,425			$	-			$	74,987
Special mention			-				2,661				1,163				-				1,175				-				4,999
Substandard			1,601				1,977				568				116				976				-				5,238
Loans not formally rated			135,938				-				-				46,626				-				10,664				193,228
Total		$	137,539			$	55,158			$	7,773			$	46,742			$	20,576			$	10,664			$	278,452

 

 

Credit Quality Indicators: As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators, including trends related to (i) weighted average risk rating of commercial loans; (ii) the level of classified and criticized commercial loans; (iii) non-performing loans; (iv) net charge-offs; and (v) the general economic conditions within the State of Connecticut.

 

The Company utilizes a risk rating matrix to assign a risk grade to each of its commercial and construction loans. Loans are graded on a scale of 1 to 7. A “Pass” is defined as risk rating 1 through 3.5. A description of each rating class is as follows:

 

Risk Rating 1 (Superior) – This risk rating is assigned to loans secured by cash.

 

Risk Rating 2 (Good) – This risk rating is assigned to borrowers of high credit quality who have primary and secondary sources of repayment which are well defined and fully confirmed.

 

Risk Rating 3 (Satisfactory) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and have primary and secondary sources of repayment that are well defined and adequately confirmed. Most credit factors are favorable, and the credit exposure is managed through normal monitoring.

 

Risk Rating 3.5 (Bankable with Care) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and the secondary sources of repayment are weak. These loans may require more than the average amount of attention from the relationship manager.

 

Risk Rating 4 (Special Mention) – This risk rating is assigned to borrowers with loan obligations which may be adequately protected by the present debt service capacity and tangible net worth of such borrowers, but which have potential problems that could, if not checked or corrected, eventually weaken these assets or otherwise jeopardize the repayment of principal and interest as originally intended. Most credit factors are unfavorable, and the credit exposure requires immediate corrective action.

 

Risk Rating 5 (Substandard) – This risk rating is assigned to borrowers who have inadequate cash flow or collateral to satisfy their loan obligations as originally defined in the loan agreement. Substandard loans may be placed on nonaccrual status if the conditions described above are generally met.

 

Risk Rating 6 (Doubtful) – This risk rating is assigned to borrowers or the portion of borrowers’ loans with which the Company is no longer certain of such loans’ collectability. A specific allocation is assigned to such portion of the loans.

 

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loans that have been charged off. “Loss” does not imply that the loan, or any portion thereof, will never be repaid, nor does it imply that there has been a forgiveness of debt.

 

 

 

“Loans not formally rated” represent residential, home equity and consumer loans. As of September 30, 2014, $193.5 million of the total residential, home equity and consumer portfolio totaling $194.1 million were not formally rated. The performance of these loans is measured by delinquency status. The Bank underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines. These guidelines provide for specific requirements with regard to documentation, loan to value and debt to income ratios. Guidelines for home equity loans and lines place a maximum loan to value of 80% on these loans and lines and the Bank requires full underwriting disclosure documentation for these loans. These underwriting factors have produced a loan portfolio with low delinquencies. Total non-accrual and delinquent loans on September 30, 2014 were 0.91% of total loans outstanding compared to 1.24% on December 31, 2013. The Company’s allowance for loan losses at September 30, 2014 was 0.98% of total loans compared to 0.99% as of December 31, 2013.

 

An age analysis of past-due loans, segregated by class of loans, as of September 30, 2014 and December 31, 2013 is as follows:

 

										90 Days				Total				Total				Total
		30–59 Days				60–89 Days				or More				Past Due				Current				Loans
		(Dollars in thousands)
September 30, 2014:
Real estate:
Residential		$	-			$	-			$	365			$	365			$	131,514			$	131,879
Commercial			-				-				-				-				46,772				46,772
Construction and land development			-				-				-				-				11,312				11,312
Home equity			175				-				-				175				45,992				46,167
Municipal			-				-				-				-				7,500				7,500
Commercial and industrial			-				-				-				-				19,906				19,906
Municipal			-				-				-				-				1,718				1,718
Consumer			91				-				-				91				15,954				16,045
Total		$	266			$	-			$	365			$	631			$	280,668			$	281,299
December 31, 2013:
Real estate:
Residential		$	-			$	720			$	1,253			$	1,973			$	135,566			$	137,539
Commercial			-				-				924				924				47,890				48,814
Construction and land development			-				-				204				204				7,569				7,773
Home equity			-				94				83				177				46,565				46,742
Municipal			-				-				-				-				6,344				6,344
Commercial and industrial			-				-				-				-				18,432				18,432
Municipal			-				-				-				-				2,144				2,144
Consumer			128				-				26				154				10,510				10,664
Total		$	128			$	814			$	2,490			$	3,432			$	275,020			$	278,452

 

 

The following tables set forth information regarding nonaccrual loans as of September 30, 2014 and December 31, 2013:

 

Real estate:		September 30, 2014				December 31, 2013
		(Dollars in thousands)				(Dollars in thousands)
Residential		$	602			$	1,597
Commercial			873				924
Construction and land development			-				222
Home equity			-				83
Commercial and industrial			460				-
Consumer			2				23
Total		$	1,937			$	2,849

 

There were no loans 90 days or more past due and still accruing as of September 30, 2014 and December 31, 2013.

