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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2015

Commission File Number: 000-17859

 

 

Lake Sunapee Bank Group

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

State of Delaware   02-0430695
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
I.D. Number)
9 Main Street, P.O. Box 9, Newport, New Hampshire   03773
(Address of Principal Executive Offices)   (Zip Code)

(603) 863-0886

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of November 3, 2015 was 8,360,120.

 

 

 


Table of Contents

LAKE SUNAPEE BANK GROUP

INDEX

 

         Page  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     i   

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements:   
  Condensed Consolidated Balance Sheets -
September 30, 2015 (unaudited) and December 31, 2014
     1   
  Condensed Consolidated Statements of Income (unaudited) -
For the Three Months and Nine Months Ended September 30, 2015 and 2014
     2   
  Condensed Consolidated Statements of Comprehensive Income (unaudited) -
For the Three Months and Nine Months Ended September 30, 2015 and 2014
     3   
  Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Nine Months Ended September 30, 2015 and 2014
     4   
  Condensed Consolidated Statements of Cash Flows (unaudited) -
For the Nine Months Ended September 30, 2015 and 2014
     5   
  Notes to Condensed Consolidated Financial Statements (unaudited)      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      42   

Item 4.

  Controls and Procedures      43   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      44   

Item 1A.

  Risk Factors      44   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 3.

  Defaults Upon Senior Securities      44   

Item 4.

  Mine Safety Disclosures      44   

Item 5.

  Other Information      44   

Item 6.

  Exhibits      44   


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to stockholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

 

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

 

    continued volatility and disruption in national and international financial markets;

 

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

 

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

 

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

 

    inflation, interest rate, securities market and monetary fluctuations;

 

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

 

    changes in consumer spending, borrowings and savings habits;

 

    technological changes;

 

    the ability to increase market share and control expenses;

 

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

 

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

 

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

 

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

 

    difficulties related to the integration of any businesses we have or may acquire; and

 

    other factors detailed from time to time in our SEC filings.

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

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

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share data)    September 30,
2015
    December 31,
2014
 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 25,498      $ 24,957   

Interest-bearing deposit with the Federal Reserve Bank

     16,402        26,163   
  

 

 

   

 

 

 

Cash and cash equivalents

     41,900        51,120   

Interest-bearing time deposits with other banks

     —          747   

Securities available-for-sale

     122,679        115,698   

Federal Home Loan Bank stock

     10,762        10,762   

Loans held-for-sale

     1,382        2,000   

Loans receivable, net of allowance for loan losses of $8.6 million as of September 30, 2015 and $9.3 million as of December 31, 2014

     1,196,161        1,206,845   

Accrued interest receivable

     3,051        2,576   

Bank premises and equipment, net

     24,753        24,391   

Investments in real estate

     3,426        3,533   

Other real estate owned

     677        251   

Goodwill

     44,576        44,576   

Other intangible assets

     8,180        9,332   

Bank-owned life insurance

     20,664        20,187   

Other assets

     12,601        11,768   
  

 

 

   

 

 

 

Total assets

   $ 1,490,812      $ 1,503,786   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 136,838      $ 117,889   

Interest-bearing

     1,000,099        1,034,825   
  

 

 

   

 

 

 

Total deposits

     1,136,937        1,152,714   

Federal Home Loan Bank advances

     129,998        140,992   

Securities sold under agreements to repurchase

     19,573        16,756   

Subordinated debentures

     37,620        37,620   

Accrued expenses and other liabilities

     22,511        15,868   
  

 

 

   

 

 

 

Total liabilities

     1,346,639        1,363,950   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, $.01 par value per share: 2,500,000 shares authorized, non-cumulative perpetual Series B; 8,000 shares issued and outstanding at September 30, 2015 and December 31, 2014; liquidation value $1,000 per share

     —          —    

Common stock, $.01 par value per share: 30,000,000 shares authorized, 8,790,528 shares issued and 8,356,199 shares outstanding at September 30, 2015, and 10,000,000 shares authorized, 8,692,360 shares issued and 8,258,031 shares outstanding at December 31, 2014

     88        87   

Paid-in capital

     87,997        86,561   

Retained earnings

     67,366        63,876   

Unearned restricted stock awards

     (1,383     (598

Accumulated other comprehensive loss

     (3,144     (3,339

Treasury stock, 434,329 shares as of September 30, 2015 and December 31, 2014, at cost

     (6,751     (6,751
  

 

 

   

 

 

 

Total stockholders’ equity

     144,173        139,836   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,490,812      $ 1,503,786   
  

 

 

   

 

 

 

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

 

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Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended     Nine months ended  
     September 30,     September 30,     September 30,     September 30,  
(In thousands, except share and per share data)    2015     2014     2015     2014  

Interest and dividend income

        

Interest and fees on loans

   $ 11,599      $ 11,869      $ 34,670      $ 34,854   

Interest on debt securities:

        

Taxable

     291        314        862        1,034   

Tax-exempt

     82        89        253        425   

Dividends

     89        41        184        122   

Other

     21        6        52        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     12,082        12,319        36,021        36,458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     941        1,155        2,999        3,324   

Interest on advances and other borrowed money

     698        537        2,181        1,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,639        1,692        5,180        4,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and dividend income

     10,443        10,627        30,841        31,543   

Provision for loan losses

     21        27        440        736   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     10,422        10,600        30,401        30,807   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Customer service fees

     1,496        1,567        4,325        4,513   

Gain on sales of securities, net

     —          313        373        756   

Mortgage banking activities

     196        257        1,008        560   

Net (loss) gain on sales and writedowns of other real estate and property owned

     (66     (1     (69     194   

Net (loss) gain on sales of premises and equipment

     (6     —          (3     12   

Rental income

     176        181        513        528   

Trust and investment management fee income

     2,093        2,038        6,339        6,165   

Insurance and brokerage service income

     344        359        1,163        1,161   

Bank-owned life insurance income

     152        151        450        453   

Other income

     1        1        89        54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     4,386        4,866        14,188        14,396   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     6,123        6,330        18,133        18,433   

Occupancy and equipment

     1,485        1,411        4,700        4,606   

Advertising and promotion

     297        218        737        643   

Depositors’ insurance

     223        232        697        773   

Outside services

     702        602        1,885        1,874   

Professional services

     355        281        1,014        1,000   

ATM processing fees

     203        230        622        650   

Supplies

     149        128        422        428   

Telephone

     273        257        813        823   

Amortization of intangible assets

     376        416        1,152        1,285   

Other expenses

     1,570        1,348        4,494        4,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     11,756        11,453        34,669        34,812   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     3,052        4,013        9,920        10,391   

Provision for income taxes

     905        1,309        3,052        3,202   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,147      $ 2,704      $ 6,868      $ 7,189   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 2,127      $ 2,646      $ 6,808      $ 7,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.25      $ 0.32      $ 0.82      $ 0.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares, basic

     8,254,688        8,242,181        8,234,789        8,229,665   

Earnings per common share, assuming dilution

   $ 0.25      $ 0.32      $ 0.82      $ 0.85   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares, assuming dilution

     8,265,187        8,255,350        8,242,303        8,237,850   

Dividends declared per common share

   $ 0.14      $ 0.13      $ 0.40      $ 0.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

(Dollars in thousands)    Three months
ended September 30,
    Nine months
ended September 30,
 
     2015      2014     2015      2014  

Net income

   $ 2,147       $ 2,704      $ 6,868       $ 7,189   

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

     263         (428     195         591   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 2,410       $ 2,276      $ 7,063       $ 7,780   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

3


Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands)    For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
 

PREFERRED STOCK

    

Balance, beginning of year

   $ —        $ —     

Issuance of preferred stock

     —          —     

Redemption of preferred stock

     —          —     
  

 

 

   

 

 

 

Balance, end of period

   $ —        $ —     
  

 

 

   

 

 

 

COMMON STOCK

    

Balance, beginning of year

   $ 87      $ 87   

Issuance of common stock from stock awards issued

     1        —     
  

 

 

   

 

 

 

Balance, end of period

   $ 88      $ 87   
  

 

 

   

 

 

 

PAID-IN CAPITAL

    

Balance, beginning of year

   $ 86,561      $ 100,961   

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

     336        35   

Issuance of common stock from dividend reinvestment plan

     159        117   

Restricted stock awards issued

     979        243   

Restricted stock awards forfeited

     (38     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 87,997      $ 101,356   
  

 

 

   

 

 

 

RETAINED EARNINGS

    

Balance, beginning of year

   $ 63,876      $ 58,347   

Net income

     6,868        7,189   

Cash dividends declared, preferred stock

     (60     (173

Dividends paid, common stock

     (3,318     (3,207
  

 

 

   

 

 

 

Balance, end of period

   $ 67,366      $ 62,156   
  

 

 

   

 

 

 

UNEARNED RESTRICTED STOCK AWARDS

    

Balance, beginning of year

   $ (598   $ (490

Shares awarded

     (980     (243

Shares vested

     157        135   

Shares forfeited

     38        —     
  

 

 

   

 

 

 

Balance, end of period

   $ (1,383   $ (598
  

 

 

   

 

 

 

ACCUMULATED OTHER COMPREHENSIVE LOSS

    

Balance, beginning of year

   $ (3,339   $ (2,897

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

     195        591   
  

 

 

   

 

 

 

Balance, end of period

   $ (3,144   $ (2,306
  

 

 

   

 

 

 

TREASURY STOCK

    

Balance, beginning of year

   $ (6,751   $ (6,751

Issuance of restricted stock awards

     —          —     

Stock options exercised from treasury stock

     —          —     
  

 

 

   

 

 

 

Balance, end of period

   $ (6,751   $ (6,751
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

   $ 144,173      $ 153,944   
  

 

 

   

 

 

 

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

 

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Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the nine months ended  
     September 30,     September 30,  
(Dollars in thousands)    2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 6,868      $ 7,189   

Depreciation and amortization

     1,877        1,805   

Amortization of fair value adjustments, net

     222        246   

Amortization of deferred expenses related to issuance of capital securities and subordinated debt

