UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

(Mark One)

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

 

For the fiscal year ended December 31, 2015

 

or

 

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

 

For the transition period from ________ to _______

 

Commission file Number: 000-51832

 

SBT BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut		20-4346972
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

 

	86 Hopmeadow Street, Weatogue, CT	06089
	(Address of Principal Executive Offices)	(Zip Code)

 

	(860) 408-5493
	(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(g) of the Act:
	Common Stock, no par value
	(Title of Class)

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

 

INDEX

SBT BANCORP, INC.

 

		Page No.
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	15
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures	16
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	41
Item 9A.	Controls and Procedures	41
Item 9B.	Other Information	42
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
Item 14.	Principal Accounting Fees and Services	43
PART IV
Item 15.	Exhibits and Financial Statement Schedules	44
SIGNATURES		47

 

 

ITEM 1.     BUSINESS

 

General

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Market Area

 

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

 

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

 

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

 

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

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

 

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

 

Employees

 

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

 

Competition

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Supervision and Regulation

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

  

The Sarbanes-Oxley Act of 2002

 

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

 

USA PATRIOT Act

 

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

 

  

Dividend Restrictions

 

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

 

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

 

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

 

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

  

Capital Standards

 

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

 

 

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

 

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

 

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

  

		Actual 12/31/2015				Well Capitalized				Actual 12/31/2014				Well Capitalized
Bank:
Tier 1 leverage capital ratio			8.58%				5.00%				7.17%				5.00%
Tier 1 risk-based capital ratio			13.11%				8.00%				11.69%				6.00%
Total risk-based capital ratio			14.21%				10.00%				12.80%				10.00%
Common equity tier 1 risk-based capital ratio			13.11%				6.50%				N/A				N/A

 

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

 

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

 

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

 

 

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

 

Safety and Soundness Standards

 

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

 

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

 

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

 

  

Premiums for Deposit Insurance

  

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

 

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

 

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

 

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

 

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

 

Interstate Banking and Branching

 

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

 

Community Reinvestment Act

 

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

 

 

ITEM 1A.

RISK FACTORS

 

Not required.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.

PROPERTIES

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

ITEM 3.

LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.

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

 

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

 

		December 31, 2015								December 31, 2014
		High				Low				High				Low
Fourth Quarter		$	22.00			$	19.35			$	22.99			$	21.53
Third Quarter		$	22.95			$	20.20			$	22.75			$	21.55
Second Quarter		$	24.95			$	21.05			$	25.50			$	21.75
First Quarter		$	22.10			$	21.30			$	23.25			$	21.10

 

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

 

Dividends

 

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

 

 

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

 

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

 

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

 

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

 

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

   

ITEM 6.

SELECTED FINANCIAL DATA

 

Not required.

 

ITEM 7.

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

 

Forward-Looking Statements

 

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

 

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

 

●

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

  

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

adverse changes may occur in the equity markets;

 

●

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

 

●

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

 

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

 

General

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Net Interest Income and Net Interest Margin

 

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

 

 

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

 

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

  

NET INTEREST INCOME

(Dollars in thousands)

 

		For the Year Ended 12/31/15
						[1]
		Average Balance				Interest				Yield
Federal funds sold & overnight deposits		$	13,032			$	38				0.29	%
Investments (1)			79,378				1,789				2.25	%
Mortgage loans			143,554				5,044				3.51	%
Commercial loans			97,757				4,027				4.12	%
Consumer loans			63,218				1,858				2.94	%
Total loans (1)			304,529				10,929				3.59	%
Total interest-earning assets (1)		$	396,939			$	12,756				3.21	%
NOW deposits		$	39,270			$	32				0.08	%
Savings deposits			151,863				163				0.11	%
Certificates of deposit			58,761				420				0.71	%
Total interest bearing deposits			249,894				615				0.25	%
Securities sold under agreements to repurchase			3,066				4				0.13	%
Long-term subordinated debt			1,430				61				4.27	%
Federal Home Loan Bank advances			17,795				48				0.27	%
Total interest-bearing liabilities		$	272,185			$	728				0.27	%
Net interest income						$	12,028
Net interest spread											2.95	%
Net interest margin											3.03	%

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

		For the Year Ended 12/31/14
						[1]
		Average Balance				Interest				Yield
Federal funds sold & overnight deposits		$	16,648			$	45				0.27	%
Investments (1)			88,580				1,980				2.24	%
Mortgage loans			141,497				5,195				3.67	%
Commercial loans			81,916				3,387				4.13	%
Consumer loans			58,154				1,884				3.24	%
Total loans (1)			281,567				10,466				3.72	%
Total interest-earning assets (1)		$	386,795			$	12,491				3.23	%
NOW deposits		$	38,729			$	30				0.08	%
Savings deposits			152,488				277				0.18	%
Certificates of deposit			65,787				542				0.82	%
Total interest bearing deposits			257,004				849				0.33	%
Securities sold under agreements to repurchase			3,622				4				0.11	%
Federal Home Loan Bank advances			8,426				18				0.21	%
Total interest-bearing liabilities		$	269,052			$	871				0.32	%
Net interest income						$	11,620
Net interest spread											2.91	%
Net interest margin											3.00	%

 

 

NET INTEREST INCOME

(Dollars in thousands)

 

		For the Year Ended 12/31/13
						[1]
		Average Balance				Interest				Yield
Federal funds sold & overnight deposits		$	12,738			$	35				0.27	%
Investments (1)			105,771				2,362				2.23	%
Mortgage loans			127,805				4,723				3.70	%
Commercial loans			71,680				3,159				4.41	%
Consumer loans			56,332				1,971				3.50	%
Total loans (1)			255,817				9,853				3.85	%
Total interest-earning assets (1)		$	374,326			$	12,250				3.27	%
NOW deposits		$	35,529			$	28				0.08	%
Savings deposits			147,657				253				0.17	%
Certificates of deposit			72,344				613				0.85	%
Total interest bearing deposits			255,530				894				0.35	%
Securities sold under agreements to repurchase			3,265				4				0.12	%
Federal Home Loan Bank advances			9,575				19				0.20	%
Total interest-bearing liabilities		$	268,370			$	917				0.34	%
Net interest income						$	11,333
Net interest spread											2.93	%
Net interest margin											3.03	%

   

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

 

 

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

 

		Year Ended December 31, 2015 compared to Year Ended December 31, 2014												Year Ended December 31, 2014 compared to Year Ended December 31, 2013
		Increase (Decrease)												Increase (Decrease)
		Due to												Due to
		Volume				Rate				Net				Volume				Rate				Net
Interest and dividend income:
Federal funds sold and overnight deposits		$	(12	)		$	5			$	(7	)		$	11			$	(1	)		$	10
Investments			(213	)			22				(191	)			(500	)			118				(382	)
Loans			824				(361	)			463				1,273				(660	)			613
Total interest-earning assets		$	599			$	(334	)		$	265			$	784			$	(543	)		$	241
Interest expense:
NOW deposits		$	2			$	-			$	2			$	2			$	-			$	2
Savings deposits			(1	)			(113	)			(114	)			8				16				24
Time deposits			(59	)			(63	)			(122	)			(54	)			(17	)			(71	)
Total interest-bearing deposits			(58	)			(176	)			(234	)			(44	)			(1	)			(45	)
Securities sold under agreements to repurchase			(1	)			1				-				-				-				-
Long term subordinated debt			61				-				61
FHLB advances			20				10				30				(3	)			2				(1	)
Total interest-bearing liabilities			22				(165	)			(143	)			(47	)			1				(46	)
Net change in interest income		$	577			$	(169	)		$	408			$	831			$	(544	)		$	287

  

Provision for Loan Losses

 

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

 

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

 

 

Noninterest Income and Noninterest Expense

 

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

 

NONINTEREST INCOME

(Dollars in thousands)

 

		For Year Ended 12/31/2015				% of Noninterest Income				For Year Ended 12/31/2014				% of Noninterest Income				For Year Ended12/31/2013				% of Noninterest Income
Service charges on deposit accounts		$	400				12.8	%		$	474				19.2	%		$	488				15.6	%
Safe deposit fees			92				2.9	%			95				3.8	%			91				2.9	%
Writedown of securities			(7	)			-0.2	%			(8	)			-0.3	%			(17	)			-0.5	%
Gain on sales of investments			139				4.5	%			150				6.1	%			126				4.0	%
Mortgage banking activities			1,201				38.5	%			581				23.5	%			1,390				44.5	%
Investment services fees and commissions			216				6.9	%			237				9.6	%			231				7.4	%
Other income			1,081				34.6	%			941				38.1	%			817				26.1	%
Total noninterest income		$	3,122				100.0	%		$	2,470				100.0	%		$	3,126				100.0	%

 

NONINTEREST EXPENSE

(Dollars in thousands)

 

		For Year Ended 12/31/2015				% of Noninterest Expense				For Year Ended 12/31/2014				% of Noninterest Expense				For Year Ended 12/31/2013				% of Noninterest Expense
Salaries and employee benefits		$	6,872				53.1	%		$	6,736				51.8	%		$	6,880				54.6	%
Occupancy expense			1,394				10.8	%			1,358				10.4	%			1,185				9.4	%
Equipment expense			399				3.1	%			443				3.4	%			290				2.4	%
Professional fees			571				4.4	%			538				4.1	%			543				4.3	%
Advertising and promotions			442				3.4	%			594				4.6	%			756				6.0	%
Forms and supplies			162				1.3	%			172				1.3	%			144				1.1	%
Insurance			395				3.1	%			467				3.6	%			280				2.2	%
Loan expenses			143				1.1	%			155				1.2	%			138				1.1	%
Postage			16				0.1	%			32				0.3	%			86				0.7	%
Other expenses			2,556				19.7	%			2,505				19.3	%			2,297				18.2	%
Total noninterest expense		$	12,950				100.0	%		$	13,000				100.0	%		$	12,599				100.0	%

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Distribution of Assets, Liabilities and Stockholders' Equity

(Dollars In Thousands)

 

		For the Year Ended 12/31/2015								For the Year Ended 12/31/2014								For the Year Ended 12/31/2013
		Average Balance				% of Total Assets				Average Balance				% of Total Assets				Average Balance				% of Total Assets
ASSETS
Cash and due from banks		$	8,442				2.0	%		$	8,542				2.1	%		$	8,489				2.2	%
Investment securities			79,378				19.0	%			87,704				21.5	%			105,771				26.8	%
Fed funds sold and overnight deposits			13,032				3.1	%			16,861				4.1	%			12,738				3.2	%
Loans, net			304,529				73.0	%			278,798				68.4	%			253,151				64.2	%
Premises and equipment			1,426				0.4	%			1,714				0.4	%			1,073				0.3	%
Accrued interest and other assets			10,317				2.5	%			13,788				3.4	%			13,097				3.3	%
Total assets		$	417,124				100.0	%		$	407,407				100.0	%		$	394,319				100.0	%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand and NOW deposits		$	151,327				36.3	%		$	147,473				36.2	%		$	131,494				33.3	%
Savings deposits			151,863				36.4	%			152,488				37.4	%			147,657				37.4	%
Time deposits			58,761				14.1	%			65,787				16.1	%			72,344				18.3	%
Total deposits			361,951				86.8	%			365,748				89.8	%			351,495				89.1	%
Federal Home Loan Bank advances			17,795				4.3	%			8,425				2.1	%			9,575				2.4	%
Long-term subordinated debt			1,430				0.3	%			0				0.0	%			0				0.0	%
Accrued interest and other liabilities			4,507				1.1	%			4,312				1.1	%			5,368				1.5	%
Total liabilities			385,683				92.5	%			378,485				92.9	%			366,438				92.9	%
STOCKHOLDERS' EQUITY
Common stock			11,730				2.8	%			10,141				2.5	%			9,918				2.5	%
Preferred stock			8,649				2.1	%			8,982				2.2	%			8,970				2.3	%
Retained Earnings and accumulated other comprehensive (loss) income			11,062				2.6	%			9,799				2.4	%			8,993				2.3	%
Total stockholders' equity			31,441				7.5	%			28,922				7.1	%			27,881				7.1	%
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	417,124				100.0	%		$	407,407				100.0	%		$	394,319				100.0	%

 

Investment Portfolio

 

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

 

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

 

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

 

 

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

 

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

		December 31, 2015
		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value				Yield
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agency securities
Due after one to five years		$	10,499			$	6			$	42			$	10,463				1.33	%
Total U.S. government and agency securities			10,499				6				42				10,463				1.33
State and municipal securities
Due within one year			375				4				-				379				3.95
Due after one to five years			7,780				305				20				8,065				2.70
Due after five to ten years			4,580				121				8				4,693				3.08
Due after ten to fifteen years			1,025				9				8				1,026				2.51
Due beyond fifteen years			498				8				-				506				3.25
Total state and municipal securities			14,258				447				36				14,669				2.86
Mortgage-backed securities
Due after one to five years			733				12				-				745				2.43
Due after five to ten years			1,997				19				7				2,009				2.13
Due after ten to fifteen years			25,144				16				393				24,767				1.80
Due beyond fifteen years			18,084				18				342				17,760				2.20
Total mortgage-backed securities			45,958				65				742				45,281				1.98
SBA loan pools
Due after five to ten years			1,089				23				8				1,104				3.19
Total SBA loan pools			1,089				23				8				1,104				3.19
Total available-for-sale securities		$	71,804			$	541			$	828			$	71,517				2.36	%

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

		December 31, 2014
		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value				Yield
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agency securities
Due after one to five years		$	16,702			$	1			$	135			$	16,568				1.21	%
Due after five to ten years			1,500				-				4				1,496				1.83
Total U.S. government and agency securities			18,202				1				139				18,064				1.27
State and municipal securities
Due after one to five years			559				24				-				583				2.26
Due after five to ten years			4,835				184				31				4,988				3.22
Due after ten to fifteen years			8,065				445				21				8,489				3.23
Due beyond fifteen years			2,513				26				-				2,539				3.09
Total state and municipal securities			15,972				679				52				16,599				3.18
Mortgage-backed securities
Due within one year			-				-				-				-				-
Due after one to five years			588				14				-				602				2.97
Due after five to ten years			1,846				36				1				1,881				2.25
Due after ten to fifteen years			28,811				42				360				28,493				1.78
Due beyond fifteen years			17,912				48				268				17,692				2.38
Total mortgage-backed securities			49,157				140				629				48,668				2.03
SBA loan pools
Due after one to five years			-				-				-				-				-
Due after five to ten years			440				34				-				474				4.96
Total SBA loan pools			440				34				-				474				4.96
Total available-for-sale securities		$	83,771			$	854			$	820			$	83,805				2.36	%

 

 

INVESTMENT PORTFOLIO

(Dollars in thousands)

 

		December 31, 2013
		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value				Yield
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agency securities
Due after one to five years		$	13,061			$	-			$	245			$	12,816				1.08	%
Due after five to ten years			5,706				-				275				5,431				1.46
Total U.S.government and agency securities			18,767				-				520				18,247				1.20
State and municipal securities
Due after one to five years			301				2				-				303				3.00
Due after five to ten years			3,412				86				98				3,400				3.08
Due after ten to fifteen years			10,067				303				100				10,270				3.47
Due beyond fifteen years			-				-				-				-				-
Total state and municipal securities			13,780				391				198				13,973				3.36
Mortgage-backed securities
Due within one year			9				-				-				9				3.98
Due after one to five years			761				14				-				775				2.60
Due after five to ten years			2,660				49				11				2,698				2.39
Due after ten to fifteen years			32,886				31				1,281				31,636				1.85
Due beyond fifteen years			20,483				32				1,065				19,450				2.44
Total mortgage-backed securities			56,799				126				2,357				54,568				2.10
SBA loan pools
Due after one to five years			611				50				-				661				4.60
Due after ten to fifteen years			-				-				-				-				-
Total SBA loan pools			611				50				-				661				4.60
Total available-for-sale securities		$	89,957			$	567			$	3,075			$	87,449				2.25	%

 

 

 

Loan Portfolio

 

General

 

The following tables present the Bank’s loan portfolio as of December 31, 2015, 2014, 2013, 2012 and 2011.