 

 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the nine months ended September 30, 2014 and the year ended December 31, 2013:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(Dollars in thousands)
September 30, 2014
With no related allowance recorded:
Real Estate:
Commercial		$	873			$	873			$	-			$	899			$	-
Construction and land development			-				-				-				147				-
Commercial and industrial			460				460				-				474				-
Total impaired with no related allowance		$	1,333			$	1,333			$	-			$	1,520			$	-
Total
Real Estate:
Commercial		$	873			$	873			$	-			$	899			$	-
Construction and land development			-				-				-				147				-
Commercial and industrial			460				460				-				474				-
Total impaired loans		$	1,333			$	1,333			$	-			$	1,520			$	-

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(Dollars in thousands)
December 31, 2013:
With no related allowance recorded:
Real Estate:
Residential		$	175			$	175			$	-			$	178			$	6
Commercial			924				924				-				929				3
Home equity			4				4				-				5				-
Construction and land development			222				222				-				212				-
Total impaired with no related allowance		$	1,325			$	1,325			$	-			$	1,324			$	9
Total
Real Estate:
Residential		$	175			$	175			$	-			$	178			$	6
Commercial			924				924				-				929				3
Home equity			4				4				-				5				-
Construction and land development			222				222				-				212				-
Total impaired loans		$	1,325			$	1,325			$	-			$	1,324			$	9

 

 

The Bank’s troubled debt restructured loans (“TDRs”) are determined by management. TDRs may include accrued interest, late charges, title and recording fees, or attorney’s fees being added back to the pre-modification balance. In addition, rates and terms of the loans have changed.

 

There were no loans modified as a troubled debt restructure during the nine months ended September 30, 2014.

 

There were no loans modified as a troubled debt restructure during the year ended December 31, 2013.

 

The balance of mortgage servicing rights included in other assets at September 30, 2014 and December 31, 2013 was $1.48 million and $1.41 million, respectively. Mortgage servicing rights of $58 thousand and $925 thousand were capitalized for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. Amortization of mortgage servicing rights was $285 thousand and $300 thousand for the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively. The fair value of these rights was $1.94 million and $1.67 million as of September 30, 2014 and December 31, 2013, respectively.

 

Mortgage loans serviced for others were not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $166.7 million and $148.0 million as of September 30, 2014 and December 31, 2013, respectively.

 

 

 

NOTE 8 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase consist of funds borrowed from customers on a short-term basis secured by portions of the Company's investment portfolio. The securities which were sold have been accounted for not as sales but as borrowings. The securities consisted of debt securities issued by the U.S. Treasury and other U.S. government sponsored enterprises, corporations and agencies and states and municipalities. The securities were held in safekeeping by Morgan Stanley, under the control of the Company. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements. The agreements mature generally within three months from date of issue.

 

 

NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables present the reclassification disclosure for the three months and nine months ended September 30, 2014 and 2013: 

 

		9/30/2014				9/30/2013
Three months ended:		(Dollars in thousands)
Change in net unrealized holding gain/loss on available-for-sale securities		$	(250	)		$	(6	)
Reclassification adjustment for realized gains and writedowns, net, in net income (1)			-				6
Other comprehensive loss before income tax effect			(250	)			-
Income tax benefit			85				-
Other comprehensive loss, net of tax		$	(165	)		$	-

 

		9/30/2014				9/30/2013
Nine months ended:		(Dollars in thousands)
Change in net unrealized holding gain/loss on available-for-sale securities		$	1,977			$	(3,241	)
Reclassification adjustment for realized gains and writedowns, net, in net income (1)			(96	)			(98	)
Other comprehensive income (loss) before income tax effect			1,881				(3,339	)
Income tax (expense) benefit			(640	)			1,136
Other comprehensive income (loss), net of tax		$	1,241			$	(2,203	)

 

Reclassification adjustments are comprised of realized security gains/losses and writedowns.  The gains/losses and writedowns have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the consolidated statements of operations as follows: the pre-tax amount is included in  gain on sales and writedowns of available- for- sale securities, net, the tax expense amount is included in income tax provision (benefit) and the after tax amount is included in net income.

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, can generally be identified by the use of words such as “may,” “will,” “should,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate” or words of similar meaning. These forward-looking statements include statements relating to the Company’s anticipated future financial performance, projected growth and management’s long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from developments or events, the Company’s business and growth strategies.

