Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2010
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.
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(Exact name of registrant as specified in its charter)
Connecticut 20-4346972
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 Hopmeadow Street, P.O. Box 248, Simsbury, CT 06070
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(Address of principal executive offices) (Zip Code)
(860) 408-5493
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(ss. 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer," and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer __ Accelerated filer __ Non-accelerated filer __
Smaller reporting company [X]
-1-
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 29, 2010, the registrant had 864,976 shares of its Common Stock,
no par value per share, outstanding.
-2-
TABLE OF CONTENTS
SBT Bancorp, Inc.
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2010
and 2009 (unaudited) and December 31, 2009 4
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2010 and 2009 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2010 and 2009
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2010 and 2009 (unaudited) 7
Notes to Condensed Consolidated Financial Statements -
(unaudited) 8 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. [Removed and Reserved] 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
EXHIBIT INDEX 23
-3-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
ASSETS 9/30/10 12/31/09 9/30/09
------ ------------ --------- ------------
(unaudited) (unaudited)
Cash and due from banks $ 7,276 $ 8,212 $ 10,272
Interest-bearing deposits with the Federal Reserve Bank of Boston 14,817 4,945 2,864
Interest-bearing deposits with the Federal Home Loan Bank 7 163 89
Federal funds sold 1,509 2,416 7,349
Money market mutual funds 8,842 1,353 3,329
------------ --------- ------------
Cash and cash equivalents 32,451 17,089 23,903
Interest-bearing time deposits with other banks 5,629 5,488 5,443
Investments in available-for-sale securities (at fair value) 42,896 50,011 54,656
Federal Home Loan Bank stock, at cost 660 631 631
Loans outstanding 209,069 193,515 195,349
Less allowance for loan losses 2,309 2,211 2,138
------------ --------- ------------
Loans, net 206,760 191,304 193,211
------------ --------- ------------
Premises and equipment 580 684 705
Accrued interest receivable 925 977 1,032
Bank owned life insurance 3,971 3,846 3,803
Due from broker - - 1,195
Other assets 3,157 3,709 2,230
------------ --------- ------------
Total other assets 8,633 9,216 8,965
------------ --------- ------------
TOTAL ASSETS $ 297,029 $ 273,739 $ 286,809
============ ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand deposits $ 49,136 $ 43,887 $ 40,011
Savings and NOW deposits 145,300 124,482 131,049
Time deposits 75,883 82,077 92,454
------------ --------- ------------
Total deposits 270,319 250,446 263,514
Securities sold under agreements to repurchase 3,435 913 741
Other liabilities 930 968 1,025
------------ --------- ------------
Total liabilities 274,684 252,327 265,280
------------ --------- ------------
Stockholders' equity:
Preferred Stock - Series A 3,839 3,805 3,793
Preferred Stock - Series B 221 225 227
Common stock, no par value; authorized 2,000,000 shares;
issued and outstanding 864,976 shares on 9/30/10,
12/31/09, and 9/30/09 9,381 9,372 9,365
Retained earnings 8,107 7,782 7,759
Accumulated other comprehensive income 797 228 385
------------ --------- ------------
Total stockholders' equity 22,345 21,412 21,529
------------ --------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 297,029 $ 273,739 $ 286,809
============ ========= ============
See accompanying notes to the condensed consolidated financial statements
-4-
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for per share amounts)
For the quarter ended For the nine months ended
----------------------- --------------------------
9/30/2010 9/30/2009 9/30/2010 9/30/2009
--------- --------- --------- ---------
Interest and dividend income:
Interest and fees on loans $ 2,619 $ 2,447 $ 7,679 $ 7,254
Investment securities 438 528 1,379 1,428
Federal funds sold and overnight deposits 11 12 21 21
--------- --------- --------- ---------
Total interest and dividend income 3,068 2,987 9,079 8,703
--------- --------- --------- ---------
Interest expense:
Deposits 446 680 1,346 2,224
Repurchase agreements 10 3 31 7
Federal Home Loan Bank advances - - - 7
--------- --------- --------- ---------
Total interest expense 456 683 1,377 2,238
--------- --------- --------- ---------
Net interest and dividend income 2,612 2,304 7,702 6,465
Provision for loan losses 180 192 605 322
--------- --------- --------- ---------
Net interest and dividend income after provision for loan losses 2,432 2,112 7,097 6,143
--------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts 116 159 386 395
Gain on sales of available-for-sale securities - 40 - 40
Other service charges and fees 166 145 484 413
Increase in cash surrender value of life insurance policies 42 44 125 99
Gain on loans sold 93 17 101 60
Investment Services fees and commissions 35 27 81 74
Other income 52 16 75 62
--------- --------- --------- ---------
Total noninterest income 504 448 1,252 1,143
--------- --------- --------- ---------
Noninterest expense:
Salaries and employee benefits 1,232 964 3,507 3,033
Premises and equipment 359 373 1,068 1,109
Advertising and promotions 97 128 289 307
Forms and supplies 36 50 99 138
Professional fees 178 125 541 395
Directors' fees 33 33 114 99
Correspondent charges 78 67 216 206
Postage 26 28 71 77
FDIC assessment 100 160 297 315
Data processing 126 178 353 250
Other expenses 250 261 713 652
--------- --------- --------- ---------
Total noninterest expense 2,515 2,367 7,268 6,581
--------- --------- --------- ---------
Income before income taxes 421 193 1,081 705
Income tax provision 107 33 251 178
--------- --------- --------- ---------
Net income $ 314 $ 160 $ 830 $ 527
========= ========= ========= =========
Net income available to common shareholders $ 249 $ 95 $ 636 $ 395
========= ========= ========= =========
Average shares outstanding, basic 864,976 864,976 864,976 864,976
Earnings per common share, basic $ 0.29 $ 0.11 $ 0.74 $ 0.46
========= ========= ========= =========
Average shares outstanding, assuming dilution 865,363 864,976 865,311 864,976
Earnings per common share, assuming dilution $ 0.29 $ 0.11 $ 0.74 $ 0.46
========= ========= ========= =========
-5-
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Preferred Preferred Accumulated Other
Stock Stock Common Retained Comprehensive
Series A Series B Stock Earnings Income (Loss) Total
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2008 $ - $ - $ 9,328 $ 7,543 $ (25) $16,846
Comprehensive income:
Net income - - - 527 - -
Net change in unrealized holding loss on
available-for-sale securities, net of tax effect - - - - 410 -
Comprehensive income - - - - - 937
Preferred stock issuance 3,770 230 - - - 4,000
Preferred stock dividends - - - (84) - (84)
Preferred stock amortization (accretion) 23 (3) - (20) - -
Stock-based compensation - - 37 - - 37
Dividends declared common stock ($0.12 per share) - - - (207) - (207)
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Balance, September 30, 2009 $ 3,793 $ 227 $ 9,365 $ 7,759 $ 385 $21,529
===========================================================================
Balance, December 31, 2009 $ 3,805 $ 225 $ 9,372 $ 7,782 $ 228 $21,412
Comprehensive Income:
Net income - - - 830 - -
Net change in unrealized holding income on
available-for-sale securities, net of tax effect - - - - 569 -
Comprehensive income - - - - - 1,399
Preferred stock dividends - - - (164) - (164)
