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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

(Mark One)

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

 

For the fiscal year ended December 31, 2016

 

or

 

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

 

For the transition period from ________ to _______

 

Commission file Number: 000-51832

 

SBT BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut

 

20-4346972

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

86 Hopmeadow Street, Weatogue, CT

06089

 

(Address of Principal Executive Offices)

(Zip Code)

 

 

(860) 408-5493

 
 

(Registrant’s telephone number, including area code)

 

 

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

 

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

     
 

Common Stock, no par value

 
 

(Title of Class)

 

 

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

 

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

 

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

 

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

 

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

 

 

 

1

 

 

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second quarter, is $26,534,060

 

As of March 17, 2017, 1,371,980 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of SBT Bancorp, Inc.’s definitive Proxy Statement for its 2017 Annual Meeting of Shareholders to be held May 9, 2017 (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

2

 

 

INDEX

SBT BANCORP, INC.

 

  Page No.
   
PART I

 

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

15

 

 

 

PART II

 

 

 

Item 5.

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

16

Item 6.

Selected Financial Data

17

Item 7.

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

17

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 8.

Financial Statements and Supplementary Data

40

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A.

Controls and Procedures

41

Item 9B.

Other Information

41

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11.

Executive Compensation

42

Item 12.

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

42

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accounting Fees and Services

43

 

 

 

PART IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

43

 

 

 

SIGNATURES

46

 

3

 

 

ITEM 1.     BUSINESS

 

General

 

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

 

The Bank was incorporated on April 28, 1992 and commenced operations as a Connecticut chartered bank on March 31, 1995. The Bank's deposit accounts are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits thereof. The Bank is not a member of the Federal Reserve System. The Bank's main office and its corporate offices are located in the town of Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon, Bloomfield, and West Hartford, Connecticut. The full service West Hartford branch was opened in April of 2016 after the Bank received regulatory approval from the Connecticut Department of Banking and the FDIC in 2015 to open this branch. The Bank also maintains a mortgage center in Glastonbury, Connecticut. Services to the Bank’s customers are also provided through SBT Online Internet banking. The Bank's customer base consists primarily of individual consumers and small businesses in north central Connecticut. The Bank has in excess of 22,000 deposit accounts.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On September 30, 2015 the Company entered into a Subordinated Loan Agreement (the “Loan Agreement”) with Community Funding CLO, Ltd. (“Community Funding”) pursuant to which the Company issued an unsecured subordinated term note in the aggregate principal amount of $7.5 million due October 1, 2025 (the “Subordinated Note”) to Community Funding. The closing date of the issuance of the Subordinated Note occurred on October 15th, 2015 (the “Closing Date”). The Company received net proceeds of approximately $7.2 million from the issuance of the Subordinated Note.

 

The Loan Agreement provides that the Subordinated Note will bear interest at a fixed rate of 6.75% per annum, provided, however, that for the period beginning immediately after the Closing Date through, but not including, February 11, 2016, Community Funding rebated an amount equal to 3.40% per annum to the Company, resulting in a rate of 3.35% per annum to the Company, net of any payments of interest made by the Company, since no event of default occurred during such period. Interest on the Subordinated Note is payable by the Company quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on the first such date following the Closing Date and on the maturity date. The principal amount of the Subordinated Note is due on October 1, 2025, provided, however, that the Company may prepay all or a portion of the principal amount of the Subordinated Note on or after the fifth anniversary of the Closing Date. Prior to the fifth anniversary of the Closing Date, the Company can prepay all or a portion of the principal amount of the Subordinated Note only under limited specified circumstances set forth in the Loan Agreement. The Loan agreement contains customary events of default such as the institution of bankruptcy proceedings by or against the Company and the non-payment by the Company of principal or interest when due. Community Funding may accelerate the repayment of the Subordinated Note only in the event that bankruptcy proceedings are instituted by or against the Company and not for any other event of default.

 

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

 

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

 

5

 

 

In connection with the public offering and the exercise of the Option, the Company issued a total of 451,473 shares of its common stock at $21.00 per share. Net proceeds amounted to $8.5 million, after deducting related underwriting discounts, fees and other expenses of $978 thousand.

   

Market Area

 

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

 

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

 

These towns are some of the most attractive and affluent markets located in Connecticut. Based on the most current information available, the Bank's primary and secondary markets have a median household income of $90,761. This household income level places the Bank’s overall market approximately 30% above the median income of all of Connecticut's households. Compared to the nation as a whole, the median income in the Bank’s primary and secondary market is approximately 57% greater than the median income for all U.S. households. By themselves, the towns of Simsbury and Avon have median household incomes of over $112,872, placing them 61% above the median income of all households in Connecticut and 95% above the median income for all U.S. households.

 

Educational attainment in the Bank’s primary and secondary markets is similarly high. Forty five percent of the residents in the nine towns are college graduates. In Avon, Bloomfield, Granby, Simsbury and West Hartford, the percentage of residents who are college graduates averages 46%. In addition, per U.S. News & World Report rankings, West Hartford Conard, Simsbury, West Hartford Hall and Avon High Schools are among the top high schools in the State of Connecticut (ranked #6, #9, #13 and #23 respectively, out of a total of 193 high schools in Connecticut).