 

These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in these forward-looking statements:

 

	●	economic conditions (both generally and in the Company’s markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;
	●	a general decline in the real estate and lending markets may negatively affect the Company’s financial results;
	●	inaccuracies in management’s assumptions used in calculating the appropriate amount to be placed into the Company’s allowance for loan and lease losses;
	●	restrictions or conditions imposed by regulators on the Company’s operations may make it more difficult for the Company to achieve its goals;
	●	legislative and regulatory changes (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject the Company to additional regulatory oversight which may result in increased compliance costs and/or require the Company to change its business model;
	●	changes in accounting standards and compliance requirements may adversely affect the businesses in which the Company is engaged;
	●	competitive pressures among depository and other financial institutions may increase significantly;
	●	changes in the interest rate environment may reduce margins or the volumes or values of the loans the Company makes;
	●	competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than the Company can;
	●	the Company’s ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;
	●	adverse changes may occur in the equity markets;
	●	war or terrorist activities may cause deterioration in the economy or cause instability in credit markets; and economic, governmental or other factors may prevent the projected population and residential and commercial growth in the markets in which the Company operates.

 

 

 

Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

General

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a better understanding of the significant changes and trends related to the Company’s financial condition, results of operations, liquidity and capital resources. The discussion should be read in conjunction with the consolidated financial statements of the Company as of September 30, 2014 and for the three and nine months ended September 30, 2014. All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 not misleading have been made.

 

The Company’s only business is its investment in The Simsbury Bank and Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. The Bank offers a full range of banking services, including commercial loans, real estate term loans, construction loans, SBA loans and a variety of consumer loans; checking, savings, certificates of deposit and money market deposit accounts; and safe deposit and other customary non-deposit banking services to consumers and businesses in north central Connecticut.

 

The Bank offers investment products and services to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, and its affiliation with the securities broker/dealer, LPL Financial LLC.

 

Disclosure of the Company’s significant accounting policies is included in Note 2 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management. One of these significant policies relates to the provision for loan losses. See the heading “Provision for Loan Losses” below for further details about the Bank’s current provision.

 

Overview

 

For the nine months ended September 30, 2014, net income amounted to $451 thousand, or $0.42 per diluted share. This compares to net income of $1.003 million, or $1.05 per diluted share, for the nine months ended September 30, 2013. Total assets as of September 30, 2014 were $410 million.

 

Key financial highlights for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 include total asset growth of $3.4 million or 0.8%, deposit growth of $12.3 million or 3.4% and loan growth, including loans held-for-sale, of $11.9 million or 4.3%. Non-interest income decreased by $703 thousand or 28% to $1.8 million for the nine months ended September 30, 2014 compared to the same period ended September 30, 2013.

 

For the third quarter of 2014, non-interest income increased $181 thousand or 37% to $667 thousand from $486 thousand for the third quarter of 2013. The Company’s basic and diluted earnings per share was $0.26 for the third quarter of 2014, an increase of $0.20 from the basic and diluted earnings per share of $0.06 for the third quarter of 2013. Total non-accrual loans and loans 30 or more days past due decreased to 0.91% of total loans outstanding as of September 30, 2014 from 1.24% of total loans outstanding as of September 30, 2013.

 

Total deposits at September 30, 2014 were $376 million, an increase of $12 million or 3% over a year ago. This growth was mainly in savings and NOW deposits. As of September 30, 2014, 27% of total deposits were in non-interest bearing demand accounts, 56% were in low-cost savings and NOW accounts and 17% were in time deposits.

 

At September 30, 2014, loans outstanding, including loans held-for-sale, were $290 million, an increase of $12 million, or 4%, over a year ago. Commercial loans grew by $7 million or 9% and residential mortgage loans, including loans held-for-sale, grew by $1.5 million or 1% while consumer loans grew by $3 million or 6%. The profile of the Company’s loan portfolio remains relatively low-risk. The Company’s allowance for loan losses at September 30, 2014 was 0.98% of total loans. The Company had non-accrual loans totaling $1.9 million equal to 0.69% of total loans as of September 30, 2014 compared to non-accrual loans totaling $2.9 million or 1.05% of total loans as of September 30, 2013. Total non-accrual and delinquent loans as of September 30, 2014 were 0.91% of loans outstanding compared to 1.24% of total loans outstanding as of September 30, 2013.

 

 

 

Total revenues, consisting of net interest and dividend income plus non-interest income, were $3.5 million in the third quarter of 2014 compared to $3.3 million for the third quarter of 2013, an increase of $178 thousand or 5% that was attributable mainly to the increase in gains on loans sold and commission fee income. Net interest and dividend income decreased by $3 thousand or 0.11%, primarily due to a decrease in interest earned on the investment securities portfolio, which was partially offset by an increase in interest and fees on loans. Non-interest income increased by $181 thousand or 37% primarily due to the increase in gain on loans sold and commission fee income in the amount of $150 thousand.

 

The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) for the nine months ended September 30, 2014 was 2.98% compared to 3.09% for the nine months ended September 30, 2013. The Company’s yield on earning assets decreased 14 basis points to 3.20%, while the cost of funds remained the same at 0.33% for the nine months ended September 30, 2014 compared to the same period of 2013.