Preferred stock amortization (accretion) 34 (4) - (30) - -
Stock-based compensation - - 9 - - 9
Dividends declared common stock ($0.12 per share) - - - (311) - (311)
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Balance, September 30, 2010 $ 3,839 $ 221 $ 9,381 $ 8,107 $ 797 $22,345
===========================================================================
See accompanying notes to the condensed consolidated financial statements
-6-
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months ended
-------------------------
9/30/10 9/30/09
--------- ---------
Cash flows from operating activities:
Net income $ 830 $ 527
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net 138 92
Interest capitalized on interest-bearing time deposits with other banks (141) -
Change in deferred loan costs, net (35) 21
Provision for loan losses 605 322
Depreciation and amortization 171 205
Accretion on impairment of operating lease (33) (33)
Net gain on sales of available-for-sale securities - (40)
Decrease (increase) in other assets 79 (80)
Decrease (increase) in interest receivable 52 (196)
Decrease in taxes receivable 108 118
Stock based compensation 9 37
Decrease in other liabilities (15) (413)
Increase in cash surrender value of bank owned life insurance (125) (99)
Increase in interest payable 10 17
--------- ---------
Net cash provided by operating activities 1,653 478
--------- ---------
Cash flows from investing activities:
Proceeds from maturities of interest-bearing time deposits with other banks - 1,877
Purchases of available-for-sale securities (10,066) (31,867)
Proceeds from maturities of available-for-sale securities 17,975 9,634
Loan originations and principal collections, net (13,520) (4,462)
Purchases of FHLB stock (29) -
Loans purchased (2,512) (11,021)
Purchase of life insurance policies - (2,500)
Capital expenditures (65) (82)
Recoveries of loans previously charged-off 6 3
--------- ---------
Net cash used in investing activities (8,211) (38,418)
--------- ---------
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts 26,067 34,508
Net (decrease) increase in time deposits (6,194) 8,127
Net change in short-term advances from the Federal Home Loan Bank - (1,000)
Net increase in securities sold under agreements to repurchase 2,522 164
Proceeds from issuance of preferred stock - 4,000
Dividends paid - preferred stock (164) (84)
Dividends paid - common stock (311) (207)
--------- ---------
Net cash provided by financing activities 21,920 45,508
--------- ---------
Net increase in cash and cash equivalents 15,362 7,568
Cash and cash equivalents at beginning of period 17,089 16,335
--------- ---------
Cash and cash equivalents at end of period $ 32,451 $ 23,903
========= =========
Supplemental disclosures:
Interest paid 1,367 2,221
Income taxes paid 142 60
See accompanying notes to the condensed consolidated financial statements
-7-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-Q, and accordingly
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all necessary adjustments, consisting of only
normal recurring accruals, to present fairly the financial position, results of
operations, cash flows and changes in stockholders' equity of SBT Bancorp, Inc.
(the "Company") for the periods presented. In preparing the interim financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. The interim results of operations are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2010.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Form 10-K for the year ended
December 31, 2009.
NOTE 2 - STOCK-BASED COMPENSATION
At September 30, 2010, the Company maintained a stock-based employee
compensation plan. The Company recognizes the cost resulting from all
share-based payment transactions in the consolidated financial statements and
establishes fair value as the measurement objective in accounting for
share-based payment arrangements. During the three and nine months ended
September 30, 2010, the Company recognized $0 and $9,000, respectively, in
stock-based employee compensation expense. During the three and nine months
ended September 30, 2009, the Company recognized $7,000 and $37,000,
respectively, in stock-based employee compensation expense.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses." This ASU was
created to provide financial statement users with greater transparency about an
entity's allowance for credit losses and the credit quality of its financing
receivables. This ASU is intended to provide additional information to
financial statement users to assist them in assessing the entity's credit risk
exposures and evaluating the adequacy of its allowance for credit losses. The
amendments in this ASU will become effective as of the end of a reporting period
for interim and annual reporting periods ending on or after December 15, 2010.
The disclosures about activity that occurs during a reporting period will become
effective for interim and annual reporting periods beginning on or after
December 15, 2010.
In April 2010, the FASB issued ASU 2010-18, "Effect of a Loan Modification
When the Loan is Part of a Pool that Is Accounted for as a Single Asset." As a
result of this ASU, modifications of loans that are accounted for within a pool
under Subtopic 310-30 do not result in the removal of those loans from the pool
even if the modification of those loans would otherwise be considered a troubled
debt restructuring. An entity will continue to be required to consider whether
the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. The amendments in this ASU were effective for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010.
In March 2010, the FASB issued ASU 2010-11, "Scope Exception Related to
Embedded Credit Derivatives." The ASU clarifies that certain embedded
derivatives, such as those contained in certain securitizations, CDOs and
structured notes, should be considered embedded credit derivatives subject to
potential bifurcation and separate fair value accounting. The ASU allows any
beneficial interest issued by a securitization vehicle to be accounted for under
the fair value option at transition. At transition, the Company may elect to
reclassify various debt securities (on an instrument-by-instrument basis) from
held-to-maturity (HTM) or available-for-sale (AFS) to trading. The new rules
were effective July 1, 2010. The adaptation of this ASU did not have a
significant impact on the Company's financial statements.
-8-
NOTE 4 - FAIR VALUE MEASUREMENT DISCLOSURES
In accordance with ASC 820, the Company groups its financial assets and
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value.
Level 1 Inputs - Unadjusted quoted prices in active markets for
identical assets or liabilities that are available at the measurement
date.
Level 2 Inputs - Inputs other than quoted prices included within Level
1 that are observable for the assets or liabilities, either directly
or indirectly. These might include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the assets or liabilities
(such as interest rates, volatilities, prepayment speeds, credit
risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of
the assets or liabilities and are based on the entity's own assumption
about the assumptions that market participants would use to price the
assets or liabilities.
A description of the valuation methodologies used for instruments measured
at fair value, as well as the general clarification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and liabilities carried at
fair value effective January 1, 2008. The Company did not have any significant
transfers of assets or liabilities to and from Levels 1 and 2 of the fair value
hierarchy during the three and nine months ended September 30, 2010.