 

Hartford County is the second largest deposit market in the state of Connecticut, which management believes such market provides opportunities to grow the Bank’s deposit base. The total amount of current deposits in Hartford County is $35.9 billion, which is approximately 28% of total deposits in the State of Connecticut. Deposits in the Hartford County market have increased 30% since 2008. From a population perspective, there continues to be approximately 900,000 individuals domiciled in Hartford County, which continues to represent one-fourth of all residents in Connecticut. Additionally, the population is projected to grow slightly, by 0.3% through 2020.

 

Employees

 

At December 31, 2016, the Bank employed a total of 84 people, which consisted of 80 full-time employees and 4 part-time employees. Neither the Company’s employees nor the Bank's employees are represented by any union or other collective bargaining agreement, and the Company and the Bank believe their employee relations are satisfactory.

 

Competition

 

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

 

6

 

 

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

 

As of June 30, 2016, the top three banks in Simsbury, by deposit account market share, were the Bank (34%), Bank of America (30%), and Webster Bank (16%). The top three banks in Avon were Bank of America (27%), People’s United Bank (18%), and Farmington Bank (15%),. The Bank ranked fifth, with 8% of the deposit account market share. In Granby, the top three banks were Bank of America (25%), Windsor Federal Savings And Loan Association (24%), and the Bank (22%). In Bloomfield, the top three banks were Bank of America (27%), Webster Bank (22%), and Wells Fargo Bank (19%). The Bank ranked fifth, with 8% of the deposit account market share. In the Bank’s West Hartford branch, which was opened for approximately two months prior to the deposit survey, the Bank recorded 1% of the town’s deposits. The top three banks in West Hartford were Santander Bank (25%), Bank of America (19%), and Webster Bank (18%). In the Bank’s primary market (Simsbury, Granby, Avon, Bloomfield, and West Hartford), the top three banks, as of June 30, 2016, were Bank of America with 22% of the market, Santander Bank with 16%, and Webster Bank with 15%. In the total nine-town area of the Bank's primary and secondary markets, the top three banks were Bank of America with 22% of the market, Webster Bank with 16% and Santander Bank with 14%. The Bank, with 7% of the market share, was sixth.

 

Supervision and Regulation

 

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

 

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

 

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

 

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

 

7

 

 

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

 

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

 

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

 

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

 

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

 

The FRB has established capital adequacy guidelines for bank holding companies that are similar to the FDIC capital requirements for banks described below under the heading “Capital Standards.” The Company exceeded all current regulatory capital requirements and is considered “well capitalized” as of December 31, 2016.

   

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

 

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

 

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

 

8

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Dodd-Frank Act and the rules and regulations promulgated under the Dodd-Frank Act have impacted the Bank as well as all community banks, by increasing our operating and compliance costs. To the extent the Dodd-Frank Act remains in place, it is likely to further increase our operating and compliance costs as certain yet to be written implementing rules and regulations are enacted.

 

9

 

 

The Sarbanes-Oxley Act of 2002

 

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

 

USA PATRIOT Act

 

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

   

Dividend Restrictions

 

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

 

 

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

 

10

 

 

 

 

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

 

The FRB’s capital adequacy rules also limit a banking organization’s ability to pay dividends, or engage in share repurchases if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% (fully phased-in) of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. As of January 1, 2017, the Bank was required to maintain a capital conservation buffer of 1.25%.

   

Capital Standards

 

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

 

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

 

As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, total risk-based and common equity Tier 1 risk-based capital ratios as set forth in the table below. Management of the Bank believes there are no conditions that have changed the Bank’s category since December 31, 2016.

 

11

 

 

The following table presents the amounts of regulatory capital and capital ratios for the Bank compared to the minimum regulatory capital requirements to be categorized as “well capitalized” as of December 31, 2016 and 2015, under the regulatory capital rules then in effect.

 

      Actual       Well       Actual       Well  
      12/31/2016       Capitalized       12/31/2015       Capitalized  

Bank:

                               

Tier 1 leverage capital ratio

    7.46 %     5.00 %     8.58 %     5.00 %

Tier 1 risk-based capital ratio

    10.65 %     8.00 %     13.11 %     8.00 %

Total risk-based capital ratio

    11.72 %     10.00 %     14.21 %     10.00 %

Common equity tier 1 risk-based capital ratio

    10.65 %     6.50 %     13.11 %     6.50 %

Capital conservation buffer

    3.72 %     0.625 %     N/A       N/A  

 

In December 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions, referred to as Basel III.

 

Subsequently, in July 2013, the FRB and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and address relevant provisions of the Dodd-Frank Act. The FRB’s and the FDIC’s rules apply to all depository institutions and top-tier bank holding companies with total consolidated assets of $500 million or more (this threshold was subsequently increased to $1 billion or more in May 2015) ("banking organizations"). Among other things, the rules established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are required to have a total capital ratio of 8% (unchanged from prior rules) and a Tier 1 leverage ratio of 4% (unchanged from prior rules). The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% (fully phased-in amount effective January 1, 2019) of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Bank on January 1, 2015 (subject to phase-in periods for certain components). The capital conservation buffer requirement is being phased in beginning on January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. At December 31, 2016, the Bank exceeded the phased-in regulatory requirement for the capital conservation buffer. As of January 1, 2017, the Bank was required to maintain a capital conservation buffer of 1.25%.

 

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

 

12

 

 

Safety and Soundness Standards

 

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

 

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

 

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

 

Premiums for Deposit Insurance

 

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

 

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

 

Insured depository institution failures over the past few years, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the Deposit Insurance Fund to historical lows. In addition, the increased deposit insurance coverage of $250,000 (up from $100,000 previously) per account owner may result in even larger losses to the Deposit Insurance Fund. In 2016, the FDIC added a surcharge to the insurance assessments for banks with over $10 billion in assets, which became effective in July 2016 and which will continue until the FDIC reserve ratio reaches 1.35% or the end of 2018, whichever occurs first.

