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EX-23.2 - EXHIBIT 23.2 - SBT Bancorp, Inc.ex23-2.htm
EX-23.1 - EXHIBIT 23.1 - SBT Bancorp, Inc.ex23-1.htm
EX-32.1 - EXHIBIT 32.1 - SBT Bancorp, Inc.ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - SBT Bancorp, Inc.ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - SBT Bancorp, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SBT Bancorp, Inc.ex31-1.htm
EX-21 - EXHIBIT 21 - SBT Bancorp, Inc.ex21.htm
EX-14 - EXHIBIT 14 - SBT Bancorp, Inc.ex14.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

(Mark One)

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2015

 

or

 

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to _______

 

Commission file Number: 000-51832

 

SBT BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut

 

20-4346972

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

86 Hopmeadow Street, Weatogue, CT

06089

 

(Address of Principal Executive Offices)

(Zip Code)

 

 

(860) 408-5493

 
 

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

     
 

Common Stock, no par value

 
 

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No

 

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        No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes        No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

 
1

 

 

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

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

(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 Act). Yes No

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second quarter, is $20,856,147.

 

As of March 18, 2016, 1,360,700 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of SBT Bancorp, Inc.’s definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be held May 10, 2016 (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 
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INDEX

SBT BANCORP, INC.

 

    Page No.
     
PART I
 

Item 1.

Business

   4 

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

15

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16

   

 

PART II

   

 

Item 5.

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

16

Item 6.

Selected Financial Data

17

Item 7.

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

17

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 8.

Financial Statements and Supplementary Data

41

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

41

Item 9A.

Controls and Procedures

41

Item 9B.

Other Information

42

   

 

PART III

   

 

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11.

Executive Compensation

42

Item 12.

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

43

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accounting Fees and Services

43

   

 

PART IV

   

 

Item 15.

Exhibits and Financial Statement Schedules

44

   

 

SIGNATURES  

47

 

 
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ITEM 1.     BUSINESS

 

General

 

SBT Bancorp, Inc. (the “Company”) is the holding company for The Simsbury Bank & Trust Company, Inc. (the “Bank”). The Company was incorporated in the State of Connecticut on February 17, 2006. The Company became the Bank’s sole shareholder pursuant to a reorganization that occurred on March 7, 2006. The Company’s only business is its investment in the Bank, which is a community-oriented financial institution providing a variety of banking and investment services.

 

The Bank was incorporated on April 28, 1992 and commenced operations as a Connecticut chartered bank on March 31, 1995. The Bank's deposit accounts are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits thereof. The Bank is not a member of the Federal Reserve System. The Bank's main office and its corporate offices are located in the town of Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon and Bloomfield, Connecticut. The Bank also maintains a mortgage centers in Warwick, Rhode Island, Mattapoisett, Massachusetts, Glastonbury, Connecticut and Mansfield, Massachusetts. Services to the Bank’s customers are also provided through SBT Online Internet banking. The Bank's customer base consists primarily of individual consumers and small businesses in north central Connecticut. The Bank has in excess of 20,000 deposit accounts.

 

On July 10, 2015, the Bank filed applications with the Connecticut Department of Banking and the Federal Deposit Insurance Corporation to open a full service branch at 1232 Farmington Avenue in West Hartford, Connecticut. The Bank has received regulatory approval from the Connecticut Department of Banking and the FDIC to open this new branch office in West Hartford, Connecticut and has negotiated a lease for the new branch office, which is scheduled to open in the second quarter of 2016.

 

The Bank has five ATMs: two at its main office, and one each at the other branch/business offices. The ATMs generate activity fees based upon utilization by other banks' customers.

 

The Bank offers a full range of commercial banking services to residents and businesses in its primary and secondary markets through a wide variety of commercial loans and residential mortgage programs as well as home equity lines and loans, FDIC-insured checking, savings, and IRA accounts, 401K rollover accounts, and safe deposit and other customary non-deposit banking services. The Bank offers investment products to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, and through its affiliation with the securities broker/dealer, LPL Financial Corporation.

 

In May of 2010, the Bank formed NERE Holdings, Inc., a subsidiary to hold real estate primarily acquired through foreclosures. In January of 2011, the Bank formed Simsbury Bank Passive Investment Company, a subsidiary Passive Investment Company (PIC). Under current State of Connecticut statutes, Simsbury Bank Passive Investment Company is not subject to Connecticut corporation business taxes.

 

Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Bank's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank are subject to the influence of domestic and foreign economic conditions, including, without limitation, inflation, deflation, recession and unemployment.

 

Commercial banking is affected not only by general economic conditions but also by monetary and fiscal policies of the federal government and policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in monetary policies cannot be predicted.

 

 
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The Bank’s Investment Policy permits the Bank to invest in mortgage-backed securities. It is the policy of the Bank to invest in mortgage-backed securities that have no more risk than the underlying mortgages. While the Investment Policy also permits the Bank to invest in preferred stock issued by the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), no such investments have been made by the Bank since 2001 and no investments of this type are anticipated.

 

During the third quarter of 2011, the Company received $9 million in capital through the Small Business Lending Fund (the “SBLF”) administered by the United States Department of the Treasury (the “Treasury”). The SBLF was created by the Treasury to encourage banks to increase lending to small business by providing capital to eligible banks at an adjustable dividend rate based on the volume of qualified lending. The Company’s initial weighted average dividend rate was 3%. However, as a result of its increased lending, the Company’s weighted average dividend rate was reduced to 1%. Effective January 1, 2016, the dividend rate was scheduled to increase to 9% (including a quarterly lending incentive fee of 0.5%). However, on December 18, 2015, the Company redeemed all of the 9,000 outstanding shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation amount $1,000 per share, that had been issued to the Treasury under the SBLF program with proceeds that the Company raised through the issuance of a subordinated note and the issuance of its common stock in an underwritten offering.

 

On September 30, 2015 the Company entered into a Subordinated Loan Agreement (the “Loan Agreement”) with Community Funding CLO, Ltd. (“Community Funding”) pursuant to which the Company issued an unsecured subordinated term note in the aggregate principal amount of $7,500,000 due July 31, 2025 (the “Subordinated Note”) to Community Funding. The closing date of the issuance of the Subordinated Note occurred on October 15th, 2015 (the “Closing Date”). The Company received net proceeds of approximately $7.2 million from the issuance of the Subordinated Note.

 

The Loan Agreement provides that the Subordinated Note will bear interest at a fixed rate of 6.75% per annum, provided, however, that for the period beginning immediately after the Closing Date through, but not including, February 11, 2016, Community Funding rebated an amount equal to 3.40% per annum to the Company, resulting in a rate of 3.35% per annum to the Company, net of any payments of interest made by the Company, since no event of default occurred during such period. Interest on the Subordinated Note will be payable by the Company quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on the first such date following the Closing Date and on the maturity date. The principal amount of the Subordinated Note is due on the tenth anniversary of the Closing Date, provided, however, that the Company may prepay all or a portion of the principal amount of the Subordinated Note on or after the sixth anniversary of the Closing Date. Prior to the sixth anniversary of the Closing Date, the Company can prepay all or a portion of the principal amount of the Subordinated Note only under limited specified circumstances set forth in the Loan Agreement. The Loan agreement contains customary events of default such as the institution of bankruptcy proceedings by or against the Company and the non-payment by the Company of principal or interest when due. Community Funding may accelerate the repayment of the Subordinated Note only in the event that bankruptcy proceedings are instituted by or against the Company and not for any other event of default.

 

On November 5, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Keefe, Bruyette & Woods, Inc. (the “Underwriter”), pursuant to which the Company agreed to sell to the Underwriter, and the Underwriter agreed to purchase from the Company, 400,000 shares (the “Shares”) of common stock, no par value per share, of the Company (the “Common Stock”) at a public offering price of $21.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the Underwriter an option (the “Option”), exercisable not later than 30 calendar days after the date of the Underwriting Agreement, to purchase up to 60,000 additional shares of Common Stock. The Shares were registered under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-206533), which the Securities and Exchange Commission (the “Commission”) declared effective on November 5, 2015 and Registration Statement on Form S-1MEF (File No. 333-207856) as filed by the Company with the Commission on November 6, 2015, which became effective upon filing in accordance with Rule 462(b) under the Securities Act.