Assets Measured at Fair Value on a Recurring Basis
Securities Available for Sale. The fair value of the Company's
available-for-sale securities portfolio was estimated using Level 2 inputs. The
Company obtains fair value measurements from an independent pricing service.
The fair value measurements consider observable data that may include dealer
quotes, market spreads, cash flows, market consensus prepayment speeds, credit
information, and bonds' terms and conditions, among other factors. At September
30, 2010 and December 31, 2009, the carrying value and estimated fair value,
using Level 2 inputs, of securities available-for-sale was $42.9 million and
$50.0 million, respectively.
Assets Measured at Fair Value on a Nonrecurring Basis
Impaired Loans. The Company's impaired loans are reported at the fair value of
the underlying collateral if repayment is expected solely from the collateral.
Collateral values are estimated using Level 2 inputs based upon appraisals of
similar properties obtained from a third party. For Level 3 input, collateral
values are based on management's estimates or adjustments to third party
appraisals by management. At September 30, 2010 and December 31, 2009, the
estimated fair value, using Level 2 inputs, of impaired loans was $0 and
$194,000, respectively. At September 30, 2010 and December 31, 2009, the
estimated fair value, using Level 3 inputs, of impaired loans was $330,000 and
$0, respectively.
-9-
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, were as follows as of
September 30, 2010 and December 31, 2009:
(Dollars in thousands)
------------------------------------------------------
September 30, 2010 December 31, 2009
-------------------------- ------------------------
Carrying Carrying
amount Fair value amount Fair value
----------- ----------- --------- -----------
Financial assets
Cash and cash equivalents $ 32,451 $ 32,451 $ 17,089 $ 17,089
Interest-bearing time deposits with
other banks 5,629 5,989 5,488 5,691
Available-for-sale securities 42,896 42,896 50,011 50,011
Federal Home Loan Bank stock 660 660 631 631
Loans, net 206,760 212,811 191,304 193,185
Accrued interest receivable 925 925 977 977
Financial liabilities
Deposits 270,319 271,006 250,446 251,268
Securities sold under agreements to
repurchase 3,435 3,435 913 913
The following table below presents the changes in Level 3 assets and liabilities
that are measured at fair value for the nine months ended September 30, 2010:
(Dollars in thousands)
Fair Value Measurements Using
Significant Unobservable Inputs
Level 3
-------------------------------
Impaired Loans Total
-------------- ---------
Beginning balance, December 31, 2009 $ - $ -
Transfers in and/or out of Level 3 330 330
-------------- ---------
Ending balance, September 30, 2010 $ 330 $ 330
============== =========
NOTE 5 - EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
-10-
The following information was used in the computation of EPS on both a
basic and diluted basis for the three and nine months ended September 30, 2010
and September 30, 2009:
(Dollars in thousands, except per share amounts)
For the three months ended
--------------------------
9/30/10 9/30/09
--------- ---------
Basic EPS computation:
Net income $ 314 $ 160
Preferred stock net accretion (10) (10)
Preferred stock dividend paid (55) (55)
Cumulative preferred stock dividend earned - -
--------- ---------
Net income available to common shareholders $ 249 $ 95
Weighted average shares outstanding, basic 864,976 864,976
Basic EPS $ 0.29 $ 0.11
========= =========
Diluted EPS computation:
Net income $ 314 $ 160
Preferred stock net accretion (10) (10)
Preferred stock dividend paid (55) (55)
Cumulative preferred stock dividend earned - -
--------- ---------
Net income available to common shareholders $ 249 $ 95
Weighted average shares outstanding, assuming dilution 864,976 864,976
Dilutive potential shares 387 -
--------- ---------
865,363 864,976
Diluted EPS $ 0.29 $ 0.11
========= =========
(Dollars in thousands, except per share amounts)
For the nine months ended
-------------------------
9/30/10 9/30/09
--------- ---------
Basic EPS computation:
Net income $ 830 $ 527
Preferred stock net accretion (30) (20)
Preferred stock dividend paid (164) (84)
Cumulative preferred stock dividend earned - (28)
--------- ---------
Net income available to common shareholders $ 636 $ 395
Weighted average shares outstanding, basic 864,976 864,976
Basic EPS $ 0.74 $ 0.46
========= =========
Diluted EPS computation:
Net income $ 830 $ 527
Preferred stock net accretion (30) (20)
Preferred stock dividend paid (164) (84)
Cumulative preferred stock dividend earned - (28)
--------- ---------
Net income available to common shareholders $ 636 $ 395
Weighted average shares outstanding, assuming dilution 864,976 864,976
Dilutive potential shares 335 -
--------- ---------
865,311 864,976
Diluted EPS $ 0.74 $ 0.46
========= =========
-11-
NOTE 6 - IMPAIRED INVESTMENT SECURITIES
The aggregate fair value and unrealized losses of securities that have been
in a continuous unrealized loss position for less than twelve months and for
twelve months or more, and are not other than temporarily impaired, were as
follows:
As of September 30, 2010 (dollars in thousands)
-------------------------------------------------------------------------
Less than 12 months 12 Months or longer Total
------------------- --------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
------ ----------- ------ ------------ ------ ------------
Mortgage-backed securities $ - $ - $ 985 $ (125) $ 985 $ (125)
------ ----------- ------ ------------ ------ ------------
Total temporarily impaired securities $ - $ - $ 985 $ (125) $ 985 $ (125)
====== =========== ====== ============ ====== ============
The investments in the Company's investment portfolio that were temporarily
impaired as of September 30, 2010 consisted of debt issued by U.S. government
corporations and agencies. The Company's management considers investments with
an unrealized loss as of September 30, 2010 to be only temporarily impaired
because the impairment is attributable to changes in market interest rates and
current market inefficiencies. The Company's management anticipates that the
fair value of securities that are currently impaired will recover to cost basis.
As the Company has the ability and intent to hold securities for the foreseeable
future, no declines are deemed to be other than temporary.
NOTE 7 - LOAN INFORMATION
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of September 30, 2010 and December 31,
2009:
Dollars in thousands
---------------------------------------------
September 30, 2010 December 31, 2009
------------------ -----------------
Total nonaccrual loans $ 2,482 $ 3,153
================== =================
Accruing loans which are 90 days
or more overdue $ - $ 202
================== =================
Information about loans that meet the definition of an impaired loan under ASC
310-10-35 is as follows as of September 30, 2010 and December 31, 2009:
(Dollars in thousands)
--------------------------------------------------------------
September 30, 2010 December 31, 2009
----------------------------- -----------------------------
Recorded Related Recorded Related
investment in allowance investment in allowance
impaired for credit impaired for credit
loans losses loans losses
-------------- ----------- -------------- -----------
Loans for which there is a related
allowance for credit losses $ 410 $ 80 $ 354 $ 160
Loans for which there is no related
allowance for credit losses 1,351 - 1,912 -
-------------- ----------- -------------- -----------
Totals $ 1,761 $ 80 $ 2,266 $ 160
============== =========== ============== ===========
Included in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At September 30, 2010, the
Company had $410,000 in loans that were modified in troubled debt restructuring
and impaired.