   

LOAN PORTFOLIO

(Dollars in Thousands)

 

		For the Year Ended								For the Year Ended
		12/31/2015								12/31/2014
						% of Total								% of Total
		Balance				Loans				Balance				Loans
Commercial & industrial		$	35,305				10.8	%		$	19,038				6.8	%
Real estate - construction and land development			10,070				3.1	%			13,234				4.6	%
Real estate - residential			138,628				42.6	%			132,553				46.5	%
Real estate - commercial			62,118				19.1	%			46,982				16.5	%
Municipal			12,239				3.8	%			10,061				3.5	%
Home equity			47,681				14.7	%			46,403				16.3	%
Consumer			19,350				5.9	%			16,576				5.8	%
Total Loans			325,391				100.0	%			284,847				100.0	%
Allowance for loan losses			(3,028	)							(2,761	)
Deferred costs, net			1,332								1,295
Net loans		$	323,695							$	283,381

  

LOAN PORTFOLIO

(Dollars in Thousands)

 

		For the Year Ended  12/31/2013								For the Year Ended  12/31/2012
						% of Total								% of Total
		Balance				Loans				Balance				Loans
Commercial & industrial		$	18,432				6.6	%		$	13,991				6.0	%
Real estate - construction and land development			7,773				2.8	%			2,982				1.3	%
Real estate - residential			137,539				49.4	%			118,316				50.3	%
Real estate - commercial			48,814				17.5	%			41,978				17.9	%
Municipal			8,488				3.0	%			1,478				0.6	%
Home equity			46,742				16.8	%			45,245				19.2	%
Consumer			10,664				3.8	%			11,053				4.7	%
Total Loans			278,452				100.0	%			235,043				100.0	%
Allowance for loan losses			(2,792	)							(2,594	)
Deferred costs, net			1,215								841
Net loans		$	276,875							$	233,290

 

 

LOAN PORTFOLIO

(Dollars in Thousands)

 

		For the Year Ended 12/31/2011
						% of Total
		Balance				Loans
Commercial & industrial		$	15,145				7.0	%
Real estate - construction and land development			1,307				0.6	%
Real estate - residential			99,691				46.1	%
Real estate - commercial			39,723				18.4	%
Municipal			1,807				0.8	%
Home equity			48,485				22.5	%
Consumer			9,913				4.6	%
Total Loans			216,071				100.0	%
Allowance for loan losses			(2,469	)
Deferred costs, net			482
Net loans		$	214,084

  

The Bank’s commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or for other business purposes. Such loans include loans with maturities ranging from thirty days to two years and “term loans,” which are loans with maturities normally ranging from one to ten 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 to finance the construction of commercial and single-family residential properties. 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 occasionally make loans for housing construction or for acquisition and development of raw land.

 

The Bank’s other real estate loans consist primarily of loans based on the borrower’s cash flow and which are secured by deeds of trust on commercial and residential properties to provide another source of repayment in the event of default. It is the Bank’s policy to restrict real estate loans without credit enhancement to no more than 80% of the lower of the appraised value or the purchase price of the property depending on the type of property and its utilization. The Bank offers both fixed and floating rate loans. Maturities on such loans typically range from five to thirty years. However, Small Business Administration (SBA) and certain other real estate loans easily sold in the secondary market are made for longer maturities. The Bank has been designated an approved SBA lender. The Bank’s SBA loans are categorized as commercial or real estate, depending on the underlying collateral. The Bank has also been approved as an originator of loans that can be sold to the Federal Home Loan Mortgage Corporation.

 

During the year ended December 31, 2015, there were 370 loans with a total principal balance of $83,153,000 that were sold, resulting in a gain of $1,201,000 for the Bank. For the year ended December 31, 2014, there were 184 loans with a total principal balance of $42,080,000 that were sold, resulting in a gain of $500,000 for the Bank. For the year ended December 31, 2013, there were 305 loans with a total principal balance of $69,220,000 that were sold, resulting in a gain of $1,058,000 for the Bank.

 

Consumer loans are made for the purpose of financing automobiles, various types of consumer goods and other personal purposes. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Bank’s consumer loans are secured by the personal property purchased with the proceeds of such consumer loans.

 

 

With certain exceptions, the Bank is permitted under applicable law to make extensions of credit to any one borrowing entity and its related affiliates of up to 15% of the Bank’s capital and reserves. An additional 10% is permitted under applicable law if the credit is fully secured by qualified collateral. The Bank sells participations in its loans when necessary to stay within its lending limits. As of December 31, 2015, these lending limits for the Bank were $5,889,300 and $9,815,500, respectively.

 

Loan Concentrations

 

The Bank does not have any significant concentrations in its loan portfolio by industry or group of industries. As of December 31, 2015, approximately 85% of the Bank’s loans were secured by residential real property located in Connecticut. As of December 31, 2014, approximately 83% of the Bank’s loans were secured by residential real property located in Connecticut.

 

Loan Portfolio Maturities and Interest Rate Sensitivity

 

The following table summarizes the maturities and interest rate sensitivity of the Bank’s loan portfolio.

 

As of December 31, 2015

(dollars in thousands)

 

		One Year or Less				Over One to Five Years				Over Five years				Total
Commercial and industrial		$	9,986			$	14,508			$	10,811			$	35,305
Real estate - construction and land development			4,712				4,404				954				10,070
Real estate - residential			14,743				2,615				121,270				138,628
Real estate - commercial			24,408				2,391				35,319				62,118
Municipal			3,757				1,389				7,093				12,239
Home Equity			102				9,585				37,994				47,681
Consumer			1,379				12,025				5,946				19,350
Total loans		$	59,087			$	46,917			$	219,387			$	325,391
Loans with fixed interest rates		$	4,806			$	32,380			$	121,690			$	158,875
Loans with variable interest rates			54,282				14,537				97,697				166,516
Total loans		$	59,088			$	46,917			$	219,387			$	325,391

 

The following tables set forth the Bank’s loan commitments, standby letters of credit, and unadvanced portions of loans at December 31, 2015, 2014 and 2013.

  

LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT

(In thousands)

 

		2015				2014				2013
Commitments to originate loans		$	40,708			$	17,151			$	10,488
Standby letters of credit			3,391				1,888				857
Unadvanced portions of loans:
Construction loans			15,647				6,960				5,456
Commercial lines of credit			20,580				17,394				14,265
Consumer			621				677				677
Home equity lines of credit			47,650				45,005				40,075
		$	128,597			$	89,075			$	71,818

 

 

Non-Performing Assets

 

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 nonaccrual status unless the loan is well collateralized and in the process of collection. Interest received on nonaccrual 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 19 nonaccrual loans with a balance of approximately $4,079,000 as of December 31, 2015; 11 nonaccrual loans with a balance of approximately $2,528,000 as of December 31, 2014; 15 nonaccrual loans with a balance of approximately $2,849,000 as of December 31, 2013; 11 nonaccrual loans with a balance of approximately $1,240,000 as of December 31, 2012; and 19 nonaccrual loans with a balance of approximately $2,306,000 as of December 31, 2011. Gross interest that would have been recorded if the nonaccrual loans had been current was approximately $103,000 for the year ended December 31, 2015; approximately $112,000 for the year ended December 31, 2014; approximately $127,000 for the year ended December 31, 2013; approximately $80,000 for the year ended December 31, 2012; and approximately $137,000 for the year ended December 31, 2011.     

 

The amount of interest on nonaccrual loans included in net income was approximately $77,000 for the year ended December 31, 2015; approximately $31,000 for the year ended December 31, 2014; approximately $29,000 for the year ended December 31, 2013; approximately $12,000 for the year ended December 31, 2012; and approximately $29,000 for the year ended December 31, 2011. As of December 31, 2015, 2014 and 2013, the Bank had $0, $0 and $3,000, respectively, of loans more than 90 days past due and still accruing interest. As of December 31, 2012 and 2011, the Bank had $0 and $204,000, respectively, of loans more than 90 days past due and still accruing interest.

 

When appropriate or necessary to protect the Bank’s interests, real estate pledged 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 is referred to as “other real estate owned” (“OREO”) and is 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 December 31, 2015, the Bank had no OREO property on its books. As of December 31, 2014, the Bank had one OREO property on its books for $105,000. As of December 31, 2013, the Bank did not have any OREO property on its books. As of December 31, 2012, there was $213,000 in OREO property held by the Bank. As of December 31, 2011, the Bank held no OREO property.

 

A loan whose terms have been modified due to financial difficulties is reported as a troubled debt restructure (“TDR”) loan. All TDR loans are placed on nonaccrual 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 modified one commercial loan with a balance of approximately $363,000 as a TDR during the year ended December 31, 2015. The Bank modified one commercial loan with a balance of approximately $439,000 as a TDR during the year ended December 31, 2014. The Bank did not modify any loans as a TDR loan during the year ended December 31, 2013. The Bank modified one loan with a balance of approximately $68,000 as a TDR during the year ended December 31, 2012. The Bank modified two loans as TDRs with an aggregate balance of $571,000 during the years ended December 31, 2011 and December 31, 2010. On December 31, 2015, the Bank had two loan classified as a TDR on is books with an aggregate balance of approximately $365,000.

 

The risk of nonpayment of loans is an inherent feature of 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 most loans be approved by at least two officers, one of whom must be an executive officer. Commercial loans greater than $1,500,000, 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 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 loan 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 either review process are added to the Bank’s Internal Watch list and an additional allowance for loan 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 time a further review of the loan portfolio is conducted.

 

The Bank had criticized and classified loans with a combined outstanding balance of $9,184,000 as of December 31, 2015; $9,838,000 as of December 31, 2014; $10,237,000 as of December 31, 2013; $8,979,000 as of December 31, 2012; and $9,571,000 as of December 31, 2011.

 

 

Allowance for Loan Losses

 

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 within operating expenses in the form of a provision for loan losses. All loans that are judged to be uncollectable 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.

 

The following tables summarize the Bank’s loan loss experience, transactions in the allowance for loan losses and certain prominent ratios at or for the years ended December 31, 2015, 2014, 2013, 2012 and 2011.

  

		At or for the Year Ended 12/31/2015				At or for the Year Ended 12/31/2014
		(Dollars in thousands)				(Dollars in thousands)
Balance at beginning of period		$	2,761			$	2,792
Charge-offs:
Real estate:
Residential			-				(93	)
Commercial			-				-
Commercial and industrial			-				-
Consumer			(22	)			(8	)
Total charge-offs			(22	)			(101	)
Recoveries:
Commercial and industrial			3				3
Real estate - residential			-				8
Home equity			2				-
Consumer			6				4
Total recoveries			11				15
Net loans charged-off			(11	)			(86	)
Provision for loan losses			278				55
Balance at end of period		$	3,028			$	2,761
BALANCES
Average total loans		$	304,529			$	281,567
Total net loans at end of period		$	323,695			$	283,381
RATIOS
Allowance for loan losses to average assets			0.68	%			0.68	%
Allowance for loan losses to loans at end of period			0.93	%			0.97	%

 

 

		Year Ended At or for the 12/31/2013				Year Ended At or for the 12/31/2012
		(Dollars in thousands)				(Dollars in thousands)
Balance at beginning of period		$	2,594			$	2,469
Charge-offs:
Real estate:
Residential			(40	)			(113	)
Commercial			(54	)			(25	)
Construction and land development			-				(49	)
Commercial and industrial			(2	)			-
Consumer			(58	)			(23	)
Total charge-offs			(154	)			(210	)
Recoveries:
Commercial and industrial			4				5
Construction and land development			-				1
Consumer			3				9
Total recoveries			7				15
Net loans (charged-off) recovered			(147	)			(195	)
Provision for loan losses			345				320
Balance at end of period		$	2,792			$	2,594
BALANCES
Average total loans		$	255,817			$	218,152
Total net loans at end of period		$	276,875			$	233,290
RATIOS
Allowance for loan losses to average assets			0.71	%			0.73	%
Allowance for loan losses to loans at end of period			1.00	%			1.11	%

 

 

		At or for the
		Year Ended
		12/31/2011
		(Dollars in thousands)
		$	2,326
Balance at beginning of period
Charge-offs:
Real estate:			(20	)
Residential			(68	)
Commercial			(160	)
Construction and land development			(69	)
Commercial and industrial			(40	)
Consumer			(357	)
Total charge-offs
Recoveries:			-
Commercial and industrial			-
Construction and land development			5
Installment loans to individuals			5
Total recoveries
			(352	)
Net loans (charged-off) recovered			495
Provision for loan losses		$	2,469
Balance at end of period
BALANCES
Average total loans		$	206,951
Total net loans at end of period		$	214,084
RATIOS
Allowance for loan losses to average assets			0.74	%
Allowance for loan losses to loans at end of period			1.15	%

  

		ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
		(Dollars in Thousands)
		12/31/2015								12/31/2014
		Allocation of				% of loans				Allocation of				% of loans
		Allowance				by Category				Allowance				by Category
Real estate - residential		$	1,065				42.5	%		$	1,085				49.2	%
Real estate - commercial			706				21.7	%			738				18.8	%
Real estate - construction and land development			324				3.1	%			249				3.7	%
Commercial and industrial			398				12.0	%			227				6.9	%
Home equity			331				14.7	%			324				16.0	%
Consumer			157				6.0	%			134				5.4	%
Unallocated			47				-				4				-
Total		$	3,028				100.0	%		$	2,761				100.0	%

 

  

		12/31/2013								12/31/2012
		Allocation of				% of loans				Allocation of				% of loans
		Allowance				by Category				Allowance				by Category
Real estate - residential		$	1,189				49.4	%			1,051				50.3	%
Real estate - commercial			748				17.5	%			586				17.9	%
Real estate - construction and land development			211				2.8	%			142				1.3	%
Commercial and industrial			239				9.7	%			219				6.6	%
Home equity			303				16.8	%			362				19.2	%
Consumer			102				3.8	%			99				4.7	%
Unallocated			-				-				135				-
Total		$	2,792				100.0	%		$	2,594				100.0	%

  

		12/31/2011
		Allocation of				% of loans
		Allowance				by Category
Real estate - residential		$	750				46.1	%
Real estate - commercial			573				18.4	%
Real estate - construction and land development			22				0.7	%
Commercial and industrial			422				7.8	%
Home equity			342				22.4	%
Consumer			194				4.6	%
Unallocated			166				-
Total		$	2,469				100.0	%

 

Deposits

 

Deposits are the Bank’s primary source of funds. At December 31, 2015, the Bank had a deposit mix of 47.6% checking, 37.0% savings and 15.4% certificates of deposit. Thirty-six percent of the total deposits of $373 million were noninterest bearing. At December 31, 2014, the Bank had a deposit mix of 44.4% checking, 38.3% savings and 17.3% certificates of deposit. Thirty-three percent of the total deposits of $356 million were noninterest bearing at December 31, 2014. At December 31, 2013, the Bank had a deposit mix of 43% checking, 37.5% savings and 19.5% certificates of deposit. Thirty-two percent of the total deposits of $359 million were noninterest bearing at December 31, 2013. At December 31, 2015, $43.8 million of the Bank’s deposits were from public sources compared to $46.0 million of the Bank’s deposits at December 31, 2014 and $54.6 million of the Bank’s deposits at December 31, 2013. The Bank’s net interest income is enhanced by its percentage of noninterest bearing deposits.

