UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2016

or

[  ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act OF 1934a

 

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)		(I.R.S. Employer Identification No.)

                  

86 Hopmeadow Street, P.O. Box 248, Simsbury, CT		06070
(Address of Principal Executive Offices)		(Zip Code)

 

(860) 408-5493

---

(Registrant's Telephone Number, Including Area Code)

 

---

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]     No [ ]

 

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

 

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [X]
(Do not check if a smaller reporting company)

                   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]     No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of October 31, 2016, the registrant had 1,360,721 shares of its Common Stock, no par value per share, outstanding.

 

 

table of contents

 

SBT Bancorp, Inc. and Subsidiary

 

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	7 - 8
	Notes to Condensed Consolidated Financial Statements – (unaudited)	9 - 24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 - 35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
SIGNATURES		39
EXHIBIT INDEX		40

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

 

		9/30/16				12/31/15
		(Unaudited)
ASSETS
Cash and due from banks		$	12,994			$	8,933
Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank			6,418				19,795
Money market mutual funds			45				13
Federal funds sold			100				149
Cash and cash equivalents			19,557				28,890
Certificates of deposit			1,500				1,250
Investments in available-for-sale securities, at fair value			63,611				71,517
Federal Home Loan Bank stock, at cost			1,977				2,047
Loans held-for-sale			8,238				2,167
Loans			396,280				326,723
Less: allowance for loan losses			3,631				3,028
Loans, net			392,649				323,695
Premises and equipment, net			1,988				1,420
Accrued interest receivable			1,232				1,143
Bank owned life insurance			9,066				7,389
Other assets			5,120				5,262
Total assets		$	504,938			$	444,780
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits		$	128,000			$	135,580
Savings and NOW deposits			239,557				179,775
Time deposits			65,108				57,287
Total deposits			432,665				372,642
Securities sold under agreements to repurchase			3,193				1,915
Federal Home Loan Bank advances			29,000				31,500
Long-term subordinated debt			7,245				7,230
Other liabilities			1,854				1,751
Total liabilities			473,957				415,038
Stockholders' equity:
Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 1,361,135 shares and 1,360,721 shares, respectively, at September 30, 2016 and 1,360,591 shares and 1,360,177 shares, respectively, at December 31, 2015			18,887				18,856
Retained earnings			11,609				11,288
Treasury stock, 414 shares			(7	)			(7	)
Unearned compensation-restricted stock awards			(95	)			(206	)
Accumulated other comprehensive income (loss)			587				(189	)
Total stockholders' equity			30,981				29,742
Total liabilities and stockholders' equity		$	504,938			$	444,780

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for share and per share amounts)

 

		For the three months ended								For the nine months ended
		9/30/2016				9/30/2015				9/30/2016				9/30/2015
Interest and dividend income:
Interest and fees on loans		$	3,433			$	2,748			$	9,814			$	8,057
Investment securities			359				393				1,130				1,235
Interest-bearing deposits			26				14				65				26
Total interest and dividend income			3,818				3,155				11,009				9,318
Interest expense:
Interest on deposits			271				192				619				566
Interest on securities sold under agreements to repurchase			2				1				5				3
Interest on long-term subordinated debt			137				-				379				-
Interest on Federal Home Loan Bank advances			36				8				134				35
Total interest expense			446				201				1,137				604
Net interest and dividend income			3,372				2,954				9,872				8,714
Provision for loan losses			305				65				606				145
Net interest and dividend income after provision for loan losses			3,067				2,889				9,266				8,569
Noninterest income (loss):
Service charges on deposit accounts			98				98				278				303
Gain on sales of available-for-sale securities,net			23				26				93				93
Other service charges and fees			293				208				733				561
Increase in cash surrender value of life insurance policies			64				51				177				154
Mortgage loan servicing activities,net			41				48				(316	)			(8	)
Gain on sale of mortgages			607				422				1,214				971
Investment services fees and commissions			53				48				133				159
Other income			11				20				41				44
Total noninterest income			1,190				921				2,353				2,277
Noninterest expense:
Salaries and employee benefits			1,949				1,779				5,700				5,062
Occupancy expense			387				340				1,147				1,046
Equipment expense			111				104				317				306
Advertising and promotions			213				109				508				365
Forms and supplies			86				48				160				125
Professional fees			142				196				345				448
Directors’ fees			53				66				160				180
Correspondent charges			83				67				228				187
FDIC assessment			70				78				223				234
Data processing			219				198				628				531
Internet banking costs			75				52				221				157
Other expenses			338				345				1,001				975
Total noninterest expense			3,726				3,382				10,638				9,616
Income before income taxes			531				428				981				1,230
Income tax provision			100				75				93				185
Net income		$	431			$	353			$	888			$	1,045
Net income available to common stockholders		$	431			$	327			$	888			$	959
Weighted average shares outstanding, basic			1,352,263				890,190				1,350,725				889,473
Earnings per common share, basic		$	0.32			$	0.37			$	0.66			$	1.08
Weighted average shares outstanding, assuming dilution			1,354,362				894,380				1,352,887				892,004
Earnings per common share, assuming dilution		$	0.32			$	0.37			$	0.66			$	1.08
Dividends declared per common share		$	0.14			$	0.14			$	0.42			$	0.42

