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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2016

Commission File Number: 000-17859

 

 

Lake Sunapee Bank Group

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

State of Delaware   02-0430695

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

I.D. Number)

9 Main Street, P.O. Box 9, Newport, New Hampshire   03773
(Address of Principal Executive Offices)   (Zip Code)

(603) 863-0886

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

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

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of August 1, 2016 was 8,388,116.

 

 

 


Table of Contents

LAKE SUNAPEE BANK GROUP

INDEX

 

         Page  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     i   

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements:   
  Condensed Consolidated Balance Sheets—June 30, 2016 (unaudited) and December 31, 2015      1   
  Condensed Consolidated Statements of Income (unaudited)—For the Three Months and Six Months Ended June 30, 2016 and 2015      2   
  Condensed Consolidated Statements of Comprehensive Income (unaudited)—For the Three Months and Six Months Ended June 30, 2016 and 2015      3   
  Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) For the Six Months Ended June 30, 2016 and 2015      4   
  Condensed Consolidated Statements of Cash Flows (unaudited)—For the Six Months Ended June 30, 2016 and 2015      5   
  Notes to Condensed Consolidated Financial Statements (unaudited)      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      47   

Item 4.

  Controls and Procedures      48   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      48   

Item 1A.

  Risk Factors      48   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

  Defaults Upon Senior Securities      48   

Item 4.

  Mine Safety Disclosures      48   

Item 5.

  Other Information      49   

Item 6.

  Exhibits      49   


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

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

 

    continued volatility and disruption in national and international financial markets;

 

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

 

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

 

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

 

    inflation, interest rate, securities market and monetary fluctuations;

 

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

 

    changes in consumer spending, borrowings and savings habits;

 

    technological changes;

 

    the ability to increase market share and control expenses;

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,  
     2016     2015  
(Dollars in thousands, except per share data)    (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 19,630      $ 16,426   

Interest-bearing deposit with the Federal Reserve Bank

     34,999        26,140   
  

 

 

   

 

 

 

Cash and cash equivalents

     54,629        42,566   

Securities available-for-sale

     157,424        120,198   

Federal Home Loan Bank stock

     13,713        9,963   

Loans held-for-sale

     3,573        2,188   

Loans receivable, net of allowance for loan losses of $8.8 million as of June 30, 2016 and $8.9 million as of December 31, 2015

     1,233,871        1,217,461   

Accrued interest receivable

     3,799        2,431   

Bank premises and equipment, net

     24,674        24,421   

Investments in real estate

     3,331        3,392   

Other real estate owned

     335        904   

Goodwill

     44,576        44,576   

Other intangible assets

     7,135        7,822   

Bank-owned life insurance

     31,288        30,833   

Other assets

     12,316        11,019   
  

 

 

   

 

 

 

Total assets

   $ 1,590,664      $ 1,517,774   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 141,176      $ 127,428   

Interest-bearing

     1,007,158        1,029,924   
  

 

 

   

 

 

 

Total deposits

     1,148,334        1,157,352   

Federal Home Loan Bank advances

     226,178        150,000   

Securities sold under agreements to repurchase

     20,540        17,957   

Subordinated debentures

     36,910        36,873   

Accrued expenses and other liabilities

     17,327        18,884   
  

 

 

   

 

 

 

Total liabilities

     1,449,289        1,381,066   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $.01 par value per share: 30,000,000 shares authorized, 8,821,025 shares issued and 8,385,278 shares outstanding as of June 30, 2016, and 30,000,000 shares authorized, 8,811,170 shares issued and 8,376,841 shares outstanding as of December 31, 2015

     88        88   

Paid-in capital

     80,387        80,252   

Retained earnings

     70,835        68,344   

Unearned restricted stock awards

     (1,031     (1,375

Accumulated other comprehensive loss

     (2,129     (3,850

Treasury stock, 435,747 shares as of June 30, 2016 and 434,329 shares as of December 31, 2015, at cost

     (6,775     (6,751
  

 

 

   

 

 

 

Total stockholders’ equity

     141,375        136,708   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,590,664      $ 1,517,774   
  

 

 

   

 

 

 

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

 

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Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended      Six months ended  
     June 30,     June 30,      June 30,     June 30,  
(In thousands, except share and per share data)    2016     2015      2016     2015  

Interest and dividend income

         

Interest and fees on loans

   $ 11,872      $ 11,481       $ 23,398      $ 23,071   

Interest on debt securities:

         

Taxable

     753        258         1,459        571   

Tax-exempt

     137        85         219        172   

Dividends

     104        47         189        95   

Other

     22        12         45        30   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     12,888        11,883         25,310        23,939   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Interest on deposits

     918        991         1,849        2,057   

Interest on advances and other borrowed money

     530        244         956        526   

Interest on debentures

     484        465         961        926   

Interest on securities sold under agreements to repurchase

     26        17         51        32   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     1,958        1,717         3,817        3,541   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest and dividend income

     10,930        10,166         21,493        20,398   

Provision for loan losses

     121        215         232        419   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     10,809        9,951         21,261        19,979   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Customer service fees

     1,453        1,454         2,869        2,828   

Gain on sales and calls of securities, net

     1,201        1         1,201        373   

Mortgage banking activities

     236        683         348        810   

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

     (27     —           (42     (3

Net gain on sales and disposals of premises and equipment

     —          3         —          3   

Rental income

     170        168         337        337   

Trust and investment management fee income

     2,115        2,202         4,166        4,246   

Insurance and brokerage service income

     370        296         907        819   

Bank-owned life insurance income

     218        152         437        298   

Other income

     2        85         94        89   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     5,738        5,044         10,317        9,800   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense

         

Salaries and employee benefits

     6,115        5,975         12,336        12,010   

Occupancy and equipment

     1,466        1,533         2,968        3,214   

Advertising and promotion

     298        271         440        440   

Depositors’ insurance

     234        236         470        474   

Outside services

     695        591         1,328        1,183   

Professional services

     307        377         602        659   

ATM processing fees

     231        231         419        419   

Supplies

     150        163         298        273   

Telephone

     273        271         544        540   

Merger related

     754        —           754        —     

Amortization of intangible assets

     341        386         687        776   

Other expenses

     2,176        1,464         3,735        2,923   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     13,040        11,498         24,581        22,911   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     3,507        3,497         6,997        6,868   

Provision for income taxes

     1,139        1,079         2,160        2,147   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 2,368      $ 2,418       $ 4,837      $ 4,721   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income applicable to common stock

   $ 2,343      $ 2,398       $ 4,785      $ 4,681   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.28      $ 0.29       $ 0.58      $ 0.57   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of shares, basic

     8,298,504        8,285,521         8,292,397        8,273,519   

Earnings per common share, assuming dilution

   $ 0.28      $ 0.29       $ 0.58      $ 0.56   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of shares, assuming dilution

     8,298,504        8,298,584         8,293,050        8,287,204   

Dividends declared per common share

   $ 0.14      $ 0.13       $ 0.28      $ 0.26   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

2


Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three months
ended June 30,
    Six months
ended June 30,
 
(Dollars in thousands)    2016      2015     2016      2015  

Net income

   $ 2,368       $ 2,418      $ 4,837       $ 4,721   

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

     120         (312     1,721         (68
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 2,488       $ 2,106      $ 6,558       $ 4,653   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except share data)

  Preferred
Stock
    Common Stock     Paid-in
Capital
    Retained
Earnings
    Unearned
Restricted
Stock
Awards
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total  
  Shares     Amount     Shares     Amount              

Balance at December 31, 2014

    8,000      $ —         8,692,360      $ 87      $ 86,561      $ 63,876      $ (598   $ (3,339   $ (6,751   $ 139,836   

Net income

              4,721              4,721   

Other comprehensive loss

                  (68       (68

Exercise of stock options (cashless exchanges shown net)

        15,514          204                204   

Dividend reinvestment plan

        6,594          94                94   

Dividends declared—preferred stock

              (40           (40

Dividends paid—common stock ($0.26 per share)

              (2,149           (2,149

Issuance of restricted stock awards

        64,250        1        979          (980         —     

Vesting of restricted stock awards

                157            157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    8,000      $ —         8,778,718      $ 88      $ 87,838      $ 66,408      $ (1,421   $ (3,407   $ (6,751   $ 142,755   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

    —       $ —         8,811,170      $ 88      $ 80,252      $ 68,344      $ (1,375   $ (3,850   $ (6,751   $ 136,708   

Net income

              4,837              4,837   

Other comprehensive income

                  1,721          1,721   

Dividend reinvestment plan

        9,855          135                135   

Dividends paid—common stock ($0.28 per share)

              (2,346           (2,346

Restricted stock awards surrendered to treasury stock

                    (24     (24

Vesting of restricted stock awards

                344            344   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

    —       $ —         8,821,025      $ 88      $ 80,387      $ 70,835      $ (1,031   $ (2,129   $ (6,775   $ 141,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the six months ended  
     June 30,     June 30,  
(Dollars in thousands)    2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 4,837      $ 4,721   

Depreciation and amortization

     1,287        1,231   

Amortization of fair value adjustments, net

     84        145   

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

     37        36   

Amortization of securities, net

     240        144   

Net decrease (increase) in mortgage servicing rights

     383        (74

Loans originated for sale

     (34,361     (51,482

Proceeds from loans sold

     33,285        50,620   

Increase in cash surrender value of life insurance

     (455     (316

Amortization of intangible assets

     687        776   

Provision for loan losses

     232        419   

Increase in accrued interest receivable and other assets

     (2,974     (1,022

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

     6        —     

Write-down of other real estate owned

     42        —     

Net gain on sales and calls of securities

     (1,201     (373

Net gain on sales of loans

     (309     (395

Change in deferred loan origination fees and cost, net

     (147     (15

(Decrease) increase in accrued expenses and other liabilities

     (2,342     1,166   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (669     5,581   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures – investments in real estate

     (13     (4

Capital expenditures – software

     (168     (40

Capital expenditures – premises and equipment

     (1,378     (1,353

Maturities of interest-bearing time deposits with other banks

     —          747   

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

     31,754        40,662   

Proceeds from maturities of securities available-for-sale

     5,352        162,458   

Purchases of securities available-for-sale

     (70,521     (206,651

Purchase of Federal Home Loan Bank stock

     (3,750     —     

Loan originations and principal collections, net

     (16,806     10,162   

Recoveries of loans previously charged off

     204        485   

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

     527        61   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (54,799     6,527   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in demand deposits, savings and NOW accounts

     (18,249     15,804   

Net increase (decrease) in time deposits

     9,254        (19,740

Net increase in securities sold under agreements to repurchase

     2,583        2,790   

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

     70,000        (5,000

Principal advances from Federal Home Loan Bank

     21,180        20,000   

Repayment of advances from the Federal Home Loan Bank

     (15,002     (10,000

Issuance of common stock from dividend reinvestment plan

     45        21   

Dividends paid on preferred stock

     —          (40

Dividends paid on common stock

     (2,256     (2,076

Surrender of stock awards to treasury

     (24     —     

Proceeds from exercise of stock options

     —          204   
  

 

 

   

 

 

 

Net cash provided by financing activities

     67,531        1,963   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     12,063        14,071   

CASH AND CASH EQUIVALENTS, beginning of period

     42,566        51,120   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 54,629      $ 65,191   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Interest paid

   $ 3,756      $ 3,623   
  

 

 

   

 

 

 

Income taxes paid

   $ 2,200      $ 965   
  

 

 

   

 

 

 

Loans transferred to other real estate owned

   $ —        $ 465   
  

 

 

   

 

 

 

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

 

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LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

Nature of Operations

Lake Sunapee Bank Group (the “Company”), a Delaware company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank organized in 1868. The Bank has four wholly owned subsidiaries: Lake Sunapee Financial Services Corporation (“LSFS”); Lake Sunapee Group, Inc., which owns and maintains all buildings and investment properties; McCrillis & Eldredge Insurance, Inc. (“M&E”), a full-line independent insurance agency, which offers a complete range of commercial insurance services and consumer products; and Charter Holding Corp. (“Charter Holding”), which through its subsidiaries, provides trust and wealth management services. The Company’s operations are managed along two reportable segments that represent its core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and its subsidiaries, Charter Trust Company (“Charter Trust”) and Charter New England Agency. The Company, through its direct and indirect subsidiaries, currently operates 26 locations in New Hampshire in Grafton, Hillsborough, Merrimack and Sullivan counties as well as 14 locations in Vermont in Orange, Rutland and Windsor counties. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”), and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”).