 

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. Through the Promontory Interfinancial Network’s Certificate of Deposit Accounts Registry Service (CDARS) program, the Bank had brokered deposits of $1,268,000 as of December 31, 2015, $1,021,000 as of December 31, 2014 and $2,010,000 as of December 31, 2013.

 

The Bank is not dependent upon funds from sources outside the United States and has not made loans to any foreign entities.

 

 

The following table summarizes the distribution of average deposits and the average annualized rates paid for the years ended December 31, 2015, 2014 and 2013.

 

AVERAGE DEPOSITS

(Dollars in Thousands)

 

		For the Year Ended								For the Year Ended								For the Year Ended
		12/31/2015								12/31/2014								12/31/2013
		Average				Average				Average				Average				Average				Average
		Balance				Rate				Balance				Rate				Balance				Rate
Demand deposits		$	112,057				0.00	%		$	108,744				0.00	%		$	95,965				0.00	%
NOW deposits			39,270				0.08	%			38,729				0.02	%			35,529				0.08	%
Savings deposits			151,863				0.11	%			152,488				0.10	%			147,657				0.07	%
Time deposits			58,761				0.71	%			65,787				0.78	%			72,344				0.85	%
Total average deposits		$	361,951				0.17	%		$	365,748				0.18	%		$	351,495				0.25	%

  

The following table indicates the maturity schedule for the Bank’s time deposits of $100,000 or more as of December 31, 2015, 2014 and 2013.

 

SCHEDULED MATURITY OF TIME DEPOSITS OF $100,000 OR MORE

(Dollars in Thousands)

 

		December 31, 2015								December 31, 2014								December 31, 2013
		Balance				% of total				Balance				% of total				Balance				% of total
Three months or less		$	11,523				43.5	%		$	9,986				37.5	%		$	7,987				26.9	%
Over three through six months			3,291				12.4	%			3,349				12.6	%			4,913				16.5	%
Over six through twelve months			2,587				9.8	%			3,868				14.5	%			5,913				19.9	%
Over twelve months			9,098				34.3	%			9,447				35.4	%			10,890				36.7	%
Total		$	26,499				100.0	%		$	26,650				100.0	%		$	29,703				100.0	%

 

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 Company is a member of Promontory Interfinancial Network’s Certificate of Deposit Accounts Registry Service (CDARS). This allows the Company to offer its customers FDIC insurance on deposits in excess of $250,000, which reflects the current deposit insurance limits in effect, by placing the deposits in the CDARS network. Accounts placed in this manner are considered brokered deposits. As of December 31, 2015, the Company had $1,268,000 of deposits in the CDARS network compared to $1,021,000 of deposits in the CDARS network as of December 31, 2014. The Company had no other brokered deposits as of December 31, 2015 and December 31, 2014.

 

Liquidity of a financial institution, such as a bank, is measured based on its ability to have liquid assets sufficient to meet its short-term obligations. The net sum of liquid assets less anticipated current obligations represents the basic liquidity surplus of the Company. The Company maintains a portion of its funds in cash deposits in other banks, federal funds sold, and available-for-sale securities to meet its obligations for anticipated depositors’ demands in the near future. As of December 31, 2015, the Company held $24.4 million in cash and cash equivalents and CDs, net of required FRB reserves of $5.7 million, and $57.2 million in available-for-sale securities, net of pledged investments of $14.3 million, for total liquid assets of $81.6 million. As of December 31, 2014, the Company held $13.2 million in cash and cash equivalents, net of required FRB reserves of $6.6 million, and $66.6 million in available-for-sale securities, net of pledged investments of $17.2 million, for total liquid assets of $79.8 million. As of December 31, 2013, the Company held $31.1 million in cash and cash equivalents, net of required FRB reserves of $7.5 million, and $72.0 million in available-for-sale securities, net of pledged investments of $15.4 million, for total liquid assets of $103.1 million. As of December 31, 2015, the Company’s anticipated short-term liability obligations were $75.8 million, which resulted in a basic liquidity surplus of $5.8 million that represented 1.3% of total assets. As of December 31, 2014, the Company’s anticipated short-term liability obligations were $61.0 million, which resulted in a basic liquidity surplus of $18.8 million that represented 5% of total assets. As of December 31, 2013, the Company’s anticipated short-term liability obligations were $75.8 million, which resulted in a basic liquidity surplus of $27.3 million that represented 6% of total assets.

 

  

The careful planning of asset and liability maturities, and the matching of interest rates to correspond with these maturities, is an integral part of the active management of an institution’s net yield. To the extent that maturities of assets and liabilities do not match in a changing interest rate environment, net yields may be affected. Even with perfectly matched re-pricing 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 the rates and maturities offered in connection with its certificates of deposit and provides for the extension of variable rate loans to borrowers. The Company 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 table below sets forth the interest rate sensitivity of the Bank’s interest-sensitive assets and interest-sensitive liabilities as of December 31, 2015, 2014 and 2013, using the interest rate sensitivity gap ratio. For the purposes of the following table, an asset or liability is considered interest rate-sensitive within a specified period when it can be re-priced or matures within its contractual terms.

 

INTEREST RATE SENSITIVITY

(Dollars in thousands) 

 

		December 31, 2015
		Due within				Due in				Due after One				Due after
		Three				Three to Twelve				Year to Five				Five
		Months				Months				Years				Years				Total
Rate sensitive assets
Federal funds sold & overnight deposits		$	149			$	-			$	-			$	-			$	149
Certificates of Deposit			-				250				1,000				-				1,250
Available-for-sale securities (at fair value)			1,824				5,445				37,767				26,481				71,517
Total loans			5,802				53,285				46,917				219,387				325,391
		$	7,775			$	58,980			$	85,684			$	245,868			$	398,307
Rate sensitive liabilities
NOW deposits		$	-			$	-			$	-			$	41,778			$	41,778
Savings deposits			76,272				-				-				61,725				137,997
Time deposits			16,904				20,055				20,328				-				57,287
Securities sold under agreements to repurchase			1,915				-				-				-				1,915
Long term debt			-				-				-				7,230				7,230
FHLB advances			31,500				-				-				-				31,500
		$	126,591			$	20,055			$	20,328			$	110,733			$	277,707
Interest rate sensitivity gap		$	(118,816	)		$	38,925			$	65,356			$	135,135			$	120,600
Cumulative gap		$	(118,816	)		$	(79,891	)		$	(14,535	)		$	120,600
Cumulative gap ratio to total assets			-27	%			-18	%			-3	%			27	%

 

 

INTEREST RATE SENSITIVITY

(Dollars in thousands) 

 

		December 31, 2014
		Due within				Due in				Due after One				Due after
		Three				Three to Twelve				Year to Five				Five
		Months				Months				Years				Years				Total
Rate sensitive assets
Federal funds sold & overnight deposits		$	5			$	-			$	-			$	-			$	5
Available-for-sale securities (at fair value)			2,912				14,383				40,878				25,632				83,805
Total loans			116,312				27,477				93,575				47,483				284,847
		$	119,229			$	41,860			$	134,453			$	73,115			$	368,657
Rate sensitive liabilities
NOW deposits		$	2,013			$	-			$	-			$	38,819			$	40,832
Savings deposits			81,760				-				-				54,566				136,326
Time deposits			19,335				22,673				19,638				-				61,646
Securities sold under agreements to repurchase			3,921				-				-				-				3,921
FHLB advances			17,500				-				-				-				17,500
		$	124,529			$	22,673			$	19,638			$	93,385			$	260,225
Interest rate sensitivity gap		$	(5,300	)		$	19,187			$	114,815			$	(20,270	)		$	108,432
Cumulative gap		$	(5,300	)		$	13,887			$	128,702			$	108,432
Cumulative gap ratio to total assets			-1	%			3	%			31	%			27	%

  

INTEREST RATE SENSITIVITY

(Dollars in thousands) 

 

		December 31, 2013
		Due within				Due in				Due after One				Due after
		Three				Three to Twelve				Year to Five				Five
		Months				Months				Years				Years				Total
Rate sensitive assets
Federal funds sold & overnight deposits		$	724			$	-			$	-			$	-			$	724
Available-for-sale securities (at fair value)			2,503				7,031				48,724				29,191				87,449
Total loans			105,032				26,646				93,986				52,788				278,452
		$	108,259			$	33,677			$	142,710			$	81,979			$	366,625
Rate sensitive liabilities
NOW deposits		$	1,863			$	-			$	-			$	35,391			$	37,254
Savings deposits			88,056				-				-				48,190				136,246
Time deposits			15,991				29,170				23,828				-				68,989
Securities sold under agreements to repurchase			4,390				-				-				-				4,390
FHLB advances			30,000				-				-				-				30,000
		$	140,300			$	29,170			$	23,828			$	83,581			$	276,879
Interest rate sensitivity gap		$	(32,041	)		$	4,507			$	118,882			$	(1,602	)		$	89,746
Cumulative gap		$	(32,041	)		$	(27,534	)		$	91,348			$	89,746
Cumulative gap ratio to total assets			-7	%			-6	%			22	%			22	%

  

Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the Bank’s interest rate sensitivity position. To supplement traditional gap analysis, the Bank performs simulation modeling to estimate the potential effects of changing interest rates. This process allows the Bank to explore complex relationships among re-pricing assets and liabilities over time in various interest rate environments.

  

 

The Company’s Executive Committee meets at least quarterly to monitor the Bank’s investments and liquidity needs and oversee its asset-liability management. Between meetings of the Executive Committee, management oversees the Bank’s liquidity.

   

Capital Reserve

  

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

 

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

 

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

  

		December 31, 2015								December 31, 2014
						Capital Minimum								Capital Minimum
		Ratio				Requirement				Ratio				Requirement
Tier 1 leverage capital ratio			8.58	%			5.00	%			7.17	%			5.00	%
Tier 1 risk-based capital ratio			13.11	%			8.00	%			11.69	%			6.00	%
Total risk-based capital ratio			14.21	%			10.00	%			12.80	%			10.00	%
Common equity tier 1 risk-based capital ratio			13.11	%			6.50	%			N/A				N/A

 

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

 

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

 

 

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

 

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

 

Inflation

 

The impact of changes in the general price level of goods or services on financial institutions, either through inflation or deflation, may differ significantly from the impact exerted on other companies. Banks, as financial intermediaries, have numerous assets and liabilities whose values are affected by both inflation and deflation. This is especially true for companies, such as a bank, with a high percentage of interest-rate-sensitive assets and liabilities. Banks seek to reduce the impact of inflation or deflation, and the coincident increase or decrease in interest rates, by managing their interest-rate sensitivity gap. The Company attempts to manage its interest-rate-sensitivity gap and to structure its mix of financial instruments in order to minimize the potential adverse effects inflation or deflation may have on its net interest income and, therefore, its earnings and capital.

 

Based on the Company’s interest-rate-sensitivity position, the Company may be adversely affected by changes in interest rates in the short term. As such, management of the money supply and interest rates by the Federal Reserve to control the general price level of goods or services has an indirect impact on the earnings of the Company. Also, changes in interest rates may have a corresponding impact on the ability of borrowers to repay loans made by the Company.

 

ITEM 7a.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

 

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Reference is made to Item 15(a)(1) and (2) on page 44 for a list of financial statements and supplementary data required to be filed pursuant to this Item 8. The information required by this Item 8 is provided beginning on page F-1 hereof.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

As previously disclosed by the Company in a Current Report on Form 8-K filed on August 18, 2015 with the SEC, the Company was notified that Shatswell, MacLeod & Company, P. C. (“Shatswell”), the Company’s independent registered public accounting firm, combined its audit practice (the “Merger”) with Baker Newman & Noyes, P.A., LLC (“BNN”). As a result of the Merger, effective August 17, 2015, Shatswell resigned as the Company’s independent registered public accounting firm and BNN, as the successor to Shatswell following the Merger, was engaged as the Company’s independent registered public accounting firm. The Company’s Audit Committee was notified of the Merger and the effective resignation of Shatswell and approved the engagement of BNN.

 

During the years ended December 31, 2014 and 2013, and the subsequent interim period prior to the engagement of BNN on August 17, 2015, (i) the Company did not consult with BNN regarding the application of accounting principles to a specific completed or proposed transaction or regarding the type of audit opinion that might be rendered by BNN on the Company’s financial statements, (ii) BNN did not provide any written or oral advice that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, and (iii) the Company did not consult with BNN regarding any matter that was either the subject of a “disagreement” (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a “reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

 

The reports of Shatswell on the financial statements of the Company for the years ended December 31, 2014 and 2013 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the years ended December 31, 2014 and 2013 and reviews of the Company’s financial statements through August 17, 2015, there were no disagreements with Shatswell on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Shatswell, would have caused Shatswell to make reference thereto in its reports, and there have been no “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

 

The Company previously provided Shatswell with a copy of the foregoing disclosure and requested that Shatswell furnish the Company with a letter addressed to the SEC stating whether it agrees with the above statements and, if it does not agree, the respects in which it does not agree. A copy of the letter, dated August 17, 2015, was filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on August 18, 2015 with the SEC.