-12-
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Forward-Looking Statements
When used in this quarterly report on Form 10-Q (the "Quarterly Report"),
the words "intends," "expects," "plans," "estimates," "projects," "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. The Company has made and may continue to make various
forward-looking statements with respect to earnings, credit quality and other
financial and business matters for periods subsequent to the quarter ended
September 30, 2010. The Company cautions that these forward-looking statements
are not guarantees of future performance and are subject to numerous
assumptions, risks and uncertainties, and that statements relating to subsequent
periods are subject to greater uncertainty because of the increased likelihood
of changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements. The following factors, among
others, could cause actual results to differ materially from such
forward-looking statements: competitive pressures on loan and deposit product
pricing; actions of competitors; changes in economic conditions; extent and
timing of actions of the Federal Reserve Board (the "Fed"); customer deposit
disintermediation; changes in customers' acceptance of our products and
services; and the extent and timing of legislative and regulatory actions and
reforms.
Forward-looking statements included in this Quarterly Report speak only as
of the date hereof and the Company undertakes no obligation to revise or update
such statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events or circumstances.
General
Management's Discussion and Analysis of Financial Conditions and Results of
Operations is designed to provide a better understanding of the significant
changes and trends related to the Company's financial condition, results of
operations, liquidity and capital resources. The discussion should be read in
conjunction with the consolidated financial statements of the Company for the
nine months ended September 30, 2010. All adjustments which, in the opinion of
management, are necessary in order to make the consolidated financial statements
for the nine months ended September 30, 2010 not misleading have been made.
The Company's only business is its investment in The Simsbury Bank & Trust
Company (the "Bank"), which is a community-oriented financial institution
providing a variety of banking and investment services. The Bank offers a full
range of banking services including commercial loans, term real estate loans,
construction loans, SBA loans and a variety of consumer loans; checking,
savings, certificates of deposit and money market deposit accounts; and safe
deposit and other customary non-deposit banking services to consumers and
businesses in north central Connecticut.
The Bank offers investment products and services to customers through SBT
Investment Services, Inc., a wholly-owned subsidiary of the Bank, and its
affiliation with the securities broker/dealer, LPL Financial.
Disclosure of the Company's significant accounting policies is included in
Note 2 to the consolidated financial statements of the Company's Annual Report
on Form 10-K for the year ended December 31, 2009. Some of these policies are
particularly sensitive, requiring significant judgments, estimates and
assumptions to be made by management. One of these significant policies relates
to the provision for loan losses. See the heading "Provision for Loan Losses"
below for further details about the Bank's current provision.
Overview
For the nine months ended September 30, 2010, net income available to
common stockholders amounted to $636,000, or $0.74 per diluted share. This
compares to net income available to common stockholders of $395,000, or $0.46
per diluted share, for the nine months ended September 30, 2009, an increase in
diluted earnings per share of 61%. Total assets were $297 million at September
30, 2010 compared to $274 million at December 31, 2009, an increase of $23
million or 9%, and $287 million at September 30, 2009, an increase of $10
million or 3%.
Total revenues, consisting of net interest and dividend income plus
noninterest income, were $3,116,000 in the third quarter compared to $2,752,000
during the same period a year ago, an increase of 13%. Net interest and
dividend income increased by $308,000, or 13%. This increase was driven by a 3%
growth in the balance sheet and a 36 basis point increase in the Company's
taxable equivalent net interest margin. For the nine months ended September 30,
2010, total revenues were $8,954,000 compared to $7,608,000 for the nine months
ended September 30, 2009, an increase of 18%.
-13-
The Company's taxable-equivalent net interest margin (taxable-equivalent
net interest and dividend income divided by average earning assets) was 3.75%
for the third quarter of 2010, compared to 3.39% for the third quarter of 2009.
The primary cause of this increase was a much lower cost of funds. Core
deposits grew rapidly during this period, replacing higher-cost time deposits.
Total non-interest expenses for the third quarter of 2010 were $2,515,000,
an increase of $148,000 or 6% over the third quarter of 2009. Salaries and
employee benefit expenses and professional fees increased during the third
quarter of 2010 compared to the third quarter of 2009. Advertising and
promotion expenses as well as data processing fees declined in the third quarter
of 2010 compared to the third quarter of 2009. For the nine months ended
September 30, 2010, total non-interest expenses were $7,268,000 compared to
$6,581,000 for the nine months ended September 30, 2009, an increase of 10%.
At September 30, 2010, total loans outstanding were $209 million, an
increase of $15 million or 8% over December 31, 2009 and an increase of $14
million or 7% over a year ago. With a loan loss provision of $180,000 during
the quarter, the Company's allowance for loan losses at September 30, 2010 was
1.10% of total loans. The profile of the Company's loan portfolio remains
relatively low-risk. The Company had non-accrual loans totaling $2.5 million
equal to 1.20% of total loans at September 30, 2010 compared to non-accrual
loans of 1.70% of total loans at December 31, 2009 and non-accrual loans of
1.27% of total loans a year ago. Loans 30 days or more delinquent, excluding
non-accrual loans, totaled $184,000, or 0.09% of total loans at September 30,
2010 compared to .06% at December 31, 2009 and 1.00% a year ago. Total
non-accrual loans and loans 30 or more days past due decreased to 1.28% of loans
outstanding at September 30, 2010 from 1.80% of loans outstanding at December
31, 2009 and 2.27% of loans outstanding at September 30, 2009.
Total deposits at September 30, 2010 were $270 million, an increase of $20
million or 8% over December 31. 2009 and an increase of $7 million or 3% over a
year ago. Core deposits (Demand, Savings and NOW accounts) increased by $26
million or 15% over December 31, 2009 and increased by $23 million or 14% over a
year ago. However, time deposits decreased by $6 million from December 31, 2009
and $17 million from a year ago. At quarter-end, 18% of total deposits were in
non-interest bearing demand accounts, 54% were in low-cost savings and NOW
accounts, and 28% were in time deposits.
Capital levels for The Simsbury Bank & Trust Company remain well in excess
of those required to meet the regulatory "well-capitalized" designation.