Note A—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed balance sheet data at December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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

Note B—Accounting Policies

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

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

Effective as of March 31, 2016, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The guidance requires the Company to report debt issuance costs, less amortization, net against the outstanding principal balance of the related debt. The guidance was adopted on a retrospective basis. Debt issuance costs which were reported in previous periods in other assets have been reclassified against subordinated debentures, reducing the reported outstanding principal.

Note C—Impact of New Accounting Standards

In May 2014 and August 2015, respectively, the FASB issued ASU 2014-09 and 2015-14, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to clarify principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial

 

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assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, the amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The Company is currently reviewing ASUs 2014-09 and 2015-14 to determine if they will have an impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.” The amendments in this update make targeted improvements to GAAP as follows:

 

  1. Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

 

  2. Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

 

  3. Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

 

  4. Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

 

  5. Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

 

  6. Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

 

  7. Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of item 5 above is permitted for financial statements of fiscal years or interim periods that have not yet been issued. Early adoption of other items above is not permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU was issued to increase transparency and comparability among organizations by requiring reporting entities to recognize all leases, including operating, as lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and related retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several areas of accounting for share-based compensation including accounting for income taxes, forfeitures and classification of excess tax benefits and employee taxes paid. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU replace the existing incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU covers expected credit losses on financial instruments and other commitments. The amendments in this ASU are effective for SEC filing public business entities for fiscal years beginning after December 15, 2019, and interim periods within those annual periods. The Company is still determining the impact of the adoption of this ASU and the related impact on its consolidated financial statements.

Note D—Fair Value Measurements

In accordance with ASC 820-10, “Fair Value Measurement—Overall,” the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1—Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

 

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

Mortgage Servicing Rights. The fair value of servicing rights is estimated using a present value cash flow model. Assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

The following summarizes assets and liabilities measured at fair value at June 30, 2016 and December 31, 2015.

Assets Measured at Fair Value on a Recurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    June 30,
2016
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

U.S. Treasury notes

   $ 35,267       $ —        $ 35,267       $ —     

U.S. government-sponsored enterprise bonds

     7,281         —           7,281         —     

Mortgage-backed securities

     75,635         —           75,635         —     

Municipal bonds

     28,496         —           28,496         —     

Other bonds and debentures

     10,448         —           10,448         —     

Equity securities

     297         297         —           —     

Interest rate lock commitments

     143         —           —           143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 157,567       $ 297       $ 157,127       $ 143   
  

 

 

    

 

 

    

 

 

    

 

 

 
(Dollars in thousands)    December 31,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

U.S. Treasury notes

   $ 34,939       $ —         $ 34,939       $ —     

U.S. government-sponsored enterprise bonds

     7,211         —           7,211         —     

Mortgage-backed securities

     69,334         —           69,334         —     

Municipal bonds

     8,304         —           8,304         —     

Other bonds and debentures

     112         —           112         —     

Equity securities

     298         298         —           —     

Interest rate lock commitments

     32         —           —           32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 120,230       $ 298       $ 119,900       $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Liabilities Measured at Fair Value on a Recurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    June 30, 2016      Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Forward loan sale commitments

   $ 171       $ —         $ —         $ 171   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 171       $ —         $ —         $ 171   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    December 31,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Forward loan sale commitments

   $ 14       $ —         $ —         $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14       $ —         $ —         $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Three months ended June 30, 2016

  

Balance as of March 31, 2016

   $ (121    $ 104   

Realized (loss) gain recognized in non-interest income

     (50      143   

Transfers to loans held for sale

     —           (104
  

 

 

    

 

 

 

Balance as of June 30, 2016

   $ (171    $ 143   
  

 

 

    

 

 

 

 

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

Six months ended June 30, 2016

  

Balance as of December 31, 2015

   $ (14    $ 32   

Realized (loss) gain recognized in non-interest income

     (157      247   

Transfers to loans held for sale

     —           (136
  

 

 

    

 

 

 

Balance as of June 30, 2016

   $ (171    $ 143   
  

 

 

    

 

 

 

 

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

Three months ended June 30, 2015

  

Balance as of March 31, 2015

   $ (128    $ 128   

Realized (loss) gain recognized in non-interest income

     168         90   

Transfers to loans held for sale

     —           (128
  

 

 

    

 

 

 

Balance as of June 30, 2015

   $ 40       $ 90   
  

 

 

    

 

 

 

 

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

Six months ended June 30, 2015

  

Balance as of December 31, 2014

   $ —         $ —     

Realized (loss) gain recognized in non-interest income

     40         218   

Transfers to loans held for sale

     —           (128
  

 

 

    

 

 

 

Balance as of June 30, 2015

   $ 40       $ 90   
  

 

 

    

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

     Fair Value Measurements at Reporting Date Using:  
(Dollars in thousands)    June 30,
2016
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Impaired loans

   $ 1,585       $ —         $ —         $ 1,585   

Mortgage servicing rights

     2,057         —           —           2,057   

Other real estate owned

     335         —           —           335   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,977       $ —         $ —         $ 3,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)    December 31,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
Level 1
     Significant
Other
Observable
Inputs
Level 2
     Significant
Unobservable
Inputs
Level 3
 

Impaired loans

   $ 5,905       $ —         $ —         $ 5,905   

Mortgage servicing rights

     2,441         —           —           2,441   

Other real estate owned

     904         —           —           904   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,250       $ —         $ —         $ 9,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans with a specific reserve measured for impairment using the fair value of the underlying collateral at June 30, 2016 and December 31, 2015. Collateral dependent loans are valued using third-party appraisals primarily using the sales comparison approach. The appraisals may be discounted between 25-40% to reflect realizable value based on historical losses, which represents an unobservable input. Impaired loans measured for impairment using the net present value of cash flows had a recorded investment of $1.8 million with a valuation allowance of $237 thousand at June 30, 2016. Loans valued using the net present value of cash flows are calculated using expected future cash flows with a discount rate equal to the effective yield of the loan. At December 31, 2015, impaired loans measured using the net present value of cash flows had a recorded investment of $6.3 million with a valuation allowance of $386 thousand.

 

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The estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015, all of which are held or issued for purposes other than trading, were as follows:

 

            Fair Value Measurements at Reporting Date Using:  

(Dollars in thousands)

June 30, 2016

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

Financial assets:

        

Cash and cash equivalents

   $ 54,629       $ 54,629       $ —         $ —         $ 54,629   

Securities available-for-sale

     157,424         297         157,127         —           157,424   

Federal Home Loan Bank stock

     13,713         13,713         —           —           13,713   

Loans held-for-sale

     3,573         —           3,608         —           3,608   

Loans, net

     1,233,871         —           —           1,246,530         1,246,530   

Investment in unconsolidated subsidiaries

     620         —           —           501         501   

Accrued interest receivable

     3,799         3,799         —           —           3,799   

Interest rate lock commitments

     143         —           —           143         143   

Financial liabilities:

        

Deposits

     1,148,334         —           1,149,975         —           1,149,975   

Federal Home Loan Bank advances

     226,178         —           227,269         —           227,269   

Securities sold under agreements to repurchase

     20,540         20,540         —           —           20,540   

Subordinated debentures

     36,910         —           —           33,875         33,875   

Forward loan sale commitments

     171         —           —           171         171   
              
            Fair Value Measurements at Reporting Date Using:  

(Dollars in thousands)

December 31, 2015

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

Financial assets:

        

Cash and cash equivalents

   $ 42,566       $ 42,566       $ —         $ —         $ 42,566   

Securities available-for-sale

     120,198         298         119,900         —           120,198   

Federal Home Loan Bank stock

     9,963         9,963         —           —           9,963   

Loans held-for-sale

     2,188         —           2,202         —           2,202   

Loans, net

     1,217,461         —           —           1,215,166         1,215,166   

Investment in unconsolidated subsidiaries

     620         —           —           349         349   

Accrued interest receivable

     2,431         2,431         —           —           2,431   

Interest rate lock commitments

     32         —           —           32         32   

Financial liabilities:

        

Deposits

     1,157,352         —           1,157,080         —           1,157,080   

Federal Home Loan Bank advances

     150,000         —           150,312         —           150,312   

Securities sold under agreements to repurchase

     17,957         17,957         —           —           17,957   

Subordinated debentures

     36,873         —           —           27,983         27,983   

Forward loan sale commitments

     14         —           —           14         14   

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

The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the six months ended June 30, 2016 or during the 12-month period ended December 31, 2015.

 

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Note E—Securities

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

The amortized cost basis of securities available-for-sale and their approximate fair values at June 30, 2016 and December 31, 2015 are summarized as follows:

 

(Dollars in thousands)

June 30, 2016

   Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Bonds and notes

           

U.S. Treasury notes

   $ 35,231       $ 37       $ 1       $ 35,267   

U.S. government-sponsored enterprise bonds

     7,284         2         5         7,281   

Mortgage-backed securities

     74,815         859         39         75,635   

Municipal bonds

     28,226         362         92         28,496   

Other bonds and debentures

     10,102         347         1         10,448   

Equity securities

     258         49         10         297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 155,916       $ 1,656       $ 148       $ 157,424   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)

December 31, 2015

   Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Bonds and notes

           

U.S. Treasury notes

   $ 35,282       $ —         $ 343       $ 34,939   

U.S. government-sponsored enterprise bonds

     7,305         1         95         7,211   

Mortgage-backed securities

     70,169         14         849         69,334   

Municipal bonds

     8,418         34         148         8,304   

Other bonds and debentures

     108         4         —           112   

Equity securities

     258         49         9         298   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 121,540       $ 102       $ 1,444       $ 120,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of June 30, 2016:

 

(Dollars in thousands)    Fair Value  

Other bonds and debentures

   $ 85   
  

 

 

 

Total due in less than one year

   $ 85   
  

 

 

 

U.S. Treasury notes

   $ 35,267   

U.S. government-sponsored enterprise bonds

     7,000   

Municipal bonds

     6,108   
  

 

 

 

Total due after one year through five years

   $ 48,375   
  

 

 

 

U.S. government-sponsored enterprise bonds

   $ 128   

Municipal bonds

     21,132   

Other bonds and debentures

     10,345   
  

 

 

 

Total due after five years through ten years

   $ 31,605   
  

 

 

 

U.S. government-sponsored enterprise bonds

   $ 153   

Municipal bonds

     1,256   

Other bonds and debentures

     18   
  

 

 

 

Total due after ten years

   $ 1,427   
  

 

 

 

 

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For the six months ended June 30, 2016, the proceeds from sales of securities available -for-sale were $31.8 million. Gross gains of $1.2 million were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $477 thousand. For the six months ended June 30, 2015, the proceeds from sales of securities available-for-sale were $40.2 million. Gross gains of $373 thousand were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $148 thousand. Securities, carried at $120.3 million and $119.8 million, were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) advances, and securities sold under agreements to repurchase as of June 30, 2016 and December 31, 2015, respectively.

Note F—Impairment of Securities

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

 

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

June 30, 2016:

                 

Bonds and notes—

                 

U.S. Treasury notes

   $ 15,011       $ 1       $ —         $ —         $ 15,011       $ 1   

U.S. Government-sponsored enterprise bonds

     —           —           153         5         153         5   

Mortgage-backed securities

     —           —           5,486         39         5,486         39   

Municipal bonds

     —           —           2,216         92         2,216         92   

Other bonds and debentures

     85         1         —           —           85         1   

Equity securities

     28         3         35         7        63         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 15,124       $ 5       $ 7,890       $ 143       $ 23,014       $ 148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

                 

Bonds and notes—  

                 

U.S. Treasury notes

   $ 24,817       $ 199       $ 10,122       $ 144       $ 34,939       $ 343   

U.S. Government-sponsored enterprise bonds

     2,967         33         4,101         62         7,068         95   

Mortgage-backed securities

     56,351         592         11,681         257         68,032         849   

Municipal bonds

     1,420         38         2,208         110         3,628         148   

Equity securities

     53         9         —           —           53         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 85,608       $ 871       $ 28,112       $ 573       $ 113,720       $ 1,444   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The investments in the Company’s investment portfolio that were temporarily impaired as of June 30, 2016 consisted of one U.S. Treasury note, one U.S. government-sponsored enterprise bond, fourteen mortgage-backed securities issued by U.S. government-sponsored enterprises, five municipal bonds, one other bond and debenture and twelve equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The Company has the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. We do not believe the unrealized losses on equity securities relate to credit quality of the issuers. We have the ability and intent to hold these investments until a recovery of cost basis.