 

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

 

The Bank expensed $349 thousand in FDIC assessments in 2016 and $312 thousand in 2015.

 

13

 

 

Interstate Banking and Branching

 

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

 

Community Reinvestment Act

 

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

 

ITEM 1A.     RISK FACTORS

 

Not required.

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.        PROPERTIES

 

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

 

The Bank's main office is located at 981 Hopmeadow Street, Simsbury, Connecticut. The Bank leases its main office pursuant to a lease with an initial term that expired in 2016. The Bank utilized its option to renew the lease through January 31, 2021. This lease also covers the building at 987 Hopmeadow Street that is being used as additional administrative offices and is partially subleased to small local businesses.

 

The Bank’s Granby branch office is located at 11 Hartford Avenue, Granby, Connecticut. The Bank leases this office pursuant to a lease with an initial term of fifteen years that, by the terms of the lease, expired in 2013 and that contains renewal options for a total of an additional ten years. The Bank exercised its first renewal option and the lease currently expires on August 31, 2018. Thereafter, the remaining renewal option is for five additional years.

 

The Bank’s Avon branch office is located at 27 Dale Road, Avon, Connecticut. The Bank leases this office pursuant to a lease with an initial term of fifteen years that, by the terms of the lease, expired in 2014 and that contains two renewal options for a total of ten additional years. The Bank exercised its first renewal option and the lease currently expires on August 31, 2019. Thereafter, the remaining renewal option is for five additional years.

 

14

 

 

The Bank’s Bloomfield office is located at 864 Cottage Grove Road, Bloomfield, Connecticut. The Bank leases this office pursuant to a lease with an initial term of ten years that expired in 2016 and that was renewed through May 31, 2021. Thereafter, the renewal option is for five additional years.

 

The Bank’s West Hartford office, which was opened in 2016, is located at 1232 Farmington Avenue in West Hartford, Connecticut. The Bank leases this office pursuant to a lease with an initial term of 10 years that expires December 31, 2025 and that contains an option to renew for two terms of five additional years each.

 

The Bank operates a loan production office located at 2389 Main Street, Glastonbury, Connecticut. The Bank leases this office pursuant to a lease dated October 1, 2015. The initial one year term expired in 2016 and the lease was renewed through September 30, 2017.

 

The Bank operated a loan production office located at 175 Capital Boulevard, Rocky Hill, Connecticut. The Bank leases this office pursuant to a lease dated May 16, 2016. In October 2016, the Bank paid the remainder of the lease obligation and vacated the premises. The initial one year term expires May 31, 2017.

 

The Bank’s administrative offices are located at 86 Hopmeadow Street, Weatogue, Connecticut. The Bank leases this building pursuant to a lease with a term that expires on September 30, 2020. The Bank has an option to renew the lease for two terms of five additional years each.

 

The Bank operated a loan production office located at 51 Jefferson Boulevard, Warwick, Rhode Island until August 2016 when the Bank’s lease expired and the Bank vacated the premises.

 

The Bank operated a loan production office located at 21 County Road, Mattapoisett, Massachusetts until August 2016 when the Bank’s lease expired and the Bank vacated the premises.

 

The Bank operated a loan production office located at 20 Cabot Boulevard, Mansfield, Massachusetts until May 2016 when the Bank’s lease expired and the Bank vacated the premises.

  

The Bank made aggregate lease payments of $1.01 million during 2016 and $936 thousand during 2015.

 

ITEM 3.     LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

15

 

 

PART II

 

ITEM 5.

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

 

The bid price of the stock of the Bank’s parent company, SBT Bancorp, Inc., is currently quoted on the OTCQX marketplace operated by the OTC Markets Group (symbol: “SBTB”). At December 31, 2016, there were 1,372,394 shares of the Company's common stock issued, of which 1,371,980 shares were outstanding. As of March 31, 2017, the Company had approximately 1,000 shareholders of record. There is a limited market for the Company’s common stock. The following table sets forth the high and low prices for the periods indicated.

 

    December 31, 2016     December 31, 2015  
                                 
   

High

   

Low

   

High

   

Low

 

Fourth Quarter

  $ 23.88     $ 19.80     $ 22.00     $ 19.35  

Third Quarter

  $ 20.00     $ 19.35     $ 22.95     $ 20.20  

Second Quarter

  $ 19.55     $ 19.05     $ 24.95     $ 21.05  

First Quarter

  $ 21.70     $ 19.05     $ 22.10     $ 21.30  

 

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

   

Dividends

 

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

 

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

 

In 2016, the Company declared and paid cash dividends on its common stock of $179 thousand on March 11, 2016. The Company also declared and paid cash dividends of $180 thousand on each of June 10, 2016 and September 16, 2016 and $190 thousand on December 16, 2016.

 

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

 

The Company did not repurchase any shares of its common stock during 2016 or 2015. The Company’s common stock is the only class of equity securities that is registered by the Company pursuant to Section 12 of the Exchange Act.