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

(a)     Evaluation of Disclosure 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 reports to the Audit and Compliance Committee of the Board of Directors.

 

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2015 and 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. This conclusion is based on the above-referenced officers’ evaluation of such controls and procedures.

 

  

(b)     Management’s Annual Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2015.

 

(c)     Attestation Report of the Registered Public Accounting Firm

 

As of 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 an issuer to include an attestation report from an issuer’s independent registered public accounting firm on the issuer’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.

 

(d)     Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

   

PART III

  

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this Item 10 is incorporated into this Form 10-K by reference to the Proxy Statement of the Company (the “Proxy Statement”) for the annual meeting of shareholders to be held on May 10, 2016 under the captions “ELECTION OF DIRECTORS,” “INFORMATION ABOUT OUR DIRECTORS,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and “Shareholder Proposals and Nominations.”

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this Item 11 is incorporated into this Form 10-K by reference to the Company’s Proxy Statement under the caption “COMPENSATION AND OTHER MATTERS.”

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The Company issued options to purchase shares of its common stock under the SBT Bancorp 2011 Stock Plan (the “2011 Plan”). As of March 26, 2016, there were options outstanding to purchase an aggregate of 20,000 shares of the Company’s authorized but unissued common stock at a price of $30.00 per share which will expire in 2025.

 

Following shareholder approval in 2011, the Company established the SBT Bancorp, Inc. 2011 Stock Award and Option Plan (the “2011 Plan”), effective June 1, 2011, to provide stock awards and options to employees, officers and directors of the Company in order to attract them to the Company, give them a proprietary interest in the Company, and to encourage them to remain in the employ or service of the Company. The maximum number of shares of the Company’s common stock that may be delivered pursuant to awards or options under the 2011 Plan is 100,000 shares. As of December 31, 2015, 42,349 shares of restricted stock have been granted to directors and officers of the Bank and the remaining number of shares and options to be granted under the 2011 Plan was 63,290. The 2011 Plan will expire on March 16, 2021.

 

During 2015, the Company granted 8,225 shares of restricted stock with an award value of $177,000, or $21.52 per share. During 2014, the Company granted 1,934 shares of restricted stock with an award value of $42,000, or $21.50 per share. The restricted shares vest over a three-year period. During 2015 and 2014, the Company recognized compensation expense related to the restricted shares awarded in the amount of $178,000 and $145,000, respectively.

 

The following table sets forth the total number of securities authorized for issuance under equity compensation plans as of December 31, 2015. 

 

		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by shareholders			20,000			$	30.00				63,290
Equity compensation plans not approved by shareholders			0				0				0
Total			20,000			$	30.00				63,290

 

Additional information required by this Item 12 is incorporated into this Form 10-K by reference to the Proxy Statement under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”

 

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this Item 13 is incorporated into this Form 10-K by reference to the Company’s Proxy Statement under the captions “CERTAIN TRANSACTIONS WITH RELATED PERSONS” and “Independence of Directors and Director Nominees.”

 

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this Item 14 is incorporated into this Form 10-K by reference to the Company’s Proxy Statement under the caption “RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS.”

 

 

PART IV

 

 

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)	Financial Statements and Schedules.

 

The following Financial Statements and Supplementary Data are filed as part of this Annual Report on Form 10-K:

 

Reports of Independent Registered Public Accounting Firms

 

Consolidated Balance Sheets

 

Consolidated Statements of Income

 

Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Changes in Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.

 

(b)

Exhibits.

 

The following exhibits required by Item 601 are filed herewith or are incorporated by reference to the filings previously made by the Bank and the Company as noted below (the reference in parentheses at the end of an Exhibit indicates the number of the Exhibit as it was filed in the document referenced below):

 

Exhibit No.	Description
1.1	Underwriting Agreement, dated November 5, 2015, by and between SBT Bancorp, Inc. and Keefe, Bruyette & Woods, Inc., as representative of the several underwriters named in Schedule I attached thereto (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K filed on November 10, 2015)
3(i).1	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(i).2	Certificate of Amendment to the Certificate of Incorporation of SBT Bancorp, Inc. establishing the designations, preferences, limitations and relative rights of the SBLF Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB filed on May 15, 2006)
4.2	Subordinated Loan Agreement dated as of September 30, 2015 by and between the Company and Community Funding CLO, Ltd. (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on October 16, 2015)
10.1#	Employment Agreement, dated as of September 1, 2004, by and between the Bank and Martin J. Geitz (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-K filed on March 28, 2014)

  

 

10.2#	Amendment to Employment Agreement, dated as of December 31, 2008, between the Bank and Martin J. Geitz (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-K filed on March 31, 2009)
10.3#	Supplemental Executive Retirement Agreement, dated as of October 20, 2010, by and between the Bank and Martin J. Geitz (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on October 22, 2010)
10.4#	Endorsement Split Dollar Insurance Agreement, dated October 20, 2010, by and between the Bank and Martin J. Geitz (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on October 22, 2010)
10.5#	Supplemental Executive Retirement Plan Agreement, dated as of April 23, 2001, by and between the Bank and Anthony F. Bisceglio (incorporated by reference to Exhibit 10.6 of the Company’s Form 10-K filed on March 28, 2014)
10.6#	Supplemental Executive Retirement Agreement, dated May 7, 2010, by and between the Bank and Anthony F. Bisceglio (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 13, 2010)
10.7#	Letter Agreement, dated August 6, 2013 between the Bank and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 26, 2013)
10.8#	Change in Control Severance Agreement, dated as of March 11, 2014, by and between the Bank and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 12, 2014)
10.9#	Supplemental Executive Retirement Agreement, adopted as of March 11, 2014, by and between the Bank and Richard J. Sudol (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on March 12, 2014)
10.10#	Split Dollar Life Insurance Agreement, dated as of April 29, 2014, by and between the Bank and Richard J. Sudol (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 29, 2014)
10.11#	Change in Control Severance Agreement, dated as of October 24, 2012, by and between the Bank and Gary W. Burdick (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K filed on March 28, 2013)
10.12#	Supplemental Executive Retirement Agreement, dated as of October 24, 2012, by and between the Bank and Gary W. Burdick (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K filed on March 28, 2013)
10.13#	Change in Control Severance Agreement, dated as of November 26, 2014, by and between the Bank and Joan A. Beresford (incorporated by reference to Exhibit 10.16 of the Company’s Form 10-K filed on March 26, 2015)
10.14#	Change in Control Severance Agreement, dated as of May 5, 2014, by and between the Bank and Jocelyn A. Mitchell (incorporated by reference to Exhibit 10.17 of the Company’s Form 10-K filed on March 26, 2015)
10.15#	Change in Control Severance Agreement, dated as of November 26, 2014, by and between the Bank and Joseph F. Pagliarini (incorporated by reference to Exhibit 10.18 of the Company’s Form 10-K filed on March 26, 2015)
10.16#	Form of Split Dollar Life Insurance Agreement by and between the Bank and certain officers of the Bank in key managerial roles, including Gary W. Burdick, Joan A. Beresford and Jocelyn A. Mitchell (incorporated by reference to Exhibit 10.14 of the Company’s Form 10-K filed on March 28, 2013)

  

 

10.17#	SBT Bancorp, Inc. 2011 Stock Award and Option Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement filed with the SEC on April 11, 2011 for the Company’s 2011 Annual Meeting of Shareholders)
10.18#	Form of Restricted Stock Agreement for grants under the SBT Bancorp, Inc. 2011 Stock Award and Option Plan (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on August 15, 2011)
10.19#	Form of Non-Qualified Stock Option Agreement for grants under the SBT Bancorp, Inc. 2011 Stock Award and Option Plan (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed on August 15, 2011)
10.20#	Form of Incentive Stock Option Agreement for grants under the SBT Bancorp, Inc. 2011 Stock Award and Option Plan (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-Q filed on August 15, 2011)
14*	Code of Ethics and Conflicts of Interest Policy
21*	Subsidiaries
23.1*	Consent of Shatswell, MacLeod & Company, P.C.
23.2*	Consent of Baker Newman & Noyes, LLC
31.1*	Section Rule 13(a)-14(a)/15(d)-14(a) Certification by Chief Executive Officer
31.2*	Section Rule 13(a)-14(a)/15(d)-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
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	Taxonomy Extension Definitions Linkbase Document

 

* Filed herewith

# Management contract or compensatory plan or arrangement

 

 

SIGNATURES

  

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 2016.

 

	SBT BANCORP, INC.
	By:	/s/   Martin J. Geitz
		Martin J. Geitz
		President and Chief Executive Officer

 

In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name	Capacity	Date
/s/      Martin J. Geitz	President, Chief Executive	March 29, 2016
Martin J. Geitz	Officer and Director
/s/      Richard J. Sudol	Senior Vice President,	March 29, 2016
Richard J. Sudol	Chief Financial Officer and Treasurer
/s/      Robert J. Bogino	Director	March 29, 2016
Robert J. Bogino
/s/      James T. Fleming	Director	March 29, 2016
James T. Fleming
/s/      Gary R. Kevorkian	Director	March 29, 2016
Gary R. Kevorkian
/s/      Jerry W. Long	Director	March 29, 2016
Jerry W. Long
/s/      Nicholas B. Mason	Director	March 29, 2016
Nicholas B. Mason
/s/      Michael D. Nicastro	Director	March 29, 2016
Michael D. Nicastro
/s/      Peter C. Pabich	Director	March 29, 2016
Peter C. Pabich
/s/      David W. Sessions	Director	March 29, 2016
David W. Sessions
/s/      Ann G. Taylor	Director	March 29, 2016
Ann G. Taylor
/s/      Penny R. Woodford	Director	March 29, 2016
Penny R. Woodford

 

 

SBT BANCORP, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   

Reports of Independent Registered Accounting Firms	F-2 + F-3
Consolidated Balance Sheets (As of December 31, 2015 and 2014)	F-4
Consolidated Statements of Income (For the years ended December 31, 2015 and 2014)	F-5
Consolidated Statements of Comprehensive Income (For the years ended December  31, 2015 and 2014)	F-6
Consolidated Statements of Changes in Stockholders’ Equity (For the years ended December  31, 2015 and 2014)	F-7
Consolidated Statements of Cash Flows (For the years ended December 31, 2015 and 2014)	F-8
Notes to Consolidated Financial Statements	F-10

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

SBT Bancorp, Inc.

Simsbury, Connecticut

 

We have audited the accompanying consolidated balance sheet of SBT Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SBT Bancorp, Inc. and Subsidiary as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Baker Newman & Noyes

       Limited Liability Company

   

Peabody, Massachusetts

March 29, 2016

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

SBT Bancorp, Inc.

Simsbury, Connecticut

 

We have audited the accompanying consolidated balance sheet of SBT Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SBT Bancorp, Inc. and Subsidiary as of December 31, 2014, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Shatswell, MacLeod & Company, P.C.

     Shatswell, MacLeod & Company, P.C.

 

Peabody, Massachusetts

March 25, 2015

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

December 31, 2015 and 2014

 

(In Thousands, Except Share Data)

ASSETS		2015				2014
Cash and due from banks		$	8,933			$	10,118
Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank			19,795				9,696
Money market mutual funds			13				1
Federal funds sold			149				5
Cash and cash equivalents			28,890				19,820
Certificates of deposit			1,250				-
Investments in available-for-sale securities			71,517				83,805
Federal Home Loan Bank stock, at cost			2,047				1,801
Loans held-for-sale			2,167				5,374
Loans outstanding			326,723				286,142
Less: allowance for loan losses			3,028				2,761
Loans, net			323,695				283,381
Premises and equipment, net			1,420				1,460
Accrued interest receivable			1,143				1,095
Other real estate owned			-				105
Bank owned life insurance			7,389				7,184
Other assets			5,262				4,815
Total other assets			15,214				14,659
Total assets		$	444,780			$	408,840
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits		$	135,580			$	117,261
Savings and NOW deposits			179,775				177,158
Time deposits			57,287				61,646
Total deposits			372,642				356,065
Securities sold under agreements to repurchase			1,915				3,921
Federal Home Loan Bank advances			31,500				17,500
Long-term subordinated debt			7,230				-
Other liabilities			1,751				1,882
Total liabilities			415,038				379,368
Stockholders' equity:
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000 shares issued and outstanding at December 31, 2014			-				8,988
Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 1,360,591 shares and 1,360,177 shares, respectively, at 12/31/15 and 898,105 shares and 897,691 shares, respectively, at 12/31/14			18,856				10,127
Retained earnings			11,288				10,549
Treasury stock, 414 shares			(7	)			(7	)
Unearned compensation - restricted stock awards			(206	)			(207	)
Accumulated other comprehensive (loss) income			(189	)			22
Total stockholders' equity			29,742				29,472
Total liabilities and stockholders' equity		$	444,780			$	408,840

  

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

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31, 2015 and 2014

 

(In Thousands, Except Share Data)

 

		2015				2014
Interest and dividend income:
Interest and fees on loans		$	10,819			$	10,387
Investment securities			1,627				1,825
Interest-bearing deposits			38				45
Total interest and dividend income			12,484				12,257
Interest expense:
Interest on deposits			615				849
Interest on securities sold under agreements to repurchase			4				4
Interest on long-term debt			61				-
Interest on Federal Home Loan Bank advances			48				18
Total interest expense			728				871
Net interest and dividend income			11,756				11,386
Provision for loan losses			278				55
Net interest and dividend income after provision for loan losses			11,478				11,331
Noninterest income:
Service charges on deposit accounts			400				474
Gain on available-for-sale securities, net of writedowns			132				142
Mortgage banking activities			1,201				581
Investment services fees and commissions			216				237
Other service charges and fees			769				731
Increase in cash surrender value of life insurance policies			205				205
Other income			199				100
Total noninterest income			3,122				2,470
Noninterest expense:
Salaries and employee benefits			6,872				6,736
Occupancy expense			1,394				1,358
Equipment expense			399				443
Advertising and promotions			442				594
Forms and supplies			162				172
Professional fees			571				538
Directors’ fees			248				254
Correspondent charges			255				205
FDIC assessment			312				374
Data processing			773				676
Internet banking costs			208				215
Other expense			1,314				1,435
Total noninterest expense			12,950				13,000
Income before income taxes			1,650				801
Income tax expense (benefit)			241				(4	)
Net income		$	1,409			$	805
Net income available to common stockholders		$	1,301			$	703
Earnings per common share		$	1.37			$	0.80
Earnings per common share, assuming dilution		$	1.36			$	0.79

  

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

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

 

Years Ended December 31, 2015 and 2014

 

(In Thousands)

 

		2015				2014
Net income		$	1,409			$	805
Other comprehensive (loss) income, net of tax:
Net change in unrealized holding gain/ loss on securities available for sale			(189	)			2,684
Reclassification adjustment for realized gains in net income (1)			(139	)			(150	)
Reclassification adjustment for writedowns of securities in net income (1)			7				8
Other comprehensive (loss) income, before tax			(321	)			2,542
Income tax expense (benefit)			110				(865	)
Other comprehensive (loss) income, net of tax			(211	)			1,677
Comprehensive income		$	1,198			$	2,482

 

(1) Reclassification adjustments include realized securities gains and losses and writedowns of securities. The gains and losses have been reclassified out of other comprehensive (loss) income and affect certain captions in the consolidated statements of income as follows; the pre-tax amount is reflected in gain on available-for-sale securities, net of writedowns; the tax effect is included in income tax expense (benefit); and the after tax amount is included in net income.