     55        8   

Amortization of securities, net

     215        339   

Net (increase) decrease in mortgage servicing rights

     (131     283   

Loans originated for sale

     (73,051     (28,870

Proceeds from loans sold

     74,253        27,556   

Increase in cash surrender value of life insurance

     (477     (478

Amortization of intangible assets

     1,152        1,285   

Provision for loan losses

     440        736   

Increase in accrued interest receivable and other assets

     (1,302     (1,681

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

     2        (212

Write-down of other real estate owned

     70        6   

Net gain on sales of securities

     (373     (756

Net gain on sales of loans

     (584     (411

Change in deferred loan origination fees and cost, net

     (111     (420

Increase in accrued expenses and other liabilities

     6,671        3,067   
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,796        9,692   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures – investments in real estate

     (4     —     

Capital expenditures – software

     (88     —     

Capital expenditures – premises and equipment

     (2,029     (2,314

Disposal of fixed assets

     —          21   

Proceeds from maturities of interest-bearing time deposits with other banks

     747        996   

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

     41,088        83,870   

Proceeds from maturities of securities available-for-sale

     204,064        50,009   

Purchases of securities available-for-sale

     (251,651     (113,406

Purchase of Federal Home Loan Bank stock

     —          (1,002

Loan originations and principal collections, net

     8,726        (64,040

Purchase of loans

     —          (7,688

Recoveries of loans previously charged off

     771        351   

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

     168        1,928   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,792        (51,275
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in demand deposits, savings and NOW accounts

     22,437        18,287   

Net (decrease) increase in time deposits

     (38,179     4,767   

Net increase (decrease) in securities sold under agreements to repurchase

     2,817        (11,035

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

     (31,000     75,000   

Principal advances from Federal Home Loan Bank

     30,000        20,000   

Repayment of advances from the Federal Home Loan Bank

     (10,000     (55,750

Issuance of common stock from dividend reinvestment plan

     45        7   

Dividends paid on preferred stock

     (60     (173

Dividends paid on common stock

     (3,204     (3,097

Proceeds from exercise of stock options

     336        35   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (26,808     48,041   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (9,220     6,458   

CASH AND CASH EQUIVALENTS, beginning of period

     51,120        33,578   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 41,900      $ 40,036   
  

 

 

   

 

 

 

 

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Table of Contents
     For the nine months ended  
     September 30,      September 30,  
(Dollars in thousands)    2015      2014  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Interest paid

   $ 5,281       $ 4,922   
  

 

 

    

 

 

 

Income taxes paid

   $ 1,386       $ 3,363   

Loans transferred to other real estate owned

   $ 607       $ 458   
  

 

 

    

 

 

 

Goodwill adjustments, net

   $ —         $ 402   
  

 

 

    

 

 

 

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

 

6


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LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

Nature of Operations

Lake Sunapee Bank Group (the “Company”), a Delaware company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank organized in 1868. The Bank has four wholly owned subsidiaries: Lake Sunapee Financial Services Corporation (“LSFS”); Lake Sunapee Group, Inc., which owns and maintains all buildings and investment properties; McCrillis & Eldredge Insurance, Inc. (“M&E”), a full-line independent insurance agency, which offers a complete range of commercial insurance services and consumer products; and Charter Holding Corp. (“Charter Holding”), which through its subsidiaries, provides trust and wealth management services. The Company’s operations are managed along two reportable segments that represent its core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and its subsidiary, Charter Trust Company (“Charter Trust”). The Company, through its direct and indirect subsidiaries, currently operates 27 locations in New Hampshire in Grafton, Hillsborough, Merrimack and Sullivan counties as well as 16 locations in Vermont in Orange, Rutland and Windsor counties. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”), and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”).

Note A—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed balance sheet data at December 31, 2014 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill and other intangible assets for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets.

Note B—Accounting Policies

The condensed consolidated financial statements include the accounts of the Company and its subsidiary, the Bank, and the Bank’s subsidiaries, M&E, Lake Sunapee Group, Inc., LSFS and Charter Holding and its subsidiaries, Charter Trust and Charter New England Agency. All significant intercompany accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third-party trust pool. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, “Consolidation-Overall,” these affiliates have not been included in the condensed consolidated financial statements.

Note C—Impact of New Accounting Standards

In May 2014, FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for U.S. 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. For public entities, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period. However, in August 2015, FASB issued ASU 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The Company is currently reviewing this ASU to determine if it will have an impact on its condensed consolidated financial statements.

 

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In February 2015, FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its condensed consolidated financial statements.

In April 2015, FASB issued ASU 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company anticipates that the adoption of this ASU will not have a material impact on its condensed consolidated financial statements.

In April 2015, FASB issued ASU 2015-05, “Intangibles – Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its condensed consolidated financial statements.

In August 2015, FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires the acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the Update require the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for interim and annual reporting periods beginning after December 15, 2015. The company anticipates that the adoption of this ASU will not have a material impact on its condensed consolidated financial statements.

Note D—Fair Value Measurements

In accordance with ASC 820-10, “Fair Value Measurement—Overall,” the Company groups its financial assets and financial 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—Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3—Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

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Table of Contents

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.

The Company’s equity securities are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

The Company’s investment in mortgage-backed securities, asset-backed securities, preferred stock with maturities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains 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.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available-for-Sale. The fair value of the Company’s available-for-sale securities portfolio is estimated using Level 1 and Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. For Levels 1 and 2, the fair value measurements consider (i) quoted prices in active markets for identical assets and (ii) observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and a bond’s terms and conditions, among other factors, respectively.

Interest Rate Lock Commitments. The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment which is not observable. As such, interest rate lock commitments are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the interest rate lock commitments and loans held for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable and adjusted for inputs which are not observable, as discussed above. As such, best efforts and mandatory delivery forward sale commitments are classified as Level 3 measurements.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Fair values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service discounted by management based on historical losses for similar collateral.

Other Real Estate Owned. Other real estate owned (“OREO”) is reported at fair value less costs to sell. Values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. For Level 3 inputs, fair values are based on management estimates.

 

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Table of Contents

The following summarizes assets and liabilities measured at fair value at September 30, 2015 and December 31, 2014.

Assets Measured at Fair Value on a Recurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    September 30,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

U.S. Treasury notes

   $ 65,309       $ —         $ 65,309       $ —     

U.S. government-sponsored enterprise bonds

     7,308         —           7,308         —     

Mortgage-backed securities

     41,157         —           41,157         —     

Municipal bonds

     8,507         —           8,507         —     

Other bonds and debentures

     122         —           122         —     

Equity securities

     276         276         —           —     

Interest rate lock commitments

     92         —           —           92  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 122,771       $ 276       $ 122,403       $ 92  
  

 

 

    

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    December 31,
2014
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

U.S. Treasury notes

   $ 40,123       $ —         $ 40,123       $ —     

U.S. government-sponsored enterprise bonds

     7,265         —           7,265         —     

Mortgage-backed securities

     58,280         —           58,280         —     

Municipal bonds

     9,596         —           9,596         —     

Other bonds and debentures

     126         —           126         —     

Equity securities

     308         308         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 115,698       $ 308       $ 115,390       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities Measured at Fair Value on a Recurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    September 30,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Forward loan sale commitments

   $ 82       $ —         $ —         $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 82       $ —         $ —         $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the periods indicated:

 

(Dollars in thousands)    Forward Loan Sale
Commitments
     Interest Rate Lock
Commitments
 

Three months ended September 30, 2015

  

Balance as of June 30, 2015

   $ 40       $ 90   

Realized (loss) gain recognized in non-interest income

     (122      92   

Transfers to loans held for sale

     —           (90
  

 

 

    

 

 

 

Balance as of September 30, 2015

   $ (82    $ 92   
  

 

 

    

 

 

 

 

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Table of Contents
(Dollars in thousands)    Forward Loan Sale
Commitments
     Interest Rate Lock
Commitments
 

Nine months ended September 30, 2015

  

Balance as of December 31, 2014

   $ —         $ —     

Realized (loss) gain recognized in non-interest income

     (82      310   

Transfers to loans held for sale

     —           (218
  

 

 

    

 

 

 

Balance as of September 30, 2015

   $ (82    $ 92   
  

 

 

    

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    September 30,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Impaired loans

   $ 4,538       $ —         $ —         $ 4,538   

Other real estate owned

     677         —           —           677   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,215       $ —         $ —         $ 5,215   
  

 

 

    

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    December 31,
2014
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Impaired loans

   $ 997       $ —         $ —         $ 997   

Other real estate owned

     251         —           —           251   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,248       $ —         $ —         $ 1,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans measured for impairment using the fair value of the underlying collateral at September 30, 2015 and December 31, 2014. Collateral dependent loans are valued using third-party appraisals primarily using the sales comparison approach. The appraisals may be discounted between 25-40% to reflect realizable value based on historical losses, which represents an unobservable input. Impaired loans measured for impairment using the net present value of cash flows had a recorded investment of $4.9 million with a valuation allowance of $335 thousand at September 30, 2015. Loans valued using the net present value of cash flows are calculated using expected future cash flows with a discount rate equal to the effective yield of the loan. At December 31, 2014, impaired loans measured using the net present value of cash flows had a recorded investment of $1.1 million with a valuation allowance of $67 thousand.