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (Unaudited)

(Dollars in thousands)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
		(unaudited)								(unaudited)
Net income		$	431			$	353			$	888			$	1,045
Other comprehensive (loss) income net of tax:
Net change in unrealized holding gain/loss on securities available-for-sale			(186	)			672				1,270				381
Reclassification adjustment for realized gains in net income			(23	)			(26	)			(93	)			(93	)
Other comprehensive (loss) income, before tax			(209	)			646				1,177				288
Income tax benefit (expense)			72				(220	)			(401	)			(98	)
Other comprehensive (loss) income, net of tax			(137	)			426				776				190
Comprehensive income		$	294			$	779			$	1,664			$	1,235

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

(Dollars in thousands)

 

		Preferred Stock				Common				Retained				Treasury				Unearned Compensation- Restricted				Accumulated Other Comprehensive
		Series C				Stock				Earnings				Stock				Stock Awards				Income (Loss)				Total
Balance, December 31, 2014		$	8,988			$	10,127			$	10,549			$	(7	)		$	(207	)		$	22			$	29,472
Net income			-				-				1,045				-				-				-				1,045
Other comprehensive income, net of tax			-				-				-				-				-				190				190
Preferred stock dividends-SBLF			-				-				(77	)			-				-				-				(77	)
Preferred stock amortization (accretion)			9				-				(9	)			-				-				-				-
Stock-based compensation			-				-				-				-				130				-				130
Restricted stock awards			-				177				-				-				(177	)			-				-
Common stock issued			-				29				-				-				-				-				29
Dividends declared on common stock ($.42 per share)			-				-				(374	)			-				-				-				(374	)
Balance September 30, 2015		$	8,997			$	10,333			$	11,134			$	(7	)		$	(254	)		$	212			$	30,415
Balance, December 31, 2015		$	-			$	18,856			$	11,288			$	(7	)		$	(206	)		$	(189	)		$	29,742
Net income			-				-				888				-				-				-				888
Other comprehensive income, net of tax			-				-				-				-				-				776				776
Stock-based compensation			-				14				-				-				99				-				113
Forfeited restricted stock awards			-				(12	)			-				-				12				-				-
Common stock issued			-				29				-				-				-				-				29
Dividends declared on common stock ($.42 per share)			-				-				(567	)			-				-				-				(567	)
Balance, September 30, 2016		$	-			$	18,887			$	11,609			$	(7	)		$	(95	)		$	587			$	30,981

     