    

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

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

 

Years Ended December 31, 2015 and 2014

 

(In Thousands, Except Share Data)

 

		Preferred Stock				Common				Retained				Treasury				Unearned Compensation - Restricted Stock				Accumulated Other Comprehensive
		Series C				Stock				Earnings				Stock				Awards				Income (Loss)				Total
Balance, December 31, 2013		$	8,976			$	10,136			$	10,347			$	(7	)		$	(401	)		$	(1,655	)		$	27,396
Net income			-				-				805												-				805
Other comprehensive income, net of tax			-				-				-				-				-				1,677				1,677
Preferred stock dividends			-				-				(90	)			-				-				-				(90	)
Preferred stock amortization (accretion)			12				-				(12	)			-				-				-				-
Stock based compensation			-				-				-				-				145				-				145
Restricted stock awards			-				41				-				-				(41	)			-				-
Forfeited restricted stock awards			-				(90	)			-				-				90				-				-
Tax benefit - vested restricted stock awards			-				1				-				-				-				-				1
Common stock issued			-				39				-				-				-				-				39
Dividends declared on common stock ($.56 per share)			-				-				(501	)			-				-				-				(501	)
Balance, December 31, 2014			8,988				10,127				10,549				(7	)			(207	)			22				29,472
Net income			-				-				1,409												-				1,409
Other comprehensive loss, net of tax			-				-				-				-				-				(211	)			(211	)
Preferred stock dividends			-				-				(96	)			-				-				-				(96	)
Preferred stock amortization (accretion)			12				-				(12	)			-				-				-				-
Stock based compensation			-				10				-				-				178				-				188
Restricted stock awards			-				177				-				-				(177	)			-				-
Preferred stock redeemed			(9,000	)			-				-				-				-				-				(9,000	)
Common stock issued			-				8,542				-				-				-				-				8,542
Dividends declared on common stock ($.56 per share)			-				-				(562	)			-				-				-				(562	)
Balance, December 31, 2015		$	-			$	18,856			$	11,288			$	(7	)		$	(206	)		$	(189	)		$	29,742

    

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

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2015 and 2014

 

(In Thousands) 

		2015				2014
Cash flows from operating activities:
Net income		$	1,409			$	805
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of securities, net			396				401
Writedown of available-for-sale securities			7				8
Gain on sales of available-for-sale securities			(139	)			(150	)
Change in deferred origination costs, net			(37	)			(80	)
Provision for loan losses			278				55
Loans originated for sale			(79,946	)			(44,593	)
Proceeds from sales of loans originated for sale			84,354				42,580
Gain on sales of loans			(1,201	)			(500	)
(Gain) loss on sales of other real estate owned			(9	)			1
Writedown of other real estate owned			-				50
Depreciation and amortization			296				383
Accretion on impairment of operating lease			(26	)			(44	)
Amortization of long-term debt issuance costs			7				-
Increase in other assets			(395	)			(1,142	)
Increase in interest receivable			(48	)			(21	)
Decrease in taxes receivable			83				182
Deferred income tax benefit			(24	)			(187	)
Increase in cash surrender value of bank owned life insurance			(205	)			(205	)
Excess tax benefit related to stock based compensation			-				(1	)
Stock based compensation			188				145
(Decrease) increase in other liabilities			(120	)			315
Increase in interest payable			15				44
Net cash provided by (used in) operating activities			4,883				(1,954	)
Cash flows from investing activities:
Purchase of Federal Home Loan Bank Stock			(2,212	)			(542	)
Redemption of Federal Home Loan Bank Stock			1,966				937
Purchases of certificates of deposit			(1,250	)			-
Purchases of available-for-sale securities			(6,334	)			(4,146	)
Proceeds from maturities of available-for-sale securities			15,826				8,361
Proceeds from sales of available-for-sale securities			2,211				1,712
Loan originations and principal collections, net			(23,051	)			7,215
Loans purchased			(17,493	)			(14,407	)
Recoveries of loans previously charged-off			(11	)			15
Proceeds from sales of other real estate owned			114				540
Capital expenditures			(257	)			(301	)
Purchase of bank owned life insurance			-				(250	)
Net cash used in investing activities			(30,491	)			(866	)

  

 

SBT BANCORP, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2015 and 2014

 

(In Thousands)

 

(continued)

 

		2015				2014
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts			20,936				4,904
Decrease in time deposits			(4,359	)			(7,343	)
Net decrease in securities sold under agreements to repurchase			(2,006	)			(469	)
Net change in short-term advances			14,000				(12,500	)
Proceeds from issuance of common stock			8,542				39
Proceeds from the issuance of subordinated debt			7,223				-
Redemption of preferred stock			(9,000	)			-
Excess tax benefit related to stock based compensation			-				1
Dividends paid - preferred stock			(96	)			(90	)
Dividends paid - common stock			(562	)			(492	)
Net cash provided by (used in) financing activities			34,678				(15,950	)
Net increase (decrease) in cash and cash equivalents			9,070				(18,770	)
Cash and cash equivalents at beginning of year			19,820				38,590
Cash and cash equivalents at end of year		$	28,890			$	19,820
Supplemental disclosures:
Interest paid		$	706			$	827
Income taxes paid			182				1
Increase in common stock dividends held in escrow			-				9
Loans transferred to other real estate owned			-				696

    

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

 

 

SBT BANCORP, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Years Ended December 31, 2015 and 2014

 

NOTE 1 - NATURE OF OPERATIONS

 

On March 2, 2006, The Simsbury Bank & Trust Company, Inc. (the “Bank”) reorganized into a holding company structure. As a result, the Bank became a wholly-owned subsidiary of SBT Bancorp, Inc. (the “Company”) and each outstanding share of common stock of the Bank was converted into the right to receive one share of the common stock, no par value, of the Company. The Company files reports with the Securities and Exchange Commission and is supervised by the Board of Governors of the Federal Reserve System.

 

The Bank is a state chartered bank which was incorporated on April 28, 1992 and is headquartered in Simsbury, Connecticut. The Bank commenced operations on March 31, 1995 engaging principally in the business of attracting deposits from the general public and investing those deposits in securities, residential and commercial real estate, consumer and small business loans.

 

NOTE 2 - ACCOUNTING POLICIES

 

The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements of the Company were prepared using the accrual basis of accounting. The significant accounting policies of the Company are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein.

 

USE OF ESTIMATES:

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan losses, valuation and potential other-than-temporary impairment (“OTTI”) of available-for-sale securities and the valuation of deferred tax assets.

 

BASIS OF PRESENTATION:

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, SBT Investment Services, Inc. and NERE Holdings, Inc. SBT Investment Services, Inc. was established solely for the purpose of providing investment products, financial advice and services to its clients and the community. NERE Holdings, Inc. was established to hold real estate. All significant intercompany accounts and transactions have been eliminated in the consolidation.

 

CASH AND CASH EQUIVALENTS:

 

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks, Federal Home Loan Bank interest-bearing demand and overnight deposits, Federal Reserve Bank interest-bearing demand deposits, money market mutual funds and federal funds sold.

 

Cash and due from banks as of December 31, 2015 and 2014 includes $5,657,000 and $6,585,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank of Boston and Bankers’ Bank Northeast.

 

 

CERTIFICATES OF DEPOSIT

 

Certificates of deposit are issued by federally insured depository instituions, have an original maturity of greater than 90 days and up to 35 months and are carried at cost.

 

SECURITIES:

 

Investments in debt securities are adjusted for amortization of premiums and accretion of discounts computed so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis.

 

The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

 

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Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, or in a separate component of stockholders’ equity. They are merely disclosed in the notes to the consolidated financial statements.

 

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Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings but are reported as a net amount (less expected tax) in a separate component of stockholders’ equity until realized.

 

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Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

 

For any debt security with a fair value less than its amortized cost basis, the Company will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

 

Declines in marketable equity securities below their cost that are deemed other than temporary are reflected in earnings as realized losses.

 

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is currently required to purchase and hold shares of capital stock in the FHLB of Boston in an amount equal to 0.35% of the Bank’s Membership Stock Investment Base plus an Activity Based Stock Investment Requirement. The Activity Based Stock Investment Requirement is equal to 3.0% of any outstanding principal for overnight advances, 4.0% of any outstanding principal for term advances with an original term of two days to three months and 4.5% of any outstanding principal for term advances with an original term greater than three months. The Bank is in compliance with these requirements. Based on its most recent analysis of the FHLB as of December 31, 2015, management deems its investment in FHLB stock to be not other-than-temporarily impaired.

 

 

LOANS HELD-FOR-SALE:

 

Loans held-for-sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations.

 

Interest income on mortgages held-for-sale is accrued currently and classified as interest on loans.

 

LOANS:

 

Loans receivable that management has the intent and ability to hold until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

 

Interest on loans is recognized on a simple interest basis.

 

Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan's yield. The Company is amortizing these amounts over the contractual lives of the related loans.

 

Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.

 

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 

The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis. A reporting system is in place which provides management with frequent reports related to loan quality, loan production, loan delinquencies and non-performing or potential problem loans.

 

Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay their obligation as agreed. Underwriting standards are designed to promote relationship banking rather than transactional banking. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. The cash flow of the borrower may not be as expected and the collateral supporting the loan may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable and inventory and may incorporate a personal guarantee. Some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent upon the ability of the borrower to collect amounts due from its customers.

  

  

Commercial real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher principal balances and longer repayment periods. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversification reduces the exposure to adverse economic conditions that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations, in addition to economic conditions and trends within a specific industry. The Company also tracks the level of owner occupied commercial real estate loans within its commercial real estate portfolio.

 

With respect to land developers’ and builders’ loans that are secured by non-owner-occupied properties that the Company may originate from time to time, the Company generally requires that the borrower have a proven record of success. Construction loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by on-site inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

 

The Company originates consumer loans utilizing a computer-based credit-scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by staff and management. This continual review, coupled with the high volume of borrowers of smaller dollar loans, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by regulatory requirements, which include, but are not limited to, a maximum loan-to-value of 75%, collection remedies, the number of such loans that a borrower can have at one time, and documentation requirements.

 

The Company engages an independent loan review firm that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification process and assessment decisions made by the relationship managers and credit officer, as well as the Company’s policies and procedures.

 

ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

  

  

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

General Component:

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction and land development, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2015.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate and home equity: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent without obtaining private mortgage insurance for any amounts over 80% and does not grant subprime loans. All loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate: Loans in this segment are primarily income-producing properties throughout the Farmington Valley and surrounding communities in Connecticut. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which, in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls annually and continually monitors the cash flows of these loans.

 

Construction and land development loans: Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

Commercial loans: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Consumer loans: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Allocated Component:

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

  

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.

 

Unallocated Component:

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

  

PREMISES AND EQUIPMENT:

 

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets. Estimated lives are 3 to 20 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the life of the lease or the estimated life of the improvements.

 

OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

 

Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures. These properties are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure or transfer, establishing a new cost basis. Subsequent to foreclosure or transfer, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense.

 

The Company classifies commercial loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place. An in-substance repossession or foreclosure occurs, and the Company is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either: (1) obtaining legal title to the residential real estate property upon completion of a foreclosure; or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

 

FAIR VALUES OF FINANCIAL INSTRUMENTS:

 

ASC 825, “Financial Instruments,” requires that the Company disclose estimated fair values for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows:

 

 

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate those assets' fair values.

 

Certificates of deposit: Fair values of certificates of deposit are estimated using discounted cash flows analyses based on the individual underlying instrument’s current rate of interest.

 

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

Loans held-for-sale: Fair values for loans held-for-sale are estimated based on outstanding investor commitments, or in the absence of such commitments, are based on current investor yield requirements.

 

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated by discounting the future cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

 

Bank owned life insurance: The carrying amount of bank owned life insurance approximates its fair value.

 

Deposit liabilities: The fair values disclosed for demand deposits, regular savings, NOW accounts, and money market accounts are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

Securities sold under agreements to repurchase: The carrying amounts of securities sold under agreements to repurchase approximate their fair values.

 

Federal Home Loan Bank advances: Fair values of Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

Long-term subordinated debt: The fair value of long-term subordinated debt is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

 

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

 

ADVERTISING:

 

The Company directly expenses costs associated with advertising as they are incurred. During the years ended December 31, 2015 and 2014, $442,000 and $594,000, respectively, in advertising and promotion expenses were recognized.

 

INCOME TAXES:

 

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. A valuation allowance against deferred tax assets is established when, based upon all available evidence, both positive and negative, it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

 

 

STOCK BASED COMPENSATION:

 

At December 31, 2015, the Company has stock-based employee compensation plans which are described more fully in Note 19. The Company accounts for the plan under ASC 718-10, “Compensation - Stock Compensation - Overall.” During the years ended December 31, 2015 and 2014, $188,000 and $145,000, respectively, in stock-based employee compensation was recognized.

 

EARNINGS PER SHARE:

 

The Company defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that are included in computing EPS using the two-class method.

 

The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Earnings per common share is calculated by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the period.

 

Basic EPS excludes dilution and is computed by dividing income allocated 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.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

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

 

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements. In August 2015, the FASB issued ASU 2015-14 that defers by one year the effective date of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The new ASU reflects decisions reached by the FASB at its meeting on July 9, 2015.

 

 

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The standard is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company adopted this ASU for the year ended December 31, 2015 in relation to its debt issuance costs.

 

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

 

In July 2015, the FASB issued ASU 2015-7, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (a consensus of the FASB Emerging Issues Task Force)." This update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The Update also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient An entity should apply the Update on a retrospective basis. The Company intends to adopt the Update during the first quarter of 2016. Adoption is not anticipated to have a material impact on the Company's financial statements.