 

The closing occurred on November 10, 2015, following satisfaction of the closing conditions set forth in the Underwriting Agreement. As a result of the public offering, the Company issued 400,000 shares of Common Stock at $21.00 per share. On November 17, 2015, the Underwriter exercised a portion of the Option and purchased an additional 51,473 shares of Common Stock at $21.00 per share.

 

In connection with the public offering and the Option, the company issued a total of 451,473 shares of its common stock at $21.00 per share. Net proceeds amounted to $8,503,000, after deducting related underwriting discounts, fees and other expenses of $978,000.

 

 
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Market Area

 

The towns of Simsbury, Avon, Bloomfield, Granby, and West Hartford, which comprise the Bank’s primary market area, are located in north central Connecticut, west of the Connecticut River near the northern corner of Hartford. They are located a short distance from downtown Hartford. Hartford County is home to a number of S&P 500 companies, including United Technologies Corp., The Hartford Financial Services Group Inc., Aetna Inc. and Stanley Black & Decker, Inc. Other nearby large employers include Cigna Corporation, The Traveler’s Companies, Inc., ESPN, UConn Health Center and The Jackson Laboratory.

 

All five towns are situated near Interstate Routes 91 and 84. Bradley International Airport is located nearby and provides a convenient alternative to road and rail systems for passengers and cargo. The road network from each of the towns included in the Bank’s secondary market of Barkhamsted, Canton, East Granby and New Hartford leads through its primary market towns. Residents of the secondary market communities, therefore, may travel near the Bank's offices and find it convenient to bank there.

 

These towns are some of the most attractive and affluent markets located in Connecticut. Based on the most current information available, the Bank's primary and secondary markets have a median household income of $92,122. This household income level places the Bank’s overall market approximately 33% above the median income of all of Connecticut's households. Compared to the nation as a whole, the median income in the Bank’s primary and secondary market is approximately 74% greater than the median income for all U.S. households. By themselves, the towns of Simsbury and Avon have median household incomes of over $115,286, placing them 66% above the median income of all households in Connecticut and 117% above the median income for all U.S. households.

 

Educational attainment in the Bank’s primary and secondary markets is similarly high. Fifty four percent of the residents aged twenty-five and over in the nine towns are college graduates. In Avon, Bloomfield, Granby and Simsbury, the percentage of residents aged twenty-five and over who are college graduates averages

57%. In addition, per U.S. News & World Report rankings, Simsbury High School and Avon High School are among the top high schools in the State of Connecticut (ranked #6 and #22, respectively, out of a total of 193 high schools in Connecticut).

 

Hartford County is the second largest deposit market in the state of Connecticut, which management believes provides opportunities to grow the Bank’s deposit base. The total amount of current deposits in Hartford County is $36.5 billion, which is approximately one-third of total deposits in the State of Connecticut. Deposits in the Hartford County market have increased 33.5% since 2008. From a population perspective, there are roughly 900,000 individuals domiciled in Hartford County, which represents one-fourth of all residents in Connecticut. Additionally, the population has grown over the course of the past five years.

 

Employees

 

At December 31, 2015, the Bank employed a total of 89 people, which consisted of 79 full-time employees and 10 part-time employees. Neither the Company’s employees nor the Bank's employees are represented by any union or other collective bargaining agreement, and the Company and the Bank believe their employee relations are satisfactory.

 

Competition

 

The banking and financial services business in Connecticut generally, and in the Bank's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Bank competes for loans, deposits and financial services customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets, and offer a broader array of financial services than the Bank. In order to compete with these other financial services providers, the Bank relies principally upon its strong reputation for service excellence, personal relationships established by its officers, directors and employees with its customers, advertising and public relations, local decision making, strong product features and competitive pricing, and excellent technology.

 

 
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The Bank's primary and secondary markets have a number of banking institutions which offer a variety of financial products. The types of institutions range from large nationwide and regional banks to various institutions of smaller size. Simsbury is served by seven depository institutions with a total of seven offices. Of these institutions, there are four commercial banks, one savings bank and two credit unions. Avon is served by eight depository institutions with nine offices. Of these institutions, there are six commercial banks and three savings banks. Granby is served by five depository institutions with the same number of offices. Two of these institutions are commercial banks and four are savings banks. Bloomfield is served by eleven depository institutions with thirteen offices. Of these institutions, there are four commercial banks, three savings banks, and four credit unions. The total eight-town area of the Bank's primary and secondary markets is served by twenty institutions.

 

As of June 30, 2015, the top three banks in Simsbury, by deposit account market share, were the Bank (30%), Bank of America (27%), and Webster Bank (15%). The top three banks in Avon were Bank of America (29%), Farmington Bank (15%), and People’s United Bank (12%). The Bank ranked sixth, with 9% of the deposit account market share. In Granby, the top three banks were Windsor Federal Savings And Loan Association (27%), Bank of America (26%) and the Bank (23%). In Bloomfield, the top three banks were Bank of America (26%), Webster Bank (23%), and Wells Fargo Bank (20%). The Bank ranked sixth, with 8% of the deposit account market share. In the Bank’s primary market (Simsbury, Granby, Avon, and Bloomfield), the top 3 banks, as of June 30, 2015, were Bank of America with 27% of the market, the Bank with 16%, and Webster Bank with 13%. In the total eight-town area of the Bank's primary and secondary markets, the top three banks were Bank of America with 26% of the market, Webster Bank with 14% and the Bank with 14%.

 

The present bank regulatory scheme is undergoing significant change, both as it affects the banking industry itself and as it affects competition between banks and non-banking financial institutions. There has been a significant regulatory change in the bank mergers and acquisitions area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies may engage. Under the Gramm-Leach-Bliley Act enacted by Congress on November 12, 1999, banks and bank holding companies may now affiliate with insurance and securities companies. In part as a result of these changes, banks are now actively competing with other types of non-depository institutions, such as money market funds, brokerage firms, insurance companies, and other financial service enterprises.

 

Since September 2008, the President and United States Congress, United States Department of the Treasury, Federal Deposit Insurance Corporation, and Federal Reserve Board have, within their respective authorities, enacted legislation, promulgated regulations, created special programs, and taken other actions to address the financial market crisis and continuing economic conditions. This includes the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) effective July 21, 2010, which resulted in, and will continue to result in, significant changes being made to the nation’s financial market regulatory system in order to address the causes of the financial market crisis. The Bank’s competitive position relative to other banks and financial services companies has been affected by some of the changes implemented as a result of the Dodd-Frank Act.

 

Moreover, legislation and regulatory proposals that could affect the Bank and the banking industry in general may be introduced before the United States Congress, the Connecticut General Assembly and various governmental agencies. These proposals may include measures that may further alter the structure, regulation and competitive relationship of financial institutions and that may subject the Bank to increased regulation, disclosure and reporting requirements. In addition, the various bank regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation, including the Dodd-Frank Act. As these proposals are enacted, the Bank anticipates that its competitive position will be further impacted. However, it is uncertain at this time when the proposals will be enacted and how they will impact the Bank’s competitive position.

 

Supervision and Regulation

 

Banks and bank holding companies are extensively regulated under both federal and state law. Set forth below are brief summaries of various aspects of the supervision and regulation of the Company and the Bank. These summaries do not purport to be complete and are qualified in their entirety by reference to applicable laws, rules and regulations.

 

As a bank holding company, the Company is regulated by and subject to the supervision of the Board of Governors of the Federal Reserve System (the “FRB”) and is required to file with the FRB an annual report and such other information as may be required. The FRB has the authority to conduct examinations of the Company as well.