--------------------------------------------------------------------------------
Capital Ratios
9/30/10
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The Simsbury Bank & Regulatory Standard for
Trust Company Well-Capitalized
--------------------------------------------------------------------------------
Tier 1 Leverage Capital Ratio 7.07% 5.00%
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Tier 1 Risk-Based Capital Ratio 11.61% 6.00%
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Total Risk-Based Capital Ratio 12.86% 10.00%
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Results of Operation
Net Interest Income and Net Interest Margin
The Company's earnings depend largely upon the difference between the
income received from its loan portfolio and investment securities and the
interest paid on its liabilities, including interest paid on deposits and
borrowings. This difference is "net interest income." The net interest income,
when expressed as a percentage of average total interest-earning assets, is
referred to as the net yield on interest-earning assets. The Company's net
interest income is affected by the change in the level and the mix of
interest-earning assets and interest-bearing liabilities, referred to as volume
changes. The Company's net yield on interest-earning assets is also affected by
changes in yields earned on assets and rates paid on liabilities, referred to as
rate changes. Interest rates charged on the Bank's loans are affected
principally by the demand for such loans, the supply of money available for
lending purposes and competitive factors. These factors are in turn affected by
general economic conditions and other factors beyond the Bank's control, such as
federal economic policies, the general supply of money in the economy,
legislative tax policies, governmental budgetary matters, and the actions of the
Federal Reserve Bank.
-14-
Net interest and dividend income after provision for loan losses plus
non-interest income was $2,936,000 for the third quarter of 2010 compared to
$2,560,000 for the third quarter of 2009. The Company's net interest margin,
defined as the ratio of taxable equivalent net interest and dividend income to
interest-earning assets or net yield on earning assets, increased to 3.75% for
the quarter ended September 30, 2010 from 3.39% for the quarter ended September
30, 2009. The Bank's net interest spread, defined as the difference between the
yield on earning assets and the cost of deposits and borrowings, increased to
3.59% for the quarter ended September 30, 2010 from 3.19% for the quarter ended
September 30, 2009. The Bank's yield on interest earning assets increased
during the third quarter of 2010 to 4.39% as compared to 4.38% for the third
quarter of 2009, while the cost of deposits and borrowings decreased to 0.80%
for the third quarter of 2010 from 1.20% for the third quarter of 2009.
Net interest and dividend income after provision for loan losses plus
non-interest income was $8,349,000 for the first nine months of 2010 compared to
$7,286,000 for the comparable period in 2009. The Company's net interest
margin, as defined in the immediately preceding paragraph, increased to 3.88%
for the nine months ended September 30, 2010 from 3.46% for the nine months
ended September 30, 2009. The Bank's net interest spread, as defined in the
immediately preceding paragraph, increased to 3.71% for the nine months ended
September 30, 2010 from 3.21% for the nine months ended September 30, 2009. The
Bank's yield on interest-earning assets decreased during the first nine months
of 2010 to 4.56% as compared to 4.63% for the comparable period in 2009, while
the cost of deposits and borrowings decreased to 0.85% for the nine months ended
September 30, 2010 from 1.43% for the same period in 2009.
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management based on
such factors as historical experience, the volume and type of lending conducted
by the 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 transfers to the allowance, as determined by the Company's
guidelines. The total allowance for loan losses at September 30, 2010 was
$2,309,000 or 1.10% of outstanding loans as compared to $2,211,000 or 1.14% of
outstanding loans as of December 31, 2009 and $2,138,000 or 1.10% of outstanding
loans as of September 30, 2009. The provision for loan losses was $180,000 and
$605,000, respectively, for the three and nine months ended September 30, 2010.
The Bank charged off four loans totalling $178,942 in the third quarter of 2010
and nine loans totalling $188,417 in the third quarter of 2009. For the nine
months ended September 30, 2010, the Bank charged off eight loans totalling
$513,066 compared to thirteen loans totalling $204,283 in the nine months ended
September 30, 2009. During the third quarter of 2010, the Bank had one recovery
of $1,150 compared to three recoveries totalling $1,874 for the third quarter of
2009. For the nine months ended September 30, 2010, the Bank had five
recoveries totalling $5,644 compared to four recoveries totalling $3,001 for the
nine months ended September 30, 2009. The Bank believes the allowance for loan
losses is adequate.
Non-interest Income and Non-interest Expense
Total non-interest income for the three months ended September 30, 2010 was
$504,000 compared to $448,000 for the same period in the prior year. Total
non-interest income for the first nine months of 2010 was $1,252,000, an
increase of $109,000 from $1,143,000 for the first nine months of 2009. At
September 30, 2010, the Bank had approximately 21,000 deposit accounts compared
to approximately 20,500 accounts at December 31, 2009 and at September 30, 2009.
The major portion of non-interest income is derived from service and overdraft
charges.
Total non-interest expense for the three months ended September 30, 2010
was $2,515,000 compared to $2,367,000 for the same period in the prior year.
Total non-interest expense for the first nine months of 2010 was $7,268,000, an
increase of $687,000 over total non-interest expense of $6,581,000 for the first
nine months of 2009. The ratio of annualized operating expenses to average
assets was 3.34% for the third quarter of 2010 compared to 3.24% for the third
quarter of 2009. For the nine months ended September 30, 2010, the ratio of
annualized operating expenses to average assets was 3.38% compared to 3.29% for
the same period in the prior year.
Salaries and employee benefits comprised approximately 49% and 41%,
respectively, of total non-interest expense for the three months ended September
30, 2010 and 2009. Other major categories included premises and equipment,
which comprised approximately 14% and 16%, respectively, of non-interest expense
for the three months ended September 30, 2010 and 2009; advertising and
promotions, which comprised approximately 4% and 5%, respectively, of total
non-interest expense for the three months ended September 30, 2010 and 2009; and
professional fees, which comprised approximately 7% and 5% of total non-interest
expense for the three months ended September 30, 2010 and 2009.
-15-
Salaries and employee benefits comprised approximately 48% and 46%,
respectively, of total non-interest expense for the first nine months of 2010
and 2009. Other major categories included premises and equipment, which made up
approximately 15% and 17%, respectively, of non-interest expense in the first
nine months of 2010 and 2009; advertising and promotions, which made up
approximately 4% and 5%, respectively, of total non-interest expense for the
first nine months of 2010 and 2009; and professional fees, which made up
approximately 7% and 6%, respectively, of total non-interest expense in the
first nine months of 2010 and 2009.
Financial Condition
Investment Portfolio
In order to maintain a reserve of readily sellable assets to meet the
Bank's liquidity and loan requirements, the Bank purchases United States
Treasury securities and other investments. Sales of "Federal Funds" (short-term
loans to other banks) are regularly utilized. Placement of funds in
certificates of deposit with other financial institutions may be made as
alternative investments pending utilization of funds for loans or other
purposes.