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		For the nine months ended
		9/30/2016				9/30/2015
Cash flows from operating activities:
Net income		$	888			$	1,045
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of securities, net			279				307
Gain on available-for-sale securities, net of writedowns			(93	)			(93	)
Change in deferred origination costs, net			(107	)			(73	)
Provision for loan losses			606				145
Loans originated for sale			(73,391	)			(63,269	)
Proceeds from sales of loans originated for sale			68,534				62,625
Gain on sales of loans			(1,214	)			(874	)
Gain on sale of other real estate owned			-				(9	)
Depreciation and amortization			284				218
Accretion on impairment of operating lease			-				(26	)
Amortization of long-term subordinated debt issuance costs			22				-
Increase in other assets			(358	)			(352	)
(Increase) decrease in interest receivable			(89	)			50
Decrease in taxes receivable			107				48
Increase in cash surrender value of bank owned life insurance			(177	)			(154	)
Stock-based compensation			113				130
Loss on disposal of fixed assets			11				-
Increase (decrease) in other liabilities			159				(208	)
(Decrease) increase in interest payable			(56	)			69
Net cash used in operating activities			(4,482	)			(421	)
Cash flows from investing activities:
Purchases of certificates of deposit			(250	)			-
Purchases of available-for-sale securities			(6,103	)			(319	)
Proceeds from maturities of available-for-sale securities			13,009				10,767
Proceeds from sales of available-for-sale securities			1,991				1,614
Purchases of Federal Home Loan Bank stock			(1,772	)			(1,273	)
Redemption of Federal Home Loan Bank stock			1,842				-
Loan originations and principal collections, net			(32,580	)			(12,765	)
Loans purchased			(36,880	)			(8,361	)
Recoveries of loans previously charged off			7				9
Proceeds from sale of other real estate owned			-				114
Purchase of bank owned life insurance			(1,500	)			-
Capital expenditures			(871	)			(148	)
Net cash used in investing activities			(63,107	)			(10,362	)

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

(continued)

 

		For the nine months ended
		9/30/2016				9/30/2015
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts			52,202				21,856
Net increase (decrease) in time deposits			7,821				(3,115	)
Net increase (decrease) in securities sold under agreements to repurchase			1,278				(1,199	)
Net change in short-term Federal Home Loan Bank advances			(2,500	)			(12,000	)
Proceeds from issuance of common stock			29				29
Increase in subordinated debt issuance fees			(7	)			-
Dividends paid - preferred stock			-				(77	)
Dividends paid - common stock			(567	)			(373	)
Net cash provided by financing activities			58,256				5,121
Net decrease in cash and cash equivalents			(9,333	)			(5,662	)
Cash and cash equivalents at beginning of period			28,890				19,820
Cash and cash equivalents at end of period		$	19,557			$	14,158
Supplemental disclosures:
Interest paid		$	1,193			$	535
Income taxes paid			200				137

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(Dollars in thousands)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments, consisting of only normal recurring accruals, to present fairly the financial position, results of operations, cash flows and changes in stockholders’ equity of SBT Bancorp, Inc. (the “Company”) for the periods presented. The Company’s only business is its investment in The Simsbury Bank & Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and revenues and expenses for the periods presented. Actual results could differ significantly from those estimates. The interim results of operations are not necessarily indicative of the results to be expected for the full year ending December 31, 2016. 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.

 

While management believes that the disclosures presented are adequate so as to not make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2015.

 

NOTE 2 – STOCK-BASED COMPENSATION

 

At September 30, 2016, the Company maintained a stock-based employee compensation plan. The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements. During the nine months ended September 30, 2016, the Company recognized $113 thousand in stock-based employee compensation expense. During the nine months ended September 30, 2015, the Company recognized $130 thousand in stock-based employee compensation expense.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 on 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 is 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 early adopted this ASU for the year ended December 31, 2015 in relation to its debt issuance costs.

 

In January 2016, the FASB issued 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 that 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 the impact on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “ Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting.” The ASU simplifies several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The new guidance will be effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The Company is currently assessing the impact of adoption of ASU 2016-13.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

NOTE 4 – FAIR VALUE MEASUREMENTS

 

Accounting Standards Codification (ASC) 820-10, “Fair Value Measurement - Overall,” provides a framework for measuring fair value under generally accepted accounting principles.

 

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. 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 nine months ended September 30, 2016.

 

 

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 September 30, 2016 and December 31, 2015.

 

The Company’s investments 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.

Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights using a present value cash flow model. Assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

 

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 at September 30, 2016 and December 31, 2015.

 

Assets Measured at Fair Value on a Recurring Basis

 

						Fair Value Measurements at Reporting Date Using:
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				Level 1				Level 2				Level 3
		(In Thousands)
September 30, 2016:
Debt securities issued by U.S. government corporationsand agencies		$	4,775			$	-			$	4,775			$	-
Obligations of states and municipalities			14,904				-				14,904				-
Mortgage-backed securities			42,900				-				42,900				-
SBA loan pools			1,032				-				1,032				-
Totals		$	63,611			$	-			$	63,611			$	-
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			$	-

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

						Fair Value Measurements at Reporting Date Using:
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				Level 1				Level 2				Level 3
		(In Thousands)
September 30, 2016:
Impaired loans		$	240			$	-			$	-			$	240
		$	240			$	-			$	-			$	240

 

						Fair Value Measurements at Reporting Date Using:
						Quoted Prices in				Significant				Significant
						Active Markets for				Other Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				Level 1				Level 2				Level 3
		(In Thousands)
December 31, 2015:
Impaired loans		$	240			$	-			$	-			$	240
		$	240			$	-			$	-			$	240

   

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

 

		September 30, 2016
		Carrying				Fair Value
		Amount				Level 1				Level 2				Level 3				Total
		(In Thousands)
Financial assets:
Cash and cash equivalents		$	19,557			$	19,557			$	-			$	-			$	19,557
Certificates of deposit			1,500				1,500				-				-				1,500
Available-for-sale securities			63,611				-				63,611				-				63,611
Federal Home Loan Bank stock			1,977				1,977				-				-				1,977
Loans held-for-sale			8,238				-				-				8,238				8,238
Loans, net			392,649				-				-				392,879				392,879
Mortgage servicing rights			1,998				-				-				2,296				2,296
Accrued interest receivable			1,232				1,232				-				-				1,232
Bank owned life insurance			9,066				-				9,066				-				9,066
Financial liabilities:
Deposits			432,665				-				432,052				-				432,052
Securities sold under agreements to repurchase			3,193				-				3,193				-				3,193
Federal Home Loan Bank advances			29,000				-				29,000				-				29,000
Long-term subordinated debt			7,245				-				7,628				-				7,628

 

 

		December 31, 2015
		Carrying
		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
Mortgage servicing rights			2,039				-				-				2,695				2,695
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
Federal Home Loan Bank advances			31,500				-				31,500				-				31,500
Long-term subordinated debt			7,230				-				7,339				-				7,339

 

NOTE 5 – EARNINGS PER COMMON SHARE

 

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

The following information was used in the computation of EPS on both a basic and diluted basis for the three and nine months ended September 30, 2016 and 2015:

 

		For the three months ended
		9/30/16				9/30/15
		(In Thousands, Except Share and Per Share Data)
Basic earnings per share computation:
Net income		$	431			$	353
Preferred stock net accretion			-				(3	)
Cumulative preferred stock dividends			-				(23	)
Net income available to common stockholders		$	431			$	327
Weighted average shares outstanding, basic			1,352,263				890,190
Basic earnings per share		$	0.32			$	0.37
Diluted earnings per share computation:
Net income		$	431			$	353
Preferred stock net accretion			-				(3	)
Cumulative preferred stock dividends			-				(23	)
Net income available to common stockholders		$	431			$	327
Weighted average shares outstanding, before dilution			1,352,263				890,190
Dilutive potential shares			2,099				4,190
Weighted average shares outstanding, assuming dilution			1,354,362				894,380
Diluted earnings per share		$	0.32			$	0.37

 

 

 