 

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Table of Contents

Note G—Loan Portfolio

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

 

     June 30, 2016  
(Dollars in thousands)    Originated      Acquired      Total  

Real estate loans:

        

Conventional

   $ 613,087       $ 39,739       $ 652,826   

Home equity

     68,245         4,998         73,243   

Commercial

     278,633         57,190         335,823   

Construction

     19,850         1,218         21,068   
  

 

 

    

 

 

    

 

 

 
     979,815         103,145         1,082,960   

Commercial and municipal loans

     140,415         9,157         149,572   

Consumer loans

     4,836         863         5,699   
  

 

 

    

 

 

    

 

 

 

Total loans

     1,125,066         113,165         1,238,231   

Allowance for loan losses

     (8,506      (259      (8,765

Deferred loan origination costs, net

     4,405         —           4,405   
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

   $ 1,120,965       $ 112,906       $ 1,233,871   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
(Dollars in thousands)    Originated      Acquired      Total  

Real estate loans:

        

Conventional

   $ 600,763       $ 41,895       $ 642,658   

Home equity

     66,708         5,547         72,255   

Commercial

     259,834         63,434         323,268   

Construction

     33,663         1,255         34,918   
  

 

 

    

 

 

    

 

 

 
     960,968         112,131         1,073,099   

Commercial and municipal loans

     133,596         8,925         142,521   

Consumer loans

     5,411         1,077         6,488   
  

 

 

    

 

 

    

 

 

 

Total loans

     1,099,975         122,133         1,222,108   

Allowance for loan losses

     (8,607      (298      (8,905

Deferred loan origination costs, net

     4,258         —           4,258   
  

 

 

    

 

 

    

 

 

 

Loans receivable, net

   $ 1,095,626       $ 121,835       $ 1,217,461   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Real Estate                           

(Dollars in thousands)

June 30, 2016

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

Allowance for loan losses:

               

Originated:

               

Beginning balance, December 31, 2015

   $ 4,197      $ 2,884      $ 197      $ 1,199      $ 68      $ 62       $ 8,607   

Charge-offs

     (94     (242     —          (39     (163     —           (538

Recoveries

     23        —          —          44        102        —           169   

Provision (benefit)

     422        (256     (51     7        71        75         268   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, June 30, 2016

   $ 4,548      $ 2,386      $ 146      $ 1,211      $ 78      $ 137       $ 8,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Acquired:

               

Beginning balance, December 31, 2015

   $ 63     $ 190     $ 21      $ 24     $ —        $ —         $ 298  

Charge-offs

     (37     —          —          —          (1 )     —           (38 )

Recoveries

     27       —          —          2       6       —           35  

(Benefit) provision

     (29     (10 )     16        (8 )     (5 )     —           (36 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, June 30, 2016

   $ 24     $ 180     $ 37     $ 18     $ —        $ —         $ 259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Originated:

               

Individually evaluated for impairment

   $ 129      $ 108      $ —        $ —        $ —        $ —         $ 237   

Collectively evaluated for impairment

     4,419        2,278        146        1,211        78        137         8,269   

Acquired loans (Discounts related to Credit Quality)

     24        180        37        18        —          —           259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total allowance for loan losses ending balance, June 30, 2016

   $ 4,572      $ 2,566      $ 183      $ 1,229      $ 78      $ 137       $ 8,765   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

               

Originated:

               

Individually evaluated for impairment

   $ 5,173      $ 4,417      $ 432      $ 172      $ —        $ —         $ 10,194   

Collectively evaluated for impairment

     676,159        274,216        19,418        140,243        4,836        —           1,114,872   

Acquired loans (Discounts related to Credit Quality)

     44,737        57,190        1,218        9,157        863        —           113,165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total loans ending balance, June 30, 2016

   $ 726,069      $ 335,823      $ 21,068      $ 149,572      $ 5,699      $ —         $ 1,238,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

16


Table of Contents
     Real Estate                            

(Dollars in thousands)

June 30, 2015

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

Allowance for loan losses:

                

Originated:

                

Beginning balance, December 31, 2014

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

Charge-offs

     (281     —         —          (884     (135     —          (1,300

Recoveries

     8        —         —          465        78        —          551   

Provision (benefit)

     119        (285     61         417        53        54         419   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, June 30, 2015

   $ 4,609      $ 2,439      $ 1,052       $ 633      $ 82      $ 124       $ 8,939   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Acquired:

                

Beginning balance, December 31, 2014

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

Charge-offs

     —         —         —          —         —         —          —    

Recoveries

     —         —         —          —         —         —          —    

Provision (benefit)

     —         —         —          —         —         —          —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance, June 30, 2015

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Originated:

                

Individually evaluated for impairment

   $ 193      $ 75      $ 12       $ 4      $ —       $ —        $ 284   

Collectively evaluated for impairment

     4,416        2,364        1,040         629        82        124         8,655   

Acquired loans (Discounts related to Credit Quality)

     —         —         —          —         —         —          —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 4,609      $ 2,439      $ 1,052       $ 633      $ 82      $ 124       $ 8,939   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

                

Originated:

                

Individually evaluated for impairment

   $ 6,573      $ 3,542      $ 451       $ 431      $ —       $ —        $ 10,997   

Collectively evaluated for impairment

     643,758        233,619        41,247         126,699        6,549        —          1,051,872   

Acquired loans (Discounts related to Credit Quality)

     53,123        69,911        1,405         11,395        1,352        —          137,186   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans ending balance, June 30, 2015

   $ 703,454      $ 307,072      $ 43,103       $ 138,525      $ 7,901      $ —        $ 1,200,055   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

17


Table of Contents
     Real Estate                              

(Dollars in thousands)

December 31, 2015

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

Allowance for loan losses:

                    

Originated:

                    

Individually evaluated for impairment

   $ 200       $ 133       $ 15      $ 7       $ —        $ —        $ 355   

Collectively evaluated for impairment

     3,997         2,751         182         1,192         68         62         8,252   

Acquired loans (Discounts related to Credit Quality)

     63         190         21         24         —           —           298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses ending balance, December 31, 2015

   $ 4,260       $ 3,074       $ 218       $ 1,223       $ 68       $ 62       $ 8,905   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Originated:

                    

Individually evaluated for impairment

   $ 6,707       $ 5,078       $ 442       $ 732       $ —        $ —        $ 12,959   

Collectively evaluated for impairment

     660,764         254,756         33,221         132,864         5,411         —          1,087,016   

Acquired loans (Discounts related to Credit Quality)

     47,442         63,434         1,255         8,925         1,077         —          122,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans ending balance, December 31, 2015

   $ 714,913       $ 323,268       $ 34,918       $ 142,521       $ 6,488       $ —        $ 1,222,108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

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

 

     June 30, 2016  
(Dollars in thousands)    30-59 Days      60-89 Days      90 Days or
More
     Total Past
Due
     Nonaccrual
Loans
 

Originated:

              

Real estate:

              

Conventional

   $ 216       $ 1,587       $ 1,156       $ 2,959       $ 2,673   

Home equity

     480         —           115         595         115   

Commercial

     1,317         212         885         2,414         1,947   

Construction

     540         —          —           540         —     

Commercial and municipal

     427         73         2         502         91   

Consumer (including credit card)

     42         1         —           43         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,022       $ 1,873       $ 2,158       $ 7,053       $ 4,826   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

              

Real estate:

              

Conventional

   $ 176       $ 341       $ 335       $ 852       $ 363   

Home equity

     —           —           —           —           —     

Commercial

     201         30         603         834         603   

Construction

     —           —           —          —           —    

Commercial and municipal

     226         —           75         301         75   

Consumer (including credit card)

     —           —          —          —           —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 603       $ 371       $ 1,013       $ 1,987       $ 1,041   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real estate:

              

Conventional

   $ 392       $ 1,928       $ 1,491       $ 3,811       $ 3,036   

Home equity

     480         —           115         595         115   

Commercial

     1,518         242         1,488         3,248         2,550   

Construction

     540         —          —           540         —     

Commercial and municipal

     653         73         77         803         166   

Consumer (including credit card)

     42         1         —           43         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,625       $ 2,244       $ 3,171       $ 9,040       $ 5,867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
(Dollars in thousands)    30-59 Days      60-89 Days      90 Days or
More
     Total Past
Due
     Nonaccrual
Loans
 

Originated:

              

Real estate:

              

Conventional

   $ 1,644       $ 1,309       $ 1,454       $ 4,407       $ 2,310   

Home equity

     180         —          166         346         166   

Commercial

     1,028         482         309         1,819         1,565   

Construction

     24         —          —          24         —    

Commercial and municipal

     89         50         584         723         584   

Consumer (including credit card)

     16         7         —           23         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,981       $ 1,848       $ 2,513       $ 7,342       $ 4,625   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

              

Real estate:

              

Conventional

   $ 514       $ 238       $ 654       $ 1,406       $ 707   

Home equity

     12         —           17         29         17   

Commercial

     386         —           677         1,063         677   

Construction

     —           —           —           —           —     

Commercial and municipal

     5         —           —           5         —     

Consumer (including credit card)

     6         12         —           18         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 923       $ 250       $ 1,348       $ 2,521       $ 1,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
     December 31, 2015  
(Dollars in thousands)    30-59 Days      60-89 Days      90 Days or
More
     Total Past
Due
     Nonaccrual
Loans
 

Total:

              

Real estate:

              

Conventional

   $ 2,158       $ 1,547       $ 2,108       $ 5,813       $ 3,017   

Home equity

     192         —          183         375         183   

Commercial

     1,414         482         986         2,882         2,242   

Construction

     24         —          —          24         —    

Commercial and municipal

     94         50         584         728         584   

Consumer (including credit card)

     22         19         —           41         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,904       $ 2,098       $ 3,861       $ 9,863       $ 6,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans past due 90 days or more and still accruing as of June 30, 2016 and December 31, 2015.

Troubled Debt Restructurings

The following tables present the recorded investment in troubled debt restructured (“TDR”) loans as of June 30, 2016 and December 31, 2015 based on payment performance status:

 

     June 30, 2016  
     Real Estate                
(Dollars in thousands)    Conventional      Commercial      Construction      Commercial      Total  

Performing

   $ 2,635       $ 2,605       $ 432       $ 81       $ 5,753   

Non-performing

     1,918         275         —          15         2,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,553       $ 2,880       $ 432       $ 96       $ 7,961   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
     Real Estate                
(Dollars in thousands)    Conventional      Commercial      Construction      Commercial      Total  

Performing

   $ 3,506       $ 2,836       $ 442       $ 149       $ 6,933   

Non-performing

     1,160         285         —          —           1,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,666       $ 3,121       $ 442       $ 149       $ 8,378   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

During the six month period ended June 30, 2016, certain loan modifications were executed that constituted TDRs. All of these modifications included one or a combination of the following: (1) an extension of the maturity date; (2) reduction in the interest rate; or (3) change in scheduled payment amount.