 

In January 2016, the FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments-Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU will require entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. It will also require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, thus eliminating eligibility for the current available-for-sale category. The ASU will take effect for public companies for fiscal years beginning after December 15, 2017. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

 

NOTE 3 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES

 

Debt securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost basis of securities and their approximate fair values are as follows as of December 31, 2015 and 2014:

 

		Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
		Basis				Gains				Losses				Value
		(In Thousands)
December 31, 2015:
Debt securities issued by U.S. government corporations and agencies		$	10,499			$	6			$	42			$	10,463
Obligations of states and municipalities			14,258				447				36				14,669
Mortgage-backed securities			45,958				65				742				45,281
SBA loan pools			1,089				23				8				1,104
Money market mutual funds			13				-				-				13
			71,817				541				828				71,530
Money market mutual funds included in cash and other cash equivalents			(13	)			-				-				(13	)
		$	71,804			$	541			$	828			$	71,517
December 31, 2014:
Debt securities issued by U.S. government corporations and agencies		$	18,202			$	1			$	139			$	18,064
Obligations of states and municipalities			15,972				679				52				16,599
Mortgage-backed securities			49,157				140				629				48,668
SBA loan pools			440				34				-				474
Money market mutual funds			1				-				-				1
			83,772				854				820				83,806
Money market mutual funds included in cash and other cash equivalents			(1	)			-				-				(1	)
		$	83,771			$	854			$	820			$	83,805

 

  

The scheduled maturities of debt securities were as follows as of December 31, 2015:

 

		Fair
		Value
		(In Thousands)
Due within one year		$	379
Due after one year through five years			18,528
Due after five years through ten years			4,693
Due after ten years			1,532
Mortgage-backed securities			45,281
SBA loan pools			1,104
		$	71,517

  

During 2015, proceeds from sales of available-for-sale securities amounted to $2,211,000. Gross realized gains on those sales amounted to $139,000. The tax expense applicable to these gross realized gains amounted to $47,000. During 2014, proceeds from sales of available-for-sale securities amounted to $1,712,000. Gross realized gains on those sales amounted to $150,000. The tax expense applicable to these gross realized gains amounted to $51,000.

 

There were no securities of issuers that exceeded 10% of stockholders’ equity at December 31, 2015.

 

As of December 31, 2015 and 2014, the total carrying amounts of securities pledged for securities sold under agreements to repurchase and public deposits were $14,319,000 and $17,271,000, respectively.

 

 

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 are as follows:

  

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized				Number of
		Value				Losses				Value				Losses				Value				Losses				Holdings
		(In Thousands)
December 31, 2015:
Debt securities issued by U.S. Government corporations and agencies		$	5,975			$	24			$	2,482			$	18			$	8,457			$	42				17
SBA Loan Pools			760				8				-				-				760				8				1
Obligations of states and municipalities			702				8				1,997				28				2,699				36				6
Mortgage-backed securities			22,125				255				17,463				461				39,588				716				62
Total temporarily impaired securities			29,562				295				21,942				507				51,504				802				86
Other-than-temporarily impaired securities:
Mortgage-backed securities			15				-				219				26				234				26				4
Total temporarily impaired and other-than-temporarily impaired securities		$	29,577			$	295			$	22,161			$	533			$	51,738			$	828				90
December 31, 2014:
Debt securities issued by U.S. Government corporations and agencies		$	4,486			$	12			$	13,077			$	127			$	17,563			$	139				36
Obligations of states and municipalities			526				12				1,772				40				2,298				52				5
Mortgage-backed securities			1,422				6				36,550				593				37,972				599				49
Total temporarily impaired securities			6,434				30				51,399				760				57,833				790				90
Other-than-temporarily impaired securities:
Mortgage-backed securities			-				-				274				30				274				30				3
Total temporarily impaired and other-than-temporarily impaired securities		$	6,434			$	30			$	51,673			$	790			$	58,107			$	820				93

 

 

The investments in the Company’s investment portfolio that are temporarily impaired as of December 31, 2015 consist of debt securities issued by states of the United States and political subdivisions of the states and U.S. government corporations and agencies and mortgage-backed securities. Company management considers investments with an unrealized loss as of December 31, 2015 to be temporarily impaired because the impairment is attributable to changes in market interest rates and current market inefficiencies. Company management anticipates that the fair value of securities that are currently impaired will recover to cost basis. As management has the intent and ability to hold these securities for the foreseeable future, no declines are deemed to be other than temporary.

 

The following table summarizes other-than-temporary impairment losses on debt securities for the years ended December 31, 2015 and 2014:

  

		2015				2014
		Mortgage-Backed Securities				Mortgage-Backed Securities
		(In Thousands)
Total other-than-temporary impairment losses		$	33			$	38
Less: unrealized other-than-temporary losses recognized in other comprehensive income/loss (1)			(26	)			(30	)
Net impairment losses recognized in earnings (2)		$	7			$	8

 

(1) Represents the noncredit component of the other-than-temporary impairment on the securities.

(2) Represents the credit component of the other-than-temporary impairment on securities.

 

Activity related to the credit component recognized in earnings on debt securities held by the Company for which a portion of other-than-temporary impairment was recognized in other comprehensive income for the year ended December 31, 2015 is as follows:

 

		Mortgage-Backed
		Securities
		(In Thousands)
Balance, December 31, 2014		$	37
Additions for the credit component on debt securities in which other-than-temporary impairment was previously recognized			7
Balance, December 31, 2015		$	44

  

For the year ended December 31, 2015, securities with other-than-temporary impairment losses related to credit that were recognized in earnings consisted of three private label collateralized mortgage obligations (CMOs). The par value of these three securities were written down by $7,000 by the issuers.

 

Activity related to the credit component recognized in earnings on debt securities held by the Company for which a portion of other-than-temporary impairment was recognized in other comprehensive loss for the year ended December 31, 2014 is as follows:

 

		Mortgage-Backed
		Securities
		(In Thousands)
Balance, December 31, 2013		$	29
Additions for the credit component on debt securities in which other-than-temporary impairment was previously recognized			8
Balance, December 31, 2014		$	37

For the year ended December 31, 2014, securities with other-than-temporary impairment losses related to credit that were recognized in earnings consisted of three private label collateralized mortgage obligations (CMOs). The par value of these three securities were written down by $8,000 by the issuers.

 

 

NOTE 4 - LOANS

 

Loans consisted of the following as of December 31:

  

		2015				2014
		(In Thousands)
Real estate:
Residential		$	138,628			$	132,553
Commercial			62,118				46,982
Municipal			8,629				8,602
Construction and land development			10,070				13,234
Home equity			47,681				46,403
Commercial and industrial			35,305				19,038
Municipal			3,610				1,459
Consumer			19,350				16,576
			325,391				284,847
Allowance for loan losses			(3,028	)			(2,761	)
Deferred loan origination costs, net			1,332				1,295
Net loans		$	323,695			$	283,381

  

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of and for the years ended December 31, 2015 and 2014:

 

		Real Estate:
										Construction and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Unallocated				Total
		(In Thousands)
December 31, 2015:
Allowance for loan losses:
Beginning balance		$	1,085			$	738			$	249			$	324			$	227			$	134			$	4			$	2,761
Charge-offs			-				-				-				-				-				(22	)			-				(22	)
Recoveries			-				-				-				2				3				6				-				11
(Benefit) provision			(20	)			(32	)			75				5				168				39				43				278
Ending balance		$	1,065			$	706			$	324			$	331			$	398			$	157			$	47			$	3,028
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	2			$	-			$	-			$	2
Ending balance:
Collectively evaluated for impairment			1,065				706				324				331				396				157				47				3,026
Total allowance for loan losses ending balance		$	1,065			$	706			$	324			$	331			$	398			$	157			$	47			$	3,028
Loans:
Ending balance:
Individually evaluated for impairment		$	-			$	2,285			$	-			$	-			$	363			$	-			$	-			$	2,648
Ending balance:
Collectively evaluated for impairment			138,628				68,462				10,070				47,681				38,552				19,350				-				322,743
Total loans ending balance		$	138,628			$	70,747			$	10,070			$	47,681			$	38,915			$	19,350			$	-			$	325,391

  

  

		Real Estate:
										Construction and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Unallocated				Total
		(In Thousands)
December 31, 2014:
Allowance for loan losses:
Beginning balance		$	1,189			$	748			$	211			$	303			$	239			$	102			$	-			$	2,792
Charge-offs			(93	)			-				-				-				-				(8	)			-				(101	)
Recoveries			8				-				-				-				3				4				-				15
(Benefit) provision			(19	)			(10	)			38				21				(15	)			36				4				55
Ending balance		$	1,085			$	738			$	249			$	324			$	227			$	134			$	4			$	2,761
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	6			$	-			$	-			$	6
Ending balance:
Collectively evaluated for impairment			1,085				738				249				324				221				134				4				2,755
Total allowance for loan losses ending balance		$	1,085			$	738			$	249			$	324			$	227			$	134			$	4			$	2,761
Loans:
Ending balance:
Individually evaluated for impairment		$	170			$	860			$	-			$	3			$	439			$	-			$	-			$	1,472
Ending balance:
Collectively evaluated for impairment			132,383				54,724				13,234				46,400				20,058				16,576				-				283,375
Total loans ending balance		$	132,553			$	55,584			$	13,234			$	46,403			$	20,497			$	16,576			$	-			$	284,847

 

 

The following tables present the Company’s loans by risk rating as of December 31, 2015 and 2014:

 

		Real Estate:
										Construction and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Total
		(In Thousands)
December 31, 2015:
Grade:
Pass		$	-			$	64,823			$	10,070			$	-			$	36,649			$	-			$	111,542
Special mention			-				2,132				-				-				216				-				2,348
Substandard			732				3,792				-				262				2,050				-				6,836
Loans not formally rated			137,896				-				-				47,419				-				19,350				204,665
Total		$	138,628			$	70,747			$	10,070			$	47,681			$	38,915			$	19,350			$	325,391
December 31, 2014:
Grade:
Pass		$	-			$	50,208			$	11,529			$	-			$	18,380			$	-			$	80,117
Special mention			-				3,866				1,705				-				642				-				6,213
Substandard			474				1,510				-				166				1,475				-				3,625
Loans not formally rated			132,079				-				-				46,237				-				16,576				194,892
Total		$	132,553			$	55,584			$	13,234			$	46,403			$	20,497			$	16,576			$	284,847

 

 

Credit Quality Indicators: As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) weighted average risk rating of commercial loans; (ii) the level of classified and criticized commercial loans; (iii) non-performing loans; (iv) net charge-offs and (v) the general economic conditions within the State of Connecticut.

 

The Company utilizes a risk rating grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 7. A description of each rating class is as follows:

 

Risk Rating 1 (Superior) - This risk rating is assigned to loans secured by cash.

 

Risk Rating 2 (Good) – This risk rating is assigned to borrowers of high credit quality who have primary and secondary sources of repayment which are well defined and fully confirmed.

 

Risk Rating 3 (Satisfactory) - This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment, which has primary and secondary sources of repayment that are well defined and adequately confirmed. Most credit factors are favorable, and the credit exposure is managed through normal monitoring.

 

Risk Rating 3.5 (Bankable with Care) - This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and the secondary sources of repayment are weak. These loans may require more than the average amount of attention from the relationship manager.

 

Risk Rating 4 (Special Mention) – This risk rating is assigned to borrowers which may be adequately protected by the present debt service capacity and tangible net worth of the borrower, but which have potential problems that could, if not checked or corrected, eventually weaken these assets or otherwise jeopardize the repayment of principal and interest as originally intended. Most credit factors are unfavorable, and the credit exposure requires immediate corrective action.

 

Risk Rating 5 (Substandard) – This risk rating is assigned to borrowers who may not have adequate cash flow or collateral to satisfy their loan obligations as originally defined in the loan agreement. Substandard loans may be placed on nonaccrual status if the conditions described above are generally met.

 

Risk Rating 6 (Doubtful) – This risk rating is assigned to a borrower or portion of a borrower’s loan with which the Company is no longer certain of its collectability. A specific reserve allocation is assigned to this portion of the loan.

 

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loan that has been charged down. “Loss” does not imply that the loan, or portion of, will never be paid, nor does it imply that there has been a forgiveness of debt.

 

Loans not formally rated include residential, home equity and consumer loans. As of December 31, 2015, $204.7 million of the total residential, home equity and consumer loan portfolio of $205.7 million were not formally rated. As of December 31, 2014, $194.9 million of the total residential, home equity and consumer loan portfolio of $195.5 million were not formally rated. The performance of these loans is measured by delinquency status. The Company underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines. These guidelines provide for specific requirements with regard to documentation and loan to value and debt to income ratios. Home equity loan and line guidelines place a maximum loan to value ratio of 80% on these loans and the Company requires full underwriting disclosure documentation for these loans. These underwriting factors have produced a high performance loan portfolio. Total delinquent loans, consisting of loans past due 60 days or more, increased from 0.67% of total loans outstanding as of December 31, 2014 to 1.21% of total loans outstanding as of December 31, 2015.