		For the nine months ended
		9/30/16				9/30/15
		(In Thousands, Except Share and Per Share Data)
Basic earnings per share computation:
Net income		$	888			$	1,045
Preferred stock net accretion			-				(9	)
Cumulative preferred stock dividends			-				(77	)
Net income available to common shareholders		$	888			$	959
Weighted average shares outstanding, basic			1,350,725				889,473
Basic earnings per share		$	0.66			$	1.08
Diluted earnings per share computation:
Net income		$	888			$	1,045
Preferred stock net accretion			-				(9	)
Cumulative preferred stock dividends			-				(77	)
Net income available to common shareholders		$	888			$	959
Weighted average shares outstanding, before dilution			1,350,725				889,473
Dilutive potential shares			2,162				2,531
Weighted average shares outstanding, assuming dilution			1,352,887				892,004
Diluted earnings per share		$	0.66			$	1.08

 

 

 

NOTE 6 – INVESTMENT SECURITIES

 

The following tables summarize the amounts and distribution of the Company’s investment securities held as of September 30, 2016 and December 31, 2015:

 

		INVESTMENT PORTFOLIO
		(Dollars In Thousands)
		September 30, 2016
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Yield
AVAILABLE-FOR-SALE SECURITIES
Debt securities issued by U.S. government corporations and agencies
Due within one year		$	1,000			$	3				-				1,003				1.00	%
Due after one to five years			3,750				22				-				3,772				1.21	%
Total U.S. government corporations and agencies			4,750				25				-				4,775				1.17	%
Obligations of states and municipalities
Due within one year			510				14				-				524				4.15	%
Due after one to five years			1,953				56				-				2,009				3.61	%
Due after five to ten years			4,025				109				-				4,134				2.67	%
Due after ten to fifteen years			7,205				271				-				7,476				2.75	%
Due beyond fifteen years			731				30				-				761				3.14	%
Total obligations of states and municipalities			14,424				480				-				14,904				2.91	%
Mortgage-backed securities
Due after one to five years			594				11				2				603				2.63	%
Due after five to ten years			2,090				37				-				2,127				1.92	%
Due after ten to fifteen years			23,306				195				4				23,497				1.71	%
Due beyond fifteen years			16,553				158				38				16,673				2.04	%
Total mortgage-backed securities			42,543				401				44				42,900				1.86	%
SBA loan pools
Due after five to ten years			1,004				28				-				1,032				3.10	%
Total SBA loan pools			1,004				28				-				1,032				3.10	%
Total available-for-sale securities		$	62,721			$	934			$	44			$	63,611				2.34	%

 

		INVESTMENT PORTFOLIO
		(Dollars In Thousands)
		December 31,2015
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Yield
AVAILABLE-FOR-SALE SECURITIES
Debt securities issued by U.S. government corporations and agencies
Due after one to five years		$	10,499			$	6			$	42			$	10,463				1.33	%
Total obligations of states and municipalities			10,499				6				42				10,463				1.33	%
Obligations of states and municipalities
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 obligations of states and municipalities			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	%

 

 

 

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

 

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In Thousands)
September 30, 2016:
Mortgage-backed securities		$	-			$	-			$	3,767			$	11			$	3,767			$	11
Total temporarily impaired securities			-				-				3,767				11				3,767				11
Other-than-temporarily impaired securities:
Mortgage-backed securities			10				-				175				33				185				33
Total temporarily impaired and other-than-temporarily impaired securities		$	10			$	-			$	3,942			$	44			$	3,952			$	44
December 31, 2015:
Debt securities issued by U.S. Government corporations and agencies		$	5,975			$	24			$	2,482			$	18			$	8,457			$	42
SBA loan pools			760				8				-				-				760				8
Obligations of states and municipalities			702				8				1,997				28				2,699				36
Mortgage-backed securities			22,125				255				17,463				461				39,588				716
Total temporarily impaired securities			29,562				295				21,942				507				51,504				802
Other-than-temporarily impaired securities:
Mortgage-backed securities			15				-				219				26				234				26
Total temporarily impaired and other- than-temporarily impaired securities		$	29,577			$	295			$	22,161			$	533			$	51,738			$	828

 

The investments in the Company’s investment portfolio that were temporarily impaired as of September 30, 2016 consisted entirely of mortgage-backed securities. The Company’s management anticipates that the fair value of securities that are currently temporarily impaired will recover to cost basis. The gross unrealized losses are primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. As the Company has the ability and intent to hold securities for the foreseeable future, and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, no declines are deemed to be other than temporary, unless otherwise noted above.