The following table presents pre-modification balance information on how loans were modified as TDRs during the six months ended June 30, 2016:

 

(Dollars in thousands)    Interest
Rate
     Combination of
Interest Only
Payments and
Maturity
     Total  

Real estate:

        

Commercial

   $ 45       $ 193       $ 238   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 45       $ 193       $ 238   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

Real estate:

              

Conventional

   $ 80       $ 267       $ 423       $ —        $ 770   

Commercial and municipal

     —          —          —          7         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 80       $ 267       $ 423       $ 7       $ 777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(Dollars in thousands)    Number of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

June 30, 2016:

        

Troubled Debt Restructurings:

        

Real estate:

        

Commercial

     2       $ 238       $ 238   
  

 

 

    

 

 

    

 

 

 
     2       $ 238       $ 238   
  

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)    Number of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

June 30, 2015:

        

Troubled Debt Restructurings:

        

Real estate:

        

Conventional

     5       $ 770       $ 770   

Commercial and municipal

     1         7         7   
  

 

 

    

 

 

    

 

 

 
     6       $ 777       $ 777   
  

 

 

    

 

 

    

 

 

 

At June 30, 2016, there were no specific loan loss reserves related to TDRs that occurred during the six month period ended June 30, 2016. There were two new TDRs for which there was a payment default during the six month period ended June 30, 2016 including one conventional real estate loan totaling $92 thousand and one commercial real estate loan totaling $247 thousand, which occurred within 12 months following the date of the restructuring. Both TDR defaults occurred during the second quarter. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

At June 30, 2015, there were specific loan loss reserves of $94 thousand related to TDRs that occurred during the six month period ended June 30, 2015. There were no TDRs for which there was a payment default during the six month period ending June 30, 2015, which occurred within 12 months following the date of the restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

 

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Table of Contents

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables-Overall-Subsequent Measurement,” is as follows as of June 30, 2016:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit
Losses
 

With no related allowance recorded:

        

Real estate:

        

Conventional

   $ 4,141       $ 4,627       $ —    

Home equity

     132         211         —    

Commercial

     3,495         4,168         —    

Construction

     432         467         —    

Commercial and municipal

     172         196         —    
  

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance

     8,372         9,669         —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real estate:

        

Conventional

     900         925         129   

Commercial

     922         923         108   
  

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded

     1,822         1,848         237   
  

 

 

    

 

 

    

 

 

 

Total:

        

Real estate:

        

Conventional

     5,041         5,552         129   

Home equity

     132         211         —    

Commercial

     4,417         5,091         108   

Construction

     432         467         —     

Commercial and municipal

     172         196         —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 10,194       $ 11,517       $ 237   
  

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2015:

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Real estate:

        

Conventional

   $ 3,175       $ 3,895       $ —    

Home equity

     213         340         —    

Commercial

     2,589         3,028         —    

Construction

     —           —           —    

Commercial and municipal

     691         696         —    
  

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance

     6,668         7,959         —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real estate:

        

Conventional

     3,319         3,548         231  

Commercial

     2,489         2,546         133  

Construction

     442         476         15   

Commercial and municipal

     41         42         7  
  

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded

     6,291         6,612         386  
  

 

 

    

 

 

    

 

 

 

Total:

        

Real estate:

        

Conventional

     6,494         7,443         231   

Home equity

     213         340         —    

Commercial

     5,078         5,574         133   

Construction

     442         476         15   

Commercial and municipal

     732         738         7  
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 12,959       $ 14,571       $ 386   
  

 

 

    

 

 

    

 

 

 

 

 

23


Table of Contents

The following is a summary of the average recorded investment and interest income recognized on impaired loans for the six months ended June 30, 2016 and 2015:

 

    

Six months ended

June 30, 2016

    

Six months ended

June 30, 2015

 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Real estate:

           

Conventional

   $ 4,322       $ 74       $ 4,505       $ 56   

Home equity

     155         1         170         —     

Commercial

     3,704         77         4,044         33   

Construction

     437         10         503         —     

Commercial and municipal

     178         6         543         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with no related allowance

     8,796         168         9,765         96   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Real estate:

           

Conventional

     862         13         1,598         56   

Commercial

     933         20         899         30   

Construction

     —           —           227         9   

Commercial and municipal

     29         —           24         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired with an allowance recorded

     1,824         33         2,748         99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Real estate:

           

Conventional

     5,184         87         6,103         112   

Home equity

     155         1         170         —     

Commercial

     4,637         97         4,943         63   

Construction

     437         10         730         9   

Commercial and municipal

     207         6         567         11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 10,620       $ 201       $ 12,513       $ 195   
  

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment of conventional real estate loans in the process of foreclosure was $562 thousand and $1.2 million at June 30, 2016 and December 31, 2015, respectively. OREO was $335 thousand, representing one residential property and one commercial property, at June 30, 2016, compared to $904 thousand, representing three residential properties and two commercial properties of OREO and property acquired in settlement of loans at December 31, 2015.

The carrying amount of acquired loans at June 30, 2016 totaled $112.9 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $1.6 million and an outstanding principal balance of $1.9 million at June 30, 2016. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The carrying amount of acquired loans at December 31, 2015 totaled $121.8 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $2.4 million and an outstanding principal balance of $3.1 million at December 31, 2015. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

 

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Table of Contents

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

 

     Three months ended June 30,  
(Dollars in thousands)    2016      2015  

Accretable yield at the beginning of the period

   $ 1,939       $ 2,125   

Reclassification from nonaccretable difference for loans with improved cash flows

     —           —     

Accretion

     (655      (323

Change in cash flows that do not affect nonaccretable difference

     —           —     
  

 

 

    

 

 

 

Accretable yield at the end of the period

   $ 1,284       $ 1,802   
  

 

 

    

 

 

 

 

     Six months ended June 30,  
(Dollars in thousands)    2016      2015  

Accretable yield at the beginning of the period

   $ 2,213       $ 2,125   

Reclassification from nonaccretable difference for loans with improved cash flows

     13         —     

Accretion

     (691      (323

Change in cash flows that do not affect nonaccretable difference

     (251      —     
  

 

 

    

 

 

 

Accretable yield at the end of the period

   $ 1,284       $ 1,802   
  

 

 

    

 

 

 

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

 

     June 30, 2016  
     Real Estate                       
(Dollars in thousands)    Conventional
and Home
Equity
     Commercial      Construction      Commercial
and Municipal
     Consumer      Total  

Originated:

                 

Grade:

                 

Pass

   $ —        $ 245,849       $ 6,819       $ 119,749       $ —        $ 372,417   

Special mention

     —          4,198         9         105         —          4,312   

Substandard

     4,135         9,489         553         441         —          14,618   

Loans not formally rated

     677,197         19,097         12,469         20,120         4,836         733,719   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 681,332       $ 278,633       $ 19,850       $ 140,415       $ 4,836       $ 1,125,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

                 

Grade:

                 

Pass

   $ —        $ 50,942       $ 1,021       $ 8,322       $ —        $ 60,285   

Special mention

     —          1,678         —          —          —          1,678   

Substandard

     587         3,430         91         458         —          4,566   

Loans not formally rated

     44,150         1,140         106         377         863         46,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,737       $ 57,190       $ 1,218       $ 9,157       $ 863       $ 113,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Grade:

                 

Pass

   $ —        $ 296,791       $ 7,840       $ 128,071       $ —        $ 432,702   

Special mention

     —          5,876         9         105         —          5,990   

Substandard

     4,722         12,919         644         899         —          19,184   

Loans not formally rated

     721,347         20,237         12,575         20,497         5,699         780,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 726,069       $ 335,823       $ 21,068       $ 149,572       $ 5,699       $ 1,238,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents
     December 31, 2015  
     Real Estate:                       
(Dollars in thousands)    Conventional and
Home Equity
     Commercial      Construction      Commercial and
Municipal
     Consumer      Total  

Originated:

                 

Grade:

                 

Pass

   $ —        $ 222,466       $ 19,208       $ 111,653       $ —        $ 353,327   

Special mention

     —          4,278         18         112         —          4,408   

Substandard

     5,272         7,670         567         416         —          13,925   

Loans not formally rated

     662,199         25,420         13,870         21,415         5,411         728,315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 667,471       $ 259,834       $ 33,663       $ 133,596       $ 5,411       $ 1,099,975   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired:

                 

Grade:

                 

Pass

   $ —        $ 56,212       $ 1,047       $ 8,031       $ —        $ 65,290   

Special mention

     —          1,643         —          —           —          1,643   

Substandard

     1,038         4,097         92         509         —          5,736   

Loans not formally rated

     46,404         1,482         116         385         1,077         49,464   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,442       $ 63,434       $ 1,255       $ 8,925       $ 1,077       $ 122,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                 

Grade:

                 

Pass

   $ —        $ 278,678       $ 20,255       $ 119,684       $ —        $ 418,617   

Special mention

     —          5,921         18         112         —          6,051   

Substandard

     6,310         11,767         659         925         —          19,661   

Loans not formally rated

     708,603         26,902         13,986         21,800         6,488         777,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 714,913       $ 323,268       $ 34,918       $ 142,521       $ 6,488       $ 1,222,108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Information

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

 

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

 

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

 

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

 

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

 

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

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial and municipal loans over $250 thousand. The assessment of those loans less than $250 thousand is based on the borrower’s ability to pay and not on overall risk. Additionally, the Company monitors the repayment activity for such loans less than $300 thousand and if a loan becomes delinquent over 60 days past due, it is reviewed for risk and is subsequently risk rated based on available information such as ability to repay based on current cash flow conditions and workout discussions with the borrower. For residential real estate, home equity and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment capacity.

 

26


Table of Contents

Loan Servicing

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

 

(Dollars in thousands)    June 30,
2016
     December 31,
2015
 

Sold loans

   $ 451,834       $ 445,855   
  

 

 

    

 

 

 

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

The balances of capitalized servicing rights, net of valuation allowances, included in other assets at June 30, 2016, and December 31, 2015 were $2.1 million and $2.4 million, respectively. The fair value of capitalized servicing rights was $3.1 million as of June 30, 2016 and $4.0 million as of December 31, 2015. Servicing rights of $311 thousand were capitalized during the six months ended June 30, 2016, compared to $628 thousand for the same period in 2015. Amortization of capitalized servicing rights was $503 thousand for the six months ended June 30, 2016, compared to $514 thousand for the same period in 2015. Servicing rights of $203 thousand were capitalized during the three months ended June 30, 2016, compared to $465 thousand for the same period in 2015. Amortization of capitalized servicing rights was $247 thousand for the three months ended June 30, 2016, compared to $157 thousand for the same period in 2015.

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

 

     Three months ended June 30,      Six months ended June 30,  
(Dollars in thousands)    2016      2015      2016      2015  

Balance, beginning of period

   $ 198       $ 63       $ 73       $ 19   

Increase (decrease)

     67         (4      192         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 265       $ 59       $ 265       $ 59   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note H—Securities Sold Under Agreements to Repurchase

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

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

 

(Dollars in thousands)    June 30,
2016
     December 31,
2015
 

Repurchase agreements collateral

     

U.S. Treasury notes

   $ 2,519       $ 20,973   

U.S. government-sponsored enterprise bonds

     376         414   

Mortgage-backed securities

     24,187         2,896   

Municipal bonds

     746         729   
  

 

 

    

 

 

 

Total

   $ 27,828       $ 25,012   
  

 

 

    

 

 

 

Repurchase agreements

   $ 20,540       $ 17,957   
  

 

 

    

 

 

 

 

27


Table of Contents

Note I—Stock-Based Compensation

The Company’s 2014 Stock Incentive Plan, which was approved by the stockholders on May 8, 2014, had 410,000 shares remaining available for issuance at June 30, 2016. The Company accounts for the plan under ASC 718-10, “Compensation-Stock Compensation-Overall.” During the six months ended June 30, 2016 and 2015, stock-based compensation expense of $172 thousand and $79 thousand, respectively, was recognized under the Company’s equity plan. During the three months ended June 30, 2016 and 2015, stock-based compensation expense of $86 thousand and $39 thousand, respectively, was recognized under the Company’s equity plan. As of June 30, 2016, there were no options and 69,800 non-vested restricted stock awards outstanding under the 2004 Plan.

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

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

Note J—Pension Benefits

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

 

    

Three months ended

June 30,

    

Six months ended

June 30,

 
(Dollars in thousands)    2016      2015      2016      2015  

Interest cost

   $ 93       $ 93       $ 185       $ 187   

Expected return on plan assets

     (189      (160      (377      (321

Amortization of unrecognized net loss

     96         89         192         178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ —         $ 22       $ —         $ 44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note K—Derivative Instruments and Hedging Activities

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

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

The following table summarizes the fair values of derivative instruments in the consolidated balance sheet as of the periods indicated:

 

     June 30, 2016  
(Dollars in thousands)    Notional
Amount
     Fair Value
Asset/(Liability)
 

Interest rate lock commitments

   $ 15,545       $ 143   

Forward loan sale commitments

   $ 15,880       $ (171

 

     December 31, 2015  
(Dollars in thousands)    Notional
Amount
     Fair Value
Asset/(Liability)
 

Interest rate lock commitments

   $ 4,623       $ 32   

Forward loan sale commitments

   $ 5,135       $ (14

 

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Note L—Earnings Per Share (“EPS”)

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

Basic EPS has been computed using the weighted average number of common shares outstanding during each period. Diluted EPS for the six months ended June 30, 2016 and 2015 assumes, as of the beginning of the period, exercise of stock awards using the treasury stock method. Certain of our stock awards that would potentially dilute Basic EPS in the future were antidilutive for the six months ended June 30, 2016 and 2015 and are presented below.