Securities may be pledged to meet regulatory requirements imposed as a
condition to receipt of deposits of public funds and repurchase agreements. At
September 30, 2010, the Bank had 46 securities with a carrying value totaling
$18,282,000 pledged for such purposes. At December 31, 2009, the Bank had 29
securities with a carrying value totaling $11,038,000 pledged for such purposes,
and at September 30, 2009, the Bank had 29 securities with a carrying value
totaling $11,217,000 pledged for such purposes.
As of September 30, 2010, December 31, 2009 and September 30, 2009, the
Bank's investment portfolio consisted of U.S. government and agency securities,
municipal securities, corporate bonds, mortgage-backed securities, money market
securities, and U.S. government-sponsored agency equity securities. The Bank's
policy is to stagger the maturities of its investment securities to meet overall
liquidity requirements of the Bank.
The fair market value of investments in available-for-sale securities as of
September 30, 2010 was $42,896,000, which is 3% above amortized cost, compared
to $50,011,000, which was 1% above amortized cost as of December 31, 2009 and
$54,656,000, which was 1% above amortized cost as of September 30, 2009. The
Bank has the ability to hold debt securities until maturity, or for the
foreseeable future if classified as available-for-sale, and equity securities
until recovery to cost basis occurs.
Management periodically reviews all investment securities with significant
declines in fair value for potential other-than-temporary impairment pursuant to
the guidance in ASC 320-10, "Investments - Debt and Equity Securities." ASC
320-10 addresses the determination as to when an investment is considered
impaired, whether the impairment is other-than-temporary, and the measurement of
an impairment loss. Management evaluates the Company's investment portfolio on
an ongoing basis. As of September 30, 2010, there were no investment securities
in the investment portfolio that management determined to be
other-than-temporarily impaired.
Loan Portfolio
The Bank's loan portfolio as of the end of the third quarter of 2010 was
comprised of approximately 75% Mortgage and Consumer loans and 25% Commercial
loans. The Bank does not have any concentrations in its loan portfolio by
industry or group of industries. However, as of September 20, 2010,
approximately 84% of the Bank's loans were secured by residential real property
located in Connecticut compared with 78% as of December 31, 2009 and 72% as of
September 30, 2009.
There were approximately $106,000,000 of mortgage loans as of September 30,
2010, which represented a 3.9% decrease from December 31, 2009 and a 3.3%
decrease from September 30, 2009. The Bank sold twenty-three loans in the three
months ended September 30, 2010 with an aggregate principal balance of
$5,095,500 which resulted in a gain of $93,400. For the nine months ended
September 30, 2010, the Bank sold twenty-four loans with an aggregate principal
balance of $5,280,500 which resulted in a gain of $101,100. The Bank sold six
loans in the three months ended September 30, 2009, with an aggregate principal
balance of $1,337,000 for a gain of $17,000 and twenty-one loans for the nine
months ended September 30, 2009 with an aggregate principal balance of
$4,719,000 for a gain of $60,000. The Bank is an approved originator of loans
that can be sold to the Federal Home Loan Mortgage Corporation.
-16-
At September 30, 2010, the Bank had total consumer loan balances of
approximately $51,456,000 representing an increase of 50% from the consumer loan
balances at December 31, 2009 and at September 30, 2009. Most of the Bank's
consumer loans are secured by the equity in residential real property or other
personal property. Consumer home equity loans and lines of credit enable
borrowers to leverage the equity in their homes to achieve personal financial
goals, while providing for the ability to make monthly payments. The September
30, 2010 loan balance for these products represented just under 90% of the total
consumer loan portfolio.
As of September 30, 2010, the Bank had approximately $4,284,000 in consumer
auto loans purchased from BCI Financial Corp. (BCI) on its books compared to
approximately $3,226,000 in auto loans purchased from BCI on its books as of
December 31, 2009 and approximately $2,613,000 in auto loans purchased from BCI
on its books as of September 20, 2009. The Bank has an agreement with BCI
pursuant to which the Bank purchases auto loans from BCI. As part of the
agreement, BCI services the loans for the Bank.
The September 30, 2010 balance for commercial loans was slightly under
$51,700,000, a 4.2% increase from the commercial loan balance at December
31,2009 and relatively unchanged from the balance at September 30,2009. The
Bank's commercial loans are made to borrowers for the purpose of providing
working capital, financing the purchase of equipment, or financing other
business purposes. Such loans include loans with maturities ranging from thirty
days to one year and "term loans," which are loans with maturities normally
ranging from one year to twenty-five years. Short-term business loans are
generally intended to finance current transactions and typically provide for
periodic principal payments, with interest payable monthly. Term loans normally
provide for fixed or floating interest rates, with monthly payments of both
principal and interest.
The Bank's construction loans are primarily interim loans made by the Bank
to finance the construction of commercial and single-family residential
property. These loans are typically short-term. The Bank generally pre-qualifies
construction loan borrowers for permanent "take-out" financing as a condition to
making the construction loan. The Bank will make loans for speculative housing
construction or for acquisition and development of raw land.
The Bank's other commercial real estate loans consist primarily of loans
that are based on the borrower's cash flow and are secured by deeds of trust on
commercial property to provide another source of repayment in the event of
default. The Bank offers both fixed and floating rate loans. Maturities on such
loans typically range from five to thirty years.
Loans guaranteed by the Small Business Administration (SBA) and certain
other real estate loans easily sold in the secondary market may be made for
longer maturities. The Bank has been designated a Certified Lender by the SBA.
The Bank's SBA loans are categorized as commercial or real estate-commercial
depending on the underlying collateral.
The Bank is subject to certain lending limits. With certain exceptions, the
Bank is permitted under applicable law to make related extensions of credit to
any single borrowing entity of up to 15% of the Bank's capital and reserves.
Credit equaling an additional 10% of the Bank's capital and reserves may be
extended if the credit is fully secured by qualified collateral of limited
types. As of September 30, 2010, the Bank's lending limits were $3,660,000 and
$6,100,000, respectively. As of December 31, 2009, these lending limits were
$3,440,000 and $5,733,000, respectively, and as of September 30, 2009, these
lending limits were $3,447,000 and $5,745,000, respectively. The Bank sells
participations in its loans when necessary to stay within lending limits.
Interest on performing loans is accrued and taken into income daily. Loans
over 90 days past due are deemed non-performing and are placed on a non-accrual
status. Interest received on non-accrual loans is credited to income only upon
receipt and in certain circumstances may be applied to principal until the loan
has been repaid in full, at which time the interest received is credited to
income. The Bank had 20 non-accrual loans at September 30, 2010 with a balance
of approximately $2,482,000, 21 non-accrual loans with a balance of
approximately $3,200,000 at December 31, 2009 and 18 non-accrual loans with a
balance of approximately $2,486,000 at September 30, 2009.