 

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

 

 

16

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following table presents selected financial data for the years ended December 31, 2016, 2015, 2014, 2013, and 2012:

 

   

At or For the Years Ended

 
   

December 31,

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
                                         
   

(Dollars in thousands except for share data)

 
                                         

Performance Ratios and Other Data:

                                       

Return on assets (ratio of net income to average total assets)

    0.31

%

    0.34

%

    0.20 %     0.29

%

    0.57

%

Return on equity (ratio of net income to average equity)

    4.83

%

    6.18

%

    4.04 %     6.00

%

    10.51

%

Net interest margin

    3.03

%

    3.03

%

    3.00 %     3.03

%

    3.20

%

Average loans to average deposits

    93.62

%

    84.14

%

    76.23 %     72.02

%

    65.83

%

Efficiency ratio(1)

    84.46

%

    87.82

%

    94.79 %     89.33

%

    79.55

%

Equity to assets (ratio of average equity to average assets)     6.44 %     7.54 %     7.10 %     7.07 %     6.84 %
                                         

Income Data:

                                       

Interest income

  $ 15,145     $ 12,484     $ 12,257     $ 12,004     $ 11,567  

Interest expense

    1,594       728       871       917       1,041  

Net interest income

    13,551       11,756       11,386       11,087       10,526  

Provision for loan losses

    911       278       55       345       320  

Noninterest Income (excluding securities transactions)

    3,105       2,990       2,328       3,017       3,940  

Securities gains, net

    91       132       142       109       113  

Noninterest expense

    14,067       12,950       13,000       12,599       11,508  

Income before income taxes

    1,769       1,650       801       1,269       2,751  

Income tax expense (benefit)

    277       241       (4 )     134       707  

Net income

    1,492       1,409       805       1,135       2,044  

Net income available to common shareholders

  $ 1,492     $ 1,301     $ 703     $ 1,029     $ 1,898  
                                         

Share and Per Share Data:

                                       

Net income

  $ 1,492     $ 1,409     $ 805     $ 1,135     $ 2,044  

Cash dividends paid-common stock

    763       562       492       494       436  

Book value per common share

    22.08       21.87       22.82       20.97       23.05  

Dividend payout ratio-common stock

    51.14

%

    39.89

%

    61.12 %     43.52

%

    21.33

%

Weighted average number of common shares outstanding, basic

    1,350,725       953,539       880,618       872,411       867,087  

 

(1) Efficiency ratio is noninterest expenses divided by net interest income plus noninterest income.

 

 

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

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

 

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

 

 

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

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

 

 

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

 

17

 

 

 

●

In 2016, the Financial Accounting Standards Board (the "FASB") released a new standard on determining the amount of the allowance for credit losses, which will become effective for the Company for reporting periods beginning on or after January 1, 2020. The new credit loss model will be a significant change from the standard in place today, as it requires the allowance for credit losses to be calculated based on current expected credit losses (commonly referred to as the "CECL model") rather than losses inherent in the loan portfolio as of a point in time. This new standard may have a material impact on the Company's allowance for loan losses and total retained earnings in the period of adoption.

 

 

●

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

 

 

●

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

 

 

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

 

 

●

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

 

 

●

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

 

 

●

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

 

 

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

 

 

●

adverse changes may occur in the equity markets;

 

 

●

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

 

 

●

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

 

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

 

General

 

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

 

For the year ended December 31, 2016, the Company's net income totaled $1.5 million compared to $1.4 million for the year ended December 31, 2015, an increase of $83 thousand or 6%. Net income available to common stockholders after preferred stock dividends and amortization (only applicable in 2015) was $1.5 million or $1.10 per diluted share for the year ended December 31, 2016 compared to $1.3 million or $1.36 per diluted share for the year ended December 31, 2015, a 19% decrease in diluted earnings per share. The increase in net earnings was primarily due to the increase in income from the gain on the sale of mortgage loans, other service charges and fees, and an increase in net interest income. Total assets as of December 31, 2016 were $510 million compared to $445 million as of December 31, 2015.

 

Total revenues, consisting of net interest and dividend income plus noninterest income, were $16.7 million for the year ended December 31, 2016 compared to $14.9 million for the year ended December 31, 2015, an increase of $1.9 million or 12.6%. Net interest and dividend income increased in 2016 by $1.8 million or 15.3% and noninterest income increased by $74 thousand or 2.4% primarily due to increases in other service charges and fees.

 

The net interest margin of 3.03% for the year ended December 31, 2016 remained unchanged from 3.03% for the year ended December 31, 2015. The yield on interest earning assets increased 16 basis points to 3.37% and the cost of funds increased 23 basis points to 0.50% in 2016. The Bank experienced a greater increase in its cost of funds than it did on its yield on interest earnings assets, primarily due to the cost of the subordinated debt issued in late 2015 and outstanding for all of 2016.

 

Total noninterest expenses for the year ended December 31, 2016 were $14.1 million, an increase of $1.1 million or 8.6% compared to the year ended December 31, 2015. The increase in noninterest expenses was primarily attributable to increases in salary and benefit expenses, advertising and promotion expenses, and occupancy costs. Salaries and employee benefit expenses and occupancy expenses each increased slightly under 10% or $627 thousand and $136 thousand, respectively, from 2015 levels. Advertising and promotion expenses increased by $163 thousand or 37% in 2016 compared to 2015. FDIC insurance assessments increased by $37 thousand in 2016 compared to 2015, and correspondent charges increased by $59 thousand in 2016 compared to 2015. Data processing fees increased by $63 thousand during 2016 from 2015 levels, and internet banking costs increased by $74 thousand for 2016 compared to 2015. Professional and director fees decreased by a combined $124 thousand or 15% for 2016 compared to 2015. The provision for loan losses was $911 thousand for 2016 compared to $278 thousand for 2015, an increase of $633 thousand.