 

 

An age analysis of past-due loans, segregated by class of loans is as follows as of December 31, 2015 and 2014:

 

		30-59 Days				60-89 Days				90 Days or More Past Due				Total Past Due				Total Current				Total Loans				90 Days or More Past Due and Accruing				Nonaccrual Loans
		(In Thousands)
December 31, 2015:
Real estate:
Residential		$	-			$	1,062			$	594			$	1,656			$	136,972			$	138,628			$	-			$	1,086
Commercial			-				-				1,668				1,668				60,450				62,118				-				2,285
Municipal			-				-				-				-				8,629				8,629				-				-
Construction and land development			-				-				-				-				10,070				10,070				-				-
Home equity			35				84				178				297				47,384				47,681				-				340
Commercial and industrial			-				-				363				363				34,942				35,305				-				363
Municipal			-				-				-				-				3,610				3,610				-				-
Consumer			47				7				5				59				19,291				19,350				-				5
Total		$	82			$	1,153			$	2,808			$	4,043			$	321,348			$	325,391			$	-			$	4,079
December 31, 2014:
Real estate:
Residential		$	147			$	-			$	516			$	663			$	131,890			$	132,553			$	-			$	1,064
Commercial			-				-				860				860				46,122				46,982				-				860
Municipal			-				-				-				-				8,602				8,602				-				-
Construction and land development			-				-				-				-				13,234				13,234				-				-
Home equity			328				-				77				405				45,998				46,403				-				165
Commercial and industrial			-				-				439				439				18,599				19,038				-				439
Municipal			-				-				-				-				1,459				1,459				-				-
Consumer			124				19				-				143				16,433				16,576				-				-
Total		$	599			$	19			$	1,892			$	2,510			$	282,337			$	284,847			$	-			$	2,528

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the years ended December 31, 2015 and 2014:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(In Thousands)
December 31, 2015:
With no related allowance recorded:
Real estate:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			2,285				2,285				-				2,358				77
Construction and land development			-				-				-				-				-
Home equity			-				-				-				-				-
Commercial and industrial			-				-				-				-				-
Total impaired with no related allowance		$	2,285			$	2,285			$	-			$	2,358			$	77
With an allowance recorded:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			-				-				-				-				-
Construction and land development			-				-				-				-				-
Home equity			-				-				-				-				-
Commercial and industrial			363				363				2				404				-
Total impaired with an allowance recorded		$	363			$	363			$	2			$	404			$	-
Total
Real estate:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			2,285				2,285				-				2,358				77
Construction and land development			-				-				-				-				-
Home equity			-				-				-				-				-
Commercial and industrial			363				363				2				404				-
Total impaired loans		$	2,648			$	2,648			$	2			$	2,762			$	77

  

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(In Thousands)
December 31, 2014:
With no related allowance recorded:
Real estate:
Residential		$	170			$	170			$	-			$	172			$	5
Commercial			860				860				-				896				-
Construction and land development			-				-				-				133				56
Home equity			3				3				-				4				-
Commercial and industrial			-				-				-				-				-
Total impaired with no related allowance		$	1,033			$	1,033			$	-			$	1,205			$	61
With an allowance recorded:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			-				-				-				-				-
Construction and land development			-				-				-				-				-
Home equity			-				-				-				-				-
Commercial and industrial			439				439				6				372				-
Total impaired with an allowance recorded		$	439			$	439			$	6			$	372			$	-
Total
Real estate:
Residential		$	170			$	170			$	-			$	172			$	5
Commercial			860				860				-				896				-
Construction and land development			-				-				-				133				56
Home equity			3				3				-				4				-
Commercial and industrial			439				439				6				372				-
Total impaired loans		$	1,472			$	1,472			$	6			$	1,577			$	61

 

The following tables set forth information regarding troubled debt restructured loans during the years ended December 31, 2015 and 2014:

 

						Pre-Modification				Post- Modification
		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment
		(Dollars In Thousands)
December 31, 2015:
Troubled Debt Restructurings:
Commercial and industrial			1			$	363			$	363
			1			$	363			$	363

 

						Pre-Modification				Post- Modification
		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment
		(Dollars In Thousands)
December 31, 2014:
Troubled Debt Restructurings:
Commercial and industrial			1			$	439			$	439
			1			$	439			$	439

 

There was one commercial loan that was modified as a troubled debt restructuring during the year ended December 31, 2015. The loan, with a recorded investment of $363,000 as of December 31, 2015, had its payment temporarily reduced as part of the modification. The loan was individually evaluated for impairment as of December 31, 2015 and it was determined that a $2,000 specific allowance allocation was required. The loan was on nonaccrual status as of December 31, 2015.

 

 

There was one commercial loan that was modified as a troubled debt restructuring during the year ended December 31, 2014. The loan, with a recorded investment of $439,000 as of December 31, 2014, had its payment temporarily reduced as part of the modification. The loan was individually evaluated for impairment as of December 31, 2015 and it was determined that a $6,000 specific allowance allocation was required. The loan was on nonaccrual status as of December 31, 2014.

 

There were no loans modified as a troubled debt restructure during the years ended December 31, 2015 and 2014 that subsequently defaulted within one year of modification.

 

As of December 31, 2015 and 2014, there were no commitments to lend additional funds to borrowers whose loans were modified in a troubled debt restructuring.

 

As of December 31, 2015, there were no foreclosed residential real estate properties held by the Company. The recorded investment in consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure according to local requirements of the applicable jurisdiction amounted to $315,000 at December 31, 2015.

 

The balance of mortgage servicing rights included in other assets at December 31, 2015 and 2014 was $2,039,000 and $1,577,000, respectively. Mortgage servicing rights of $1,069,000 and $531,000 were capitalized in 2015 and 2014, respectively. Amortization of mortgage servicing rights was $596,000 in 2015 and $401,000 in 2014. The fair value of these rights was $2,715,000 and $2,049,000 as of December 31, 2015 and 2014, respectively.

 

 

 Following is an analysis of the aggregate changes in the valuation allowance for mortgage servicing rights for the years ended December 31:

 

		2015				2014
		(In Thousands)
Balance, beginning of year		$	9			$	42
Additions			52				5
Reductions			(41	)			(38	)
Balance, end of year		$	20			$	9

 

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $255,196,000 and $176,579,000 as of December 31, 2015 and 2014, respectively.

 

NOTE 5 - PREMISES AND EQUIPMENT

 

The following is a summary of premises and equipment as of December 31:

  

		2015				2014
		(In Thousands)
Leasehold improvements		$	1,082			$	1,389
Furniture and equipment			3,232				3,105
			4,314				4,494
Accumulated depreciation and amortization			(2,894	)			(3,034	)
		$	1,420			$	1,460

  

NOTE 6 - DEPOSITS

 

The aggregate amount of time deposit accounts in denominations that meet or exceed the Federal Deposit Insurance Corporation (FDIC) insurance limit (currently $250,000) at December 31, 2015 and 2014 was $11,356,000, and $11,160,000, respectively.

 

For time deposits as of December 31, 2015, the scheduled maturities for years ending December 31 are:

 

		(In Thousands)
2016		$	36,959
2017			10,117
2018			4,416
2019			2,975
2020			2,820
Total		$	57,287

 

At December 31, 2015, the Company had brokered certificates of deposit included in the table above totaling $1,268,000.

 

As of December 31, 2015, the Bank had one depositor with total deposits of $24.5 million or 6.59% of the Company’s total deposits. As of December 31, 2014, the Bank had one depositor with total deposits of $22.5 million or 6.32% of the Company’s total deposits.

 

 

NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase consist of funds borrowed from customers on a short-term basis secured by portions of the Company's investment portfolio. The securities which were sold have been accounted for not as sales but as borrowings. The securities consisted of debt securities issued by U.S. government sponsored enterprises, corporations and agencies and states and municipalities. The securities were held in safekeeping by the Federal Home Loan Bank and Merrill Lynch, under the control of the Company. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements. The agreements mature generally within three months from date of issue.

 

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

 

Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). There were $31,500,000 in FHLB advances outstanding as of December 31, 2015. All advances outstanding at December 31, 2015 mature in January 2016. The weighted average interest rate on these borrowings is 0.44%. There were $17,500,000 in FHLB advances outstanding as of December 31, 2014. All advances outstanding at December 31, 2014 matured in January 2015. The weighted average interest rate on these borrowings was 0.23%.

 

Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties and other qualified assets.

 

The Company has a line of credit with the FHLB in the amount of $1,525,000 at December 31, 2015 and 2014. At December 31, 2015 and 2014, there were no advances outstanding under this line of credit.

 

NOTE 9 – SUBORDINATED DEBENTURES

 

On October 15, 2015 (the “Closing Date”), the Company closed on the issuance of an unsecured subordinated term note in the aggregate principal amount of $7,500,000 due October 1, 2025 (the “Subordinated Note”) to Community Funding CLO, Ltd. (“Community Funding”) pursuant to a Subordinated Loan Agreement, dated as of September 30, 2015 (the “Loan Agreement”), by and between the Company and Community Funding. The Company used the net proceeds of approximately $7.2 million after closing costs of $277,000, from the issuance of the Subordinated Note (i) to redeem the 9,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series C, that the Company issued to the United States Department of the Treasury as part of the Company’s participation in the Small Business Lending Fund program, (ii) to support the growth of the Bank, including the Bank's expansion into the West Hartford, Connecticut market through the opening of a new branch office and the growth of the Bank’s loan portfolio, and (iii) for other general corporate purposes.

 

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 will rebate 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, so long as no event of default has occurred or is occurring 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.

 

The Loan Agreement includes customary representations, warranties and covenants by the Company. The Company also agreed to indemnify Community Funding and its affiliates against liabilities arising from any breach of representations, warranties and covenants made by the Company under the Loan Agreement or any action instituted against Community Funding and its affiliates by any shareholder of the Company or other third party with respect to the transactions contemplated by the Loan Agreement.

 

 

The initial closing costs of $277,000 are being amortized over the 10 year term of the Loan Agreement into interest expense. At December 31, 2015, there were approximately $270,000 in closing costs remaining to be amortized.

 

NOTE 10 - INCOME TAXES

 

The components of income tax expense (benefit) are as follows for the years ended December 31:

 

		2015				2014
		(In Thousands)
Current:
Federal		$	264			$	181
State			1				2
			265				183
Deferred:
Federal			(24	)			(187	)
State			-				-
			(24	)			(187	)
Total income tax expense (benefit)		$	241			$	(4	)

 

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31:

 

		2015				2014
		% of				% of
		Income				Income
Federal income tax at statutory rate			34.0	%			34.0	%
Increase (decrease) in tax resulting from:
Tax-exempt income			(20.6	)			(38.0	)
Other			1.2				3.5
Effective tax rates			14.6	%			(0.5	)%

 

  

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:

 

		2015				2014
		(In Thousands)
Deferred tax assets:
Allowance for loan losses		$	910			$	816
Deferred compensation			273				243
Impairment of operating lease			-				9
Write-down of securities			15				10
Write-down of OREO			-				17
Restricted stock awards			23				7
Charitable contribution carryover			166				120
Other			79				123
Alternative minimum tax carryforward			761				634
Net unrealized holding loss on available-for-sale securities			98				-
Gross deferred tax assets			2,325				1,979
Deferred tax liabilities:
Depreciation			(358	)			(307	)
Deferred loan costs/fees			(453	)			(437	)
Mortgage servicing rights			(693	)			(536	)
Net unrealized holding gain on available-for-sale securities			-				(12	)
Gross deferred tax liabilities			(1,504	)			(1,292	)
Net deferred tax asset (included in other assets)		$	821			$	687

 

Deferred tax assets as of December 31, 2015 and 2014 have not been reduced by a valuation allowance because management believes that it is more likely than not that the full amount of deferred taxes will be realized.

 

As of December 31, 2015, the Company had no operating loss carryovers for income tax purposes.

 

It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2015 and 2014, there were no material uncertain tax positions related to federal and state income tax matters. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2012 through December 31, 2015.

 

In January of 2011, the Bank formed a subsidiary Passive Investment Company (PIC). Under State of Connecticut statutes, such a company is not subject to Connecticut corporation business taxes. Provided that the Bank meets the mandated statutory requirements, the Company’s Connecticut corporation business taxes should be significantly reduced or eliminated.

 

 

NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES

 

As of December 31, 2015 the Company was obligated under non-cancelable operating leases for bank premises and equipment expiring between June 2016 and January 2026. Certain leases contain renewal options. The cost of such renewals is not included below. The total minimum rental due in future periods under these existing agreements is as follows as of December 31, 2015:

 

		(In Thousands)
2016		$	1,018
2017			1,004
2018			977
2019			914
2020			1,339
Thereafter			550
Total		$	5,802

 

Certain leases contain provisions for escalation of minimum lease payments contingent upon percentage increases in the consumer price index. Total rental expense amounted to $936,000 and $935,000 for the years ended December 31, 2015 and 2014, respectively.

 

On November 28, 2008, the Company entered into an agreement with its data processing servicer with an initial five-year term. A second amendment to this November 2008 agreement was signed between the parties on June 27, 2013 that extends the agreement through April 19, 2019. Under the agreement, the Company must pay a termination fee as described in the agreement if the Company terminates the agreement with notice, before the end of this extended agreement.

 

NOTE 12 - FAIR VALUE MEASUREMENTS

 

ASC 820-10, “Fair Value Measurement - Overall,” provides a framework for measuring fair value under generally accepted accounting principles. This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

 

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

 

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

 

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

 

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

 

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company did not have any significant transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2015.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for December 31, 2015 and 2014.

 

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

 

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

 

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 inputs, fair values are based on management estimates.

 

Other real estate owned values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

The following summarizes assets measured at fair value as of December 31:

 

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

		Fair Value Measurements at Reporting Date Using:
		Total				Level 1				Level 2				Level 3
		(In Thousands)
December 31, 2015:
Debt securities issued by U.S. government corporations and agencies		$	10,463			$	-			$	10,463			$	-
Obligations of states and municipalities			14,669				-				14,669				-
Mortgage-backed securities			45,281				-				45,281				-
SBA loan pools			1,104				-				1,104				-
Totals		$	71,517			$	-			$	71,517			$	-

  

		Fair Value Measurements at Reporting Date Using:
		Total				Level 1				Level 2				Level 3
		(In Thousands)
December 31, 2014:
Debt securities issued by U.S. government corporations and agencies		$	18,064			$	-			$	18,064			$	-
Obligations of states and municipalities			16,599				-				16,599				-
Mortgage-backed securities			48,668				-				48,668				-
SBA loan pools			474				-				474				-
Totals		$	83,805			$	-			$	83,805			$	-

 

  

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis. The following table presents the assets carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, at December 31, 2015 and 2014, for which a nonrecurring change in fair value has been recorded:

 

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

 

		Fair Value Measurements at Reporting Date Using:
		Total				Level 1				Level 2				Level 3				Writedowns
		(In Thousands)
December 31, 2015:
Impaired loans		$	240			$	-			$	-			$	240			$	-
Totals		$	240			$	-			$	-			$	240			$	-
December 31, 2014:
Impaired loans		$	244			$	-			$	-			$	244			$	43
Other real estate owned			105				-				-				105				50
Totals		$	349			$	-			$	-			$	349			$	93

 

 

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

   

		December 31, 2015
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	28,890			$	28,890			$	-			$	-			$	28,890
Certificates of deposit			1,250				1,250				-				-				1,250
Available-for-sale securities			71,517				-				71,517				-				71,517
Federal Home Loan Bank stock			2,047				2,047				-				-				2,047
Loans held-for-sale			2,167				-				-				2,187				2,187
Loans, net			323,695				-				-				322,596				322,596
Accrued interest receivable			1,143				1,143				-				-				1,143
Bank owned life insurance			7,389				-				7,389				-				7,389
Financial liabilities:
Deposits			372,642				-				363,752				-				363,752
Securities sold under agreements to repurchase			1,915				-				1,915				-				1,915
Long-term debt			7,230				-				7,339				-				7,339
Federal Home Loan Bank advances			31,500				-				31,500				-				31,500

		December 31, 2014
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	19,820			$	19,820			$	-			$	-			$	19,820
Available-for-sale securities			83,805				-				83,805				-				83,805
Federal Home Loan Bank stock			1,801				1,801				-				-				1,801
Loans held-for-sale			5,374				-				-				5,499				5,499
Loans, net			283,381				-				-				285,832				285,832
Accrued interest receivable			1,095				1,095				-				-				1,095
Bank owned life insurance			7,184				-				7,184				-				7,184
Financial liabilities:
Deposits			356,065				-				356,353				-				356,353
Securities sold under agreements to repurchase			3,921				-				3,921				-				3,921
Federal Home Loan Bank advances			17,500				-				17,500				-				17,500

  

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2.