 

 
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The Bank Holding Company Act of 1956 (the “BHC Act”) limits the types of companies which the Company may acquire or organize and the activities in which they may engage. In general, a bank holding company and its subsidiaries are prohibited from engaging in or acquiring control of any company engaged in non-banking activities unless such activities are so closely related to banking or managing and controlling banks as to be a proper incident thereto. Activities determined by the FRB to be so closely related to banking within the meaning of the BHC Act include operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation service; operating a collection agency; and providing certain courier services. The FRB also has determined that certain other activities, including real estate brokerage and syndication, land development, property management, and underwriting of life insurance unrelated to credit transactions, are not closely related to banking and, therefore, are not proper activities for a bank holding company.

 

The BHC Act requires every bank holding company to obtain the prior approval of the FRB before acquiring substantially all the assets of, or direct or indirect ownership or control of more than five percent of the voting shares of, any bank. Subject to certain limitations and restrictions, a bank holding company, with the prior approval of the FRB, may acquire an out-of-state bank.

 

In November 1999, Congress amended certain provisions of the BHC Act through passage of the Gramm-Leach-Bliley Act. Under this legislation, a bank holding company may elect to become a “financial holding company” and thereby engage in a broader range of activities than would be permissible for traditional bank holding companies. In order to qualify for the election, all of the depository institution subsidiaries of the bank holding company must be well capitalized and well managed, as defined under FRB regulations and all such subsidiaries must have achieved a rating of “Satisfactory” or better with respect to meeting community credit needs. Pursuant to the Gramm-Leach-Bliley Act, financial holding companies are permitted to engage in activities that are “financial in nature” or incidental or complementary thereto, as determined by the FRB. The Gramm-Leach-Bliley Act identifies several activities as “financial in nature,” including, among others, insurance underwriting and agency activities, investment advisory services, merchant banking and underwriting, and dealing in or making a market in securities. The Company currently owns a financial subsidiary, SBT Investment Services, Inc.

 

The Company believes that it meets the regulatory criteria that would enable it to elect to become a financial holding company. At this time, the Company has determined not to make such an election, although it may do so in the future.

 

The Gramm-Leach-Bliley Act also makes it possible for entities engaged in providing various other financial services to form financial holding companies and form or acquire banks. Accordingly, the Gramm-Leach-Bliley Act makes it possible for a variety of financial services firms to offer products and services comparable to the products and services offered through the Company’s subsidiaries.

 

There are various statutory and regulatory limitations regarding the extent to which present and future banking subsidiaries of the Company can finance or otherwise transfer funds to the Company or its non-banking subsidiaries, whether in the form of loans, extensions of credit, investments or asset purchases, including regulatory limitation on the payment of dividends directly or indirectly to the Company from the Bank. Federal bank regulatory agencies also have the authority to limit further the Bank’s payment of dividends based on such factors as the maintenance of adequate capital for such subsidiary bank, which could reduce the amount of dividends otherwise payable.

 

Under the policy of the FRB, the Company is expected to act as a source of financial strength to its banking subsidiary and to commit resources to support its banking subsidiary in circumstances where the Company might not do so absent such policy. In addition, any subordinated loans by the Company to its banking subsidiary would also be subordinate in right of payment to depositors and obligations to general creditors of such banking subsidiary.

 

The FRB has established capital adequacy guidelines for bank holding companies that are similar to the FDIC capital requirements for banks described below under the heading “Capital Standards.” The Company exceeded all current regulatory capital requirements and is considered “well capitalized” as of December 31, 2015.

 

 
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The Bank, as a Connecticut state-chartered bank, is subject to supervision, periodic examination and regulation by the Connecticut Commissioner of Banking (the “Commissioner”) and the Federal Deposit Insurance Corporation (the “FDIC”). If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately, to terminate a bank's deposit insurance, which for a Connecticut state-chartered bank would result in a revocation of the bank's charter. The Commissioner has many of the same remedial powers.

 

The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank is subject to deposit insurance assessments by the FDIC. (See “Premiums for Deposit Insurance.”) Although the Bank is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Board of Governors of the Federal Reserve System.

 

Various requirements and restrictions under the laws of the State of Connecticut and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

 

The Dodd-Frank Act has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes such as, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.

 

Effective in July 2011, the Dodd-Frank Act eliminated federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. This significant change to existing law has not had an adverse impact on the Bank’s net interest margin.

 

The Dodd-Frank Act also changed the base for FDIC deposit insurance assessments. Assessments are now based on average consolidated total assets less tangible equity capital of a financial institution, rather than on deposits. The Dodd-Frank Act also increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per account. The legislation also increased the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directed the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets, including the Bank.

 

The Dodd-Frank Act requires publicly traded companies to give their shareholders a non-binding vote on executive compensation (“say on pay”) and so-called “golden parachute” payments. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements.

 

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, which authority does not extend to the Bank at this time since we do not meet the asset threshold.

 

 
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The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies, which exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities; however, bank holding companies with assets of less than $15 billion as of December 31, 2009 are permitted to include trust preferred securities that were issued before May 19, 2010 as Tier 1 capital and bank holding companies with assets of less than $500 million are permitted to continue to issue trust preferred securities and have them count as Tier 1 capital.

 

The Dodd-Frank Act and the rules and regulations promulgated under the Dodd-Frank Act have impacted the Bank as well as all community banks., by increasing our operating and compliance costs. Certain yet to be written implementing rules and regulations under the Dodd-Frank Act may also further increase our operating and compliance costs.

  

The Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America. Sarbanes-Oxley’s principal provisions, many of which have been interpreted through regulations of the SEC, provide for and include, among other things: (i) the creation of an independent accounting oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) internal control reporting requirements by management pursuant to Section 404 of Sarbanes-Oxley; (v) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (vi) an increase in the oversight of, and enhancement of, certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors; (vii) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (viii) requirements that companies disclose whether at least one member of the audit committee is a “financial expert” (as such term is defined by the SEC); (ix) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (x) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulatory requirements; (xi) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and (xii) a range of enhanced penalties for fraud and other violations. As a result of a provision of the Dodd-Frank Act, which, among other things, permanently exempted non-accelerated filers, such as the Company, from complying with the requirements of Section 404(b) of Sarbanes-Oxley, which requires a public company to include an attestation report from its independent registered public accounting firm on the public company’s internal control over financial reporting, this Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding the Company’s internal control over financial reporting.

 

USA PATRIOT Act

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”), designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, broker-dealers, and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Company and the Bank, to implement new policies and procedures or amend existing policies and procedures with respect to, among other matters, anti-money-laundering, compliance, suspicious activity, currency transaction reporting, and due diligence on customers. The PATRIOT Act and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money-laundering activities when considering applications filed under the BHC Act or the Bank Merger Act.

 

 
10

 

  

Dividend Restrictions

 

The primary source of cash to pay dividends, if any, to the Company’s shareholders and to meet the Company’s obligations is dividends paid to the Company by the Bank. Dividend payments by the Bank to the Company are subject to Connecticut banking laws and the Federal Deposit Insurance Act (“FDIA”). Under Connecticut banking laws and the FDIA, a bank may not pay any dividends if, after paying such dividends, it would be undercapitalized under applicable capital requirements. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in unsafe or unsound banking practices. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

 

The FRB has issued a supervisory letter to bank holding companies that contains guidance on when the board of directors of a bank holding company should eliminate, defer or severely limit dividends. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available from the immediately preceding year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The FRB’s policy further provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. Accordingly, a bank holding company may not pay dividends when it is insolvent. The letter also contains guidance on the redemption of stock by bank holding companies which urges bank holding companies to advise the Federal Reserve of any such redemption or repurchase of common stock for cash or other value which results in the net reduction of a bank holding company’s capital at the beginning of the quarter below the capital outstanding at the end of the quarter.