 

Total non-interest expenses increased by $13 thousand or 0.4% to $3.173 million for the third quarter of 2014 from $3.160 million for the third quarter of 2013. This increase was primarily due to a $73 thousand increase in occupancy expense, a $43 thousand increase in equipment expense and a $33 thousand increase in professional fees. These increases were partially offset by decreases in salary and employee benefits in the amount of $67 thousand and advertising and promotions expense in the amount of $58 thousand.

 

Capital levels for the Bank as of September 30, 2014 were above those required to meet the regulatory “well-capitalized” designation, as follows:

  

		Capital Ratios
		9/30/2014
		The Simsbury Bank
		& Trust Company		Regulatory Standard for Well-Capitalized
Tier 1 Leverage Capital Ratio		6.78%		5.00%
Tier 1 Risk-Based Capital Ratio		11.67%		6.00%
Total Risk-Based Capital Ratio		12.79%		10.00%

  

Results of Operations

 

Net Interest Income and Net Interest Margin

 

The Company’s earnings depend largely upon the difference between the income received from its loan portfolio and investment securities and the interest paid on its liabilities, including interest paid on deposits and borrowings. This difference is “net interest income.” The net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net yield on interest-earning assets. The Company’s net interest income is affected by the change in the level and the mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. The Company’s net yield on interest-earning assets is also affected by changes in yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on the Company’s loans are affected principally by the demand for such loans, the supply of money available for lending purposes and competitive factors. These factors are in turn affected by general economic conditions and other factors beyond the Company’s control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the Federal Reserve Bank.

 

Net interest and dividend income after provision for loan losses plus non-interest income was $3.5 million for the third quarter of 2014 compared to $3.2 million for the third quarter of 2013. The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, decreased to 2.89% for the quarter ended September 30, 2014 from 3.15% for the quarter ended September 30, 2013. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 2.80% for the quarter ended September 30, 2014 from 3.07% for the quarter ended September 30, 2013. The Company’s cost of deposits and borrowings decreased to 0.31% for the third quarter ended September 30, 2014 from 0.33% for the third quarter ended September 30, 2013.

 

Net interest and dividend income after provision for loan losses plus non-interest income was $10.2 million for the first nine months of 2014 compared to $10.4 million for the first nine months of 2013. The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, decreased to 2.98% for the nine months ended September 30, 2014 from 3.09% for the nine months ended September 30, 2013. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 2.87% for the nine months ended September 30, 2014 from 3.01% for the nine months ended September 30, 2013. The Company’s cost of deposits and borrowings remained the same at 0.33% for both the nine months ended September 30, 2014 and the nine months ended September 30, 2013.

 

 

 

Provision for Loan Losses

 

The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of non-performing loans, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectability of loans in the Company’s portfolio.

 

Each month, the Company reviews the allowance for loan losses and makes additional provisions to the allowance, as determined by the Company’s guidelines. The total allowance for loan losses at September 30, 2014 was $2.761 million or 0.98% of outstanding loans compared to $2.764 million or 1.00% of outstanding loans as of September 30, 2013. The Company charged off one loan totaling $2 thousand in the third quarter of 2014 compared to no loans in the third quarter of 2013. During the third quarter of 2014, the Company had five recoveries totaling $1 thousand compared to five recoveries totaling $1 thousand for the third quarter of 2013. The Company believes the allowance for loan losses is appropriate. For the nine months ended September 30, 2014, the Company charged off 6 loans totaling $100 thousand compared to 5 loans totaling $66 thousand for the nine months ended September 30, 2013. The Company had 19 recoveries totaling $14 thousand in the nine months ended September 30, 2014 compared to 20 recoveries totaling $7 thousand for the nine months ended September 30, 2013.

 

Non-interest Income and Non-interest Expense

 

Total non-interest income (which is derived mainly from service and overdraft charges) for the three months ended September 30, 2014 was $667 thousand compared to $486 thousand for the same period in the prior year. Total non-interest income for the nine months ended September 30, 2014 was $1.78 million compared to $2.49 million for the nine months ended September 30, 2013. The increase in non-interest income for the three months ended September 30, 2014 was primarily due to an increase in gain on loans sold while the decrease in non-interest income for the nine months ended September 30, 2014 was primarily due to the decrease in gain on loans sold. At September 30, 2014, the Company had 21,741 deposit accounts compared to 21,077 deposit accounts at September 30, 2013.

 

Total non-interest expenses for the three months ended September 30, 2014 was $3.17 million compared to $3.16 million for the same period in the prior year. The ratio of annualized operating expenses to average assets was 3.10% for the third quarter of 2014 compared to 3.23% for the third quarter of 2013. Total non-interest expenses for the nine months ended September 30, 2014 was $9.8 million compared to $9.2 million for the nine months ended September 30, 2013. The increase in non-interest expenses for the three and nine months ended September 30, 2014 was primarily due to an increase in occupancy and equipment expense, other expenses and an increase in the FDIC assessment which partially offset a decrease in advertising and promotions expense.