When appropriate or necessary to protect the Bank's interests, real estate
that serves as collateral on a loan may be taken by the Bank through foreclosure
or a deed in lieu of foreclosure. Real property acquired in this manner by the
Bank will be known as "other real estate owned" (OREO) and will be carried on
the books of the Bank as an asset at the lesser of the Bank's recorded
investment or the fair value less estimated costs to sell. As of September 30,
2010, December 31, 2009 and September 30, 2009, no OREO was held by the Bank.
-17-
A loan whose terms have been modified due to financial difficulties of a
borrower is reported as a troubled debt restructure ("TDR"). All TDRs are placed
on non-accrual status until the loan qualifies for return to accrual status.
Loans qualify for return to accrual status once they have demonstrated
performance with the restructured terms of the loan agreement for a minimum of
six months. The Bank had two TDR loans at September 30, 2010 with a balance of
approximately $410,000. The Bank had no TDR loans at December 31, 2009 and
September 30, 2009.
Non-payment of loans is an inherent risk in the banking business. That risk
varies with the type and purpose of the loan, the collateral which is utilized
to secure payment and, ultimately, the creditworthiness of the borrower. In
order to minimize this credit risk, the Bank requires that all loans be approved
by at least two officers, one of whom must be an executive officer. Commercial
loans greater than $500,000, as well as other loans in certain circumstances,
must be approved by the Loan Committee of the Bank's Board of Directors.
The Bank has an internal review process to verify credit quality and risk
classifications. In addition, the Bank also maintains a program of annual review
of certain new and renewed loans by an outside loan review consultant. Loans are
graded from "pass" to "loss" depending on credit quality, with "pass"
representing loans that are fully satisfactory as additions to the Bank's
portfolio. These are loans which involve a degree of risk that is not
unwarranted given the favorable aspects of the credit and which exhibit both
primary and secondary sources of repayment. Classified loans identified in the
review process are added to the Bank's Internal Watchlist and an allowance for
credit losses is established for such loans if appropriate. Additionally, the
Bank is examined regularly by the Federal Deposit Insurance Corporation and the
State of Connecticut Department of Banking, at which times a further review of
loans is conducted.
There were 55 classified loans with combined outstanding balances of
$9,497,700 as of September 30, 2010 compared to 63 classified loans with
combined outstanding balances of $9,382,000 as of December 31, 2009. There were
56 classified loans with a combined outstanding balance of $9,498,000 as of
September 30, 2009. The Bank has no exposure to sub-prime loans in its loan
portfolio. The Bank's overall asset quality and loan loss reserves of 1.10% of
loans compare favorably to its peer banks.
The Bank maintains an allowance for loan losses to provide for potential
losses in the loan portfolio. Additions to the allowance are made by charges to
operating expenses in the form of a provision for loan losses. All loans that
are judged to be uncollectible are charged against the allowance, while any
recoveries are credited to the allowance. Management conducts a critical
evaluation of the loan portfolio monthly. This evaluation includes an assessment
of the following factors: the results of the Bank's internal loan review, any
external loan review, any regulatory examination, loan loss experience,
estimated potential loss exposure on each credit, concentrations of credit,
value of collateral, any known impairment in the borrower's ability to repay,
and present and prospective economic conditions.
Deposits
Deposits are the Bank's primary source of funds. At September 30, 2010,
the Bank had a deposit mix of 32% checking, 40% savings, and 28% certificates of
deposit. The Bank's net interest income is enhanced by its percentage of
non-interest-bearing deposits. As of December 31, 2009, the deposit mix was 32%
checking, 35% savings, and 33% certificates of deposit, and as of September 30,
2009, the deposit mix was 27% checking, 37% savings, and 36% certificates of
deposit. At September 30, 2010, eighteen percent of the total deposits of
$270.3 million were non-interest-bearing compared to eighteen percent of the
Bank's total deposits of $250.4 million that were non-interest-bearing at
December 31, 2009 and fifteen percent of the Bank's total deposits of $263.5
million that were non-interest-bearing at September 30, 2009. As of September
30, 2010, December 31, 2009 and September 30, 2009, the Bank had $45,433,000,
$28,700,000 and $41,023,000, respectively, in deposits from public sources.
The Bank's deposits are obtained from a cross-section of the communities it
serves. No material portion of the Bank's deposits has been obtained from or
is dependent upon any one person or industry. The Bank's business is not
seasonal in nature. The Bank accepts deposits in excess of $100,000 from
customers. Those deposits are priced to remain competitive.
The Bank is not dependent upon funds from sources outside the United States
and has not made any loans to a foreign entity.
-18-
Liquidity and Asset-Liability Management
Liquidity management for banks requires that funds always be available to
pay anticipated deposit withdrawals and maturing financial obligations promptly
and fully in accordance with their terms. The balance of the funds required is
generally provided by payments on loans, sale of loans, liquidation of assets,
borrowings, and the acquisition of additional deposit liabilities. One method
banks utilize for acquiring additional liabilities is through the acceptance of
"brokered deposits" (defined to include not only deposits received through
deposit brokers but also deposits bearing interest in excess of 75 basis points
over market rates), typically attracting large certificates of deposit at high
interest rates. The Bank is a member of Promontory Interfinancial Network LLC's
Certificate of Deposit Account Registry Service (CDARS). This allows the Bank
to offer its customers FDIC insurance, which reflects the deposit insurance
limits in effect on the report date, by placing the deposits in the CDARS
network. Accounts placed in this manner are considered brokered deposits. As
of September 30, 2010, the Bank had $7,825,000 of deposits in the CDARS network
compared to $5,345,000 of deposits in the CDARS network as of December 31, 2009
and $7,117,000 of deposits in the CDARS network as of September 30, 2009. The
Bank had no other brokered deposits as of September 30, 2010, December 31, 2009
and September 30, 2009.
To meet liquidity needs, the Bank maintains a portion of its funds in cash
deposits in other banks, federal funds sold, and available-for-sale securities.
As of September 30, 2010, the Bank's liquidity ratio was 21%, defined as the sum
of $1.5 million in federal funds sold, $24.6 million in available-for-sale
securities, and $30.9 million in cash and due from banks, interest-bearing
deposits at the Federal Home Loan Bank and Federal Reserve Bank, and money
market mutual funds, as a percentage of total deposits. This ratio was 22% at
December 31, 2009, defined as the sum of $2.4 million in federal funds sold, $39
million in available-for-sale securities, and $14.7 million in cash and due from
banks, interest-bearing deposits with the Federal Home Loan Bank and Federal
Reserve Bank, and money market mutual funds, as a percentage of total deposits.