 

Subsequent to the issuance of the supervisory letter, the FRB adopted regulations requiring bank holding companies to give prior written notice to the FRB before purchasing or redeeming its stock if the gross consideration for the purchase or redemption, when aggregated with the net consideration (i.e., gross consideration paid for purchases and redemptions minus gross consideration received for all stock sold) paid for all purchases and redemptions of stock during the preceding 12 months, is equal to 10 percent or more of the bank holding company’s consolidated net worth. However, if a bank holding company (i) will be well-capitalized before and immediately after the purchase or redemption, (ii) is well-managed and (iii) is not the subject of any unresolved supervisory issues, then the bank holding company will not be required to give any prior written notice to the FRB. At this time, the Company fits within the above exception and is not required to give prior written notice to the FRB before purchasing or redeeming its stock.

 

The FRB’s capital adequacy rules also limit a banking organization’s ability to pay dividends, or engage in share repurchases if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.

  

Capital Standards

 

The FDIC has adopted risk-based capital guidelines to which FDIC-insured, state-chartered banks that are not members of the Federal Reserve System, such as the Bank, are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to the differences in risk profiles among banking organizations. Banks are required to maintain minimum levels of capital based upon their total assets and total “risk-weighted assets.” For purposes of these requirements, capital is comprised of both Tier 1 and Tier 2 capital. Tier 1 capital consists primarily of common stock and retained earnings. Tier 2 capital consists primarily of loan loss reserves, subordinated debt, and convertible securities. In determining total capital, the amount of Tier 2 capital may not exceed the amount of Tier 1 capital. A bank’s total “risk-based assets” are determined by assigning the bank’s assets and off-balance sheet items (e.g., letters of credit) to one of four risk categories based upon their relative credit risks. The greater the risk associated with an asset, the greater the amount of such asset that will be subject to capital requirements.

 

 
11

 

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) defines specific capital categories based upon an institution’s capital ratios. The capital categories, in declining order, are: (i) “well capitalized”; (ii) “adequately capitalized”; (iii) “under-capitalized”; (iv) “significantly under-capitalized”; and (v) “critically under-capitalized”. Under FDICIA and the FDIC’s prompt corrective action rules, the FDIC may take any one or more of the following actions against an “under-capitalized” bank: restrict dividends and management fees, restrict asset growth, and prohibit new acquisitions, new branches or new lines of business without prior FDIC approval. If a bank is “significantly under-capitalized”, the FDIC may also require the bank to raise capital, restrict interest rates a bank may pay on deposits, require a reduction in assets, restrict any activities that might cause risk to the bank, require improved management, prohibit the acceptance of deposits from correspondent banks, and restrict compensation to any senior executive officer. When a bank becomes “critically under-capitalized” the FDIC must, within 90 days thereafter, appoint a receiver for the bank or take such action as the FDIC determines would better achieve the purposes of the law. Even where such other action is taken, the FDIC generally must appoint a receiver for a bank if the bank remains “critically under-capitalized” during the calendar quarter beginning 270 days after the date on which the bank became “critically under-capitalized.”

 

As of December 31, 2015, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 risk-based capital ratios as set forth in the table below. Management of the Bank believes there are no conditions that have changed the Bank’s category since December 31, 2015.

 

The following table presents the amounts of regulatory capital and capital ratios for the Bank compared to the minimum regulatory capital requirements to be categorized as “well capitalized” as of December 31, 2015 and 2014, under the regulatory capital rules then in effect.

  

   

Actual

12/31/2015

   

Well

Capitalized

   

Actual

12/31/2014

   

Well

Capitalized

 

Bank:

                               

Tier 1 leverage capital ratio

    8.58%       5.00%       7.17%       5.00%  

Tier 1 risk-based capital ratio

    13.11%       8.00%       11.69%       6.00%  

Total risk-based capital ratio

    14.21%       10.00%       12.80%       10.00%  

Common equity tier 1 risk-based capital ratio

    13.11%       6.50%       N/A       N/A  

 

The risk-based capital guidelines prior to January 1, 2015 were based upon the 1988 capital accord of the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors and regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply.

 

In December 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions, referred to as Basel III. Under these standards, when fully phased-in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital, and total capital ratios, as well as maintaining a “capital conservation buffer.” The Tier 1 common equity and Tier 1 capital ratio requirements will be phased-in incrementally between January 1, 2013 and January 1, 2015; the deductions from common equity made in calculating Tier 1 common equity will be phased-in incrementally over a four-year period commencing on January 1, 2014; and the capital conservation buffer will be phased-in incrementally between January 1, 2016 and January 1, 2019. The Basel Committee also announced that a countercyclical buffer of 0% to 2.5% of common equity or other fully loss-absorbing capital will be implemented according to national circumstances as an extension of the conservation buffer.

 

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and address relevant provisions of the Dodd-Frank Act. The Federal Reserve Board’s final rules and the FDIC’s interim final rules (which became final in April 2014 with no substantive changes) apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are required to have a total capital ratio of 8% (unchanged from current rules) and a Tier 1 leverage ratio of 4% (unchanged from current rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.

 

 
12

 

 

With respect to the Bank, the FDIC also revised its prompt corrective action rules by (i) introducing a Common Equity Tier 1, or CET1, ratio requirement at each capital quality level (other than critically undercapitalized); (ii) increasing the minimum Tier 1 capital ratio requirement for each category; and (iii) requiring a leverage ratio of 5 percent to be well-capitalized. Effective as of January 1, 2015, the FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a CET1 ratio of at least 6.5 percent, (iv) has a Tier 1 leverage ratio of at least 5.0 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a CET1 ratio of at least 4.5 percent, (iv) has a Tier 1 leverage ratio of at least 4.0 percent, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a CET1 ratio of less than 4.5 percent or (iv) has a Tier 1 leverage ratio of less than 4.0 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a CET1 ratio of less than 3.0 percent or (iv) has a Tier 1 leverage ratio of less than 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating. Similar categories apply to bank holding companies. When the capital conservation buffer is fully phased in, the capital ratios applicable to depository institutions will exceed the ratios to be considered well-capitalized under the prompt corrective action regulations.

 

Safety and Soundness Standards

 

Federal law requires each federal banking agency to prescribe for depository institutions under its jurisdiction standards relating to, among other things: internal controls; information systems and audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; compensation; fees and benefits; and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the “Guidelines”) to implement these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The Guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset quality; earnings and compensation; and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard set by the Federal Deposit Insurance Act. The final regulations establish deadlines for submission and review of such safety and soundness compliance plans.

 

The federal banking agencies have also adopted final regulations for real estate lending that prescribe uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards, and loan-to-value limits that do not exceed the supervisory limits prescribed by the regulations.

 

Appraisals for “real estate-related financial transactions,” generally transactions with a value of $250,000 or more, must be conducted, depending on the value of the transaction, by either state-certified or state-licensed appraisers. State-certified appraisers are required for: all transactions with a transaction value of $1,000,000 or more; nonresidential transactions valued at $250,000 or more; and transactions of $250,000 or more involving "complex" 1-4 family residential properties. An appraisal or real estate “evaluation” executed by a state-licensed appraiser is required for all other federally related transactions and is to be performed annually. Federally related transactions include the sale, lease, purchase, investment in or exchange of real property or interests in real property, the financing or refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities.

 

 
13

 

  

Premiums for Deposit Insurance

  

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. This limit is currently $250,000 per account owner for all depository accounts, including non-interest bearing transaction accounts, money market accounts, NOW accounts and savings accounts. The FDICIA requires the FDIC to establish a risk-based assessment system for all insured depository institutions. Under this legislation, the FDIC is required to establish an insurance premium assessment system based upon: (i) the probability that the insurance fund will incur a loss with respect to the institution, (ii) the likely amount of the loss, and (iii) the revenue needs of the insurance fund. In compliance with this mandate, the FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator.

 

As a result of the Dodd-Frank Act the FDIC modified its assessment rules so that an institution’s deposit insurance assessment base changed from total deposits to total assets less tangible equity. These assessment base rates range from 2.5 to 9 basis points for Risk Category I banks up to 45 basis points for Risk Category IV banks. Risk Category II and III banks have base assessment rates ranging from 9 to 33 basis points, respectively. If the risk category of the Bank changes adversely, the Bank’s FDIC insurance premiums could increase.