 

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Table of Contents

The estimated fair values of the Company’s financial instruments at September 30, 2015 and December 31, 2014, all of which are held or issued for purposes other than trading, were as follows:

 

            Fair Value Measurements at Reporting Date Using:  

(Dollars in thousands)

September 30, 2015

   Carrying
Value
     Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
     Total
Fair Value
 

Financial assets:

        

Cash and cash equivalents

   $ 41,900       $ 41,900       $ —         $ —         $ 41,900   

Securities available-for-sale

     122,679         276         122,403         —           122,679   

Federal Home Loan Bank stock

     10,762         10,762         —           —           10,762   

Loans held-for-sale

     1,382         —           1,395         —           1,395   

Loans, net

     1,196,161         —           —           1,203,286         1,203,286   

Investment in unconsolidated subsidiaries

     620         —           —           338         338   

Accrued interest receivable

     3,051         3,051         —           —           3,051   

Bank-owned life insurance

     20,664         20,664         —           —           20,664   

Interest rate lock commitments

     92         —           —           92         92   

Financial liabilities:

        

Deposits

     1,136,937         —           1,137,637         —           1,137,637   

Federal Home Loan Bank advances

     129,998         —           131,052         —           131,052   

Securities sold under agreements to repurchase

     19,573         19,573         —           —           19,573   

Subordinated debentures

     37,620         —           —           28,643         28,643   

Forward loan sale commitments

     82         —           —           82         82   
            Fair Value Measurements at Reporting Date Using  

(Dollars in thousands)

December 31, 2014

   Carrying
Value
     Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
     Total
Fair Value
 

Financial assets:

        

Cash and cash equivalents

   $ 51,120       $ 51,120       $ —         $ —         $ 51,120   

Interest-bearing time deposits with other banks

     747         —           747         —           747   

Securities available-for-sale

     115,698         308         115,390         —           115,698   

Federal Home Loan Bank stock

     10,762         10,762         —           —           10,762   

Loans held-for-sale

     2,000         —           2,029         —           2,029   

Loans, net

     1,206,845         —           —           1,205,578         1,205,578   

Investment in unconsolidated subsidiaries

     620         —           —           400         400   

Accrued interest receivable

     2,576         2,576         —           —           2,576   

Bank-owned life insurance

     20,187         20,187         —           —           20,187   

Financial liabilities:

        

Deposits

     1,152,714         —           1,154,466         —           1,154,466   

Federal Home Loan Bank advances

     140,992         —           141,746         —           141,746   

Securities sold under agreements to repurchase

     16,756         16,756         —           —           16,756   

Subordinated debentures

     37,620         —           —           29,909         29,909   

The carrying amounts of financial instruments shown in the above tables are included in the condensed consolidated balance sheets under the indicated captions, except for investment in unconsolidated subsidiaries which is included in other assets and interest rate lock commitments and forward sale commitments, which are included in other assets and other liabilities, respectively.

The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2015 or during the 12-month period ended December 31, 2014.

 

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Table of Contents

Note E—Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

The amortized cost of securities available-for-sale and their approximate fair values at September 30, 2015 and December 31, 2014 are summarized as follows:

 

(Dollars in thousands)

September 30, 2015

   Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Bonds and notes

           

U.S. Treasury notes

   $ 65,340       $ 20       $ 51       $ 65,309   

U.S. government-sponsored enterprise bonds

     7,327         3         22         7,308   

Mortgage-backed securities

     41,291         54         188         41,157   

Municipal bonds

     8,595         40         128         8,507   

Other bonds and debentures

     109         13         —           122   

Equity securities

     258         29         11         276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 122,920       $ 159       $ 400       $ 122,679   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

December 31, 2014

   Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Bonds and notes

           

U.S. Treasury notes

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

U.S. government-sponsored enterprise bonds

     7,361         2         98         7,265   

Mortgage-backed securities

     58,439         112         271         58,280   

Municipal bonds

     9,579         103         86         9,596   

Other bonds and debentures

     114         12         —           126   

Equity securities

     258         51         1         308   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

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

 

 

    

 

 

    

 

 

    

 

 

 

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of September 30, 2015:

 

(Dollars in thousands)    Fair Value  

U.S. Treasury notes

   $ 35,000   

Municipal bonds

     1,873   
  

 

 

 

Total due in less than one year

   $ 36,873   
  

 

 

 

U.S. Treasury notes

   $ 30,309   

U.S. government-sponsored enterprise bonds

     6,982   

Municipal bonds

     3,353   

Other bonds and debentures

     97   
  

 

 

 

Total due after one year through five years

   $ 40,741   
  

 

 

 

U.S. government-sponsored enterprise bonds

   $ 163   

Municipal bonds

     2,110   
  

 

 

 

Total due after five years through ten years

   $ 2,273   
  

 

 

 

U.S. government-sponsored enterprise bonds

   $ 163   

Municipal bonds

     1,171   

Other bonds and debentures

     25   
  

 

 

 

Total due after ten years

   $ 1,359   
  

 

 

 

For the nine months ended September 30, 2015, the proceeds from sales of securities available-for-sale were $40.2 million. The Company realized gross gains of $373 thousand during the same period on the sales of securities available-for-sale. The tax provision applicable to these net realized gains amounted to $148 thousand. For the nine months ended September 30, 2014, the

 

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proceeds from sales of securities available-for-sale were $83.9 million. Gross gains of $756 thousand were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $299 thousand. Securities, carried at $115.3 million and $115.1 million, were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) advances, and securities sold under agreements to repurchase as of September 30, 2015 and December 31, 2014, respectively.

Note F—Other-Than-Temporary Impairment Losses

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or more, and are not other-than-temporarily impaired, are as follows as of the dates indicated:

 

     Less Than 12 Months      12 Months or Longer      Total  
(Dollars in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

September 30, 2015:

                 

Bonds and notes

                 

U.S. Treasury notes

   $ —         $ —         $ 10,238       $ 51       $ 10,238       $ 51   

U.S. government-sponsored enterprise bonds

     —           —           7,145         22         7,145         22   

Mortgage-backed securities

     16,817         68         12,416         120         29,233         188   

Municipal bonds

     3,659         30         2,226         98         5,885         128   

Equity securities

     76         11         —           —           76         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 20,552       $ 109       $ 32,025       $ 291       $ 52,577       $ 400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less Than 12 Months      12 Months or Longer      Total  
(Dollars in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

December 31, 2014:

                 

Bonds and notes

                 

U.S. Treasury notes

   $ 10,112       $ 53       $ 20,012       $ 336       $ 30,124       $ 389   

U.S. government-sponsored enterprise bonds

     —           —           7,077         98         7,077         98   

Mortgage-backed securities

     12,109         14         13,675         257         25,784         271   

Municipal bonds

     —           —           3,554         86         3,554         86   

Equity securities

     42         1         —           —           42         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 22,263       $ 68       $ 44,318       $ 777       $ 66,581       $ 845   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The investments in the Company’s investment portfolio that were temporarily impaired as of September 30, 2015 consisted of U.S. Treasury notes, U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S. government-sponsored enterprises, municipal bonds and equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The Company has the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. The unrealized losses on equity securities have occurred for less than 12 months and the Company does not believe the losses relate to credit quality of the issuers. The Company has the ability and intent to hold these investments until a recovery of cost basis.

Note G—Loan Portfolio

Loans receivable consisted of the following as of the dates indicated:

 

     September 30, 2015  
(Dollars in thousands)    Originated      Acquired      Total  

Real estate loans:

        

Conventional

   $ 596,393       $ 45,031       $ 641,424   

Home equity

     64,245         5,648         69,893   

Commercial

     242,126         65,823         307,949   

Construction

     39,198         1,354         40,552   
  

 

 

    

 

 

    

 

 

 
     941,962         117,856         1,059,818   

Commercial and municipal loans

     123,474         9,641         133,115   

Consumer loans

     6,463         1,227         7,690   
  

 

 

    

 

 

    

 

 

 

Total loans

     1,071,899         128,724         1,200,623   

Allowance for loan losses

     (8,607      —          (8,607

Deferred loan origination costs, net

     4,145         —          4,145   
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

   $ 1,067,437       $ 128,724       $ 1,196,161   
  

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
     December 31, 2014  
(Dollars in thousands)    Originated      Acquired      Total  

Real estate loans:

        

Conventional

   $ 592,386       $ 53,304       $ 645,690   

Home equity

     63,176         6,027         69,203   

Commercial

     235,640         77,377         313,017   

Construction

     34,988         1,457         36,445   
  

 

 

    

 

 

    

 

 

 
     926,190         138,165         1,064,355   

Commercial and municipal loans

     125,161         13,414         138,575   

Consumer loans

     7,438         1,712         9,150   
  

 

 

    

 

 

    

 

 

 

Total loans

     1,058,789         153,291         1,212,080   

Allowance for loan losses

     (9,269      —           (9,269

Deferred loan origination costs, net

     4,034         —           4,034   
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

   $ 1,053,554       $ 153,291       $ 1,206,845   
  

 

 

    

 

 

    

 

 

 

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of and for the periods ending on the dates indicated:

 

     Real Estate                           

(Dollars in thousands)

September 30, 2015

   Conventional
and Home
Equity
    Commercial     Construction     Commercial
and Municipal
    Consumer     Unallocated      Total  

Allowance for loan losses:

               

Originated:

               

Beginning balance, December 31, 2014

   $ 4,763      $ 2,724      $ 991      $ 635      $ 86      $ 70       $ 9,269   

Charge-offs

     (352     (770     —          (28     (161     —           (1,311

Recoveries

     101        474       —          66        95        —           736   

(Benefit) provision

     (247     211        (488     30        60        347         (87
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2015

   $ 4,265      $ 2,639      $ 503      $ 703      $ 80      $ 417       $ 8,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Acquired:

               

Beginning balance, December 31, 2014

   $ —        $ —        $ —        $ —        $ —        $ —         $ —     

Charge-offs

     (200 )     (311 )     —          (31 )     (20 )     —           (562 )

Recoveries

     8       —          —          18       9       —           35  

Provision

     192       311       —          13       11       —           527  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2015

   $ —        $ —        $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Originated:

               

Individually evaluated for impairment

   $ 230      $ 77      $ 21      $ 7      $ —        $ —         $ 335   

Collectively evaluated for impairment

     4,035        2,562        482        696        80        417         8,272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total allowance for loan losses ending balance, September 30, 2015

   $ 4,265      $ 2,639      $ 503      $ 703      $ 80      $ 417       $ 8,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

               

Originated:

               

Individually evaluated for impairment

   $ 6,698      $ 3,003      $ 537      $ 629      $ —        $ —         $ 10,867   

 