 

Salaries and employee benefits comprised approximately 49% of total non-interest expenses for the three months ended September 30, 2014 and 52% of total non-interest expenses for the same period in the prior year. Other major categories included occupancy and equipment, which comprised approximately 15% of non-interest expenses for the three months ended September 30, 2014 and 11% of non-interest expenses for the three months ended September 30, 2013; advertising and promotions expenses, which comprised approximately 6% of total non-interest expenses for the three months ended September 30, 2014 compared to 7% for the three months ended September 30, 2013; and FDIC assessment, which comprised approximately 3% of non-interest expenses for the three months ended September 30, 2014 compared to 2% for the three months ended September 30, 2013. Other expenses comprised approximately 12% of the total non-interest expenses for the quarters ended September 30, 2014 and 2013.

 

Salaries and employee benefits comprised approximately 52% of total non-interest expenses for the nine months ended September 30, 2014 compared to 55% for the same nine month period ended September 30, 2013. Other major categories included occupancy and equipment, which comprised approximately 14% of non-interest expenses for the nine months ended September 30, 2014 and 11% for the nine months ended September 30, 2013; advertising and promotions expenses, which comprised approximately 5% of total non-interest expenses for the nine months ended September 30, 2014 and 6% of total non-interest expenses for the nine months ended September 30, 2013; data processing fees which comprised approximately 5% of total non-interest expenses for both the nine months ended September 30, 2014 and 2013; and other expenses which comprised 12% of total non-interest expenses for the nine months ended September 30, 2014, compared to 10% for the nine months ended September 30, 2013.

 

 

 

Income Taxes

 

The effective income tax rate for the three months ended September 30, 2014 and 2013 was 17.0% and (66.7%), respectively. The Company recorded a tax provision of $53 thousand in the third quarter of 2014, compared to a tax benefit of $34 thousand in the third quarter of 2013 as the Company’s core earnings were lower in relation to tax exempt income, thereby creating a tax benefit in 2013. Due to the creation on January 1, 2011 of a Passive Investment Company (“PIC”) under Connecticut tax legislation for the purpose of holding certain mortgage loans, the Company will no longer incur state income tax liability except for the minimum tax since the PIC’s earnings, net of certain allocated expenses, are exempt from Connecticut state income tax as long as the PIC meets certain ongoing qualifications.

 

Financial Condition

 

Investment Portfolio

 

The fair market value of investments in available-for-sale securities as of September 30, 2014 was $85.1 million, which was 0.7% below amortized cost, compared to $87.4 million, which was 2.8% below amortized cost, as of December 31, 2013. The Company has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, and equity securities until recovery to cost basis occurs.

 

Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance in ASC 320-10, “Investments – Debt and Equity Securities.” ASC 320-10 addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. Management evaluates the Company’s investment portfolio on an ongoing basis. As of September 30, 2014, there were no investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.

 

In order to maintain a reserve of readily sellable assets to meet the Company’s liquidity and loan requirements, the Company purchases United States Treasury securities and other investments. Sales of “federal funds” (short-term loans to other banks) are regularly utilized. Placement of funds in certificates of deposit with other financial institutions may be made as alternative investments pending utilization of funds for loans or other purposes.

 

Securities may be pledged to meet regulatory requirements imposed as a condition to receipt of deposits of public funds and repurchase agreements. At September 30, 2014, the Company had 35 securities with a carrying value totaling $15.5 million pledged for such purposes. At December 31, 2013, the Company had 41 securities with a carrying value totaling $15.4 million pledged for such purposes.

 

As of September 30, 2014 and December 31, 2013, the Company’s investment portfolio consisted of U.S. government and agency securities, municipal securities, mortgage-backed securities and SBA loan pools. The Company’s policy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company.

 

Loan Portfolio

 

The Company’s loan portfolio as of the end of the third quarter of 2014 was comprised of approximately 71% mortgage and consumer loans and 29% commercial loans. The Company does not have any concentrations in its loan portfolio by industry or group of industries. However, as of September 30, 2014 and December 31, 2013, approximately 67% and 70%, respectively, of the Company’s loans were secured by residential real property located in Connecticut.

 

There were approximately $132.0 million of residential mortgage loans as of September 30, 2014, which represented a 4.1% decrease from December 31, 2013. The Company sold sixty three loans in the three months ended September 30, 2014 with an aggregate principal balance of $14.1 million, which resulted in a gain of $216 thousand. For the nine months ended September 30, 2014, the Company sold one hundred twenty loans with an aggregate principal balance of $25.0 million, which resulted in a gain of $337 thousand. The Company is an approved originator of loans that can be sold to the Federal Home Loan Mortgage Corporation and Federal Home Loan Bank.