 

Insured depository institution failures over the past few years, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the Deposit Insurance Fund to historical lows. In addition, the increased deposit insurance coverage of $250,000 (up from $100,000 previously) per account owner may result in even larger losses to the Deposit Insurance Fund.

 

The FDIC may further increase or decrease the assessment rate schedule in order to manage the Deposit Insurance Fund to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank’s earnings. FDIC insurance of deposits may be terminated by the FDIC, after notice and hearing, upon finding by the FDIC that the insured institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule or order of, or conditions imposed by, the FDIC.

 

The Bank expensed $312,000 in FDIC assessments in 2015 and $374,000 in 2014.

 

Interstate Banking and Branching

 

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) was enacted to ease restrictions on interstate banking. Effective September 25, 1995, Riegle-Neal allows the Federal Reserve Board to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of, the assets of a bank located in a state other than such holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for a minimum time period (not exceeding five years) specified by the statutory law of the host state. Riegle-Neal also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. Riegle-Neal does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in Riegle-Neal.

 

Community Reinvestment Act

 

Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not prescribe specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a banking institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) amended the CRA to require public disclosure of an institution’s CRA rating and require the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. The Bank’s latest CRA rating, received from the FDIC, was “satisfactory.”

 

 
14

 

 

ITEM 1A.

RISK FACTORS

 

Not required.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

The Company does not own any properties and leases each of its offices.

 

The Bank's main office is located at 981 Hopmeadow Street, Simsbury, Connecticut. The Bank leases its main office pursuant to a lease with an initial term that expires in 2016 and was renewed through 2021. The Bank also has the option to purchase the office during the fifth year of the lease. This lease also covers the building at 987 Hopmeadow Street that is being used as additional administrative offices and is partially subleased to small local businesses.

 

The Bank’s Granby branch office is located at 11 Hartford Avenue, Granby, Connecticut. The Bank leases this office pursuant to a lease with an initial term of fifteen years that, by the terms of the lease expired in 2013 and that contains renewal options for a total of an additional ten years. The Bank has exercised a renewal option and the lease currently expires in 2018.

 

The Bank’s Avon branch office is located at 27 Dale Road, Avon, Connecticut. The Bank leases this office pursuant to a lease with an initial term of fifteen years that, by the terms of the lease expired in 2014 and that contains renewal options for a total of an additional ten years. The Bank has exercised a renewal option and the lease currently expires in 2019.

 

The Bank’s Bloomfield office is located at 864 Cottage Grove Road, Bloomfield, Connecticut. The Bank leases this office pursuant to a lease with an initial term of ten years that expires in 2016 and was renewed through 2021 and contains renewal options for a total of an additional five years.

 

The Bank operates a loan production office located at 51 Jefferson Boulevard, Warwick, Rhode Island. The Bank leases this office pursuant to a lease with an initial term of three years that expires in August 2016 and that contains no renewal option.

 

The Bank operates a loan production office located at 21 County Road, Mattapoisett, Massachusetts. The Bank leases this office pursuant to a lease with an initial term of three years that expires in 2017 and that contains no renewal option.

 

The Bank operates a loan production office located at 20 Cabot Boulevard, Mansfield, Massachusetts. The Bank leases this office pursuant to a lease with an initial term of six months, which automatically renews for a term of six months pursuant to an automatic renewal option.

 

The Bank operates a loan production office located at 2389 Main Street, Glastonbury, Connecticut. The Bank leases this office pursuant to a lease dated October 1, 2015 with an initial term of one year that expires in 2016 and that contains a renewal option for one year.

 

On July 10, 2015, the Bank filed applications with the Connecticut Department of Banking and the Federal Deposit Insurance Corporation to open a full service branch at 1232 Farmington Avenue in West Hartford, Connecticut. The Bank has received regulatory approval from the Connecticut Department of Banking and the FDIC to open this new branch office in West Hartford, Connecticut and has negotiated a lease for the new branch office, which is scheduled to open in the second quarter of 2016. The lease has an initial term of 10 years that expires in 2025 and that contains an option to renew for 2 terms of five additional years each.

 

 
15

 

 

The Bank’s administrative offices are located at 86 Hopmeadow Street, Simsbury, Connecticut. The Bank leases this building pursuant to a lease with a term that expires in 2020. The Bank has an option to renew the lease for 2 terms of five additional years each.

 

The Bank had leased its Canton mortgage center located at 250 Albany Turnpike, Canton, Connecticut pursuant to a lease with an initial term of ten years that, by the terms of the lease, expired in 2015 and that contained renewal options for a total of an additional fifteen years. The Bank did not renew and extend this lease and vacated the premises on July 31, 2015.

 

The Bank made aggregate lease payments of $936,000 during 2015 and $935,000 during 2014.

 

ITEM 3.

LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The bid price of the stock of the Bank’s parent company, SBT Bancorp, Inc., is currently quoted on the OTCQX marketplace operated by the OTC Markets Group (symbol: “SBTB”). At December 31, 2015, there were 1,360,591 shares of the Company's common stock issued, of which 1,360,177 shares were outstanding. As of March 28, 2016, the Company had approximately 1,000 shareholders of record. There is a limited market for the Company’s common stock. The following table sets forth the high and low price for the periods indicated.

 

    December 31, 2015     December 31, 2014  
                                 
   

High

   

Low

   

High

   

Low

 

Fourth Quarter

  $ 22.00     $ 19.35     $ 22.99     $ 21.53  

Third Quarter

  $ 22.95     $ 20.20     $ 22.75     $ 21.55  

Second Quarter

  $ 24.95     $ 21.05     $ 25.50     $ 21.75  

First Quarter

  $ 22.10     $ 21.30     $ 23.25     $ 21.10  

 

The above over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not reflect actual transactions.

 

Dividends

 

The Company’s shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available therefor. Connecticut law prohibits the Company from paying cash dividends except from its net profits, which are defined by Connecticut statues.

 

 
16

 

 

On August 11, 2011, the Company issued 9,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C (the “SBLF Preferred Stock”), to the U.S. Treasury pursuant to the SBLF program. The SBLF Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution, and winding up of the Company. On December 18, 2015, the Company redeemed all of the 9,000 outstanding shares of the SBLF Preferred Stock, Series C, liquidation amount $1,000 per share for an aggregate redemption price of approximately $9.02 million, including dividends accrued but unpaid through, but not including, the redemption date. The redemption of the Series C Preferred Stock terminated the Company’s participation in the SBLF program in full and had been approved by the Company’s primary Federal regulator.

 

In 2015, the Company declared and paid cash dividends on its common stock of $125,000 on each of March 15, 2015, June 14, 2015, and September 13, 2015, respectively. The Company also declared and paid cash dividends on its common stock of $188,000 on December 13, 2015. In accordance with the terms and conditions of the SBLF Preferred Stock, the Company declared and paid cash dividends on the SBLF Preferred Stock of $22,500 on March 30, 2015, $31,500 on June 30, 2015, $22,500 on September 30, 2015 and $19,250 on December 18, 2015.

 

In 2014, the Company declared and paid cash dividends on its common stock of $123,000 on each of March 14, 2014, June 13, 2014, and September 12, 2014, respectively. The Company also declared and paid cash dividends on its common stock of $123,500 on December 12, 2014. In accordance with the terms and conditions of the SBLF Preferred Stock, the Company declared and paid cash dividends on the SBLF Preferred Stock of $22,500 on March 30, 2014, $22,500 on June 30, 2014, $22,500 on September 30, 2014 and $22,500 on December 31, 2014.

 

The Company did not repurchase any shares of its common stock during 2015 or 2014. The Company’s common stock is the only class of equity securities that is registered by the Company pursuant to Section 12 of the Exchange Act.

 

Additional information required by this Item 5 is incorporated into this Form 10-K by reference to Item 12 of Part III of this Form 10-K under the caption “EQUITY COMPENSATION PLAN INFORMATION.”

   

ITEM 6.

SELECTED FINANCIAL DATA

 

Not required.