15


Table of Contents
     Real Estate                            

(Dollars in thousands)

September 30, 2015

   Conventional
and Home
Equity
    Commercial     Construction      Commercial
and Municipal
    Consumer     Unallocated      Total  

Collectively evaluated for impairment

     653,940        239,123        38,661         122,845        6,463        —           1,061,032   

Acquired loans (Discounts related to Credit Quality)

     50,679        65,823        1,354         9,641        1,227        —           128,724   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans ending balance, September 30, 2015

   $ 711,317      $ 307,949      $ 40,552       $ 133,115      $ 7,690      $ —         $ 1,200,623   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Real Estate                            

(Dollars in thousands)

September 30, 2014

   Conventional
and Home
Equity
    Commercial     Construction      Commercial
and Municipal
    Consumer     Unallocated      Total  

Allowance for loan losses:

                

Originated:

                

Beginning balance, December 31, 2013

   $ 5,385      $ 2,143      $ 353       $ 1,561      $ 75      $ 240       $ 9,757   

Charge-offs

     (514     (431     —           (256     (164     —           (1,365

Recoveries

     288        1       —           52        78        —           419   

(Benefit) provision

     (469     664        529         (317     75        254         736   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2014

   $ 4,690      $ 2,377      $ 882       $ 1,040      $ 64      $ 494       $ 9,547   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Acquired:

                

Beginning balance, December 31, 2013

   $ —        $ —        $ —         $ —        $ —        $ —         $ —     

Charge-offs

     —          —          —           —          —          —           —     

Recoveries

     —          —          —           —          —          —           —     

Provision (benefit)

     —          —          —           —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2014

   $ —        $ —        $ —         $ —        $ —        $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Originated:

                

Individually evaluated for impairment

   $ 22      $ 44      $ —         $ 4      $ —        $ —         $ 70   

Collectively evaluated for impairment

     4,668        2,333        882         1,036        64        494         9,477   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total allowance for loan losses ending balance, September 30, 2014

   $ 4,690      $ 2,377      $ 882       $ 1,040      $ 64      $ 494       $ 9,547   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

                

Originated:

                

Individually evaluated for impairment

   $ 6,543      $ 8,301      $ 1,208       $ 1,165      $ —        $ —         $ 17,217   

Collectively evaluated for impairment

     643,691        226,562        31,091         123,397        7,682        —           1,032,423   

Acquired loans (Discounts related to Credit Quality)

     64,261        77,995        2,160         13,778        1,913        —           160,107   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans ending balance, September 30, 2014

   $ 714,495      $ 312,858      $ 34,459       $ 138,340      $ 9,595      $ —         $ 1,209,747   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of the date indicated:

 

     Real Estate                              

(Dollars in thousands)

December 31, 2014

   Conventional
and Home Equity
     Commercial      Construction      Commercial
and Municipal
     Consumer      Unallocated      Total  

Allowance for loan losses:

                    

Originated:

                    

Individually evaluated for impairment

   $ 50       $ 17       $ —        $ —        $ —        $ —        $ 67   

Collectively evaluated for impairment

     4,713         2,707         991         635         86         70         9,202   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses ending balance, December 31, 2014

   $ 4,763       $ 2,724       $ 991       $ 635       $ 86       $ 70       $ 9,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Originated:

                    

Individually evaluated for impairment

   $ 5,965       $ 8,110       $ 1,163       $ 880       $ —        $ —        $ 16,118   

Collectively evaluated for impairment

     649,597         227,530         33,825         124,281         7,438         —          1,042,671   

Acquired loans (Discounts related to Credit Quality)

     59,331         77,377         1,457         13,414         1,712         —          153,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans ending balance, December 31, 2014

   $ 714,893       $ 313,017       $ 36,445       $ 138,575       $ 9,150       $ —        $ 1,212,080   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following tables set forth information regarding nonaccrual loans and past-due loans as of the dates indicated:

 

     September 30, 2015  
(Dollars in thousands)    30-59 Days      60-89 Days      90 Days or
More
     Total Past
Due
     Nonaccrual
Loans
 

Originated:

              

Real estate:

              

Conventional

   $ 55       $ 961       $ 1,909       $ 2,925       $ 3,407   

Home equity

     253         127         51         431         51   

Commercial

     1,161         1,951         853         3,965         2,630   

Construction

     —           —          90         90         90   

Commercial and municipal

     69         318         469         856         469   

Consumer

     10         4         —           14         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,548       $ 3,361       $ 3,372       $ 8,281       $ 6,647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

              

Real estate:

              

Conventional

   $ 767       $ 468       $ 475       $ 1,710       $ 907   

Home equity

     —          —           57         57         57   

Commercial

     554         271         441         1,266         441   

Construction

     —           —           —          —           —    

Commercial and municipal

     —           75         —           75         —     

Consumer

     21         —          —          21         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,342       $ 814       $ 973       $ 3,129       $ 1,405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
(Dollars in thousands)    30-59 Days      60-89 Days      90 Days or
More
     Total Past
Due
     Nonaccrual
Loans
 

Originated:

              

Real estate:

              

Conventional

   $ 2,639       $ 810       $ 1,080       $ 4,529       $ 1,577   

Home equity

     60         31         181         272         181   

Commercial

     1,683         365         672         2,720         2,290   

Construction

     —           28         —          28         —    

Commercial and municipal

     304         48         330         682         659   

Consumer

     34         6         —           40         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,720       $ 1,288       $ 2,263       $ 8,271       $ 4,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

              

Real estate:

              

Conventional

   $ 907       $ 589       $ 352       $ 1,848       $ 849   

Commercial

     545         1,107         671         2,323         1,636   

Construction

     —          —           15         15         15   

Commercial and municipal

     1         415         —           416         120   

Consumer

     37         15         —          52         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,490       $ 2,126       $ 1,038       $ 4,654       $ 2,620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans past due 90 days or more and still accruing interest were $291 thousand, representing $44 thousand and $247 thousand for one residential loan and one commercial real estate loan, respectively, as of September 30, 2015. There were no loans past due 90 days or more and still accruing as of December 31, 2014.

 

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Table of Contents

Troubled Debt Restructurings

The following tables present the recorded investment in troubled debt restructured (“TDR”) loans as of September 30, 2015 and December 31, 2014 based on payment performance status:

 

     September 30, 2015  
     Real Estate                
(Dollars in thousands)    Conventional      Commercial      Construction      Commercial      Total  

Performing

   $ 2,636       $ 1,177       $ 447       $ 160       $ 4,420   

Non-performing

     1,861         853         —           —           2,714   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,497       $ 2,030       $ 447       $ 160       $ 7,134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Real Estate                
(Dollars in thousands)    Conventional      Commercial      Construction      Commercial      Total  

Performing

   $ 3,359       $ 4,183       $ 1,148       $ 101       $ 8,791   

Non-performing

     882         1,015         —           358         2,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,241       $ 5,198       $ 1,148       $ 459       $ 11,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TDR loans are considered impaired and are included in the impaired loan disclosures in this footnote.

During the nine month period ended September 30, 2015, certain loan modifications were executed that constituted TDRs. Substantially all of these modifications included one or a combination of the following: (1) an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; (2) temporary reduction in the interest rate; or (3) change in scheduled payment amount.

The following table presents pre-modification balance information on how loans were modified as TDRs during the nine months ended September 30, 2015:

 

(Dollars in thousands)    Extended
Maturity
     Combination of
Interest Only
Payments, Rate
Reduction
And Extended
Maturity
     Combination
of
Interest Only
Payments and
Maturity
     Interest
Rate
     Interest
Rate
and
Maturity
     Total  

Real estate:

                 

Conventional

   $ 80       $ 267       $ 423       $ —         $ 51      $ 821   

Commercial and municipal

     —           —           —           7         —           7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 80       $ 267       $ 423       $ 7       $ 51       $ 828   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents pre-modification balance information on how loans were modified as TDRs during the nine months ended September 30, 2014:

 

(Dollars in thousands)    Extended
Maturity
     Interest
Only
Payments
     Combination of
Interest Only
Payments, Rate
Reduction, and
Extended Maturity
     Combination
of Rate
Reduction,
re-Amortized
and
Extended
Maturity
     Interest Only
Payments and
Extended
Maturity
     Re-amortized
Payment
     Total  

Real estate:

                    

Conventional

   $ —         $ —         $ 351       $ 44       $ 548       $ —         $ 943   

Commercial

     211         467         210         —           —           103         991   

Commercial and municipal

     —           35         —           —           —           —           35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 211       $ 502       $ 561       $ 44       $ 548       $ 103       $ 1,969   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

The following table summarizes TDRs that occurred during the periods indicated:

 

     For the nine months ended September 30, 2015  
(Dollars in thousands)    Number
of Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Real estate:

        

Conventional

     6       $ 821       $ 821   

Commercial and municipal

     1         7         7   
  

 

 

    

 

 

    

 

 

 

Total

     7       $ 828       $ 828   
  

 

 

    

 

 

    

 

 

 
     For the nine months ended September 30, 2014  
(Dollars in thousands)    Number
of Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Real estate:

        

Conventional

     12       $ 943       $ 943   

Commercial

     4         991         991   

Commercial and municipal

     1         35         35   
  

 

 

    

 

 

    

 

 

 

Total

     17       $ 1,969       $ 1,969   
  

 

 

    

 

 

    

 

 

 

At September 30, 2015, there were specific loan loss reserves of $94 thousand related to TDRs that occurred during the nine-month period ended September 30, 2015. There were three TDRs for which there was a payment default during the nine-month period ended September 30, 2015, which occurred within 12 months following the date of the loan debt restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

At September 30, 2014, there were specific loan loss reserves of $40 thousand related to TDRs that occurred during the nine-month period ended September 30, 2014. There were no troubled debt restructurings for which there was a payment default during the nine-month period ending September 30, 2014, which occurred within 12 months following the date of the restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables-Overall-Subsequent Measurement,” is as follows as of and for the nine months ended September 30, 2015:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real estate:

              

Conventional

   $ 3,849       $ 4,433       $ —         $ 4,324       $ 107   

Home equity

     108         158         —           150         1   

Commercial

     1,362         2,000         —           3,342         59   

Construction

     90         90         —           372         3   

Commercial and municipal

     585         585         —           558         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance

     5,994         7,266         —           8,746         188   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real estate:

              

Conventional

     2,741         2,906         230         2,020         103   

Commercial

     1,642         1,642         77         1,153         57   

Construction

     447         468         21         301         13   

Commercial and municipal

     44         44         7         31         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded

     4,874         5,060         335         3,505         175   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real estate:

              

Conventional

     6,590         7,339         230         6,344         210   

 

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Table of Contents
(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit
Losses
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Home equity

     108         158         —           150         1   

Commercial

     3,004         3,642         77         4,495         116   

Construction

     537         558         21         673         16   

Commercial and municipal

     629         629         7         589         20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 10,868       $ 12,326       $ 335       $ 12,251       $ 363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real estate:

              

Conventional

   $ 5,447       $ 6,028       $ —         $ 5,735       $ 342   

Home equity

     181         264         —           232         5   

Commercial

     7,383         8,151         —           8,093         379   

Construction

     1,163         1,185         —           1,233         53   

Commercial and municipal

     880         1,204         —           1,118         77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance

     15,054         16,832         —           16,411         856   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real estate:

              

Conventional

     337         370         50         546         17   

Commercial

     727         727         17         1,539         32   

Commercial and municipal

     —           —           —           350         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded

     1,064         1,097         67         2,435         49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Real estate:

              

Conventional

     5,784         6,398         50         6,281         359   

Home equity

     181         264         —           232         5   

Commercial

     8,110         8,878         17         9,632         411   

Construction

     1,163         1,185         —           1,233         53   

Commercial and municipal

     880         1,204         —           1,468         77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 16,118       $ 17,929       $ 67       $ 18,846       $ 905   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment of conventional real estate loans in the process of foreclosure was $590 thousand and $1.1 million at September 30, 2015 and December 31, 2014, respectively. OREO was $677 thousand, representing three residential properties and two commercial properties, at September 30, 2015, compared to $251 thousand, representing two residential properties, of OREO and property acquired in settlement of loans at December 31, 2014.

The carrying amount of acquired loans at September 30, 2015 totaled $128.7 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $2.6 million and an outstanding principal balance of $2.9 million at September 30, 2015. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The carrying amount of acquired loans at December 31, 2014 totaled $153.3 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $2.7 million and an outstanding principal balance of $3.1 million at December 31, 2014. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

 

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Table of Contents

The following table presents the Company’s activity in the accretable yield for the purchased credit impaired loans for the periods indicated:

 

(Dollars in thousands)    Three months ended
September 30, 2015
     Three months ended
September 30, 2014
 

Accretable yield at the beginning of the period

   $ 1,802       $ 2,302   

Reclassification from nonaccretable difference for loans with improved cash flows

     458         —     

Accretion

     (116      (170

Change in cash flows that do not affect nonaccretable difference

     239      
  

 

 

    

 

 

 

Accretable yield at the end of the period

   $ 2,383       $ 2,132   
  

 

 

    

 

 

 
(Dollars in thousands)    Nine months ended
September 30, 2015
     Nine months ended
September 30, 2014
 

Accretable yield at the beginning of the period

   $ 2,125       $ 2,723   

Reclassification from nonaccretable difference for loans with improved cash flows

     458         —     

Accretion

     (200      (591
  

 

 

    

 

 

 

Accretable yield at the end of the period

   $ 2,383       $ 2,132   
  

 

 

    

 

 

 

The following tables present the Company’s loans by risk ratings as of the dates indicated:

 

     September 30, 2015  
     Real Estate                       
(Dollars in thousands)    Conventional and
Home Equity
     Commercial     
Construction
     Commercial
and Municipal
     Consumer      Total  

Originated:

                 

Grade:

                 

Pass

   $ —         $ 211,679       $ 27,003       $ 100,308       $ —         $ 338,990   

Special mention

     —           4,769         22         190         —           4,981   

Substandard

     5,541         8,697         585         429         —           15,252   

Loans not formally rated

     655,097         16,981         11,588         22,547         6,463         712,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 660,638       $ 242,126       $ 39,198       $ 123,474       $ 6,463       $ 1,071,899   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

                 

Grade:

                 

Pass

   $ —         $ 56,733       $ 1,059       $ 8,693       $ —         $ 66,485   

Special mention

     —           1,658         —           —           —           1,658   

Substandard

     997         5,926         172         550         —           7,645   

Loans not formally rated

     49,682         1,506         123         398         1,227         52,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,679       $ 65,823       $ 1,354       $ 9,641       $ 1,227       $ 128,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Real Estate:                       
(Dollars in thousands)    Conventional and
Home Equity
     Commercial      Construction      Commercial and
Municipal
     Consumer      Total  

Originated:

                 

Grade:

                 

Pass

   $ —         $ 205,158       $ 19,798       $ 99,705       $ —         $ 324,661   

Special mention

     —           2,952         35         850         —           3,837   

Substandard

     4,790         11,944         2,384         359         —           19,477   

Loans not formally rated

     650,772         15,586         12,771         24,247         7,438         710,814   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 655,562       $ 235,640       $ 34,988       $ 125,161       $ 7,438       $ 1,058,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2014  
     Real Estate:                       
(Dollars in thousands)    Conventional and
Home Equity
     Commercial      Construction      Commercial and
Municipal
     Consumer      Total  

Acquired:

                 

Grade:

                 

Pass

   $ —        $ 64,441       $ 924       $ 10,676       $ —        $ 76,041   

Special mention

     —          5,600         —          401         —          6,001   

Substandard

     863         5,693         389         1,811         —          8,756   

Loans not formally rated

     58,468         1,643         144         526         1,712         62,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 59,331       $ 77,377       $ 1,457       $ 13,414       $ 1,712       $ 153,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

 

    Loans rated 10-37: Loans in these categories are considered “pass” rated loans with low to average risk.

 

    Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

    Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

    Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

    Loans rated 70: Loans in this category are considered uncollectible or a loss, and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans over $250 thousand. The assessment of those loans less than $250 thousand is based on the borrower’s ability to pay and not on overall risk. Additionally, the Company monitors the repayment activity for such loans less than $250 thousand and if a loan becomes delinquent over 60 days past due, it is reviewed for risk and is subsequently risk rated based on available information such as ability to repay based on current cash flow conditions and workout discussions with the borrower. For residential real estate and consumer loans the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment capacity.

Loan Servicing

The Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates.

Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the periodic impairment of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

The balance of capitalized servicing rights, net of valuation allowances, included in other assets at September 30, 2015, and December 31, 2014 were $2.5 million and $2.4 million, respectively. The fair value of capitalized servicing rights was $4.2 million as of September 30, 2015 and December 31, 2014. Servicing rights of $927 thousand were capitalized during the nine months ended September 30, 2015, compared to $295 thousand for the same period in 2014. Amortization of capitalized servicing rights was $778 thousand for the nine months ended September 30, 2015, compared to $628 thousand for the same period in 2014. Servicing rights of $299 thousand were capitalized during the three months ended September 30, 2015, compared to $163 thousand for the same period in 2014. Amortization of capitalized servicing rights was $264 thousand for the three months ended September 30, 2015, compared to $238 thousand for the same period in 2014.

 

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Table of Contents

Following table is an analysis of the aggregate changes in the valuation allowance for capitalized servicing rights during the periods indicated:

 

    

Three months ended

September 30,

     Nine months ended
September 30,
 
(Dollars in thousands)    2015      2014      2015      2014  

Balance, beginning of period

   $ 59       $ 19       $ 19       $ 65   

(Decrease) increase

     (23      (4      17         (50
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 36       $ 15       $ 36       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note H—Securities Sold Under Agreements to Repurchase

The securities sold under agreements to repurchase are securities sold on a short-term basis by the Bank that have been accounted for not as sales but as borrowings. The securities consisted of debt securities issued by U.S. government agencies, mortgage-backed securities and municipal bonds. The securities were held in the Bank’s safekeeping account at the Federal Home Loan Bank of Boston under the control of the Bank and pledged to the purchasers of the securities. The purchasers have agreed to sell to the Bank substantially identical securities at the maturity of the agreements.

The following table represents the Company’s short-term collateralized financing obtained through repurchase agreements and the related collateral pledged as of the periods indicated:

 

(Dollars in thousands)    September 30,
2015
     December 31,
2014
 

Repurchase agreements

     

U.S. Treasury notes

   $ 18,281       $ 5,006   

U.S. government-sponsored enterprise bonds

     —           177   

Mortgage-backed securities

     1,179         11,396   

Municipal bonds

     113         177   
  

 

 

    

 

 

 

Total

   $ 19,573       $ 16,756   
  

 

 

    

 

 

 

Note I—Stock-Based Compensation

The Company’s 2014 Stock Incentive Plan, which was approved by the stockholders on May 8, 2014, had 348,250 shares remaining available for issuance at September 30, 2015. The Company accounts for the plan under ASC 718-10, “Compensation-Stock Compensation-Overall.” During the nine months ended September 30, 2015 and 2014, stock-based compensation expense of $165 thousand and $122 thousand, respectively, was recognized under the Company’s equity plan.

The Company granted a total of 16,500 shares of restricted stock awards to directors of the Company effective May 1, 2014. The restricted stock was granted under the Company’s 2004 Stock Incentive Plan and awarded the directors shares of restricted common stock of the Company. Of the shares granted, 1,500 shares vested immediately on May 1, 2014 with the remaining 15,000 shares vesting ratably over a five-year period beginning on May 1, 2015.

The Company granted a total of 64,250 shares of restricted stock awards to officers of the Company effective June 11, 2015. The restricted stock was granted under the Company’s 2014 Stock Incentive Plan and awarded the officers shares of restricted common stock of the Company. The shares vest ratably over a five-year period beginning on June 11, 2016.