 

At September 30, 2014, the Company had total consumer loan balances of approximately $16 million, representing a 50.0% increase from the consumer loan balances at December 31, 2013. As of September 30, 2014, the Company had approximately $15.6 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $10.7 million in auto loans purchased from BCI on its books as of December 31, 2013. The Company has an agreement with BCI pursuant to which the Company purchases auto loans from BCI. As part of the agreement, BCI services the loans for the Company.

 

 

 

The September 30, 2014 balance for commercial and commercial real estate loans, including construction loans, was $83.4 million, a 5.1% increase from the commercial and commercial real estate loans balance at December 31, 2013. The Company’s commercial loans are made to borrowers for the purpose of providing working capital, financing the purchase of equipment, or financing other business purposes. Such loans include loans with maturities ranging from thirty days to one year and “term loans,” which are loans with maturities normally ranging from one year to twenty-five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for fixed or floating interest rates, with monthly payments of both principal and interest.

 

The Company’s construction loans are primarily interim loans made by the Company to finance the construction of commercial and single-family residential property. These loans are typically short-term. The Company generally pre-qualifies construction loan borrowers for permanent “take-out” financing as a condition to making the construction loan. The Company will also occasionally make loans for speculative housing construction or for acquisition and development of raw land.

 

The Company’s other real estate loans consist primarily of loans originated based on the borrower’s cash flow and which are secured by deeds of trust on commercial and residential property to provide another source of repayment in the event of default. It is the Company’s policy to restrict real estate loans without credit enhancement to no more than 80% of the lower of the appraised value or the purchase price of the property, depending on the type of property and its utilization.

 

The Company offers both fixed and floating rate loans. Maturities on such loans typically range from five to thirty years. The Company has been designated as an approved SBA lender. The Company’s SBA loans are categorized as commercial or real estate depending on the underlying collateral. Also, the Company has been approved as an originator of loans that can be sold to the Federal Home Loan Mortgage Corporation and Federal Home Loan Bank.

 

The Company is subject to certain lending limits. With certain exceptions, the Company is permitted under applicable law to make related extensions of credit to any single borrowing entity of up to 15% of the Company’s capital and reserves. Credit equaling an additional 10% of the Company’s capital and reserves may be extended if the credit is fully secured by limited types of qualified collateral. As of September 30, 2014, the Company’s lending limits were $4.7 million and $7.8 million, respectively. As of December 31, 2013, these lending limits were $4.5 million and $7.5 million, respectively. The Company sells participations in its loans when necessary to stay within lending limits.

 

Interest on performing loans is accrued and taken into income daily. Loans over 90 days past due are deemed non-performing and are placed on non-accrual status. Interest received on non-accrual loans is credited to income only upon receipt and, in certain circumstances, may be applied to principal until the loan has been repaid in full, at which time the interest received is credited to income. The Company had 9 non-accrual loans at September 30, 2014 with an aggregate balance of approximately $1.9 million, compared to 15 non-accrual loans at December 31, 2013 with an aggregate balance of approximately $2.8 million.

 

When appropriate or necessary to protect the Company’s interests, real estate pledged as collateral on a loan may be taken by the Company through foreclosure or a deed in lieu of foreclosure. Real estate property acquired in this manner by the Company is known as “other real estate owned” (“OREO”) and is carried on the books of the Company as an asset at the lesser of the Company’s recorded investment or the fair value less estimated costs to sell. At September 30, 2014, the Company had one OREO property, which was carried on the books at $130 thousand.

 

A loan whose terms have been modified due to financial difficulties of a borrower is reported as a troubled debt restructure (“TDR”). All TDRs are placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once borrowers have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. The Company had no TDR loans as of September 30, 2014 and as of December 31, 2013.

 

Non-payment of loans is an inherent risk in the banking business. That risk varies with the type and purpose of the loan, the collateral which is utilized to secure payment and, ultimately, the creditworthiness of the borrower. In order to minimize this credit risk, the Company requires that all loans be approved by at least two officers, one of whom must be an executive officer. Commercial loans greater than $500 thousand, as well as other loans in certain circumstances, must be approved by the Loan Committee of the Company’s Board of Directors.

 

 

 

The Company has an internal review process to verify credit quality and risk classifications. In addition, the Company also maintains a program of annual review of certain new and renewed loans by an outside loan review consultant. Loans are graded from “pass” to “loss” depending on credit quality, with “pass” representing loans that are fully satisfactory as additions to the Company’s portfolio. These are loans which involve a degree of risk that is not unwarranted given the favorable aspects of the credit and which exhibit both primary and secondary sources of repayment. Classified loans identified in the review process are added to the Company’s Internal Watch list and an allowance for credit losses is established for such loans, if appropriate. Additionally, the Bank is examined regularly by the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking, at which times a further review of loans is conducted.

 

The Company had classified (substandard and special mention) loans with an aggregate outstanding balance of $9.0 million as of September 30, 2014 compared to $10.2 million as of December 31, 2013. The Company had no exposure to sub-prime loans in its loan portfolio as of September 30, 2014 and December 31, 2013, respectively. The Company’s overall asset quality and loan loss reserves of 0.98% of loans as of September 30, 2014 compared favorably to its peer banks.