 

During the three months ended September 30, 2016, there were proceeds of $1.0 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $25 thousand. The tax expense applicable to these gross realized gains amounted to $9 thousand.

 

During the three months ended September 30, 2015, there were proceeds of $497 thousand from sales of available-for-sale securities. Gross realized gains on these sales amounted to $30 thousand. The tax expense applicable to these gross realized gains amounted to $10 thousand.

 

During the nine months ended September 30, 2016, there were proceeds of $2.0 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $94 thousand. The tax expense applicable to these gross realized gains amounted to $32 thousand.

 

During the nine months ended September 30, 2015, there were proceeds of $1.6 million from sales of available-for-sale securities. Gross realized gains on these sales amounted to $99 thousand. The tax expense applicable to these gross realized gains amounted to $34 thousand.

 

 

NOTE 7 – LOAN INFORMATION

 

Loans consisted of the following as of September 30, 2016 and December 31, 2015:

 

		September 30, 2016				December 31, 2015
		(In Thousands)
Real estate - residential		$	136,657			$	138,628
Real estate - commercial			82,594				62,118
Real estate- municipal			8,566				8,629
Real estate - construction and land development			16,610				10,070
Home equity			47,774				47,681
Commercial and industrial			59,928				35,305
Municipal			4,578				3,610
Consumer			38,134				19,350
Total loans			394,841				325,391
Allowance for loan losses			(3,631	)			(3,028	)
Deferred costs, net			1,439				1,332
Net loans		$	392,649			$	323,695

 

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, the 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, home equity, 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 the nine months ended September 30, 2016.

 

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% 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 these segments.

 

Commercial real estate: Loans in this segment are primarily owner-occupied properties throughout the Farmington Valley in Connecticut. Management continually monitors the financial performance of these loans and the related operating entities.   

 

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

 

 

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

 

Consumer loans: Loans in this segment are made for the purpose of financing automobiles, various types of consumer goods and other personal purposes. Most of the Bank’s consumer loans are secured by personal property purchased with the proceeds of such consumer loans. The Bank purchased approximately $9.5 million in refinanced student loans during the quarter ended June 30, 2016 and $9.3 million in refinanced student loans during the quarter ended September 30, 2016 that are classified as consumer loans.

 

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 may periodically 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.

 

 

 

The following tables present the allowance for loan losses by portfolio segment for the nine months ended September 30, 2016 and September 30, 2015:

 

		Real Estate:
										Construction and								Commercial
		Residential				Commercial				Land Development				Home Equity				& Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2016:
Allowance for loan losses:
Beginning balance		$	1,065			$	706			$	324			$	331			$	398			$	157			$	47			$	3,028
Charge-offs			-				-				-				-				-				(10	)			-				(10	)
Recoveries			1				-				-				-				2				4				-				7
Provision (benefit)			3				241				(25	)			2				280				145				(40	)			606
Ending balance		$	1,069			$	947			$	299			$	333			$	680			$	296			$	7			$	3,631

 

		Real Estate:
										Construction and								Commercial
		Residential				Commercial				Land Development				Home Equity				& Industrial				Consumer				Unallocated				Total
		(In thousands)
September 30, 2015:
Allowance for loan losses:
Beginning balance		$	1,085			$	738			$	249			$	324			$	227			$	134			$	4			$	2,761
Charge-offs			-				-				-				-				-				(18	)			-				(18	)
Recoveries			-				-				-				-				-				9				-				9
(Benefit) provision			(15	)			(66	)			119				5				98				3				1				145
Ending balance		$	1,070			$	672			$	368			$	329			$	325			$	128			$	5			$	2,897

 

The following tables set forth information regarding loans and the allowance for loan losses by portfolio segment as of September 30, 2016 and December 31, 2015:

 