 

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Table of Contents

Note J—Pension Benefits

The following summarizes the net periodic pension cost for the periods indicated:

 

    

Three months ended

September 30,

    

Nine months ended

September 30,

 
(Dollars in thousands)    2015      2014      2015      2014  

Interest cost

   $ 93       $ 85       $ 280       $ 255   

Expected return on plan assets

     (160      (134      (481      (402

Amortization of unrecognized net loss

     89         65         266         195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 22       $ 16       $ 65       $ 48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note K—Derivative Instruments and Hedging Activities

The Company’s mortgage banking activities include IRLCs and forward sales commitments that result in derivative instruments. IRLCs are provided on applications for residential mortgages intended for resale and are accounted for as non-hedging derivatives. The Company arranges offsetting forward sales commitments for these rate-locks, which are designated as economic hedges.

The IRLCs generally terminate once the loan is funded, the lock period expires or the borrower decides not to contract for the loan. The forward commitments generally terminate once the loan is sold, the commitment period expires or the borrower decides not to contract for the loan.

The following table summarizes the fair values of derivative instruments in the consolidated balance sheet as of September 30, 2015. There were no derivatives recorded at December 31, 2014.

 

(Dollars in thousands)    September 30, 2015  
     Notional
Amount
     Fair Value
Asset/(Liability)
 

Interest rate lock commitments

   $ 9,415       $ 92   

Forward loan sale commitments

   $ 8,781       $ (82

Note L—Earnings Per Share (“EPS”)

The Company computes earnings per share in accordance with FASB ASC 260-10. Under the guidance, unvested restricted stock awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing basic earnings per share (“EPS”) pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.

Basic EPS has been computed using the weighted average number of common shares outstanding during each period. Diluted EPS for the three and nine months ended September 30, 2015 and 2014 assumes, as of the beginning of the period, exercise of stock awards using the treasury stock method. Certain of our stock awards that would potentially dilute Basic EPS in the future were also antidilutive for the three and nine months ended September 30, 2015 and 2014 and are discussed below.

 

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Table of Contents

The following is a reconciliation of the numerators and denominators used in the calculation of Basic and Diluted EPS for the three and nine months ended September 30, 2015 and 2014:

 

(Dollars in thousands, except per share data)    For the three months
ended September 30,
     For the nine months
ended September 30,
 
     2015      2014      2015      2014  

Net income as reported

   $ 2,147       $ 2,704       $ 6,868       $ 7,189   

Cumulative preferred stock dividend earned

     (20      (58      (60      (173

Dividends and undistributed earnings allocated to participating shares

     (26      —           (52      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income applicable to common stock

   $ 2,101       $ 2,646       $ 6,756       $ 7,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic EPS

     8,254,688         8,242,181         8,234,789         8,229,665   

Effect of dilutive equity-based awards

     10,499         13,169         7,514         8,185   

Average common shares outstanding for dilutive EPS

     8,265,187         8,255,350         8,242,303         8,237,850   

Earnings per common share – basic

   $ 0.25       $ 0.32       $ 0.82       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share – diluted

   $ 0.25       $ 0.32       $ 0.82       $ 0.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note M—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:

 

(Dollars in thousands)    As of  
   September 30,
2015
     December 31,
2014
 

Net unrealized holding loss on available-for-sale securities, net of tax

   $ (146    $ (341

Unrecognized net actuarial loss, defined benefit pension plan, net of tax

     (2,998      (2,998
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (3,144    $ (3,339
  

 

 

    

 

 

 

Reclassification disclosures for the periods ended September 30, 2015 and 2014 follow:

 

(Dollars in thousands)    For the three months
ended September 30,
     For the nine months
ended September 30,
 
   2015      2014      2015      2014  

Net unrealized holding gains (losses) on available-for-sale securities

   $ 437       $ (395    $ 697       $ 1,730   

Reclassification adjustment for realized gains in net income (1)

     —           (313      (373      (756
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss) before income tax effect

     437         (708      324         974   

Income tax (expense) benefit

     (174      280         (129      (383
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax effect

   $ 263       $ (428      195       $ 591   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reclassification adjustments are comprised of realized securities gains. The gains have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the condensed consolidated statements of income as follows: the pre-tax amounts are included in gain on sales and calls of securities, net, the tax expense amounts are included in provision for income taxes and the after tax amounts are included in net income.

Note N—Operating Segments

The Company has two reportable operating segments: Banking, which includes the activities of the Bank and its subsidiaries, excluding Charter Holding, and Wealth Management, which includes the activities of Charter Holding and its subsidiaries. The Company operates as the parent company of the Bank and its subsidiaries and all financial activity between them is eliminated.

The accounting policies of each reportable segment are the same as those of the Company. Income tax expense for the individual segments is calculated based on the activity of the segments.

 

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Table of Contents

A summary of the Company’s operating segments is as follows:

 

(Dollars in thousands)    Banking      Wealth
Management
     Holding
Company
    Eliminations     Total
Consolidated
 

Three Months Ended September 30, 2015

            

Net interest and dividend income (expense)

   $ 10,900       $ 5       $ (462   $ —        $ 10,443   

Provision for loan losses

     21         —           —          —          21   

Noninterest income

     2,517         2,071         2,521        (2,723     4,386   

Noninterest expense

     9,861         1,750         145        —          11,756   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     3,535         326         1,914        (2,723     3,052   

Provision (benefit) for income taxes

     1,014         124         (233     —          905   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 2,521       $ 202       $ 2,147      $ (2,723   $ 2,147   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,488,823       $ 22,655       $ 170,586      $ (191,252   $ 1,490,812   
(Dollars in thousands)    Banking      Wealth
Management
     Holding
Company
    Eliminations     Total
Consolidated
 

Nine months Ended September 30, 2015

            

Net interest and dividend income (expense)

   $ 32,207       $ 12       $ (1,378   $ —        $ 30,841   

Provision for loan losses

     440         —           —          —          440   

Noninterest income

     8,567         6,301         8,161        (8,841     14,188   

Noninterest expense

     28,730         5,219         720        —          34,669   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     11,604         1,094         6,063        (8,841     9,920   

Provision (benefit) for income taxes

     3,443         414         (805     —          3,052   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 8,161       $ 680       $ 6,868      $ (8,841   $ 6,868   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,488,823       $ 22,655       $ 170,586      $ (191,252   $ 1,490,812   
(Dollars in thousands)    Banking      Wealth
Management
     Holding
Company
    Eliminations     Total
Consolidated
 

Year Ended December 31, 2014

            

Net interest and dividend income (expense)

   $ 42,757       $ 7       $ (835   $ —        $ 41,929   

Provision for loan losses

     905         —           —          —          905   

Noninterest income (loss)

     10,810         8,416         6,993        (6,993     19,226   

Noninterest expense

     38,865         7,035         746        —          46,646   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     13,797         1,388         5,412        (6,993     13,604   

Provision (benefit) for income taxes

     3,704         488         (628     —          3,564   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 10,093       $ 900       $ 6,040      $ (6,993   $ 10,040   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,480,357       $ 18,325       $ 177,837      $ (172,733   $ 1,503,786   

 

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

Highlights and Overview

Our profitability is derived from our two operating segments, Banking and Wealth Management. The following is a summary of key financial results for the nine months ended September 30, 2015:

 

    Net income available to common stockholders was $6.8 million, or $0.82 per common share.

 

    Common Equity Tier I capital remained strong at 9.59%.

 

    Return on average common stockholders’ equity of 6.80% and return on average assets of 0.61%.

 

    Book value per common share increased 2.07% to $16.30 as of September 30, 2015.

 

    Loans decreased $10.7 million, or 0.89%, to $1.2 billion as of September 30, 2015.

 

    Loans totaling $265.4 million were originated.

 

    Our loan servicing portfolio increased $29.2 million to $440.7 million.

 

    Net loan charge-offs were $1.1 million, or 0.12% (annualized) of average loans, for the nine months ended September 30, 2015.

 

    As a percentage of total loans, nonperforming loans were 0.67%.

 

    Net interest margin was 2.97%.

 

    Noninterest expense was $34.7 million, a decrease of $143 thousand compared to the same period in 2014.

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes contained elsewhere in this report.

Critical Accounting Policies

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2015. For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2014 Annual Report on Form 10-K (“Annual Report”).

Operating Segments

Our operations are managed along two reportable segments that represent our core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and Charter Trust. A summary of the financial results for each of our segments is included in Note M – Operating Segments in the notes to our unaudited condensed consolidated financial statements located elsewhere within this report.

Comparison of Financial Condition at September 30, 2015 (unaudited) and December 31, 2014

Assets. Total assets were $1.5 billion at September 30, 2015, compared to $1.5 billion at December 31, 2014, a decrease of $13.0 million, or 0.86%.

Securities Portfolio. Securities available-for-sale increased $7.0 million, or 6.03%, to $122.7 million at September 30, 2015 from $115.7 million at December 31, 2014 in order to maintain additional collateral requirements for pledged deposits. Net unrealized losses on securities available-for-sale were $241 thousand at September 30, 2015 compared to net unrealized losses of $565 thousand at December 31, 2014. During the nine months ended September 30, 2015, we sold securities with a total book value of $39.8 million for a net gain on sales of $373 thousand, and $204.1 million of U.S. Treasury notes matured. During the same period, we purchased securities totaling $251.7 million, including U.S. Treasury notes and mortgage-backed securities. Our net unrealized loss (after tax) on our investment portfolio was $146 thousand at September 30, 2015 compared to an unrealized loss (after tax) of $341 thousand at December 31, 2014. The investments in our investment portfolio that were temporarily impaired as of September 30, 2015 consisted of U.S. Treasury notes, U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S. government-sponsored enterprises, municipal bonds and equity securities. The unrealized losses on debt securities are primarily attributable to

 

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changes in market interest rates. We have the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. The unrealized losses on equity securities have occurred for less than 12 months and we do not believe the losses relate to credit quality of the issuers. We have the ability and intent to hold these investments until a recovery of cost basis.