 

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS Of financial condition and Results OF OPERATIONS

 

Forward-Looking Statements

 

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

 

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

 

 

economic conditions (both generally and in the Company’s markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;

  

 
17

 

 

 

a general decline in the real estate and lending market may negatively affect the Company’s financial results;

 

 

inaccuracies in management’s assumptions used in calculating the appropriate amount to be placed into the Company’s allowance for loan losses;

 

 

In 2012, the Financial Accounting Standards Board (the “FASB”) released a proposed standard on accounting for credit losses. The standard would replace multiple existing impairment models, including replacing an “incurred loss” model for loans with an “expected loss” model. The FASB has recently announced an effective date of January 1, 2019, and final guidance is expected to be issued in the second quarter of 2016. The final standard may have a material impact on the Company’s retained earnings in the period of adoption.

 

 

restrictions or conditions imposed by regulators on the Company’s operations may make it more difficult for the Company to achieve its goals;

 

 

legislative and regulatory changes (including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations) subject the Company to additional regulatory oversight which may result in increased compliance costs and/or require the Company to change its business model;

 

 

changes in accounting standards and compliance requirements may adversely affect the businesses in which the Company is engaged;

 

 

competitive pressures among depository and other financial institutions may increase significantly;

 

 

changes in the interest rate environment may reduce margins or the volumes or values of the loans the Company makes;

 

 

competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than the Company can;

 

 

the Company’s ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

 

 

adverse changes may occur in the equity markets;

 

 

war or terrorist activities may cause deterioration in the economy or cause instability in credit markets; and

 

 

economic, governmental or other factors may prevent the projected population and residential and commercial growth in the markets in which the Company operates.

 

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

 

General

 

This discussion is designed to assist you in better understanding the Company’s financial condition, results of operations, liquidity and capital resources as well as any significant changes and trends related thereto. This discussion should be read in conjunction with our financial statements.

 

For the year ended December 31, 2015, the Company’s net income totaled $1,409,000 compared to $805,000 for the year ended December 31, 2014, an increase of $604,000 or 75%. Net income available to common stockholders after preferred stock dividends and amortization was $1,301,000 or $1.36 per diluted share for the year ended December 31, 2015 compared to $703,000 or $0.79 per diluted share for the year ended December 31, 2014, a 72% increase in diluted earnings per share. The increase in net earnings was primarily due to the increase in income from mortgage banking activities and an increase in net interest income. Total assets as of December 31, 2015 were $445 million compared to $409 million as of December 31, 2014.

 

 
18

 

 

Total revenues, consisting of net interest and dividend income plus noninterest income, were $14.9 million for 2015 compared to $13.9 million for 2014, an increase of $1.0 million or 7%. Net interest and dividend income increased in 2015 by $370 thousand or 3% and noninterest income increased by $652 thousand or 26% primarily due to an increase in income from mortgage banking activities.

 

The net interest margin increased 3 basis points to 3.03% in 2015 from 3.00% in 2014 as the yield on interest earning assets decreased 2 basis points to 3.21% while cost of funds decreased 5 basis points to 0.27% in 2015. The Bank experienced a greater decline in its cost of funds than it did on its yield on interest earnings assets.

 

Total noninterest expenses for 2015 were $13.0 million, a decrease of $50 thousand or 0.38% compared to 2014. The decrease in noninterest expenses was primarily attributable to decreases in advertising and promotion expenses, FDIC assessments and other operating expenses, which were partially offset by increases in salaries and employee benefits, data processing expenses and occupancy expenses. Advertising and promotion expenses decreased by $152 thousand in 2015 or 26% compared to 2014. FDIC insurance assessments decreased by $62 thousand in 2015 compared to 2014. Salaries and employee benefit expenses increased $136 thousand and data processing fees increased by $97 thousand during 2015 compared to 2014. Other operating expenses decreased by $121 thousand in 2015 compared to 2014. The provision for loan losses was $278 thousand in 2015 compared to $55 thousand in 2014, an increase of $223 thousand.

 

On December 31, 2015, outstanding loans were $327 million, an increase of $40.6 million or 14.2% over a year ago. The allowance for loan losses was $3.0 million or 0.93% of total loans at December 31, 2015 compared to $2.8 million or 0.97% of total loans at December 31, 2014. The profile of the Company’s loan portfolio remained relatively low-risk throughout 2015. At December 31, 2015, 57.3% of total loans were conventionally underwritten residential mortgages and consumer home equity lines and loans. Commercial loans, including construction and land development and municipal loans, represented 36.8% of the Company’s total loans. Other consumer loans comprised 5.9% of total loans. The Company’s exposure to commercial real estate loans was relatively low. Total exposure to builder and land development loans and non-owner occupied commercial real estate loans was $25.7 million at December 31, 2015, which represented 8% of total loans and 86.5% of total stockholders’ equity. The Company had non-accrual loans totaling $4.1 million equal to 1.27% of total loans at December 31, 2015 compared to non-accrual loans of $2.5 million or 0.89% of total loans at December 31, 2014. Total non-accrual loans and loans 30 or more days past due and still accruing interest increased to 1.44% of outstanding loans at December 31, 2015 from 1.08% of outstanding loans at December 31, 2014.

 

Total deposits at December 31, 2015 were $373 million compared to $356 million at December 31, 2014. From December 31, 2014 to December 31, 2015, demand deposits increased $18.3 million or 15.6% and savings and NOW deposits increased $2.6 million or 1.5% while time deposits decreased $4.4 million or 7.1%. At December 31, 2015, 36.4% of total deposits were in non-interest bearing demand accounts, 48.2% were in low-cost savings and NOW accounts and 15.4% were in time deposits.

 

Capital levels for The Simsbury Bank & Trust Company, Inc. on December 31, 2015 were above those required to meet the regulatory “well-capitalized” designation.

 

Results of Operations for the Years Ended December 31, 2015, 2014 and 2013

 

Net Interest Income and Net Interest Margin

 

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

 

 
19

 

 

Net interest and dividend income, before provision for loan losses, totaled $11.8 million in 2015, which was an increase of $370,000 or 3.3% from 2014. Average earning assets grew to $397 million at December 31, 2015 from $387 million at December 31, 2014 primarily due to an increase in total loans. The Bank’s net interest spread and net interest margin increased to 2.95% and 3.03%, respectively, during 2015 as compared to 2.91% and 3.00%, respectively, during 2014.

 

The following tables present the average amounts outstanding for the major categories of the Bank’s interest-earning assets and interest-bearing liabilities and the average interest rates earned or paid thereon for the years ended December 31, 2015, 2014 and 2013.

  

NET INTEREST INCOME

(Dollars in thousands)

 

    For the Year Ended 12/31/15  
           

[1]

         
   

Average Balance

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 13,032     $ 38       0.29 %
                         

Investments (1)

    79,378       1,789       2.25 %
                         

Mortgage loans

    143,554       5,044       3.51 %

Commercial loans

    97,757       4,027       4.12 %

Consumer loans

    63,218       1,858       2.94 %

Total loans (1)

    304,529       10,929       3.59 %
                         

Total interest-earning assets (1)

  $ 396,939     $ 12,756       3.21 %
                         

NOW deposits

  $ 39,270     $ 32       0.08 %

Savings deposits

    151,863       163       0.11 %

Certificates of deposit

    58,761       420       0.71 %

Total interest bearing deposits

    249,894       615       0.25 %
                         

Securities sold under agreements to repurchase

    3,066       4       0.13 %

Long-term subordinated debt

    1,430       61       4.27 %

Federal Home Loan Bank advances

    17,795       48       0.27 %
                         

Total interest-bearing liabilities

  $ 272,185     $ 728       0.27 %
                         

Net interest income

          $ 12,028          

Net interest spread

                    2.95 %

Net interest margin

                    3.03 %

 

 
20

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

    For the Year Ended 12/31/14  
           

[1]

         
   

Average Balance

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 16,648     $ 45       0.27 %
                         

Investments (1)