		Real Estate:
										Construction
										and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Unallocated				Total
		(In Thousands)
September 30, 2016:
Allowance for loan losses
Ending balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	2			$	-			$	-			$	2
Ending balance: Collectively evaluated for impairment			1,069				947				299				333				678				296				7				3,629
Total allowance for loan losses ending balance		$	1,069			$	947			$	299			$	333			$	680			$	296			$	7			$	3,631
Loans:
Ending balance: Individually evaluated for impairment		$	-			$	1,017			$	222			$	-				300			$	-			$	-			$	1,539
Ending balance:
Collectively evaluated for impairment			136,657				90,143				16,388				47,774				64,206				38,134				-				393,302
Total loans ending balance		$	136,657			$	91,160			$	16,610			$	47,774			$	64,506			$	38,134			$	-			$	394,841

 

 

		Real Estate:
										Construction and								Commercial
		Residential				Commercial				Land Development				Home Equity				& Industrial				Consumer				Unallocated				Total
		(In thousands)
December 31, 2015:
Allowance for loan losses:
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

 

The following tables present the Company’s loans by risk rating as of September 30, 2016 and December 31, 2015:

 

		Real Estate
										Construction
										and Land								Commercial
		Residential				Commercial				Development				Home Equity				and Industrial				Consumer				Total
		(In Thousands)
September 30, 2016:
Grade:
Pass		$	-			$	83,109			$	16,388			$	-			$	62,642			$	-			$	162,139
Special mention			-				6,338				222				-				593				-				7,153
Substandard			1,268				1,713				-				222				1,271				-				4,474
Loans not formally rated			135,389				-				-				47,552				-				38,134				221,075
Total		$	136,657			$	91,160			$	16,610			$	47,774			$	64,506			$	38,134			$	394,841
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

 

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 “Pass” is defined as risk rating 1 through 3.5. 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 that 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 and have 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 with loan obligations which may be adequately protected by the present debt service capacity and tangible net worth of such borrowers, 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 non-accrual status if the conditions described above are generally met.

 

Risk Rating 6 (Doubtful) – This risk rating is assigned to borrowers or the portion of borrowers’ loans with which the Company is no longer certain of such loans’ collectability. A specific allocation is assigned to such portion of the loans.

 

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loans that have been charged off. “Loss” does not imply that the loan, or any portion thereof, will never be repaid, 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 September 30, 2016, $221.1 million of the total residential, home equity and consumer loan portfolio of $222.6 million was not formally rated. As of December 31, 2015, $204.7 million of the total residential, home equity and consumer loan portfolio of $205.7 million was not formally rated. The performance of these loans is measured by delinquency status. The Bank underwrites first mortgage loans in accordance with FHLMC and FNMA guidelines. These guidelines provide for specific requirements with regard to documentation, loan to value and debt to income ratios. Guidelines for home equity loans and lines place a maximum loan to value of 80% on these loans and lines and the Bank requires full underwriting disclosure documentation for these loans. These underwriting factors have produced a loan portfolio with low delinquencies. Total delinquent loans, consisting of loans past due 60 days or more, as of September 30, 2016 were 0.82% of total loans outstanding compared to 1.21% on December 31, 2015. The Company’s allowance for loan losses at September 30, 2016 was 0.92% of total loans compared to 0.93% as of December 31, 2015.

 

An age analysis of past-due loans, segregated by class of loans, as of September 30, 2016 and December 31, 2015 is as follows:

 

																										90 Days
										90 Days																or More
										or More				Total				Total				Total				Past Due				Nonaccrual
		30-59 Days				60-89 Days				Past Due				Past Due				Current				Loans				and Accruing				Loans
		(In Thousands)
September 30, 2016:
Real estate:
Residential		$	-			$	382			$	1,132			$	1,514			$	135,143			$	136,657			$	-			$	1,268
Commercial			-				-				1,017				1,017				81,577				82,594				-				1,017
Municipal			-				-				-				-				8,566				8,566				-				-
Construction and land development			-				-				222				222				16,388				16,610				-				222
Home equity			100				80				71				251				47,523				47,774				-				222
Commercial and industrial			40				-				300				340				59,588				59,928				-				300
Municipal			-				-				-				-				4,578				4,578				-				-
Consumer			88				16				30				134				38,000				38,134				-				31
Total		$	228			$	478			$	2,772			$	3,478			$	391,363			$	394,841			$	-			$	3,060
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