 

The Company maintains an allowance for loan losses to provide for potential losses in the loan portfolio. Additions to the allowance are made by charges to operating expenses in the form of a provision for loan losses. All loans or portions of loans that are judged to be uncollectible are charged against the allowance, while all recoveries are credited to the allowance. Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: the results of the Company’s internal loan review, any external loan review, any regulatory examination, loan loss experience, estimated potential loss exposure on each credit, concentrations of credit, value of collateral, any known impairment in the borrower’s ability to repay, qualitative risk factors, and present and prospective economic conditions.

 

Deposits

 

Deposits are the Company’s primary source of funds. At September 30, 2014, the Company had a deposit mix of 37% checking, 46% savings and 17% certificates of deposit. The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits. As of December 31, 2013, the deposit mix was 32% checking, 49% savings, and 19% certificates of deposit. At September 30, 2014, 26.77% of the total deposits of $376.1 million were non-interest-bearing compared to 32.36% of the Company’s total deposits of $358.5 million at December 31, 2013 being non-interest bearing. As of September 30, 2014 and December 31, 2013, the Company had $85.4 million and $54.6 million, respectively, in deposits from public sources.

 

The Company’s deposits are obtained from a cross-section of the communities it serves. No material portion of the Company’s deposits has been obtained from or is dependent upon any one person or industry. The Company’s business is not seasonal in nature. The Company accepts deposits in excess of $100 thousand from customers. Those deposits are priced to remain competitive. Through the Promontory Interfinancial Network LLC’s Certificate of Deposit Accounts Registry Service (“CDARS”) program, the Bank had brokered deposits of $771 thousand as of September 30, 2014 compared to $2.0 million as of December 31, 2013.

 

Borrowings

 

As of September 30, 2014, the Company had no advances from the Federal Home Loan Bank of Boston (FHLBB) compared to $30 million as of December 31, 2013. All advances as of December 31, 2013 matured and were timely repaid.

 

The Company is not dependent upon funds from sources outside the United States and has not made any loans to a foreign entity.

 

Liquidity and Asset-Liability Management

 

Liquidity management for banks requires that funds always be available to pay any anticipated deposit withdrawals and maturing financial obligations promptly and fully in accordance with their terms. The balance of the funds required is generally provided by payments on loans, sale of loans, liquidation of assets, borrowings and the acquisition of additional deposit liabilities. One method the bank utilizes for acquiring additional liabilities is through the acceptance of “brokered deposits” (defined to include not only deposits received through deposit brokers but also deposits bearing interest in excess of 75 basis points over market rates), typically attracting large certificates of deposit at high interest rates. The Company is a member of Promontory Interfinancial Network LLC’s Certificate of Deposit Accounts Registry Service (“CDARS”). This allows the Company to offer its customers FDIC insurance on deposits in excess of $250 thousand, which reflects the deposit insurance limits currently in effect, by placing the deposits in the CDARS network. Accounts placed in this manner are considered brokered deposits. As of September 30, 2014, the Company had $771 thousand of deposits in the CDARS network compared to $2.0 million of deposits in the CDARS network as of December 31, 2013.

 

 

 

Liquidity of a financial institution, such as the Bank, is measured by its ability to have sufficient liquid assets to meet its short term obligations. The net sum of liquid assets less anticipated current obligations represents the basic surplus of the Company. The Company maintains a portion of its funds in cash deposits in other banks, federal funds sold and available-for-sale securities to meet its obligations for anticipated depositors’ demands in the near future. As of September 30, 2014, the Company held $16.0 million in cash and cash equivalents, net of required FRB reserves of $6.6 million, and $69.6 million in available-for-sale securities, net of pledged securities of $15.5 million, for total liquid assets of $85.6 million. At September 30, 2014, the Company anticipated short-term liability obligations of $53.0 million for a basic surplus of $32.6 million, representing 7.9% of total assets. As of December 31, 2013, the Company held $32.3 million in cash and cash equivalents, net of required FRB reserves of $6.3 million, and $72.0 million in available-for-sale securities, net of pledged securities of $15.4 million, for total liquid assets of $104.3 million. At December 31, 2013, the Company’s anticipated short term liability obligations were $75.7 million for a basic surplus of $28.6 million, which represented 6.8% of total assets.

 

The careful planning of asset and liability maturities and the matching of interest rates to correspond with this matching of maturities is an integral part of the active management of an institution’s net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may be affected. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of assets, timing lags in adjusting certain assets and liabilities that have varying sensitivities to market interest rates and basis risk. In its overall attempt to match assets and liabilities, management takes into account rates and maturities offered in connection with its certificates of deposit and provides for the extension of variable rate loans to borrowers. The Company has generally been able to control its exposure to changing interest rates by maintaining floating interest rate loans, shorter term investments, and a majority of its certificates of deposit with relatively short maturities.