Loans. Net loans held in portfolio decreased $10.7 million, or 0.89%, to $1.2 billion at September 30, 2015 from $1.2 billion at December 31, 2014. The decrease of loans held in portfolio was primarily due to decreases in conventional real estate loans of $3.6 million, commercial real estate loans of $5.1 million, commercial and municipal loans of $5.5 million and consumer loans of $1.5 million, offset in part by an increase in construction loans of $4.1 million. As a percentage of total loans, impaired loans decreased to 0.91% at September 30, 2015 from 1.34% at December 31, 2014. During the nine months ended September 30, 2015, we originated $265.4 million in loans, a decrease of 6.84%, compared to $284.9 million during the same period in 2014. At September 30, 2015, our mortgage servicing loan portfolio was $440.7 million, compared to $411.6 million at December 31, 2014. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At September 30, 2015, adjustable-rate mortgages comprised approximately 60.24% of our real estate mortgage loan portfolio, which represents a slightly higher percentage compared to the mix at December 31, 2014 of 59.96%.

Allowance and Provision for Loan Losses. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses. We test the adequacy of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, we consider historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio. During the current quarter we adjusted the methodology to include additional segmentation of the portfolio by loan type.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with ASC 310-10-35, “Receivables-Overall-Subsequent Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogeneous loans such as residential mortgage, home equity or installment loans that are collectively evaluated for impairment.

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

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at September 30, 2015 was $8.6 million compared to $9.2 million at December 31, 2014. The allowance for loan losses represents 0.72% of total loans held at September 30, 2015 compared to 0.76% at December 31, 2014. Total impaired loans and non-performing assets at September 30, 2015 were $11.5 million, representing 134.34% of the allowance for loan losses. Modestly improving economic and market conditions and actual charge-off experience within the portfolio during the period resulted in us making $400 thousand in provisions to the allowance for loan losses during the nine months ended September 30, 2015, compared to $700 thousand in provisions made for the same period in 2014. Loan charge-offs (excluding the overdraft program) were $1.7 million during the nine-month period ended September 30, 2015, compared to $1.3 million for the same period in 2014. Recoveries were $682 thousand during the nine-month period ended September 30, 2015, compared to $351 thousand for the same period in 2014. This activity resulted in net charge-offs of $1.1 million for the nine-month period ended September 30, 2015, compared to $907 thousand for the same period in 2014. One-to-four family residential mortgages, commercial mortgages, commercial and municipal and consumer loans accounted for 32%, 62%, 3% and 3%, respectively, of the amounts charged-off during the nine-month period ended September 30, 2015.

The effects of national economic issues that continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to maintain our allowance for loan losses of $8.6 million. The growth in the originated loan portfolio has been offset by a reduction in non-performing loans and modestly improving economic conditions that affect the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions during the remainder of 2015 to maintain the allowance at an adequate level.

In addition to the allowance for loan losses, there is an allowance for losses from the fee for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days. At September 30, 2015, the overdraft allowance was $14 thousand, compared to $20 thousand at December 31, 2014. There were provisions of $40 thousand for overdraft losses recorded during the nine-month period ended September 30, 2015, compared to $36 thousand for the same period during 2014. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

 

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The following table is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for the periods indicated:

 

(Dollars in thousands)    Nine months ended
September 30, 2015
 
     Originated      Acquired      Total  

Balance, beginning of year

   $ 9,249       $ —        $ 9,249   
  

 

 

    

 

 

    

 

 

 

Charge-offs:

        

Conventional

     (352      (200 )      (552

Commercial real estate

     (770      (311 )      (1,081

Construction

     —          —          —    

Consumer loans

     (26      (20 )      (46

Commercial and municipal loans

     (28      (31 )      (59
  

 

 

    

 

 

    

 

 

 

Total charged-off loans

     (1,176      (562 )      (1,738
  

 

 

    

 

 

    

 

 

 

Recoveries:

        

Conventional

     101         8        109   

Commercial real estate

     474         —          474   

Construction

     —          —          —    

Consumer loans

     6         9        15   

Commercial and municipal loans

     66         18        84   
  

 

 

    

 

 

    

 

 

 

Total recoveries

     647         35        682   
  

 

 

    

 

 

    

 

 

 

Net charge-offs:

     (529      (527 )      (1,056
  

 

 

    

 

 

    

 

 

 

(Benefit) provision for loan loss charged to income:

        

Conventional

     (247      192        (55

Commercial real estate

     211         311        522   

Construction

     (488      —          (488

Consumer loans

     32         11        43   

Commercial and municipal loans

     58         13        71   

Unallocated

     307         —          307   
  

 

 

    

 

 

    

 

 

 

Total (benefit) provision

     (127      527        400   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 8,593       $ —        $ 8,593   
  

 

 

    

 

 

    

 

 

 

 

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(Dollars in thousands)    Nine months ended
September 30, 2014
 
     Originated      Acquired      Total  

Balance, beginning of year

   $ 9,733       $ —        $ 9,733   
  

 

 

    

 

 

    

 

 

 

Charge-offs:

        

Conventional

     (514      —          (514

Commercial real estate

     (431      —          (431

Construction

     —          —          —    

Consumer loans

     (57      —          (57

Commercial and municipal loans

     (256      —          (256
  

 

 

    

 

 

    

 

 

 

Total charged-off loans

     (1,258      —          (1,258
  

 

 

    

 

 

    

 

 

 

Recoveries:

        

Conventional

     288         —          288   

Commercial real estate

     1         —          1   

Construction

     —          —          —    

Consumer loans

     10         —          10   

Commercial and municipal loans

     52         —          52   
  

 

 

    

 

 

    

 

 

 

Total recoveries

     351         —          351   
  

 

 

    

 

 

    

 

 

 

Net charge-offs:

     (907      —          (907
  

 

 

    

 

 

    

 

 

 

Provision (benefit) for loan loss charged to income:

        

Conventional

     (469      —          (469

Commercial real estate

     664         —          664   

Construction

     529         —          529   

Consumer loans

     39         —          39   

Commercial and municipal loans

     (317      —          (317

Unallocated

     254         —          254   
  

 

 

    

 

 

    

 

 

 

Total provision

     700        —          700  
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 9,526       $ —        $ 9,526   
  

 

 

    

 

 

    

 

 

 

The following table is a summary of activity in the allowance for overdraft privilege accounts for the periods indicated:

 

     Nine months ended
September 30,
 
(Dollars in thousands)    2015      2014  

Beginning balance

   $ 20       $ 24   
  

 

 

    

 

 

 

Overdraft charge-offs

     (135      (107

Overdraft recoveries

     89         68   
  

 

 

    

 

 

 

Net overdraft charge-offs

     (46      (39
  

 

 

    

 

 

 

Provision for overdraft losses

     40         36   
  

 

 

    

 

 

 

Ending balance

   $ 14       $ 21   
  

 

 

    

 

 

 

 

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The following table sets forth the allocation of the allowance for loan losses (excluding overdraft allowances), the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated:

 

(Dollars in thousands)    September 30, 2015     December 31, 2014  
            % of
Allowance
    % of
Loans
           % of
Allowance
    % of
Loans
 

Real estate loans

              

Conventional, 1-4 family and home equity loans

   $ 4,035         47     59   $ 4,713         51     58

Commercial

     2,562         30     26     2,707         29     26

Land and construction

     482         5     3     991         11     3

Collateral and consumer loans

     66         1     1     66         —         1

Commercial and municipal loans

     696         8     11     635         7     12

Unallocated

     417         5     —         70         1     —    

Impaired loans

     335         4     —         67         1     —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 8,593         100     100   $ 9,249         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance as a percentage of originated loans

        0.80          0.87  

Impaired loans as a percentage of allowance

        126.46          174.27  

The following table shows total allowances including overdraft allowances:

 

(Dollars in thousands)    September 30,
2015
     December 31,
2014
 

Allowance for loan losses

   $ 8,593       $ 9,249   

Overdraft allowance

     14         20   
  

 

 

    

 

 

 

Total allowance

   $ 8,607       $ 9,269   
  

 

 

    

 

 

 

Asset Quality. Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans net of specific reserves were $22.6 million at September 30, 2015, compared to $28.2 million at December 31, 2014. OREO was $677 thousand at September 30, 2015 compared to $251 thousand at December 31, 2014. Losses have occurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Twenty-five loans considered to be impaired loans at September 30, 2015 have specific allowances identified and assigned. The 25 loans are secured by real estate, business assets or a combination of both. At September 30, 2015, the allowance included $335 thousand allocated to impaired loans compared to $67 thousand at December 31, 2014.

At September 30, 2015, we had 54 loans totaling $7.1 million considered to be TDRs as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” included in impaired loans. At September 30, 2015, 40 of the TDRs were performing under contractual terms. Of the loans classified as TDRs, 14 were non-performing at September 30, 2015. The balances of these past due loans were $2.7 million. At December 31, 2014, we had 59 loans totaling $11.0 million considered to be TDRs.

Loans over 90 days past due were $4.3 million at September 30, 2015, compared to $3.3 million at December 31, 2014. Loans 30 to 89 days past due were $7.1 million at September 30, 2015, compared to $9.6 million at December 31, 2014. As a percentage of assets, the recorded investment in non-performing loans increased from 0.48% at December 31, 2014 to 0.56% at September 30, 2015 and, as a percentage of total loans, increased from 0.60% at December 31, 2014 to 0.69% at September 30, 2015.

Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not reflect trends or uncertainties that we reasonably expect will materially impact future operating results, liquidity or capital resources. For the period ended September 30, 2015, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At September 30, 2015, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

The following table shows the breakdown of the amount of non-performing assets and non-performing assets as a percentage of the total allowance and total assets as of the dates indicated:

 

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     September 30, 2015     December 31, 2014  
(Dollars in thousands)   
Amount
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
   
Amount
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
 

Non-accrual loans

   $ 8,052         93.55     0.54   $ 7,327         79.22     0.48

Loans 90 days or more past due and accruing

     292         3.39     0.02     —           —          —     

Other real estate owned and chattel

     677         7.87     0.05     251         2.71     0.02
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-performing assets

   $ 9,021         104.81     0.61   $ 7,578         81.93     0.50
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The following table sets forth the recorded investment in nonaccrual loans by category as of the dates indicated:

 

(Dollars in thousands)    September 30,
2015
     December 31,
2014
 

Real estate:

     

Conventional

   $ 4,314       $ 2,426   

Home equity

     108         181   

Commercial

     3,071         3,926   

Construction

     90         15   

Consumer

     —          —    

Commercial and municipal

     469         779   
  

 

 

    

 

 

 

Total

   $ 8,052       $ 7,327   
  

 

 

    

 

 

 

We believe the allowance for loan losses is at a level sufficient to cover inherent losses, given the current level of risk in the loan portfolio. At the same time, we recognize that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary due to increases in the loan portfolio, or if economic, real estate and other conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.

Goodwill. Goodwill was $44.6 million, or 2.99% of total assets, as of September 30, 2015, compared to $44.6 million, or 2.96% of total assets, as of December 31, 2014.

Other Intangible Assets. Other intangible assets were $8.2 million, or 0.55% of total assets, as of September 30, 2015, compared to $9.3 million, or 0.62% of total assets, as of December 31, 2014. The decrease was due to normal amortization of core deposit intangible and customer list assets.

Other Real Estate Owned. OREO was $677 thousand, representing three residential properties and two commercial properties, at September 30, 2015, compared to $251 thousand, representing two residential properties of OREO and property acquired in settlement of loans at December 31, 2014. During the nine months ended September 30, 2015, two properties were sold while five additional properties were added.

Deposits. Total deposits decreased $15.8 million, or 1.37%, to $1.1 billion at September 30, 2015 compared to $1.2 billion at December 31, 2014. The decrease was primarily due to a decrease of $38.2 million in time deposits, partially offset by increases of $3.5 million in savings and money market accounts and $18.9 million in checking accounts.

Borrowings. We had outstanding balances of $130.0 million in advances from the FHLB at September 30, 2015, representing a decrease of $11.0 million in outstanding balances compared to December 31, 2014. In addition to advances, we had 12 letters of credit totaling $48.8 million with the FHLB to secure customer deposits under pledge agreements. These letters of credit are factored against borrowing capacity with the FHLB. Securities sold under agreements to repurchase increased $2.8 million, or 16.81%, to $19.6 million at September 30, 2015 from $16.8 million at December 31, 2014.

Comparison of the Operating Results for the Nine Months Ended September 30, 2015 and September 30, 2014 (unaudited)

Overview. Consolidated net income for the nine months ended September 30, 2015 was $6.9 million, or $0.82 per diluted common share, compared to $7.2 million, or $0.85 per diluted common share, for the same period in 2014, a decrease of $321 thousand, or 4.47%. Our net interest margin decreased to 2.97% at September 30, 2015 from 3.12% at September 30, 2014. Our return on average assets and average common stockholders’ equity for the nine months ended September 30, 2015 were 0.61% and 6.80%, respectively, compared to 0.65% and 6.49%, respectively, for the same period in 2014.

 

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Net Interest and Dividend Income. Net interest and dividend income decreased $703 thousand, or 2.23%, to $30.8 million for the nine-month period ended September 30, 2015, compared to $31.5 million for the nine-month period ended September 30, 2014, due to the additional expense of $861 thousand related to $17.0 million of subordinated debt issued in the fourth quarter of 2014, offset in part by a decrease of $324 thousand, or 30.54%, of interest on FHLB advances.

Interest and Dividend Income. For the nine months ended September 30, 2015, total interest and dividend income decreased $438 thousand, or 1.20%, to $36.0 million, compared to $36.5 million for the same period in 2014. Interest and fees on loans decreased $184 thousand, or 0.53%, to $34.7 million for the nine-month period ended September 30, 2015, compared to $34.9 million for the same period in 2014. Interest and dividends on investments and other interest decreased $254 thousand, or 15.84%, for the nine-month period ended September 30, 2015 compared to the same period in 2014.

Interest Expense. For the nine months ended September 30, 2015, total interest expense increased $265 thousand, or 5.39%, to $5.2 million, compared to $4.9 million for the same period in 2014. Interest on deposits decreased $325 thousand, or 9.78%, to $3.0 million for the nine month period ended September 30, 2015 compared to the same period in 2014 due in part to the migration from time deposits to lower cost deposit products. For the nine months ended September 30, 2015, interest on advances and other borrowed money increased $590 thousand, or 37.08%, to $2.2 million from $1.6 million for the same period in 2014 due in part to the issuance of $17.0 million of subordinated debt in the fourth quarter of 2014, which resulted in $861 thousand of additional interest expense.

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the nine month periods indicated.

 

     Nine month period ended September 30,  
     2015     2014  
(Dollars in thousands)    Average
Balance(1)
     Interest      Yield/
Cost
    Average
Balance(1)
     Interest      Yield/
Cost
 

Assets:

                

Interest-earning assets:

                

Loans(2)

   $ 1,216,071       $ 34,670         3.80   $ 1,192,568       $ 34,854         3.90

Investment securities and other

     166,678         1,351         1.08     153,626         1,604         1.39
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,382,749         36,021         3.47     1,346,194         36,458         3.61
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets:

                

Cash

     15,824              19,482         

Other noninterest-earning assets(3)

     97,463              97,974         
  

 

 

         

 

 

       

Total noninterest-earning assets

     113,287              117,456         
  

 

 

         

 

 

       

Total

   $ 1,496,036            $ 1,463,650         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings, NOW and MMAs

   $ 753,722       $ 712         0.13   $ 685,687       $ 592         0.12

Time deposits

     342,971         2,287         0.89     368,380         2,732         0.99

Repurchase agreements

     16,686         50         0.40     20,651         46         0.30

Subordinated debentures and other borrowed funds

     172,478         2,131         1.65     174,486         1,545         1.18
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,285,857         5,180         0.54     1,249,204         4,915         0.52
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                

Demand deposits

     52,418              45,994         

Other

     15,121              20,701         
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     67,539              66,695         
  

 

 

         

 

 

       

Stockholders’ equity

     142,640              147,751         
  

 

 

         

 

 

       

Total

   $ 1,496,036            $ 1,463,650         
  

 

 

         

 

 

       

Net interest and dividend income/Net interest rate spread

      $ 30,841         2.93      $ 31,543         3.09
     

 

 

    

 

 

      

 

 

    

 

 

 

Net interest margin

           2.97           3.12
        

 

 

         

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

           107.54           107.76

 

(1) Monthly average balances have been used for all periods.

 

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Table of Contents
(2) Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans caused any material difference in the information presented.
(3) Other noninterest-earning assets include non-earning assets and OREO.

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the nine month periods indicated. Volume changes are computed by multiplying the volume difference by the prior period’s rate. Rate changes are computed by multiplying the rate difference by the prior period’s balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in thousands).

 

    

Nine Months Ended September 30,

2015 vs. 2014

Increase (Decrease) Due to

 
     Volume      Rate      Total  
     (Dollars in thousands)  

Interest income on loans

   $ 933       $ (1,117    $ (184

Interest income on investments

     193         (446      (253
  

 

 

    

 

 

    

 

 

 

Total interest income

     1,126         (1,563      (437
  

 

 

    

 

 

    

 

 

 

Interest expense on savings, NOW and MMAs

     116         4         120   

Interest expense on time deposits

     (100      (345      (445

Interest expense on repurchase agreements

     (26      30         4   

Interest expense on capital securities and other borrowed funds

     (13      599         586   
  

 

 

    

 

 

    

 

 

 

Total interest expense

     (23      288         265   
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 1,149       $ (1,851    $ (702
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses. The provision for loan losses (not including overdraft allowances) was $400 thousand for the nine months ended September 30, 2015, compared to $700 thousand of provisions during the same period in 2014. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $40 thousand in provisions for overdraft losses in the nine months ended September 30, 2015, compared to $36 thousand of provisions during the same period in 2014. For additional information on provisions and adequacy, please refer to the section herein on the Allowance for Loan Losses.

Noninterest Income and Expense. For the nine months ended September 30, 2015, total noninterest income decreased $208 thousand, or 1.44%, to $14.2 million, compared to $14.4 million for the same period in 2014.

Customer service fees decreased $188 thousand, or 4.17%, to $4.3 million from $4.5 million for the nine months ended September 30, 2014. This decrease includes a decrease of $174 thousand in fees related to overdraft processing.

Gain on sales of securities decreased $383 thousand, or 50.66%, to $373 thousand from $756 thousand for the nine months ended September 30, 2014. This decrease is due to the decreased volume of sales of securities with $40.2 million sold during the nine months ended September 30, 2015, compared to $83.9 million for the same period in 2014.

Mortgage banking activities increased $448 thousand, or 80.00%, to $1.0 million from $560 thousand for the nine months ended September 30, 2014. The change represents increases of $331 thousand in gains on sales of loans and $632 thousand for capitalized mortgage servicing rights, which were partially offset by an increase of $151 thousand for the amortization of mortgage servicing rights. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.

Net gains and losses on other real estate and property owned decreased $263 thousand, or 135.57%, to a net loss of $69 thousand for the nine months ended September 30, 2015 from a net gain of $194 thousand for the same period in 2014.

Trust and investment management fee income increased $174 thousand, or 2.82%, to $6.3 million for the nine months ended September 30, 2015, compared to $6.2 million for the same period in 2014.

Total noninterest expenses decreased $144 thousand, or 0.41%, to $34.7 million for the nine months ended September 30, 2015, compared to $34.8 million for the same period in 2014, as discussed below.

Salaries and employee benefits decreased $300 thousand, or 1.63%, to $18.1 million from $18.4 million for the nine months ended September 30, 2014. Gross salaries and benefits paid, which excludes the deferral of expenses associated with the