 

Management has made estimates of fair value discount rates that it believes to be reasonable; however, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale.

 

Fair value estimates are made at a specific point in time, based on the relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

 

 

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include premises and equipment and other real estate owned. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

  

NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, unadvanced funds on loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2015 and 2014, the maximum potential amount of the Company’s obligation was $3,391,000 and $1,888,000, respectively for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

 

Notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of
December 31:

 

		2015				2014
		(In Thousands)
Commitments to originate loans		$	40,708			$	17,151
Standby letters of credit			3,391				1,888
Unadvanced portions of loans:
Construction loans			15,647				6,960
Commercial lines of credit			20,580				17,394
Consumer			621				677
Home equity lines of credit			47,650				45,005
		$	128,597			$	89,075

 

There is no material difference between the notional amounts and the estimated fair values of the above off-balance sheet liabilities.

 

 

NOTE 14 - RELATED PARTY TRANSACTIONS

 

Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2015. Total loans to such persons and their companies amounted to $4,559,000 as of December 31, 2015, of which $1,334,000 was participated out to another financial institution. During the year ended December 31, 2015, principal payments totaled $1,026,000 and advances amounted to $1,336,000.

 

Deposits from related parties held by the Company as of December 31, 2015 and 2014 amounted to $5,950,000 and $6,625,000, respectively.

 

During 2015 and 2014, the Company paid $80,000 and $90,000, respectively, for rent and related expenses of the Company’s Granby branch office to a company of which a bank director is a principal. The rent expense for the Granby branch included in Note 11 amounted to $60,000 in 2015 and $65,000 in 2014.

 

NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

 

Most of the Company's business activity is with customers located within the state of Connecticut. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Company's loan portfolio is comprised of loans collateralized by real estate located in the state of Connecticut.

 

NOTE 16 - OTHER COMPREHENSIVE (LOSS) INCOME

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).

 

The activity in other comprehensive (loss) income, included in stockholders’ equity, is as follows during the years ended December 31:

 

		2015				2014
		In Thousands
Net change in unrealized holding gain/loss on securities available-for-sale		$	(189	)		$	2,684
Reclassification adjustment for realized gains in net income (1)			(132	)			(142	)
Other comprehensive (loss) income, before tax			(321	)			2,542
Income tax benefit (expense)			110				(865	)
Other comprehensive (loss) income, net of tax		$	(211	)		$	1,677

 

(1) Reclassification adjustments include realized securities gains and losses and writedowns of securities. The gains and losses have been reclassified out of other comprehensive (loss) income and affect certain captions in the consolidated statements of income as follows; the pre-tax amount is reflected in writedowns and gain on sales of investments; the tax effect of $45,000 and $48,000 in December 31, 2015 and 2014, respectively, is included in income tax (benefit) expense; and the after tax amount is included in net income.

 

Accumulated other comprehensive (loss) income as of December 31, 2015 and 2014 consists of net unrealized holding (losses) gains on available-for-sale securities, net of taxes.

 

NOTE 17 - REGULATORY MATTERS

 

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

 

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to new capital regulations adopted by the FRB and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CETI”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CETI capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Beginning January 1, 2016, failure to maintain the capital conservation buffer will limit the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses.

 

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

 

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

 

As of December 31, 2015, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

 

The Bank’s actual capital amounts and ratios are also presented in the table under the regulatory capital rules then in effect.

 

																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars In Thousands)
As of December 31, 2015:
Total Capital (to Risk Weighted Assets)		$	39,262				14.21	%		$	22,107				8.0	%		$	27,634				10.0	%
Tier 1 Capital (to Risk Weighted Assets)			36,234				13.11				16,580				6.0				22,107				8.0
Common Equity Tier 1 capital (to Risk Weighted Assets)			36,234				13.11				12,435				4.5				17,962				6.5
Tier 1 Capital (to Average Assets)			36,234				8.58				16,902				4.0				21,127				5.0
As of December 31, 2014:
Total Capital (to Risk Weighted Assets)			31,675				12.80				19,791				8.0				24,739				10.0
Tier 1 Capital (to Risk Weighted Assets)			28,914				11.69				9,895				4.0				14,843				6.0
Tier 1 Capital (to Average Assets)			28,914				7.17				16,137				4.0				20,171				5.0

 

The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Company's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefor. The declaration of future dividends will be subject to favorable operating results, financial conditions, tax considerations, and other factors.

 

Under Connecticut law, the Bank may pay dividends only out of net profits. The Connecticut Banking Commissioner’s approval is required for dividend payments which exceed the current year’s net profits and retained net profits from the preceding two years. As of December 31, 2015, the Bank is restricted from declaring dividends to the Company in an amount greater than $2,109,000.

 

NOTE 18 - EMPLOYEE BENEFITS

 

The Company sponsors a 401(k) savings and retirement plan. Employees who are 21 years of age and employed on the plan's effective date are immediately eligible to participate in the plan. Other employees who have attained age 21 are eligible for membership on the first day of the month following completion of 90 days of service.

 

The provisions of the 401(k) plan allow eligible employees to contribute subject to IRS limitations. The Company's matching contribution will be determined at the beginning of the plan year. The Company's expense under this plan was $95,000 in 2015 and $74,000 in 2014.

 

The Company entered into Supplemental Executive Retirement Agreements with current and former executive officers. The agreements require the payment of specified benefits upon retirement over specified periods as described in each agreement. The total liability for the agreements included in other liabilities was $804,000 at December 31, 2015 and $715,000 at December 31, 2014. Expenses under these agreements amounted to $126,000 and $101,000, respectively, for the years ended December 31, 2015 and 2014. Payments made under the agreements were $37,000 and $34,000, respectively for each of the years ended December 31, 2015 and 2014.

 

The Company entered into employment agreements (the “Agreements”) with the Executive Officers of the Company. The Agreements provide for severance benefits upon termination following a change in control as defined in the agreements in amounts equal to cash compensation as defined in the agreements, and fringe benefits that the Executive(s) would have received if the Executive(s) would have continued working for an additional two years. The agreements also include provisions to accelerate vesting for stock option plans; or for additional credit for years of service under benefit plans.

 

 

NOTE 19 - STOCK BASED COMPENSATION PLANS

 

The SBT Bancorp, Inc. 1998 Stock Plan (“1998 Plan”) provided for the granting of options to purchase shares of common stock or the granting of shares of restricted stock up to an aggregate amount of 142,000 shares of common stock of the Company. Options granted under the 1998 Plan may have been either Incentive Stock Options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code or non-qualified options (“NQOs”) which do not qualify as ISOs. Effective March 17, 2009, no additional restricted stock awards or stock options may be granted under the 1998 Plan.

 

On May 10, 2011, the stockholders of SBT Bancorp, Inc. approved the SBT Bancorp, Inc. 2011 Stock Award and Option Plan (“2011 Plan”). The 2011 Plan provides for the granting of options to purchase shares of common stock or the granting of shares of restricted stock up to an aggregate amount of 100,000 shares of common stock of the Company. Options granted under the 2011 Plan may be either Incentive Stock Options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code or non-qualified options (“NQOs”) which do not qualify as ISOs.

 

The exercise price for shares covered by an ISO may not be less than 100% of the fair market value of common stock on the date of grant. All options must expire no later than ten years from the date of grant.

 

During 2015 and 2014, the Company granted 8,225 shares and 1,934 shares, respectively, of restricted stock with an award value of $177,000 and $41,000, respectively, or $21.52 and $21.50 per share, respectively. The restricted shares vest over a three year period. During 2015 and 2014, the Company recognized compensation expense related to the restricted shares awarded in the amounts of $178,000 and $145,000, respectively. The recognized tax benefit related to this expense was $53,000 in 2015 and $49,000 in 2014.

 

 

A summary of the status of the restricted stock awards as of December 31 and changes during the years ending on that date is presented below:

 

		2015								2014
						Weighted-Average								Weighted-Average
		Number of				Grant				Number of				Grant
Fixed Options		Shares				Price				Shares				Price
Non-vested restricted stock awards at beginning of year			9,792			$	23.00				19,524			$	22.95
Restricted shares granted			8,225				21.52				1,934				21.50
Shares vested			(5,634	)			23.24				(7,756	)			23.08
Shares forfeited			(300	)			23.52				(3,910	)			23.09
Non-vested restricted stock awards at end of year			12,083			$	21.92				9,792			$	23.00

 

As of December 31, 2015, the unrecognized share-based compensation expense related to the non-vested restricted stock awards was $206,000. This amount is expected to be recognized over a weighted average period of 1.8 years.

 

A summary of the status of the Company’s stock option plan as of December 31 and changes during the years ending on that date is presented below:

 

		2015								2014
						Weighted-Average								Weighted-Average
Fixed Options		Shares				Exercise Price				Shares				Exercise Price
Outstanding at beginning of year			21,000			$	31.50				31,500			$	30.67
Granted			20,000				30.00				-				-
Forfeited			(21,000	)			31.50				(10,500	)			29.00
Outstanding at end of year			20,000				30.00				21,000				31.50
Options exercisable at year-end			4,500			$	30.00				21,000			$	31.50
Weighted-average fair value of options granted during the year		$	2.20								N/A

The following table summarizes information about fixed stock options outstanding and exercisable as of December 31, 2015:

 

December 31,2015

Options Outstanding and Exercisable

Weighted-Average

Number

Remaining

Number

Exercise Price

Outstanding

Contractual Life

Exercisable

Exercise Price

$

30.00

20,000

10 years

4,500

$

30.00

 

The fair value of each option award in 2015 was $2.20, as estimated on the date of grant using the Black-Scholes Option Pricing Model using the following assumptions: 10 years expected term; 2.59% expected dividend yield; 0.00% expected forfeiture rate; 20.13% expected volatility; and a 2.27% risk-free interest rate.

 

These assumptions can be highly subjective and therefore, the Company uses historical data within the valuation model. The expected term of options granted is derived from actual option exercise. The expected dividend yield is based on the current annual dividend on a current stock price. The expected volatility is derived from historical returns of the daily closing stock price over the year ended December 31, 2015. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for periods that coincide with the contractual life of the option.

 

As of December 31, 2015, the remaining compensation costs related to stock options granted under the Plans amounted to $34,000. There were 4,500 shares that vested during the year ended December 31, 2015. Unearned compensation costs relating to the 15,500 unvested shares at December 31, 2015 will be recognized over a weighted average period of 1.7 years. Compensation expense related to the stock options amounted to $10,000 in 2015 and $0 in 2014.

 

 

NOTE 20 - EARNINGS PER SHARE

 

Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income available to common stockholders are as follows:

 

		2015				2014
		(In Thousands, Except Share Data)
Basic earnings per share computation:
Net income		$	1,409			$	805
Preferred stock net accretion			(12	)			(12	)
Cumulative preferred stock dividends			(96	)			(90	)
Net income available to common shareholders		$	1,301			$	703
Weighted average shares outstanding, basic			953,539				880,618
Basic earnings per share		$	1.37			$	0.80
Diluted earnings per share computation:
Net income		$	1,409			$	805
Preferred stock net accretion			(12	)			(12	)
Cumulative preferred stock dividends			(96	)			(90	)
Net income available to common shareholders		$	1,301			$	703
Weighted average shares outstanding, before dilution			953,539				880,618
Dilutive potential shares, stock options and awards			3,075				4,415
Weighted average shares outstanding, assuming dilution			956,614				885,033
Diluted earnings per share		$	1.36			$	0.79

  

Anti-dilutive equity-based awards totaling 20,000 shares and 21,000 shares for the years ended December 31, 2015 and 2014, respectively, have been excluded from the calculation of diluted EPS.

 

NOTE 21 – COMMON STOCK OFFERING

  

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

 

 

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

 

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

   

NOTE 22 - PREFERRED STOCK

 

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 Small Business Lending Fund program (the “SBLF”). The SBLF Preferred Stock was purchased for $9 million, 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. The dividend rate on the SBLF Preferred Stock was 1% in 2015 and 2014. On December 18, 2015, the Company redeemed all of the 9,000 outstanding shares of the SBLF Preferred Stock 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 SBLF Preferred Stock terminated the Company’s participation in the SBLF program.

 

NOTE 23- LEGAL CONTINGENCIES

 

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

 

NOTE 24 - RECLASSIFICATION

 

Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation.

 

NOTE 25 - SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

 

On February 17, 2016, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.14 per share on the Company’s common stock. The dividend is payable on March 11, 2016 to shareholders of record as of February 29, 2016.

 

 

NOTE 26 – PARENT COMPANY INFORMATION

 

Financial information for the parent company only is presented in the following tables:

  

Condensed balance sheets

 

(in thousands)
		December 31,
Assets		2015				2014
Cash and due from banks		$	557			$	40
Investment in subsidiaries			36,045				29,095
Due from subsidiary			164				127
Other assets			321				210
Total Assets		$	37,087			$	29,472
Liabilities and stockholders' equity
Long-term subordinated debt		$	7,230			$	-
Other liabilities			115				-
Total liabilities			7,345				-
Total stockholders' equity			29,742				29,472
Total Liabilities and stockholders' equity		$	37,087			$	29,472

  

Condensed statements of income

  

(in thousands)		Years ended December 31,
		2015				2014
Operating Income
Dividend income from operating subsidiary		$	525			$	680
Total operating income			525				680
Operating Expense
Interest on long-term debt			61				-
Salaries and employee benefits			156				88
Forms and supplies			-				6
Professional fees			79				38
Directors’ fees			33				58
Correspondent charges			63				40
Other expense			29				13
Total operating expense			421				243
Income before tax benefit and equity in undistributed earnings of subsidiaries			104				437
Income tax benefit			143				83
Equity in undistributed earnings of subsidiaries			1,162				285
Net income		$	1,409			$	805

 

 

 

Condensed statements of cash flows

  

(in thousands)		Years ended December 31,
		2015				2014
Cash flows from operating activities:
Net income		$	1,409			$	805
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiary			(1,162	)			(285	)
Stock based compensation			188				145
Other, net			(32	)			(105	)
Amortization of long-term debt issuance costs			7				-
Net cash provided by operating activities			410				560
Cash flows from investing activity:
Investment in operating subsidiary			(6,000	)			-
Net cash used in investing activity			(6,000	)			-
Cash flows from financing activities:
Proceeds from issuance of common stock			8,542				39
Proceeds from the issuance of subordinated debt			7,223				-
Redemption of preferred stock			(9,000	)			-
Excess tax benefit related to stock based compensation			-				1
Dividends paid - preferred stock			(96	)			(90	)
Dividends paid - common stock			(562	)			(492	)
Net cash provided by (used in) financing activities			6,107				(542	)
Net increase in cash and cash equivalents			517				18
Cash and cash equivalents at beginning of year			40				22
Cash and cash equivalents at end of year		$	557			$	40

 

F-47