 

The Executive Committee of the Company’s Board of Directors meets at least quarterly to monitor the Company’s investments and liquidity needs and oversee its asset-liability management. In between meetings of the Executive Committee, the Company’s management oversees the Bank’s liquidity.

 

Capital Requirements

 

The banking industry is subject to capital adequacy requirements based on risk-adjusted assets. The risk-based guidelines are used to evaluate capital adequacy and are based on the institution’s asset risk profile, including investments and loans, and off-balance sheet exposures, such as unused loan commitments and standby letters of credit. The guidelines require that a portion of total capital be core, or Tier 1. Tier 1 capital is the aggregate of common stockholders’ equity and perpetual preferred stock, less goodwill and certain other deductions. Total capital consists of Tier 1 capital plus the allowance for loan losses subject to certain limitations. Leverage ratio is defined as Tier 1 capital divided by average assets.

 

At September 30, 2014 and December 31, 2013, the Company’s capital exceeded all minimum regulatory requirements and the Company was considered to be “well capitalized” as defined in the regulations issued by the FDIC.

 

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Federal Reserve Board’s final rules and the FDIC’s interim final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations will also be required to have a total capital ratio of 8% (unchanged from current rules) and a Tier 1 leverage ratio of 4% (unchanged from current rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% in addition to the amount necessary to meet the minimum revised capital requirements. The rules become effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning in January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and would increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. Management has evaluated the provisions of these rules and their expected impact on the Company and the Bank.

 

 

 

Inflation and Deflation

 

The impact of changes in the general price level of goods or services on financial institutions, either through inflation or deflation, may differ significantly from the impact exerted on other companies. Banks, as financial intermediaries, have numerous assets and liabilities whose values are affected by both inflation and deflation. This is especially true for companies, such as a bank, with a high percentage of interest-rate-sensitive assets and liabilities. Banks seek to reduce the impact of inflation or deflation, and the coincident increase or decrease in interest rates, by managing their interest-rate-sensitivity gap. The Company attempts to manage its interest-rate-sensitivity gap and to structure its mix of financial instruments so as to minimize the potential adverse effects inflation or deflation may have on its net interest income and, therefore, its earnings and capital.

 

Based on the Company’s interest-rate-sensitivity position, the Company may be adversely affected by changes in interest rates in the short term. As such, management of the money supply and interest rates by the Federal Reserve to control the general price level of goods or services has an indirect impact on the earnings of the Company. Also, changes in interest rates may have a corresponding impact on the ability of borrowers to repay loans made by the Company.

 

Off Balance Sheet Arrangements

 

As of September 30, 2014 and December 31, 2013, the Company had in place mandatory commitments to sell approximately $7.1 million and $4.4 million, respectively, of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac).

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

The Company has initiatives in place to ensure compliance with the Sarbanes-Oxley Act of 2002. The Company has an Internal Compliance Committee that is responsible for the monitoring of, and compliance with, all federal regulations. This committee makes reports on compliance matters to the Audit and Compliance Committee of the Company’s Board of Directors.

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2014. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, the Company’s disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis.

 

As used herein, “disclosure controls and procedures” mean controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is not a party to any pending legal proceeding, nor is its property the subject of any pending legal proceeding, other than routine litigation that is incidental to its business. The Company is not aware of any pending or threatened litigation that could have a material adverse effect upon its business, operating results, or financial condition. Moreover, the Company is not a party to any administrative or judicial proceeding, including, but not limited to, proceedings arising under Section 8 of the Federal Deposit Insurance Act.

 

To the best of the Company’s knowledge, none of its directors or officers, or their respective affiliates, or a beneficial owner of 5% or more of the Company’s securities is a party adverse to the Company or has a material interest adverse to the Company in any legal proceeding.

 

Item 1A. Risk Factors

 

Not required.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None.

 

 

Item 6. Exhibits

 

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company's Form 10-K (SEC File No. 000-51832) filed on March 31, 2009)
3(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)

31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer

 

 

 

32.2	Section 1350 Certification by Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Taxonomy Extension Definitions Linkbase Document

 

 

  

SIGNATURES

  

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	SBT BANCORP, INC.
	By:	/s/ Martin J. Geitz
Date: November 14, 2014		Martin J. Geitz
		Chief Executive Officer
Date: November 14, 2014	By:	/s/ Richard J. Sudol
		Richard J. Sudol
		Chief Financial Officer

 

 

 

 

EXHIBIT INDEX

 

Exhibit No.	Description
3(i).1	Conformed Copy of the Certificate of Incorporation of SBT Bancorp, Inc. (incorporated by reference to Exhibit 3(i) of the Company's Form 10-K (SEC File No. 000-51832) filed on March 31, 2009)
3(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.(ii) of the Company's Form 8-K filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer
32.2	Section 1350 Certification by Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	Taxonomy Extension Definitions Linkbase Document

 

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