The following is a reconciliation of the numerators and denominators used in the calculation of Basic and Diluted EPS for the six months ended June 30, 2016 and 2015:

 

     For the three months
ended June 30,
     For the six months
ended June 30,
 
(Dollars in thousands, except per share data)    2016      2015      2016      2015  

Net income as reported

   $ 2,368       $ 2,418       $ 4,837       $ 4,721   

Cumulative preferred stock dividend earned

     —           (20      —           (40

Dividends and undistributed earnings allocated to participating shares

     (25      —           (52      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income applicable to common stock

   $ 2,343       $ 2,398       $ 4,785       $ 4,681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic EPS

     8,298,504         8,285,521         8,292,397         8,273,519   

Effect of dilutive equity-based awards

     —           13,063         653         13,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for dilutive EPS

     8,298,504         8,298,584         8,293,050         8,287,204   

Earnings per common share – basic

   $ 0.28       $ 0.29       $ 0.58       $ 0.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share – diluted

   $ 0.28       $ 0.29       $ 0.58       $ 0.56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note M—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:

 

(Dollars in thousands)    As of  
   June 30,
2016
     December 31,
2015
 

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

   $ 911       $ (810

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

     (3,040      (3,040
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (2,129    $ (3,850
  

 

 

    

 

 

 

Reclassification disclosures for the periods ended June 30, 2016 and 2015 follow:

 

(Dollars in thousands)   

For the three months

ended June 30,

    

For the six months

ended June 30,

 
   2016      2015      2016      2015  

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

   $ 1,400       $ (515    $ 4,051       $ 260   

Reclassification adjustment for realized gains in net income (1)

     (1,201      (1      (1,201      (373
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss) before income tax effect

     199         (516      2,850         (113

Income tax (expense) benefit

     (79      204         (1,129      45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax effect

   $ 120       $ (312    $ 1,721       $ (68
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

(1) Reclassification adjustments are comprised of realized securities gains. The gains have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the condensed consolidated statements of income as follows: the pre-tax amounts are included in gain on sales of securities, net, the tax expense in the amount of $477 thousand for the three and six months ended June 30, 2016 is included in provision for income taxes and the after tax amounts are included in net income.

Note N—Operating Segments

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

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

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

 

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

Three Months Ended June 30, 2016

            

Net interest and dividend income (expense)

   $ 11,404       $ 5       $ (479   $ —       $ 10,930   

Provision for loan losses

     121         —          —         —         121   

Noninterest income

     3,866         2,138         3,574        (3,840     5,738   

Noninterest expense

     10,253         1,796         1,038        (47 )     13,040   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     4,896         347         2,057        (3,793     3,507   

Provision (benefit) for income taxes

     1,322         128         (311     —         1,139   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 3,574       $ 219       $ 2,368      $ (3,793   $ 2,368   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,593,232       $ 24,075       $ 177,792      $ (204,435   $ 1,590,664   

 

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

Three Months Ended June 30, 2015

            

Net interest and dividend income (expense)

   $ 10,625       $ —        $ (459   $ —       $ 10,166   

Provision for loan losses

     215         —          —         —         215   

Noninterest income

     3,145         2,196         2,905        (3,202     5,044   

Noninterest expense

     9,444         1,716         338        —         11,498   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     4,111         480         2,108        (3,202     3,497   

Provision (benefit) for income taxes

     1,206         183         (310     —         1,079   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 2,905       $ 297       $ 2,418      $ (3,202   $ 2,418   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,489,915       $ 20,151       $ 174,741      $ (173,303   $ 1,511,504   

 

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

Six Months Ended June 30, 2016

            

Net interest and dividend income (expense)

   $ 22,433       $ 10       $ (950   $ —       $ 21,493   

Provision for loan losses

     232         —          —         —         232   

Noninterest income

     6,603         4,206         6,442        (6,934     10,317   

Noninterest expense

     19,880         3,573         1,215        (87     24,581   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     8,924         643         4,277        (6,847     6,997   

Provision (benefit) for income taxes

     2,483         237         (560     —         2,160   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 6,441       $ 406       $ 4,837      $ (6,847   $ 4,837   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,593,232       $ 24,075       $ 177,792      $ (204,435   $ 1,590,664   

 

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

Six Months Ended June 30, 2015

            

Net interest and dividend income (expense)

   $ 21,307       $ 7       $ (916   $ —       $ 20,398   

Provision for loan losses

     419         —          —         —         419   

Noninterest income

     6,047         4,230         5,640        (6,117     9,800   

Noninterest expense

     18,867         3,469         575        —         22,911   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     8,068         768         4,149        (6,117     6,868   

Provision (benefit) for income taxes

     2,428         291         (572     —         2,147   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 5,640       $ 477       $ 4,721      $ (6,117   $ 4,721   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,489,915       $ 20,151       $ 174,741      $ (173,303   $ 1,511,504   

Note O—Merger Agreement

On May 5, 2016, we announced the signing of a definitive merger agreement pursuant to which Bar Harbor Bankshares (“Bar Harbor”), the holding company for Bar Harbor Bank & Trust (the “Bank”), will acquire the Company, whereby the Company will merge with and into Bar Harbor (the “Merger”). Thereafter, pursuant to the terms of the plan of bank merger to be entered into by the Bank and Bar Harbor Bank, the Bank will merge with and into Bar Harbor Bank, with Bar Harbor Bank surviving. Under the terms of the merger agreement, each outstanding share of the Company common stock will be converted into the right to receive 0.4970 shares of Bar Harbor common stock. The transaction is expected to close in the fourth quarter of 2016 or first quarter of 2017, subject to customary closing conditions, including receipt of regulatory approvals and the approvals of the shareholders of the Company and Bar Harbor. If the merger is not consummated under certain circumstances, the Company has agreed to pay Bar Harbor a termination fee of $5.5 million.

Note P—Subsequent Events

On July 11, 2016, the Company declared a regular quarterly cash dividend of $0.14 per common share payable July 29, 2016, to stockholders of record as of July 22, 2016.

 

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

Highlights and Overview

Our profitability is derived from our two operating segments, Banking and Wealth Management. The following is a summary of key financial results for the six months ended June 30, 2016:

 

    Net income available to common stockholders increased 2.22% compared to the same period in 2015.

 

    Return on average common stockholders’ equity of 6.94% and return on average assets of 0.62%.

 

    Book value per common share increased 3.31% to $16.86 as of June 30, 2016.

 

    Net loans increased $16.4 million, or 1.35%, to $1.2 billion as of June 30, 2016.

 

    Loans totaling $178.1 million were originated.

 

    Our loan servicing portfolio increased $5.9 million to $451.8 million.

 

    Net loan charge-offs were $372 thousand, or 0.06% (annualized) of average loans, for the six months ended June 30, 2016.

 

    As a percentage of total loans, nonperforming loans were 0.47%.

 

    Net interest margin was 3.05%.

 

    Noninterest income increased 5.28% to $10.3 million compared to the same period in 2015.

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

Critical Accounting Policies

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

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the six months ended June 30, 2016. For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2015 Annual Report on Form 10-K (“Annual Report”).

Operating Segments

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

Comparison of Financial Condition at June 30, 2016 (unaudited) and December 31, 2015

Assets. Total assets were $1.6 billion at June 30, 2016, compared to $1.5 billion at December 31, 2015, an increase of $72.9 million, or 4.80%.

Securities Portfolio. Securities available-for-sale increased $37.2 million, or 30.97%, to $157.4 million at June 30, 2016 from $120.2 million at December 31, 2015 as a result of $70.5 million in securities purchased during the period. Net unrealized gains on securities available-for-sale were $1.5 million at June 30, 2016 compared to net unrealized losses of $1.3 million at December 31, 2015. During the six months ended June 30, 2016, we sold securities with a total book value of $30.2 million for a net gain on sales of $1.2 million and $362 thousand of municipal bonds were called. During the same period, we purchased securities totaling $70.5 million, including mortgage-backed securities, municipal securities and corporate bonds. Our net unrealized gain (after tax) on our investment portfolio was $911 thousand at June 30, 2016 compared to a net unrealized loss (after tax) of $810 thousand at December 31, 2015. The investments in our investment portfolio that were temporarily impaired as of June 30, 2016 consisted of U.S. Treasury notes, U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S. government-sponsored enterprises, municipal bonds, other bonds and equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates. We have the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. We do not believe the unrealized losses on equity securities relate to credit quality of the issuers. We have the ability and intent to hold these investments until a recovery of cost basis.

 

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Table of Contents

Loans. Net loans held in portfolio increased $16.4 million, or 1.35%, to $1.2 billion at June 30, 2016 from $1.2 billion at December 31, 2015. The increase of loans held in portfolio was primarily due to increases in conventional real estate loans of $10.2 million, commercial real estate loans of $12.6 million and commercial and municipal loans of $7.1 million, offset in part by a decrease in land and construction loans of $13.9 million. As a percentage of total loans, impaired loans decreased to 0.83% at June 30, 2016 from 1.06% at December 31, 2015. During the six months ended June 30, 2016, we originated $178.1 million in loans, an increase of 5.26%, compared to $169.2 million during the same period in 2015. At June 30, 2016, our mortgage servicing loan portfolio was $451.8 million, compared to $445.9 million at December 31, 2015. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At June 30, 2016, adjustable-rate mortgages comprised approximately 61.56% of our real estate mortgage loan portfolio, which represents a slightly higher percentage compared to the mix at December 31, 2015 of 60.67%.

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

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

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

The allowance for loan losses at June 30, 2016 was $8.8 million compared to $8.9 million at December 31, 2015. The allowance for loan losses represents 0.71% of total loans held at June 30, 2016 compared to 0.73% at December 31, 2015. Total impaired loans at June 30, 2016 were $10.2 million, representing 116.30% of the allowance for loan losses. Modestly improving economic and market conditions and actual charge-off experience within the portfolio during the period resulted in us making $232 thousand in provisions to the allowance for loan losses during the six months ended June 30, 2016, compared to $419 thousand in provisions made for the same period in 2015. Loan charge-offs were $576 thousand during the six month period ended June 30, 2016, compared to $1.3 million for the same period in 2015. Recoveries were $204 thousand during the six month period ended June 30, 2016, compared to $551 thousand for the same period in 2015. This activity resulted in net charge-offs of $372 thousand for the six month period ended June 30, 2016, compared to $749 thousand for the same period in 2015. One-to-four family residential mortgages, commercial mortgages, commercial and municipal and consumer loans accounted for 23%, 42%, 7% and 28%, respectively, of the amounts charged-off during the six month period ended June 30, 2016.

The effects of national economic issues that continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to maintain our allowance for loan losses at $8.8 million. The risk of loss inherent in the loan portfolio was affected by a decrease in the originated loan portfolio, a reduction in impaired loans and modestly improving economic conditions. Management may make additional provisions during the remainder of 2016 to maintain the allowance at an adequate level.

Included in the allowance for loan losses is an allowance for losses from the fee for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days. At June 30, 2016, the overdraft allowance was $17 thousand, compared to $16 thousand at December 31, 2015. There were provisions of $32 thousand for overdraft losses recorded during the six month period ended June 30, 2016, compared to $19 thousand for the same period during 2015. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

 

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Table of Contents

The following tables are a summary of activity in the allowance for loan losses account for the periods indicated:

 

     Six months ended
June 30, 2016
 
(Dollars in thousands)    Originated      Acquired      Total  

Balance, beginning of year

   $ 8,607       $ 298      $ 8,905   
  

 

 

    

 

 

    

 

 

 

Charge-offs:

        

Conventional

     (94      (37      (131

Commercial real estate

     (242      —           (242

Construction

     —          —           —    

Commercial and municipal loans

     (39      —           (39

Consumer loans

     (163      (1      (164
  

 

 

    

 

 

    

 

 

 

Total charged-off loans

     (538      (38      (576
  

 

 

    

 

 

    

 

 

 

Recoveries:

        

Conventional

     23         27        50   

Commercial and municipal loans

     44         2        46   

Consumer loans

     102         6        108   
  

 

 

    

 

 

    

 

 

 

Total recoveries

     169         35        204   
  

 

 

    

 

 

    

 

 

 

Net charge-offs:

     (369      (3 )      (372
  

 

 

    

 

 

    

 

 

 

Provision (benefit) for loan loss charged to income:

        

Conventional

     422         (29 )      393   

Commercial real estate

     (256      (10 )      (266

Construction

     (51      16        (35

Commercial and municipal loans

     7         (8 )      (1

Consumer loans

     71         (5 )      66   

Unallocated

     75         —          75   
  

 

 

    

 

 

    

 

 

 

Total provision (benefit)

     268         (36 )      232   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 8,506       $ 259       $ 8,765   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six months ended
June 30, 2015
 
(Dollars in thousands)    Originated      Acquired      Total  

Balance, beginning of year

   $ 9,269       $ —        $ 9,269   
  

 

 

    

 

 

    

 

 