 

At December 31, 2016, gross outstanding loans were $407.7 million, an increase of $82.3 million or 25.3% over a year ago. The allowance for loan losses was $3.8 million or 0.92% of total loans at December 31, 2016 compared to $3.0 million or 0.93% of total loans at December 31, 2015. At December 31, 2016, 47.1% of total loans were conventionally underwritten residential mortgages and consumer home equity lines and loans. Commercial loans, including construction and land development and municipal loans, represented 44.3% of the Company's total loans. Other consumer loans comprised 8.6% of total loans. Total exposure to builder and land development loans and non-owner occupied commercial real estate loans was $42.9 million at December 31, 2016, which represented 11% of total loans. The Company had non-accrual loans totaling $4.1 million, which was 0.99% of total loans at December 31, 2016 compared to non-accrual loans of $4.1 million or 1.27% of total loans at December 31, 2015. Total non-accrual loans and loans 30 or more days past due and still accruing interest decreased to 1.26% of outstanding loans at December 31, 2016 from 1.44% of outstanding loans at December 31, 2015.

 

 

18

 

 

 


 

 

 

Total deposits at December 31, 2016 were $414 million compared to $373 million at December 31, 2015. From December 31, 2015 to December 31, 2016, demand deposits decreased $1 million or 1% while savings and NOW deposits increased $33 million or 18% and time deposits increased $9 million or 16%. At December 31, 2016, 33% of total deposits were in non-interest bearing demand accounts, 51% were in low-cost savings and NOW accounts and 16% were in time deposits.

 

Capital levels for The Simsbury Bank & Trust Company, Inc. on December 31, 2016 were above those required to meet the regulatory "well-capitalized" designation.

 

Results of Operations for the Years Ended December 31, 2016 and 2015

 

Net Interest Income and Net Interest Margin

 

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

 

Net interest and dividend income, before provision for loan losses, totaled $13.6 million for the year ended December 31, 2016, which was an increase of $1.8 million or 15.3% from $11.8 million for the year ended December 31, 2015. Average earning assets grew to $457 million at December 31, 2016 from $397 million at December 31, 2015 primarily due to an increase in total loans. The Bank’s net interest spread decreased to 2.88% for the year ended December 31, 2016 from 2.95% for the year ended December 31, 2015. The net interest margin remained unchanged at 3.03% for each of the years ended December 31, 2016 and 2015.

 

19

 

 

The following tables present the average amounts outstanding for the major categories of the Bank’s interest-earning assets and interest-bearing liabilities and the average interest rates earned or paid thereon for the years ended December 31, 2016, 2015 and 2014.

 

NET INTEREST INCOME

(Dollars in thousands)

 

   

For the Year Ended 12/31/16

 
      Year-to-date    

 

         
   

Average Balance (1)

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 10,317     $ 59       0.57 %
                         

Investments (2)

    72,269       1,640       2.27 %
                         

Mortgage loans

    144,602       4,946       3.42 %

Commercial loans

    152,012       6,483       4.26 %

Consumer loans

    77,944       2,296       2.95 %

Total loans (2)

    374,558       13,725       3.66 %
                         

Total interest-earning assets (2)

    457,144     $ 15,424       3.37 %

Non-interest earning assets

    22,707                  

Total Assets

  $ 479,851                  
                         

NOW deposits

  $ 43,878     $ 38       0.09 %

Savings deposits

    168,814       361       0.21 %

Certificates of deposit

    61,135       482       0.79 %

Total interest bearing deposits

    273,827       881       0.32 %
                         

Securities sold under agreements to repurchase

    2,524       6       0.24 %

Long-term subordinated debt

    7,237       515       7.12 %

Federal Home Loan Bank advances

    37,614       192       0.51 %
                         

Total interest-bearing liabilities

    321,202     $ 1,594       0.50 %

Non-interest bearing liabilities

    127,752                  

Total Liabilities

    448,954                  
                         

Common stockholders' equity

    30,897                  

Total stockholders' equity

    30,897                  

Total liabilities and stockholders' equity

  $ 479,851                  
                         

Tax Equivalent net interest income

          $ 13,830          

Less: tax equivalent adjustments

          $ (279 )        

Net interest income

          $ 13,551          

Net interest spread

                    2.88 %

Net interest margin

                    3.03 %
(1) Average balances presented are full year averages.                        
 (2) On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $279 thousand in 2016, $270 thousand in 2015 and $234 thousand in 2014. Loan balances contain the book value carrying amount of nonaccrual loans

 

20

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

   

For the Year Ended 12/31/15

 
     

Year-to-date

   

 

         
   

Average Balance (1)

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 13,032     $ 38       0.29 %
                         

Investments (2)

    79,378       1,789       2.25 %
                         

Mortgage loans

    143,554       5,044       3.51 %

Commercial loans

    97,757       4,027       4.12 %

Consumer loans

    63,218       1,858       2.94 %

Total loans (2)

    304,529       10,929       3.59 %
                         

Total interest-earning assets (2)