    88,580       1,980       2.24 %
                         

Mortgage loans

    141,497       5,195       3.67 %

Commercial loans

    81,916       3,387       4.13 %

Consumer loans

    58,154       1,884       3.24 %

Total loans (1)

    281,567       10,466       3.72 %
                         

Total interest-earning assets (1)

  $ 386,795     $ 12,491       3.23 %
                         

NOW deposits

  $ 38,729     $ 30       0.08 %

Savings deposits

    152,488       277       0.18 %

Certificates of deposit

    65,787       542       0.82 %

Total interest bearing deposits

    257,004       849       0.33 %
                         

Securities sold under agreements to repurchase

    3,622       4       0.11 %

Federal Home Loan Bank advances

    8,426       18       0.21 %
                         

Total interest-bearing liabilities

  $ 269,052     $ 871       0.32 %
                         

Net interest income

          $ 11,620          

Net interest spread

                    2.91 %

Net interest margin

                    3.00 %

 

 
21

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

    For the Year Ended 12/31/13  
           

[1]

         
   

Average Balance

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 12,738     $ 35       0.27 %
                         

Investments (1)

    105,771       2,362       2.23 %
                         

Mortgage loans

    127,805       4,723       3.70 %

Commercial loans

    71,680       3,159       4.41 %

Consumer loans

    56,332       1,971       3.50 %

Total loans (1)

    255,817       9,853       3.85 %
                         

Total interest-earning assets (1)

  $ 374,326     $ 12,250       3.27 %
                         

NOW deposits

  $ 35,529     $ 28       0.08 %

Savings deposits

    147,657       253       0.17 %

Certificates of deposit

    72,344       613       0.85 %

Total interest bearing deposits

    255,530       894       0.35 %
                         

Securities sold under agreements to repurchase

    3,265       4       0.12 %

Federal Home Loan Bank advances

    9,575       19       0.20 %
                         

Total interest-bearing liabilities

  $ 268,370     $ 917       0.34 %
                         

Net interest income

          $ 11,333          

Net interest spread

                    2.93 %

Net interest margin

                    3.03 %

   

(1)

On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $272,000 in 2015, $234,000 in 2014 and $246,000 in 2013.

 

 
22

 

 

The following tables set forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the rate column and the volume column. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

 

   

Year Ended December 31, 2015

compared to

Year Ended December 31, 2014

   

Year Ended December 31, 2014

compared to

Year Ended December 31, 2013

 
    Increase (Decrease)     Increase (Decrease)  
    Due to     Due to  
   

Volume

   

Rate

   

Net

   

Volume

   

Rate

   

Net

 
                                                 

Interest and dividend income:

                                               

Federal funds sold and overnight deposits

  $ (12 )   $ 5     $ (7 )   $ 11     $ (1 )   $ 10  

Investments

    (213 )     22       (191 )     (500 )     118       (382 )

Loans

    824       (361 )     463       1,273       (660 )     613  

Total interest-earning assets

  $ 599     $ (334 )   $ 265     $ 784     $ (543 )   $ 241  
                                                 
                                                 
                                                 

Interest expense:

                                               

NOW deposits

  $ 2     $ -     $ 2     $ 2     $ -     $ 2  

Savings deposits

    (1 )     (113 )     (114 )     8       16       24  

Time deposits

    (59 )     (63 )     (122 )     (54 )     (17 )     (71 )

Total interest-bearing deposits

    (58 )     (176 )     (234 )     (44 )     (1 )     (45 )
                                                 

Securities sold under agreements to repurchase

    (1 )     1       -       -       -       -  

Long term subordinated debt

    61       -       61                          

FHLB advances

    20       10       30       (3 )     2       (1 )

Total interest-bearing liabilities

    22       (165 )     (143 )     (47 )     1       (46 )
                                                 

Net change in interest income

  $ 577     $ (169 )   $ 408     $ 831     $ (544 )   $ 287  

  

Provision for Loan Losses

 

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

 

Each month, the Bank reviews the allowance for loan losses and makes additional provisions to the allowance as needed. For the year ended December 31, 2015, the allowance increased $267,000, net of charge-offs and recoveries. The total allowance for loan losses at December 31, 2015 was $3,028,000 or 0.93% of outstanding loans. This compares with a total allowance for loan losses of $2,761,000 at December 31, 2014, which represented 0.97% of outstanding loans. During 2015, the Bank charged off eight loans for a total of $22,000 compared to seven loans for a total of $101,000 during 2014. The Bank recorded recoveries on three loans for $11,000 in 2015 compared to six loans for $15,000 in 2014. Management believes the allowance for loan losses is adequate and will continue to monitor the levels closely in 2016.

 

 
23

 

 

Noninterest Income and Noninterest Expense

 

The following tables set forth the various components of the Bank’s noninterest income and noninterest expense for the years ended December 31, 2015, 2014 and 2013.

 

NONINTEREST INCOME

(Dollars in thousands)

 

   

For Year

Ended

12/31/2015

   

% of

Noninterest

Income

   

For Year

Ended

12/31/2014

   

% of

Noninterest

Income

   

For Year

Ended12/31/2013

   

% of

Noninterest

Income

 
                                                 

Service charges on deposit accounts

  $ 400       12.8 %   $ 474       19.2 %   $ 488       15.6 %

Safe deposit fees

    92       2.9 %     95       3.8 %     91       2.9 %

Writedown of securities

    (7 )     -0.2 %     (8 )     -0.3 %     (17 )     -0.5 %

Gain on sales of investments

    139       4.5 %     150       6.1 %     126       4.0 %

Mortgage banking activities

    1,201       38.5 %     581       23.5 %     1,390       44.5 %

Investment services fees and commissions

    216       6.9 %     237       9.6 %     231       7.4 %

Other income

    1,081       34.6 %     941       38.1 %     817       26.1 %

Total noninterest income

  $ 3,122       100.0 %   $ 2,470       100.0 %   $ 3,126       100.0 %

 

NONINTEREST EXPENSE

(Dollars in thousands)

 

   

For Year

Ended

12/31/2015

   

% of

Noninterest

Expense

   

For Year

Ended

12/31/2014

   

% of

Noninterest

Expense

   

For Year

Ended

12/31/2013

   

% of

Noninterest

Expense

 
                                                 

Salaries and employee benefits

  $ 6,872       53.1 %   $ 6,736       51.8 %   $ 6,880       54.6 %

Occupancy expense

    1,394       10.8 %     1,358       10.4 %     1,185       9.4 %

Equipment expense

    399       3.1 %     443       3.4 %     290       2.4 %

Professional fees

    571       4.4 %     538       4.1 %     543       4.3 %

Advertising and promotions

    442       3.4 %     594       4.6 %     756       6.0 %

Forms and supplies

    162       1.3 %     172       1.3 %     144       1.1 %

Insurance

    395       3.1 %     467       3.6 %     280       2.2 %

Loan expenses

    143       1.1 %     155       1.2 %     138       1.1 %

Postage

    16       0.1 %     32       0.3 %     86       0.7 %

Other expenses

    2,556       19.7 %     2,505       19.3 %     2,297       18.2 %

Total noninterest expense

  $ 12,950       100.0 %   $ 13,000       100.0 %   $ 12,599       100.0 %

 

Noninterest income increased by $652,000 to $3,122,000 for the year ended December 31, 2015 from $2,470,000 for the year ended December 31, 2014. This increase was due primarily to an increase of $620,000 in income from mortgage banking activities, which was partially offset by a $74,000 decrease in the deposit service charges category. For the year ended December 31, 2014, noninterest income decreased by $656,000 to $2,470,000 from $3,126,000 for the year ended December 31, 2013. This decrease was due primarily to a decrease of $809,000 in income from mortgage banking activities.

 

At December 31, 2015, the Bank had 20,738 deposit accounts, a decrease of 440 accounts or 2.1% from the number of accounts at December 31, 2014 and a decrease of 408 accounts over the number of accounts at December 31, 2013. SBT Investment Services, Inc.’s revenues decreased by approximately $21,000 in 2015 compared to 2014.