 

Charge-offs:

        

Conventional

     (281      —          (281

Commercial real estate

     —          —          —    

Construction

     —          —          —    

Consumer loans

     (135      —          (135

Commercial and municipal loans

     (884      —          (884
  

 

 

    

 

 

    

 

 

 

Total charged-off loans

     (1,300      —          (1,300
  

 

 

    

 

 

    

 

 

 

Recoveries:

        

Conventional

     8         —          8   

Commercial real estate

     —          —          —    

Construction

     —          —          —    

Consumer loans

     78         —          78   

Commercial and municipal loans

     465         —          465   
  

 

 

    

 

 

    

 

 

 

Total recoveries

     551         —          551   
  

 

 

    

 

 

    

 

 

 

Net charge-offs:

     (749      —          (749
  

 

 

    

 

 

    

 

 

 

Provision (benefit) for loan loss charged to income:

        

Conventional

     119         —          119   

Commercial real estate

     (285      —          (285

Construction

     61         —          61   

Consumer loans

     53         —          53   

Commercial and municipal loans

     417         —          417   

Unallocated

     54         —          54   
  

 

 

    

 

 

    

 

 

 

Total provision

     419         —          419   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 8,939       $ —        $ 8,939   
  

 

 

    

 

 

    

 

 

 

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

 

    

Six months ended

June 30,

 
(Dollars in thousands)    2016      2015  

Beginning balance

   $ 16       $ 20   
  

 

 

    

 

 

 

Overdraft charge-offs

     (130      (93

Overdraft recoveries

     99         66   
  

 

 

    

 

 

 

Net overdraft charge-offs

     (31      (27
  

 

 

    

 

 

 

Provision for overdraft losses

     32         19   
  

 

 

    

 

 

 

Ending balance

   $ 17       $ 12   
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     June 30, 2016     December 31, 2015  
(Dollars in thousands)           % of
Allowance
    % of
Loans
           % of
Allowance
    % of
Loans
 

Real estate loans

              

Conventional, 1-4 family and home equity loans

   $ 4,419         50     55   $ 3,997         45     54

Commercial

     2,278         26     22     2,751         31     21

Land and construction

     146         2     2     182         2     3

Commercial and municipal loans

     1,211         14     11     1,192         13     11

Collateral and consumer loans

     78         1     —         68         1     —    

Unallocated

     137         1     —         62         1     —    

Acquired loans (discounts to related credit quality)

     259         3     9     298         3     10

Impaired loans

     237         3     1     355         4     1
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance

   $ 8,765         100     100   $ 8,905         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for originated loans as a percentage of originated loans

        0.76          0.78  

Non-performing loans as a percentage of allowance

        66.94          67.67  

The following table shows total allowances including overdraft allowances:

 

(Dollars in thousands)    June 30, 2016      December 31, 2015  

Allowance for loan losses

   $ 8,748       $ 8,889   

Overdraft allowance

     17         16   
  

 

 

    

 

 

 

Total allowance

   $ 8,765       $ 8,905   
  

 

 

    

 

 

 

Asset Quality. Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans net of specific reserves were $18.9 million at June 30, 2016, compared to $19.7 million at December 31, 2015. OREO was $335 thousand at June 30, 2016 compared to $904 thousand at December 31, 2015. Losses have occurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Six loans considered to be impaired loans at June 30, 2016 have specific allowances identified and assigned. The six loans are secured by real estate, business assets or a combination of both. At June 30, 2016, the allowance included $237 thousand allocated to impaired loans compared to $386 thousand at December 31, 2015.

At June 30, 2016, we had 55 loans totaling $8.0 million considered to be TDRs as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” included in impaired loans. At June 30, 2016, 38 of the TDRs were performing under contractual terms. Of the loans classified as TDRs, 17 were non-performing at June 30, 2016. The total balance of these past due loans was $2.2 million. At December 31, 2015, we had 56 loans totaling $8.4 million considered to be TDRs.

Loans over 90 days past due were $3.2 million at June 30, 2016, compared to $3.9 million at December 31, 2015. Loans 30 to 89 days past due totaled $5.9 million at June 30, 2016, compared to $6.0 million at December 31, 2015. As a percentage of assets, the recorded investment in non-performing loans decreased from 0.40% at December 31, 2015 to 0.37% at June 30, 2016 and, as a percentage of total loans, decreased from 0.49% at December 31, 2015 to 0.47% at June 30, 2016.

Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not reflect trends or uncertainties that we reasonably expect will materially impact future operating results, liquidity or capital resources. For the six-month period ended June 30, 2016, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At June 30, 2016, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

 

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

 

     June 30, 2016     December 31, 2015  
(Dollars in thousands)   
Amount
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
   
Amount
     Percentage
of Total
Allowance
    Percentage
of Total
Assets
 

Non-accrual loans

   $ 5,867         66.94     0.37   $ 6,026         67.67     0.40

Other real estate owned and chattel

     335         3.82     0.02     904         10.15     0.06
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-performing assets

   $ 6,202         70.76     0.39   $ 6,930         77.82     0.46
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

 

(Dollars in thousands)    June 30, 2016      December 31, 2015  

Real estate:

     

Conventional

   $ 3,036       $ 3,017   

Home equity

     115         183   

Commercial

     2,550         2,242   

Commercial and municipal

     166         584   
  

 

 

    

 

 

 

Total

   $ 5,867       $ 6,026   
  

 

 

    

 

 

 

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

Goodwill. Goodwill was $44.6 million, or 2.80% of total assets, as of June 30, 2016, compared to $44.6 million, or 2.94% of total assets, as of December 31, 2015.

Other Intangible Assets. Other intangible assets were $7.1 million, or 0.45% of total assets, as of June 30, 2016, compared to $7.8 million, or 0.52% of total assets, as of December 31, 2015. The decrease was due to normal amortization of core deposit intangible and customer list assets.

Other Real Estate Owned. OREO was $335 thousand, representing one residential property and one commercial property, at June 30, 2016, compared to $904 thousand, representing three residential properties and two commercial properties at December 31, 2015. During the six months ended June 30, 2016, three properties were sold while no additional properties were added.

Deposits. Total deposits decreased $9.0 million, or 0.78%, to $1.1 billion at June 30, 2016 compared to $1.2 billion at December 31, 2015. The decrease was primarily due to a decrease of $32.0 million in savings and money market accounts, partially offset by increases of $9.2 million in time deposits and $13.7 million in checking accounts.

Borrowings. We had outstanding balances of $226.2 million in advances from the FHLB at June 30, 2016, representing an increase of $76.2 million in outstanding balances compared to December 31, 2015. In addition to advances, we had 11 letters of credit totaling $44.8 million with the FHLB to secure customer deposits under pledge agreements. These letters of credit are factored against borrowing capacity with the FHLB. Securities sold under agreements to repurchase increased $2.6 million, or 14.38%, to $20.5 million at June 30, 2016 from $18.0 million at December 31, 2015.

Comparison of the Operating Results for the Six Months Ended June 30, 2016 and June 30, 2015 (unaudited)

Overview. Consolidated net income for the six months ended June 30, 2016 was $4.8 million, or $0.58 per diluted common share, compared to $4.7 million, or $0.56 per diluted common share, for the same period in 2015, an increase of $116 thousand, or 2.46%. Our net interest margin increased to 3.05% for the six months ended June 30, 2016 from 2.99% for the six months ended June 30, 2015. Our return on average assets and average common stockholders’ equity for the six months ended June 30, 2016 were 0.62% and 6.94%, respectively, compared to 0.63% and 7.05%, respectively, for the same period in 2015.

 

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Net Interest and Dividend Income. Net interest and dividend income increased $1.1 million, or 5.37%, to $21.5 million for the six-month period ended June 30, 2016, compared to $20.4 million for the six-month period ended June 30, 2015, due to the additional income of $888 thousand related to securities purchased in the first quarter of 2016 and a decrease in interest on deposits of $208 thousand, or 10.11%, offset in part by an increase in interest on advances and other borrowed money of $430 thousand, or 81.75%.

Interest and Dividend Income. For the six months ended June 30, 2016, total interest and dividend income increased $1.4 million, or 5.73%, to $25.3 million, compared to $23.9 million for the same period in 2015. Interest and fees on loans increased $327 thousand, or 1.42%, to $23.4 million for the six-month period ended June 30, 2016, compared to $23.1 million for the same period in 2015. Interest and dividends on investments and other interest increased $1.0 million, or 120.28%, for the six-month period ended June 30, 2016 compared to the same period in 2015.

Interest Expense. For the six months ended June 30, 2016, total interest expense increased $276 thousand, or 7.79%, to $3.8 million, compared to $3.5 million for the same period in 2015. Interest on deposits decreased $208 thousand, or 10.11%, to $1.8 million for the six-month period ended June 30, 2016 compared to the same period in 2015 due in part to the migration from time deposits to lower cost deposit products. For the six months ended June 30, 2016, interest on advances and other borrowed money increased $430 thousand, or 81.75%, to $956 thousand from $526 thousand for the same period in 2015 due in part to the increase in FHLB advances of $76.2 million during the six months ended June 30, 2016.

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

 

     Six month period ended June 30,  
     2016     2015  
(Dollars in thousands)    Average
Balance(1)
     Interest      Yield/
Cost(4)
    Average
Balance(1)
     Interest      Yield/
Cost(4)
 

Assets:

                

Interest-earning assets:

                

Loans(2)

   $ 1,232,507       $ 23,398         3.80   $ 1,202,162       $ 23,071         3.79

Investment securities and other(5)

     177,751         1,912         2.15     159,993         868         1.09
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,410,258         25,310         3.59     1,362,155         23,939         3.51
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets:

                

Cash

     29,340              15,289         

Other noninterest-earning assets(3)

     129,887              130,806         
  

 

 

         

 

 

       

Total noninterest-earning assets

     159,227              146,095         
  

 

 

         

 

 

       

Total

   $ 1,569,485            $ 1,508,250         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings, NOW and MMAs

   $ 763,400       $ 463         0.12   $ 741,783       $ 433         0.12

Time deposits

     325,413         1,386         0.85     345,722         1,624         0.94

Repurchase agreements

     18,509         51         0.55     16,061         32         0.40

Subordinated debentures and other borrowed funds

     248,168         1,917         1.54     177,430         1,452         1.64
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,355,490         3,817         0.56     1,280,996         3,541         0.55
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                

Demand deposits

     53,071              50,634         

Other

     21,474              34,687         
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     74,545              85,321         
  

 

 

         

 

 

       

Stockholders’ equity

     139,450              141,933         
  

 

 

         

 

 

       

Total

   $ 1,569,485            $ 1,508,250         
  

 

 

         

 

 

       

Net interest and dividend income/Net interest rate spread

      $ 21,493         3.03      $ 20,398         2.96
     

 

 

    

 

 

      

 

 

    

 

 

 

Net interest margin

           3.05           2.99
        

 

 

         

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

           104.04           106.34

 

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

 

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(2) Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans caused any material difference in the information presented.
(3) Other noninterest-earning assets include non-earning assets and OREO.
(4) Yields and costs are annualized.
(5) The yield on investment securities does not consider the impact of the tax effect on tax exempt municipal bonds.

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

 

    

Six Months Ended June 30,

2016 vs. 2015

Increase (Decrease) Due to

 
     Volume      Rate      Total  
     (Dollars in thousands)  

Interest income on loans

   $ 168       $ 159       $ 327   

Interest income on investments

     106         938         1,044   
  

 

 

    

 

 

    

 

 

 

Total interest income

     274         1,097         1,371   
  

 

 

    

 

 

    

 

 

 

Interest expense on savings, NOW and MMAs

     13         17         30   

Interest expense on time deposits

     (92      (146      (238

Interest expense on repurchase agreements

     5         14         19   

Interest expense on subordinated debentures and other borrowed funds

     541         (76      465   
  

 

 

    

 

 

    

 

 

 

Total interest expense

     467         (191      276   
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ (193    $ 1,288       $ 1,095   
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses. The provision for loan losses (excluding overdraft losses) was $200 thousand for the six months ended June 30, 2016, compared to $400 thousand of provisions during the same period in 2015. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $32 thousand in provisions for overdraft losses in the six months ended June 30, 2016, compared to $19 thousand in provisions during the same period in 2015. For additional information on provisions and adequacy, please refer to the Allowance for Loan Losses section herein.

Noninterest Income and Expense. For the six months ended June 30, 2016, total noninterest income increased $517 thousand, or 5.28%, to $10.3 million, compared to $9.8 million for the same period in 2015.