At September 30, 2009, this ratio was 26%, defined as the sum of $10.2 million
in federal funds sold, $43.4 million in available-for-sale securities, $10.4
million in cash and due from banks, interest-bearing deposits with the Federal
Home Loan Bank and Federal Reserve Bank, and money market mutual funds, as a
percentage of total deposits.
The careful planning of asset and liability maturities and the matching of
interest rates to correspond with this matching of maturities is an integral
part of the active management of an institution's net yield. To the extent
maturities of assets and liabilities do not match in a changing interest rate
environment, net yields may be affected. Even with perfectly matched repricing
of assets and liabilities, risks remain in the form of prepayment of assets,
timing lags in adjusting certain assets and liabilities that have varying
sensitivities to market interest rates and basis risk. In its overall attempt
to match assets and liabilities, management takes into account rates and
maturities offered in connection with its certificates of deposit and provides
for the extension of variable rate loans to borrowers. The Bank has generally
been able to control its exposure to changing interest rates by maintaining
floating interest rate loans, shorter term investments, and a majority of its
time certificates of deposit with relatively short maturities.
The Executive Committee of the Company's Board of Directors meets at least
quarterly to monitor the Bank's investments and liquidity needs and oversee its
asset-liability management. In between meetings of the Committee, the Bank's
management oversees the Bank's liquidity.
Capital Requirements
The banking industry is subject to capital adequacy requirements based on
risk-adjusted assets. The risk-based guidelines are used to evaluate capital
adequacy and are based on the institution's asset risk profile, including
investments and loans, and off-balance sheet exposures, such as unused loan
commitments and standby letters of credit. The guidelines require that a
portion of total capital be core, or Tier 1. Tier 1 capital is the aggregate of
common shareholders' equity and perpetual preferred stock, less goodwill and
certain other deductions. Total capital consists of Tier 1 capital plus the
allowance for loan losses subject to certain limitations. Leverage ratio is
defined as Tier 1 capital divided by average assets.
At September 30, 2010, December 31, 2009 and September 30, 2009, the Bank's
capital exceeded all minimum regulatory requirements and the Bank was considered
to be "well capitalized" as defined in the regulations issued by the FDIC.
-19-
Inflation
The impact of inflation on financial institutions may differ significantly
from the impact exerted on other companies. Banks, as financial intermediaries,
have numerous assets and liabilities that may move in concert with inflation
both as to interest rates and as to value. This is especially true for
companies with a high percentage of interest-rate-sensitive assets and
liabilities, such as a bank. Banks seek to reduce the impact of inflation by
managing the interest-rate-sensitivity gap. The Bank attempts to manage its
interest-rate-sensitivity gap and to structure its mix of financial instruments
in order to minimize the potential adverse effects of inflation or other market
forces on its net interest income and, therefore, its earnings and capital.
Financial institutions are also affected by inflation's impact on
non-interest expenses such as salaries and occupancy expenses. From 1992
through September 30, 2010, inflation has remained relatively stable due
primarily to continuous management of the money supply by the Federal Reserve.
Based on the Bank's interest-rate-sensitivity position, the Bank may be
adversely affected by changes in interest rates in the short term. As such, the
management of the money supply by the Federal Reserve to control the rate of
inflation has an indirect impact on the earnings of the Bank. Also, changes in
interest rates may have a corresponding impact on the ability of borrowers to
repay loans with the Bank.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4. Controls and Procedures
The Company has initiatives in place to ensure compliance with the
Sarbanes-Oxley Act of 2002. The Company has an Internal Compliance Committee
that is responsible for the monitoring of and compliance with all federal
regulations. This committee makes reports on compliance matters to the Audit
and Compliance Committee of the Company's Board of Directors.
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of September 30, 2010.
Based upon this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of that date, the Company's disclosure
controls and procedures were effective at ensuring that required information
will be disclosed on a timely basis.
As used herein, "disclosure controls and procedures" mean controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There was no change in the Company's internal controls over financial
reporting during the quarter ended September 30, 2010 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
-20-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. Description
----------- -----------
3(i) Conformed Copy of the Certificate of Incorporation
of SBT Bancorp, Inc. (incorporated by reference to
Exhibit 3(i) of the Company's Form 10-K filed on
March 31, 2009)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2
of the Company's Form 8-K12G3 filed on March 7,
2006)
10.1 Supplemental Executive Retirement Agreement, dated
October 20, 2010, by and between The Simsbury Bank
& Trust Company and Martin J. Geitz (incorporated
by reference to Exhibit 10.1 of the Company's Form
8-K filed on October 22, 2010)
10.2 Endorsement Split Dollar Insurance Agreement,
dated October 20, 2010, by and between The
Simsbury Bank & Trust Company and Martin J. Geitz
(incorporated by reference to Exhibit 10.2 of the
Company's Form 8-K filed on October 22, 2010)
10.3 Change in Control Severance Agreement, dated
November 2, 2010, by and between The Simsbury Bank
& Trust Company and Michael T. Sheahan
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief
Financial Officer
32.1 Section 1350 Certification by Chief Executive
Officer
32.2 Section 1350 Certification by Chief Financial
Officer
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SBT BANCORP, INC.
Date: November 12, 2010 By: /s/ Martin J. Geitz
----------------------
Martin J. Geitz
Chief Executive Officer
Date: November 12, 2010 By: /s/ Anthony F. Bisceglio
---------------------------
Anthony F. Bisceglio
Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3(i) Conformed Copy of the Certificate of Incorporation
of SBT Bancorp, Inc. (incorporated by reference to
Exhibit 3(i) of the Company's Form 10-K filed on
March 31, 2009)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2
of the Company's Form 8-K12G3 filed on March 7,
2006)
10.1 Supplemental Executive Retirement Agreement, dated
October 20, 2010, by and between The Simsbury Bank
& Trust Company and Martin J. Geitz (incorporated
by reference to Exhibit 10.1 of the Company's Form
8-K filed on October 22, 2010)
10.2 Endorsement Split Dollar Insurance Agreement,
dated October 20, 2010, by and between The
Simsbury Bank & Trust Company and Martin J. Geitz
(incorporated by reference to Exhibit 10.2 of the
Company's Form 8-K filed on October 22, 2010)
10.3 Change in Control Severance Agreement, dated
November 2, 2010, by and between The Simsbury Bank
& Trust Company and Michael T. Sheahan
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief
Financial Officer
32.1 Section 1350 Certification by Chief Executive
Officer
32.2 Section 1350 Certification by Chief Financial
Officer
-23