 

Noninterest expense for the year ended December 31, 2015 was $12,950,000, a decrease of $50,000 or 0.38% compared to 2014. The decrease in 2015 was primarily related to a decrease of $152,000 in advertising and promotions expenses, a decrease of $62,000 in FDIC assessment fees and a decrease of $12,000 in loan related expenses, which were partially offset by increases in salaries and employee benefits of $136,000, professional fees of $33,000 and other expenses of $51,000.

 

Salaries and employee benefits comprised 53.1% of total noninterest expense during 2015 as compared to 51.8% in 2014 and 54.6% in 2013. Occupancy expenses were approximately 10.7% in 2015, 10.4% in 2014 and 9.4% in 2013, respectively, and continued to be the other major category of noninterest expense.

 

 
24

 

 

Financial Condition at Years Ended December 31, 2015, 2014 and 2013

 

The following tables set forth the average balances of each principal category of our assets, liabilities, and capital accounts for the years ended December 31, 2015, 2014 and 2013.

 

Distribution of Assets, Liabilities and Stockholders' Equity

(Dollars In Thousands)

 

   

For the Year Ended

12/31/2015

   

For the Year Ended

12/31/2014

   

For the Year Ended

12/31/2013

 
   

Average

Balance

   

% of

Total Assets

   

Average

Balance

   

% of

Total Assets

   

Average

Balance

   

% of

Total Assets

 
ASSETS                                                

Cash and due from banks

  $ 8,442       2.0 %   $ 8,542       2.1 %   $ 8,489       2.2 %

Investment securities

    79,378       19.0 %     87,704       21.5 %     105,771       26.8 %

Fed funds sold and overnight deposits

    13,032       3.1 %     16,861       4.1 %     12,738       3.2 %

Loans, net

    304,529       73.0 %     278,798       68.4 %     253,151       64.2 %

Premises and equipment

    1,426       0.4 %     1,714       0.4 %     1,073       0.3 %

Accrued interest and other assets

    10,317       2.5 %     13,788       3.4 %     13,097       3.3 %

Total assets

  $ 417,124       100.0 %   $ 407,407       100.0 %   $ 394,319       100.0 %
                                                 
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Deposits:

                                               

Demand and NOW deposits

  $ 151,327       36.3 %   $ 147,473       36.2 %   $ 131,494       33.3 %

Savings deposits

    151,863       36.4 %     152,488       37.4 %     147,657       37.4 %

Time deposits

    58,761       14.1 %     65,787       16.1 %     72,344       18.3 %

Total deposits

    361,951       86.8 %     365,748       89.8 %     351,495       89.1 %
                                                 

Federal Home Loan Bank advances

    17,795       4.3 %     8,425       2.1 %     9,575       2.4 %

Long-term subordinated debt

    1,430       0.3 %     0       0.0 %     0       0.0 %

Accrued interest and other liabilities

    4,507       1.1 %     4,312       1.1 %     5,368       1.5 %

Total liabilities

    385,683       92.5 %     378,485       92.9 %     366,438       92.9 %
                                                 

STOCKHOLDERS' EQUITY

                                               

Common stock

    11,730       2.8 %     10,141       2.5 %     9,918       2.5 %

Preferred stock

    8,649       2.1 %     8,982       2.2 %     8,970       2.3 %

Retained Earnings and accumulated other comprehensive (loss) income

    11,062       2.6 %     9,799       2.4 %     8,993       2.3 %

Total stockholders' equity

    31,441       7.5 %     28,922       7.1 %     27,881       7.1 %
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 417,124       100.0 %   $ 407,407       100.0 %   $ 394,319       100.0 %

 

Investment Portfolio

 

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

 

Securities may be pledged to meet security requirements imposed as a condition for receipt of deposits of public funds and repurchase agreements. At December 31, 2015, the Bank had 33 securities with a carrying value totaling $14,319,000 pledged for such purposes.

 

As of December 31, 2015, the Bank’s investment portfolio consisted of U.S. government and agency securities, mortgage-backed securities, municipal securities and money market mutual funds. The Bank’s policy is to stagger the maturities of its investments to meet overall liquidity requirements of the Bank.

 

 
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The following table summarizes the amounts and distribution of the Bank’s investment securities held as of December 31, 2015 and 2014.

 

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

   

December 31, 2015

 
   

Amortized

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair

Value

   

Yield

 
                                         

AVAILABLE-FOR-SALE SECURITIES

                                       

U.S. Government and agency securities

                                       

Due after one to five years

  $ 10,499     $ 6     $ 42     $ 10,463       1.33 %

Total U.S. government and agency securities

    10,499       6       42       10,463       1.33  

State and municipal securities

                                       
Due within one year     375       4       -       379       3.95  

Due after one to five years

    7,780       305       20       8,065       2.70  

Due after five to ten years

    4,580       121       8       4,693       3.08  

Due after ten to fifteen years

    1,025       9       8       1,026       2.51  

Due beyond fifteen years

    498       8       -       506       3.25  

Total state and municipal securities

    14,258       447       36       14,669       2.86  

Mortgage-backed securities

                                       

Due after one to five years

    733       12       -       745       2.43  

Due after five to ten years

    1,997       19       7       2,009       2.13  

Due after ten to fifteen years

    25,144       16       393       24,767       1.80  

Due beyond fifteen years

    18,084       18       342       17,760       2.20  

Total mortgage-backed securities

    45,958       65       742       45,281       1.98  

SBA loan pools

                                       

Due after five to ten years

    1,089       23       8       1,104       3.19  

Total SBA loan pools

    1,089       23       8       1,104       3.19  
                                         

Total available-for-sale securities

  $ 71,804     $ 541     $ 828     $ 71,517       2.36 %


INVESTMENT PORTFOLIO

(Dollars in thousands)

 

   

December 31, 2014

 
   

Amortized

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair

Value

   

Yield

 
                                         

AVAILABLE-FOR-SALE SECURITIES

                                       

U.S. Government and agency securities

                                       

Due after one to five years

  $ 16,702     $ 1     $ 135     $ 16,568       1.21 %

Due after five to ten years

    1,500       -       4       1,496       1.83  

Total U.S. government and agency securities

    18,202       1       139       18,064       1.27  

State and municipal securities

                                       

Due after one to five years

    559       24       -       583       2.26  

Due after five to ten years

    4,835       184       31       4,988       3.22  

Due after ten to fifteen years

    8,065       445       21       8,489       3.23  

Due beyond fifteen years

    2,513       26       -       2,539       3.09  

Total state and municipal securities

    15,972       679       52       16,599       3.18  

Mortgage-backed securities

                                       

Due within one year

    -       -       -       -       -  

Due after one to five years

    588       14       -       602       2.97  

Due after five to ten years

    1,846       36       1       1,881       2.25  

Due after ten to fifteen years

    28,811       42       360       28,493       1.78  

Due beyond fifteen years

    17,912       48       268       17,692       2.38  

Total mortgage-backed securities

    49,157       140       629       48,668       2.03  

SBA loan pools

                                       

Due after one to five years

    -       -       -       -       -  

Due after five to ten years

    440       34       -       474       4.96  

Total SBA loan pools

    440       34       -       474       4.96  
                                         

Total available-for-sale securities

  $ 83,771     $ 854     $ 820     $ 83,805       2.36 %

 

 
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INVESTMENT PORTFOLIO

(Dollars in thousands)

 

   

December 31, 2013

 
   

Amortized

Cost

   

Unrealized

Gains

   

Unrealized

Losses

   

Fair

Value

   

Yield

 
                                         

AVAILABLE-FOR-SALE SECURITIES

                                       

U.S. Government and agency securities

                                       

Due after one to five years

  $ 13,061     $ -     $ 245     $ 12,816       1.08 %

Due after five to ten years

    5,706       -       275       5,431       1.46  

Total U.S.government and agency securities

    18,767       -       520       18,247       1.20  

State and municipal securities

                                       

Due after one to five years

    301       2       -       303       3.00