Customer service fees increased $41 thousand, or 1.45%, to $2.9 million from $2.8 million for the six months ended June 30, 2015. This increase includes an increase of $61 thousand in fees related to ATM interchange income.

Gain on sales and calls of securities increased $828 thousand, or 221.98%, to $1.2 million for the six months ended June 30, 2016 from $373 thousand for the six months ended June 30, 2015.

Mortgage banking activities decreased $462 thousand, or 57.04%, to $348 thousand from $810 thousand for the six months ended June 30, 2015. The change represents a decrease of $86 thousand in gains on sales of loans, a decrease of $317 thousand for capitalized mortgage servicing rights and an increase in expense related to the fair value adjustment of forward contracts, which were partially offset by a decrease of $11 thousand for the amortization of mortgage servicing rights and $75 thousand decrease in deferred fees on sold loans. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.

Net losses on other real estate and property owned increased $39 thousand to a net loss of $42 thousand for the six months ended June 30, 2016 from a net loss of $3 thousand for the same period in 2015.

Trust and investment management fee income decreased $80 thousand, or 1.88%, to $4.2 million for the six months ended June 30, 2016, compared to $4.2 million for the same period in 2015.

Insurance and brokerage service income increased $88 thousand, or 10.74% to $907 thousand for the six months ended June 30, 2016 compared to $819 thousand for the same period in 2015.

Bank-owned life insurance income increased $139 thousand, or 46.64% to $437 thousand for the six months ended June 30, 2016 compared to $298 thousand for the same period in 2015, primarily related to the addition of $10 million of bank-owned life insurance purchased during the fourth quarter of 2015.

 

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Table of Contents

Other income increased $5 thousand, or 5.62%, to $94 thousand for the six months ended June 30, 2016 from $89 thousand for the same period in 2015.

Total noninterest expenses increased $1.7 million, or 7.29%, to $24.6 million for the six months ended June 30, 2016, compared to $22.9 million for the same period in 2015, as discussed below.

Salaries and employee benefits increased $326 thousand, or 2.71%, to $12.3 million from $12.0 million for the six months ended June 30, 2015. Gross salaries and benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $356 thousand, or 2.73%, to $13.4 million from $13.0 million for the six months ended June 30, 2015. Salary expense increased $375 thousand, or 3.83%, to $10.2 million from $9.8 million for the same period in 2015, reflecting ordinary cost-of-living adjustments, staffing increases and promotional increases. The deferral of expenses in conjunction with the origination of loans increased $30 thousand, or 2.93%, to $1.1 million from $1.0 million for the same period in 2015.

Occupancy expenses decreased $246 thousand, or 7.65%, to $3.0 million from $3.2 million for the same period in 2015. The decrease relates primarily to $93 thousand and $54 thousand decreases in snow removal and fuel expenses, respectively, due to mild weather during the first quarter of 2016 compared to the same period in 2015 as well as cost savings realized in 2016 due to closing two locations during the fourth quarter of 2015.

Outside services increased $145 thousand, or 12.26%, to $1.3 million from $1.2 million for the same period in 2015 due primarily to increases in core processing fees of $108 thousand. Professional services decreased $57 thousand, or 8.65%, to $602 thousand from $659 thousand for the same period in 2015.

Supplies expense increased $25 thousand, or 9.16%, to $298 thousand from $273 thousand for the same period in 2015. Telephone expense increased $4 thousand, or 0.74%, to $544 thousand from $540 thousand for the same period in 2015.

Merger related expenses during the six months ending June 30, 2016 were $754 thousand compared to none for the same period in 2015.

Amortization of intangible assets decreased $89 thousand, or 11.47%, to $687 thousand from $776 thousand for the same period in 2015 as our intangible assets are on the sum-of-the-years-digits declining amortization method, resulting in a reduction to year-over-year amortization.

Other expenses increased $812 thousand, or 27.78%, to $3.7 million from $2.9 million for the same period in 2015. This increase includes increases of $270 thousand in contributions, $62 thousand in insurance premium expense, $192 thousand of MSR impairment expense, $176 thousand in expenses related to ATM and debit card losses and $93 thousand related to vesting of stock awards.

Comparison of the Operating Results for the Three Months Ended June 30, 2016 and June 30, 2015 (unaudited)

Overview. Consolidated net income for the three months ended June 30, 2016 was $2.4 million, or $0.28 per diluted common share, compared to $2.4 million, or $0.29 per diluted common share, for the same period in 2015, a decrease of $50 thousand, or 2.07%. Our net interest margin increased to 3.08% for the three months ended June 30, 2016 from 2.95% for the three months ended June 30, 2015. Our return on average assets and average common stockholders’ equity for the three months ended June 30, 2016 were 0.60% and 6.76%, respectively, compared to 0.64% and 7.20%, respectively, for the same period in 2015.

Net Interest and Dividend Income. Net interest and dividend income increased $764 thousand, or 7.52%, to $10.9 million for the three month period ended June 30, 2016, compared to $10.2 million for the three month period ended June 30, 2015, due to the additional income of $495 thousand primarily related to securities purchased in the first quarter of 2016 and a decrease in interest on deposits of $73 thousand, or 7.37%, offset in part by an increase in interest on advances and other borrowed money of $286 thousand, or 117.21%.

Interest and Dividend Income. For the three months ended June 30, 2016, total interest and dividend income increased $1.0 million, or 8.46%, to $12.9 million, compared to $11.9 million for the same period in 2015. Interest and fees on loans increased $391 thousand, or 3.41%, to $11.9 million for the three month period ended June 30, 2016, compared to $11.5 million for the same period in 2015. Interest and dividends on investments and other interest increased $614 thousand, or 152.74%, for the three month period ended June 30, 2016 compared to the same period in 2015.

Interest Expense. For the three months ended June 30, 2016, total interest expense increased $241 thousand, or 14.04%, to $2.0 million, compared to $1.7 million for the same period in 2015. Interest on deposits decreased $73 thousand, or 7.37%, to $918 thousand for the three month period ended June 30, 2016 compared to the same period in 2015 due in part to the migration from time deposits to lower cost deposit products. For the three months ended June 30, 2016, interest on advances and other borrowed money increased $286 thousand, or 117.21%, to $530 thousand from $244 thousand for the same period in 2015 due in part to the increase in FHLB advances of $22.8 million during the three months ended June 30, 2016.

 

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Table of Contents

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

 

     Three month period ended June 30,  
     2016     2015  
(Dollars in thousands)    Average
Balance(1)
     Interest      Yield/
Cost(4)
    Average
Balance(1)
     Interest      Yield/
Cost(4)
 

Assets:

                

Interest-earning assets:

                

Loans(2)

   $ 1,238,413       $ 11,872         3.83   $ 1,215,403       $ 11,481         3.78

Investment securities and other(5)

     179,814         1,016         2.26     162,343         402         0.99
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,418,227         12,888         3.63     1,377,746         11,883         3.45
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-earning assets:

                

Cash

     41,532              14,530         

Other noninterest-earning assets(3)

     132,035              112,036         
  

 

 

         

 

 

       

Total noninterest-earning assets

     173,567              126,566         
  

 

 

         

 

 

       

Total

   $ 1,591,794            $ 1,504,312         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings, NOW and MMAs

   $ 757,281       $ 153         0.08   $ 742,250       $ 293         0.16

Time deposits

     328,795         765         0.93     336,210         698         0.83

Repurchase agreements

     19,523         26         0.53     16,778         17         0.41

Subordinated debentures and other borrowed funds

     267,992         1,014         1.51     183,544         709         1.55
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,373,591         1,958         0.57     1,278,782         1,717         0.54
  

 

 

    

 

 

      

 

 

    

 

 

    

Noninterest-bearing liabilities:

                

Demand deposits

     54,108              50,804         

Other

     23,944              32,413         
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     78,052              83,217         
  

 

 

         

 

 

       

Stockholders’ equity

     140,151              142,313         
  

 

 

         

 

 

       

Total

   $ 1,591,794            $ 1,504,312         
  

 

 

         

 

 

       

Net interest and dividend income/Net interest rate spread

      $ 10,930         3.06      $ 10,166         2.91
     

 

 

    

 

 

      

 

 

    

 

 

 

Net interest margin

           3.08           2.95
        

 

 

         

 

 

 

Percentage of interest-earning assets to interest-bearing liabilities

           103.25           107.74

 

(1) Monthly average balances have been used for all periods.
(2) Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans caused any material difference in the information presented.
(3) Other noninterest-earning assets include non-earning assets and OREO.
(4) Yields and costs are annualized.
(5) The yield on investment securities does not consider the impact of the tax effect on tax exempt municipal bonds.

 

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

 

    

Three Months Ended June 30,

2016 vs. 2015

Increase (Decrease) Due to

 
     Volume      Rate      Total  
     (Dollars in thousands)  

Interest income on loans

   $ 219       $ 172       $ 391   

Interest income on investments

     48         566         614   
  

 

 

    

 

 

    

 

 

 

Total interest income

     267         738         1,005   
  

 

 

    

 

 

    

 

 

 

Interest expense on savings, NOW and MMAs

     6         (146      (140

Interest expense on time deposits

     (15      82         67   

Interest expense on repurchase agreements

     3         6         9   

Interest expense on subordinated debentures and other borrowed funds

     319         (14      305   
  

 

 

    

 

 

    

 

 

 

Total interest expense

     313         (72      241   
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ (46    $ 810       $ 764   
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses. The provision for loan losses (excluding overdraft losses) was $100 thousand for the three months ended June 30, 2016, compared to $200 thousand of provisions during the same period in 2015. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $21 thousand in provisions for overdraft losses in the three months ended June 30, 2016, compared to $15 thousand in provisions during the same period in 2015. For additional information on provisions and adequacy, please refer to the Allowance for Loan Losses section herein.

Noninterest Income and Expense. For the three months ended June 30, 2016, total noninterest income increased $694 thousand, or 13.76%, to $5.7 million, compared to $5.0 million for the same period in 2015.

Customer service fees decreased $1 thousand, or 0.07%, to $1.5 million from $1.5 million for the three months ended June 30, 2015.

Gain on sales and calls of securities increased $1.2 million from $1 thousand for the three months ended June 30, 2015. This increase is due to the increased volume of sales of securities during the three months ended June 30, 2016, compared to the same period in 2015.

Mortgage banking activities decreased $447 thousand, or 65.45%, to $236 thousand from $683 thousand for the three months ended June 30, 2015. The change represents a decrease of $15 thousand in gains on sales of loans, a decrease of $262 thousand for capitalized mortgage servicing rights and an increase of $90 thousand for the amortization of mortgage servicing rights. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.

Net losses on other real estate and property owned were $27 thousand for the three months ended June 30, 2016 compared to no net gains or losses for the same period in 2015.

Trust and investment management fee income decreased $87 thousand, or 3.95%, to $2.1 million for the three months ended June 30, 2016, compared to $2.2 million for the same period in 2015.

Insurance and brokerage service income increased $74 thousand, or 25.00%, to $370 thousand for the three months ended June 30, 2016 compared to $296 thousand for the same period in 2015.

Bank-owned life insurance income increased $66 thousand, or 43.42%, to $218 thousand for the three months ended June 30, 2016 compared to $152 thousand for the same period in 2015, primarily related to the addition of $10 million of bank-owned life insurance purchased during the fourth quarter of 2015.

Other income decreased $83 thousand to $2 thousand for the three months ended June 30, 2016 from $85 thousand for the same period in 2015. The decrease is primarily related to the timing of distributions from a limited partnership recorded in the first quarter in 2016 and the second quarter in 2015.

Total noninterest expenses increased $1.5 million, or 13.41%, to $13.0 million for the three months ended June 30, 2016, compared to $11.5 million for the same period in 2015, as discussed below.

 

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Salaries and employee benefits increased $140 thousand, or 2.34%, to $6.1 million from $6.0 million for the three months ended June 30, 2015. Gross salaries and benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $99 thousand, or 1.50%, to $6.7 million from $6.6 million for the three months ended June 30, 2015. Salary expense increased $55 thousand, or 1.07%, to $5.1 million from $5.0 million for the same period in 2015, reflecting ordinary cost-of-living adjustments, staffing increases and promotional increases. The deferral of expenses in conjunction with the origination of loans decreased $41 thousand, or 6.42%, to $598 thousand from $639 thousand for the same period in 2015.

Occupancy expenses decreased $67 thousand, or 4.37%, to $1.5 million from $1.5 million for the same period in 2015. The decrease relates primarily to $71 thousand in repairs and maintenance expenses for equipment, software and other general maintenance.