    396,939     $ 12,756       3.21 %

Non-interest earning assets

    20,185                  

Total Assets

  $ 417,124                  
                         

NOW deposits

  $ 39,270     $ 32       0.08 %

Savings deposits

    151,863       163       0.11 %

Certificates of deposit

    58,761       420       0.71 %

Total interest bearing deposits

    249,894       615       0.25 %
                         

Securities sold under agreements to repurchase

    3,066       4       0.13 %

Long-term subordinated debt

    1,430       61       4.27 %

Federal Home Loan Bank advances

    17,795       48       0.27 %
                         

Total interest-bearing liabilities

    272,185     $ 728       0.27 %

Non-interest bearing liabilities

    113,498                  

Total Liabilities

    385,683                  
                         

Preferred stock

    8,649                  

Common stockholders' equity

    22,792                  

Total stockholders' equity

    31,441                  

Total liabilities and stockholders' equity

  $ 417,124                  
                         

Tax Equivalent net interest income

          $ 12,028          

Less: tax equivalent adjustments

          $ (270 )        

Net interest income

          $ 11,758          

Net interest spread

                    2.95 %

Net interest margin

                    3.03 %
(1)  Average balances presented are full year averages.                         
(2) On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $279 thousand in 2016, $270 thousand in 2015 and $234 thousand in 2014. Loan balances contain the book value carrying amount of nonaccrual loans    

 

21

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

   

For the Year Ended 12/31/14

 
      Year-to-date    

 

         
   

Average Balance (1)

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 16,648     $ 45       0.27 %
                         

Investments (2)

    88,580       1,980       2.24 %
                         

Mortgage loans

    141,497       5,195       3.67 %

Commercial loans

    81,916       3,387       4.13 %

Consumer loans

    58,154       1,884       3.24 %

Total loans (2)

    281,567       10,466       3.72 %
                         

Total interest-earning assets (2)

    386,795     $ 12,491       3.23 %

Non-interest earning assets

    20,612                  

Total Assets

  $ 407,407                  
                         

NOW deposits

  $ 38,729     $ 30       0.08 %

Savings deposits

    152,488       277       0.18 %

Certificates of deposit

    65,787       542       0.82 %

Total interest bearing deposits

    257,004       849       0.33 %
                         

Securities sold under agreements to repurchase

    3,622       4       0.11 %

Federal Home Loan Bank advances

    8,426       18       0.21 %
                         

Total interest-bearing liabilities

  $ 269,052     $ 871       0.32 %

Non-interest bearing liabilities

    109,433                  

Total Liabilities

    378,485                  
                         

Preferred stock

    8,982                  

Common stockholders' equity

    19,940                  

Total stockholders' equity

    28,922                  

Total liabilities and stockholders' equity

  $ 407,407                  
                         

Tax Equivalent net interest income

          $ 11,620          

Less: tax equivalent adjustments

          $ (234 )        

Net interest income

          $ 11,386          

Net interest spread

                    2.91 %

Net interest margin

                    3.00 %

(1) Average balances presented are full year averages.

  

  (2) On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $279 thousand in 2016, $270 thousand in 2015 and $234 thousand in 2014. Loan balances contain the book value carrying amount of nonaccrual loans.

 

22

 

 

 

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

 

    Year Ended December 31, 2016     Year Ended December 31, 2015  
    compared to     compared to  
    Year Ended December 31, 2015     Year Ended December 31, 2014  
    Increase (Decrease)     Increase (Decrease)  
           

Due to

                   

Due to

         
   

Volume

   

Rate

   

Net

   

Volume

   

Rate

   

Net

 
   

(Dollars in thousands)

 

Interest and dividend income:

                                               

Federal funds sold and overnight deposits

  $ (16 )   $ 37     $ 21     $ (12 )   $ 5     $ (7 )

Investments

    (174 )     25       (149 )     (213 )     22       (191 )

Loans

    2,780       16       2,796       824       (361 )     463  

Total interest-earning assets

  $ 2,590     $ 78     $ 2,668     $ 599     $ (334 )   $ 265  
                                                 
                                                 
                                                 

Interest expense:

                                               

NOW deposits

  $ 4     $ 2     $ 6     $ 2     $ -     $ 2  

Savings deposits

    36       162       198       (1 )     (113 )     (114 )

Time deposits

    19       43       62       (59 )     (63 )     (122 )

Total interest-bearing deposits

    59       207       266       (58 )     (176 )     (234 )
                                                 

Securities sold under agreements to repurchase

    (1 )     3       2       (1 )     1       -  

Long term subordinated debt

    413       41       454       61       -       61  

FHLB advances

    101       43       144       20       10       30  

Total interest-bearing liabilities

    572       294       866       22       (165 )     (143 )
                                                 

Net change net in interest income

  $ 2,018     $ (216 )   $ 1,802     $ 577     $ (169 )   $ 408  

 

 

Provision for Loan Losses

 

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

 

Each month, the Bank reviews the allowance for loan losses and makes additional provisions to the allowance as needed. For the year ended December 31, 2016, the allowance increased $725 thousand, net of charge-offs and recoveries. The total allowance for loan losses at December 31, 2016 was $3.8 million or 0.92% of outstanding loans. This compares with a total allowance for loan losses of $3.0 million at December 31, 2015, which represented 0.93% of outstanding loans. During 2016, the Bank charged off six loans for a total of $194 thousand compared to eight loans for a total of $22 thousand during 2015. The Bank recorded recoveries on eight loans for $8 thousand in 2016 compared to three loans for $11 thousand in 2015. Management believes the allowance for loan losses is adequate and will continue to monitor the levels closely in 2017.

 

23

 

 

Noninterest Income and Noninterest Expense

 

The following tables set forth the various components of the Bank’s noninterest income and noninterest expense for the years ended December 31, 2016, 2015 and 2014.

 

 

NONINTEREST INCOME

(Dollars in thousands)

 

   

For Year

   

% of

   

For Year

   

% of

   

For Year

   

% of

 
   

Ended

   

Noninterest

   

Ended

   

Noninterest

   

Ended

   

Noninterest

 
   

12/31/2016

   

Income

   

12/31/2015

   

Income

   

12/31/2014

   

Income

 
                                                 

Service charges on deposit accounts

  $ 379       11.9 %   $ 400       12.8 %   $ 474       19.2 %

Safe deposit fees

    87       2.7 %     92       2.9 %     95       3.8 %

Writedown of securities

    (3 )     -0.1 %     (7 )     -0.2 %     (8 )     -0.3 %

Gain on sales of investments

    94       2.9 %     139       4.5 %     150       6.1 %

Mortgage loan servicing activities

    (378 )     -11.8 %     13       0.4 %     89       3.6 %

Gain on sale of mortgages

    1,666       52.1 %     1,329       42.6 %     563       22.8 %

Investment services fees and commissions

    194       6.1 %     216       6.9 %     237       9.6 %

Other income

    1,157       36.2 %     940       30.1 %     870       35.2 %

Total noninterest income

  $ 3,196       100.0 %   $ 3,122       100.0 %   $ 2,470       100.0 %

 

 

NONINTEREST EXPENSE

(Dollars in thousands)

 

   

For Year

   

% of

   

For Year

   

% of

   

For Year

   

% of

 
   

Ended

   

Noninterest

   

Ended

   

Noninterest

   

Ended

   

Noninterest

 
   

12/31/2016

   

Expense

   

12/31/2015

   

Expense

   

12/31/2014

   

Expense

 
                                                 

Salaries and employee benefits

  $ 7,499       53.4 %   $ 6,872       53.1 %   $ 6,736       51.8 %

Occupancy expense

    1,530       10.9 %     1,394       10.8 %     1,358       10.4 %

Equipment expense

    420       3.0 %     399       3.1 %     443       3.4 %

Professional fees

    479       3.4 %     571       4.4 %     538       4.1 %

Advertising and promotions

    605       4.3 %     442       3.4 %     594       4.6 %

Forms and supplies

    202       1.4 %     162       1.3 %     172       1.3 %

Insurance

    438       3.1 %     395       3.1 %     467       3.6 %

Loan expenses

    160       1.1 %     143       1.1 %     155       1.2 %

Data Processing

    836       5.9 %     773       5.9 %     676       5.3 %

Other expenses

    1,898       13.5 %     1,799       13.8 %     1,861       14.3 %

Total noninterest expense

  $ 14,067       100.0 %   $ 12,950       100.0 %   $ 13,000       100.0 %

 

 

Noninterest income increased by $74 thousand to $3.2 million for the year ended December 31, 2016 from $3.1 million for the year ended December 31, 2015. This increase was due primarily to an increase of $367 thousand and $178 thousand from the gain on the sale of mortgage loans and other services charges and fees, respectively, which were partially offset by a $391 thousand decrease in the income from the mortgage banking activities category. SBT Investment Services, Inc.’s revenues decreased by approximately $22 thousand in 2016 compared to 2015.

 

Noninterest expense for the year ended December 31, 2016 was $14.1 million, an increase of $1.1 million or 8.6% compared to the year ended December 31, 2015. Increases in 2016 from 2015 were primarily related to salary and employee benefits, occupancy expenses and advertising and promotions, with increases of $627 thousand, $136 thousand and $163 thousand, respectively.

 

Salaries and employee benefits comprised 53.3% of total noninterest expense for the year ended December 31, 2016 as compared to 53.1% for the year ended December 31, 2015. Occupancy expenses were approximately 10.9% in 2016 and 10.7% in 2015, respectively, and continued to be the other major category of noninterest expense.

 

24

 

 

Financial Condition at Years Ended December 31, 2016, 2015 and 2014

 

The following table sets forth the average balances of each principal category of our assets, liabilities, and capital accounts for the years ended December 31, 2016, 2015 and 2014.

 

 

Distribution of Assets, Liabilities and Stockholders' Equity

(Dollars In thousands)

     

   

For the Year Ended

   

For the Year Ended

   

For the Year Ended

 
   

12/31/2016

   

12/31/2015

   

12/31/2014

 
   

Average

   

% of

   

Average

   

% of

   

Average

   

% of

 
   

Balance

   

Total Assets

   

Balance

   

Total Assets

   

Balance

   

Total Assets

 
ASSETS                                                

Cash and due from banks

  $ 8,818       1.8 %   $ 8,442       2.0 %   $ 8,542       2.1 %

Investment securities

    72,269       15.1 %     79,378       19.0 %     87,704       21.5 %

Fed funds sold and overnight deposits

    10,317       2.2 %     13,032       3.1 %     16,861       4.1 %

Loans, net

    374,558       78.0 %     304,529       73.0 %     278,798       68.4 %

Premises and equipment

    1,913       0.4 %     1,426       0.4 %     1,714       0.5 %

Accrued interest and other assets

    11,976       2.5 %     10,317       2.5 %     13,788       3.4 %

Total assets

  $ 479,851       100.0 %   $ 417,124       100.0 %   $ 407,407       100.0 %
                                                 
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Deposits:

                                               