Advertising and promotion increased $27 thousand, or 9.96%, to $298 thousand from $271 thousand for the same period in 2015. Outside services increased $104 thousand, or 17.60%, to $695 thousand from $591 thousand for the same period in 2015 primarily related to increases in core data processing expenses. Professional services decreased $70 thousand, or 18.57%, to $307 thousand from $377 thousand for the same period in 2015.

Supplies expense decreased $13 thousand, or 7.98%, to $150 thousand from $163 thousand for the same period in 2015. Telephone expense increased $2 thousand, or 0.74%, to $273 thousand from $271 thousand for the same period in 2015.

Merger related expenses during the three months ending June 30, 2016 were $754 thousand compared to none for the same period in 2015.

Amortization of intangible assets decreased $45 thousand, or 11.66%, to $341 thousand from $386 thousand for the same period in 2015 as our intangible assets are on the sum-of-the-years-digits declining amortization method, resulting in a reduction to year-over-year amortization.

Other expenses increased $712 thousand, or 48.63%, to $2.2 million from $1.5 million for the same period in 2015. This increase includes increases of $244 thousand in contributions, $37 thousand in insurance premium expense, $71 thousand of MSR impairment expense, $168 thousand in expenses related to ATM and debit card losses and $47 thousand related to vesting of stock awards.

Contractual Obligations and Contingent Liabilities

During the six months ended June 30, 2016, there were no material changes to our contractual obligations and commitments described in the section in our Annual Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Contingent Liabilities.”

Liquidity and Capital Resources

Liquidity

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. At June 30, 2016, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $83.9 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At June 30, 2016, we had approximately $117.3 million in additional borrowing capacity from the FHLB.

At June 30, 2016, stockholders’ equity totaled $141.4 million, compared to $136.7 million at December 31, 2015. This increase reflects net income of $4.8 million, the declaration of $2.3 million in common stock dividends, contributions and reinvestments in the dividend reinvestment program of $135 thousand and $1.7 million in other comprehensive income.

At June 30, 2016, we had unrestricted funds available in the amount of $1.0 million. As of June 30, 2016, our total cash needs for the remainder of 2016 are estimated to be approximately $4.0 million with $2.3 million projected to be used to pay cash dividends on our common stock, $574 thousand to pay interest on our subordinated debt, $352 thousand to pay interest on our capital securities and approximately $838 thousand for ordinary operating expenses. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC and the FRB. Since the Bank is well-capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the additional Company cash requirements for 2016, as needed, as long as earnings at the Bank are sufficient to maintain adequate Tier 1 Capital.

For the six months ended June 30, 2016, net cash used in operating activities decreased $6.3 million to $669 thousand, compared to cash provided of $5.6 million for the same period in 2015. Cash provided by loans sold decreased $17.3 million for the six months ended June 30, 2016, compared to the same period in 2015. Net gain on sales of loans decreased $86 thousand for the six months ended June 30, 2016, compared to the same period in 2015. Net gain on sales and calls of securities increased $828 thousand for the six months ended June 30, 2016, compared to the same period in 2015, as a result of $31.8 million of securities sold during the six months ended June 30, 2016, compared to approximately $40.7 million of securities sold during the same period in 2015. The provision for loan losses decreased $187 thousand for the six months ended June 30, 2016, compared to the same period in 2015. The change in accrued interest receivable and other assets increased $2.0 million for the six months ended June 30, 2016, compared to the same period in 2015. The change in accrued expenses and other liabilities decreased $3.5 million, compared to the same period in 2015.

 

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Net cash used in investing activities was $54.8 million for the six months ended June 30, 2016, compared to cash provided of $6.5 million for the same period in 2015, a change of $61.3 million. The cash used by net securities activities was $33.4 million for the six months ended June 30, 2016, compared to cash used in net securities activities of $3.5 million for the same period in 2015. The cash used for purchases of securities decreased by $136.1 million for the six months ended June 30, 2016, compared to the same period in 2015, and cash provided by maturities of securities decreased $157.1 million for the six months ended June 30, 2016, compared to the same period in 2015. Cash used in loan originations and principal collections, net, was $16.8 million for the six months ended June 30, 2016, a change of $27.0 million, compared to cash provided of $10.2 million for the same period in 2015.

For the six months ended June 30, 2016, net cash flows provided by financing activities were $67.5 million compared to net cash provided by financing activities of $2.0 million for the six months ended June 30, 2015, an increase of $65.5 million. For the six months ended June 30, 2016, we experienced a net increase of $5.3 million in cash used by deposits and securities sold under agreements to repurchase comparing cash used of $6.4 million in 2016 to cash used of $1.1 million for the same period in 2015. For the six months ended June 30, 2016, we had an increase of $71.2 million of cash provided by FHLB advances and other borrowings, comparing $76.2 million provided for the six months ended June 30, 2016 to net cash provided of $5.0 million for the same period in 2015.

Subordinated Notes

On October 29, 2014, we entered into a Subordinated Note Purchase Agreement with certain accredited investors pursuant to which we issued an aggregate of $17.0 million of subordinated notes to the accredited investors. The notes have a maturity date of November 1, 2024 and bear interest at a fixed rate of 6.75% per annum. We may, at our option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the noteholders. The notes are not subject to repayment at the option of the noteholders. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to our senior indebtedness and to our obligations to our general creditors. Total expenses associated with the offering of $621 thousand are deducted from the carrying value of the subordinated notes and are being amortized on a straight-line basis over the life of the subordinated note.

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

Capital Ratios

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the federal banking agencies that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Company and the Bank became subject to new capital regulations adopted by the FRB and the OCC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged).

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital. The Company and the Bank have elected to permanently opt out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital ratios.

The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 100%.

 

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As of June 30, 2016 (unaudited), the Company and the Bank met each of their capital requirements and the most recent notification from the OCC categorized the Bank as “well capitalized”. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below as of June 30, 2016.

 

                  For Capital     To Be Well
Capitalized Under
Prompt Corrective
 
     Actual     Adequacy Purposes     Action Provisions  
(Dollars in thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

Lake Sunapee Bank Group:

               

Tier 1 Leverage Capital

   $ 119,523         7.75   $ 61,657         4.0     N/A         N/A   

Tier 1 Risk-Based Capital

     119,523         11.29        63,546         6.0        N/A         N/A   

Total Risk-Based Capital

     145,463         13.73        84,728         8.0        N/A         N/A   

Common Equity Tier 1 Capital

     99,523         9.40        47,659         4.5        N/A         N/A   

Lake Sunapee Bank, fsb:

               

Tier 1 Leverage Capital

   $ 134,246         8.71   $ 61,627         4.0   $ 77,033         5.0

Tier 1 Risk-Based Capital

     134,246         12.68        63,515         6.0        84,687         8.0   

Total Risk-Based Capital

     143,186         13.53        84,687         8.0        105,859         10.0   

Common Equity Tier 1 Capital

     134,246         12.68        47,636         4.5        68,808         6.5   

Capital Conservation Buffer

The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016 and will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At June 30, 2016, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at June 30, 2016 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 0.625%.

Tangible Book Value

Book value per common share was $16.86 at June 30, 2016, compared to $16.32 per common share at December 31, 2015. Tangible book value per common share was $11.37 at June 30, 2016, compared to $10.76 per common share at December 31, 2015. Tangible book value per common share is a non-U.S. GAAP financial measure calculated using U.S. GAAP amounts. Tangible book value per common share is calculated by dividing tangible common equity by the total number of common shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of stockholders’ equity. We believe that tangible book value per common share provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

 

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

 

(Dollars in thousands, except per share data)    June 30, 2016      December 31, 2015  

Stockholders’ equity

   $ 141,375       $ 136,708   

Less goodwill (1)

     40,847         40,847   

Less other intangible assets(1)

     5,223         5,726   
  

 

 

    

 

 

 

Tangible common equity

   $ 95,305       $ 90,135   
  

 

 

    

 

 

 

Ending common shares outstanding

     8,385,278         8,376,841   

Tangible book value per common share

   $ 11.37       $ 10.76   

 

(1) Net of related deferred tax liability.

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures (“Debentures II”). Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are deducted from the carrying value of the debentures and are being amortized on a straight-line basis over the life of Debentures II.

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

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

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”). Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160 thousand are deducted from the carrying value of the debentures and are being amortized on a straight-line basis over the life of Debentures III.

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

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

Stock Repurchase Plan

The Board of Directors determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity; three performance benchmarks against which bank and thrift holding companies are measured. On June 12, 2007, the Board of Directors reactivated a previously adopted but incomplete stock repurchase program to repurchase up to 253,776 shares of common stock. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. At June 30, 2016, there were 148,088 shares available to be repurchased under the repurchase plan previously approved by the Board of Directors. The Company did not repurchase any shares during the six months ended June 30, 2016.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset-Liability Management

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

Market Risk

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

Interest Rate Risk

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

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

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

Our one-year cumulative interest rate gap at June 30, 2016 was positive 3.29%, compared to the December 31, 2015 gap of positive 1.56%. With an asset sensitive positive gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease increase. Over the next 12 months, $52.4 million more assets are subject to repricing than liabilities.

As another part of interest rate risk analysis, we use an interest rate sensitivity model, which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The EVE ratio, under any rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the EVE model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the EVE measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on our net interest income and will likely differ from actual results.

 

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The following table sets forth our EVE at June 30, 2016, as calculated by an independent third party agent:

 

(Dollars in thousands)    Book
Value
     -100 bp     0 bp     +100 bp     +200 bp     +300 bp     +400 bp  

EVE:

               

Amount

   $ 173,112       $ 115,759      $ 132,289      $ 127,232      $ 117,942      $ 107,957      $ 98,005   

Percent of change

        -12.5       -3.8     -10.8     -18.4     -25.9

EVE Ratio:

               

Ratio

        7.36     8.54     8.42     8.01     7.53     7.01

Change in basis points

        -118          -12        -53        -101        -153   

Management controls the Company’s interest rate exposure using several strategies, which include adjusting the maturities of securities in the Company’s investment portfolio, limiting or expanding the terms of loans originated, monitoring and limiting, as appropriate, long-term fixed rate deposits, and laddering maturities of FHLB advances. The Company limits this risk by monitoring and limiting, as appropriate, securities it invests in to those with limited average life changes under certain interest rate shock scenarios, or securities with embedded prepayment penalties. The Company also may use derivative instruments, principally interest rate swaps, to manage its interest rate risk. Information on derivative instruments is included in Note K – Derivative Instruments and Hedging Activities in the notes to our unaudited condensed consolidated financial statements located elsewhere within this report.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There is no material litigation pending to which we or any of our subsidiaries are a party or to which our property or the property of any of our subsidiaries is subject, other than ordinary routine litigation incidental to our business.

Item 1A. Risk Factors

There are risks inherent to our business. As of June 30, 2016, the risk factors of the Company have not changed materially from those disclosed within Part I, Item 1A, “Risk Factors” of our Annual Report. You should carefully consider the risk factors included in our Annual Report, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

 

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Item 5. Other Information

None.

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 9, 2016.

 

LAKE SUNAPEE BANK GROUP
(Registrant)

/s/ Stephen R. Theroux

Stephen R. Theroux
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Laura Jacobi

Laura Jacobi
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer)


Table of Contents

EXHIBIT INDEX

 

Exhibit
No.

  

Description

2.1    Agreement and Plan of Merger, dated as of May 5, 2016, by and between Bar Harbor Bankshares and Lake Sunapee Bank Group (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on May 9, 2016).
3.1    Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the SEC on January 9, 2015).
3.2    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2015).
3.3    Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 22, 2009).
3.4    Amended and Restated Certificate of Designations establishing the rights of the Company’s Non-Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 25, 2013).
3.5    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2014).
4.1    Stock Certificate (incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-4 filed with the SEC on March 1, 1989).
4.2    Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004, for Floating Rate Junior Subordinated Deferrable Interest Debentures (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).
4.3    Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association, dated March 30, 2004 (incorporated by reference to Exhibit A to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).
4.4    Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004, for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).
4.5    Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association, dated March 30, 2004 (incorporated by reference to Exhibit A to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).
4.6    Form of Subordinated Note issued by the Company to certain noteholders, dated October 24, 2014 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 29, 2014).
31.1    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1 *    Section 1350 Certification of the Chief Executive Officer.
32.2 *    Section 1350 Certification of the Chief Financial Officer.
101    Financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity and (v) the Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.

 

* Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.