Demand and NOW deposits

  $ 170,139       35.5 %   $ 151,327       36.3 %   $ 147,473       36.2 %

Savings deposits

    168,814       35.2 %     151,863       36.4 %     152,488       37.4 %

Time deposits

    61,135       12.7 %     58,761       14.1 %     65,787       16.1 %

Total deposits

    400,088       83.4 %     361,951       86.8 %     365,748       89.7 %
                                                 

Federal Home Loan Bank advances

    37,614       7.9 %     17,795       4.3 %     8,425       2.1 %

Long-term subordinated debt

    7,237       1.5 %     1,430       0.3 %     0       0.0 %

Accrued interest and other liabilities

    4,015       0.8 %     4,507       1.1 %     4,312       1.1 %

Total liabilities

    448,954       93.6 %     385,683       92.5 %     378,485       92.9 %
                                                 

STOCKHOLDERS' EQUITY

                                               

Common stock

    18,886       3.9 %     11,730       2.8 %     10,141       2.5 %

Preferred stock

    0       0.0 %     8,649       2.1 %     8,982       2.2 %

Retained Earnings and accumulated other comprehensive (loss) income

    12,011       2.5 %     11,062       2.6 %     9,799       2.4 %

Total stockholders' equity

    30,897       6.4 %     31,441       7.5 %     28,922       7.1 %
                                                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 479,851       100.0 %   $ 417,124       100.0 %   $ 407,407       100.0 %

 

 

Investment Portfolio

 

In order to maintain a reserve of readily marketable assets to meet the Bank’s liquidity and loan requirements, the Bank purchases debt securities issued by U.S. government corporations and agencies, mortgage-backed securities and other investments. Sales of “federal funds” (short-term loans to other banks) are regularly utilized. Placement of funds in certificates of deposit with other financial institutions may be made as alter
native investments pending utilization of funds for loans or other purposes.

 

Securities may be pledged to meet security requirements imposed as a condition for receipt of deposits of public funds and repurchase agreements. At December 31, 2016, the Bank had 33 securities with a carrying value totaling $13.6 million pledged for such purposes.

 

As of December 31, 2016, the Bank’s investment portfolio consisted of U.S. government and agency securities, mortgage-backed securities, and municipal securities. The Bank’s policy is to stagger the maturities of its investments to meet overall liquidity requirements of the Bank.

 

25

 

 

The following tables summarize the amounts and distribution of the Bank’s investment securities held as of December 31, 2016, 2015, and 2014.

 

INVESTMENT PORTFOLIO 

(Dollars in thousands)

 

   

December 31, 2016

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

         
   

Cost

   

Gains

   

Losses

   

Value

   

Yield

 
                                         

AVAILABLE-FOR-SALE SECURITIES

                                       

U.S. Government and agency securities

                                       
Due within one year   $ 1,000     $ 1     $ -     $ 1,001       1.00 %

Due after one to five years

    3,250       6       4       3,252       1.24  

Total U.S. government and agency securities

    4,250       7       4       4,253       1.18  

State and municipal securities

                                       

Due after one to five years

    250       1       -       251       4.00  

Due after five to ten years

    6,253       100       41       6,312       2.91  

Due after ten to fifteen years

    7,417       78       100       7,395       2.76  

Due beyond fifteen years

    389       5       -       394       3.30  

Total state and municipal securities

    14,309       184       141       14,352       2.86  

Mortgage-backed securities

                                       

Due after one to five years

    718       7       4       721       2.25  

Due after five to ten years

    3,480       13       21       3,472       1.80  

Due after ten to fifteen years

    20,272       9       539       19,742       1.69  

Due beyond fifteen years

    15,580       11       386       15,205       2.00  

Total mortgage-backed securities

    40,050       40       950       39,140       1.83  

SBA loan pools

                                       

Due after five to ten years

    973       13       3       983       3.30  

Total SBA loan pools

    973       13       3       983       3.30  
                                         

Total available-for-sale securities

  $ 59,582     $ 244     $ 1,098     $ 58,728       2.33 %

 

26

 

 

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

   

December 31, 2015

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

         
   

Cost

   

Gains

   

Losses

   

Value

   

Yield

 
                                         

AVAILABLE-FOR-SALE SECURITIES

                                       

U.S. Government and agency securities

                                       

Due after one to five years

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

Total U.S. government and agency securities

    10,499       6       42       10,463       1.33  

State and municipal securities

                                       

Due within one year

    375       4       -       379       3.95  

Due after one to five years

    7,780       305       20       8,065       2.70  

Due after five to ten years

    4,580       121       8       4,693       3.08  

Due after ten to fifteen years

    1,025       9       8       1,026       2.51  

Due beyond fifteen years

    498       8       -       506       3.25  

Total state and municipal securities

    14,258       447       36       14,669       2.86  

Mortgage-backed securities

                                       

Due after one to five years

    733       12       -       745       2.43  

Due after five to ten years

    1,997       19       7       2,009       2.13  

Due after ten to fifteen years

    25,144       16       393       24,767       1.80  

Due beyond fifteen years

    18,084       18       342       17,760       2.20  

Total mortgage-backed securities

    45,958       65       742       45,281       1.98  

SBA loan pools

                                       

Due after one to five years

    -       -       -       -       -  

Due after five to ten years

    1,089       23       8       1,104       3.19  

Total SBA loan pools

    1,089       23       8       1,104       3.19  
                                         

Total available-for-sale securities

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

 

27

 

 

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

   

December 31, 2014

 
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

         
   

Cost

   

Gains