 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the nine months ended September 30, 2016 and the year ended December 31, 2015:

 

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
		(In Thousands)
September 30, 2016:
With no related allowance recorded:
Real Estate:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			1,017				1,017				-				1,082				-
Construction and land development			222				222				-				222				4
Home equity			-				-				-				-				-
Commercial and industrial			-				-				-				-				-
Total impaired with no related allowance		$	1,239			$	1,239			$	-			$	1,304			$	4
With an allowance recorded:
Real Estate:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			-				-				-				-				-
Construction and land development			-				-				-				-				-
Home equity			-				-				-				-				-
Commercial and industrial			300				300				2				332				-
Total impaired with an allowance recorded		$	300			$	300			$	2			$	332			$	-
Total
Real Estate:
Residential		$	-			$	-			$	-			$	-			$	-
Commercial			1,017				1,017				-				1,082				-
Construction and land development			222				222				-				222				4
Home equity			-				-				-				-				-
Commercial and industrial			300				300				2				332				-
Total impaired loans		$	1,539			$	1,539			$	2			$	1,636			$	4

 

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:
Real Estate:
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

 

 

The Bank’s TDRs are determined by management. TDRs may include all accrued interest, late charges, title and recording fees, and attorneys’ fees being added back to the pre-modification balance. In addition, rates and terms of the loans may have changed.

 

There was one loan modified as a TDR during the quarter. The loan, with a principal balance of $179 thousand was extended to reduce the risk of the borrower defaulting on outstanding loans held by the borrower’s business interests.

 

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 thousand at 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 thousand specific allowance was required. The loan was in non-accrual status at September 30, 2016 and December 31, 2015.

 

As of September 30, 2016, there were no foreclosed residential real estate properties held by the Company. There were two consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure according to local requirements of the applicable jurisdiction at September 30, 2016. The aggregate principal balance of the two loans was $151 thousand at September 30, 2016.

 

The balance of mortgage servicing rights included in other assets at September 30, 2016 and December 31, 2015 was $1.99 million and $2.04 million, respectively. Mortgage servicing rights of $743 thousand and $781 thousand were capitalized for the nine months ended September 30, 2016 and September 30, 2015, respectively. Amortization of mortgage servicing rights was $639 thousand and $431 thousand for the nine months ended September 30, 2016 and September 30, 2015, respectively. The valuation allowance of the mortgage servicing asset was $165 thousand and $19 thousand as of September 30, 2016 and September 30, 2015, respectively. The fair value of these rights was $2.3 million and $2.7 million as of September 30, 2016 and December 31, 2015, respectively.

 

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 $284.7 million and $234.9 million as of September 30, 2016 and December 31, 2015, respectively.

 

NOTE 8 – 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 the U.S. Treasury and other U.S. government sponsored enterprises, corporations and agencies and states and municipalities. The securities were held in safekeeping by First Niagara Bank, N.A., 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 generally mature within three months from date of issue.

 

 

NOTE 9 – OTHER COMPREHENSIVE (LOSS) INCOME 

 

The following tables present the reclassification disclosure for the three and nine months ended September 30, 2016 and 2015:

 

Three months ended:		9/30/2016				9/30/2015
		( In Thousands)
Net change in unrealized holding gain/loss on securities available-for-sale		$	(186	)		$	672
Reclassification adjustment for realized gains in net income (1)			(23	)			(26	)
Other comprehensive (loss) income before tax			(209	)			646
Income tax benefit (expense)			72				(220	)
Other comprehensive (loss) income, net of tax		$	(137	)		$	426

 

 

Nine months ended:		9/30/2016				9/30/2015
		( In Thousands)
Net change in unrealized holding gain/loss on securities available-for-sale		$	1,270			$	381
Reclassification adjustment for realized gains in net income (1)			(93	)			(93	)
Other comprehensive income before tax			1,177				288
Income tax expense			(401	)			(98	)
Other comprehensive income, net of tax		$	776			$	190

 

(1) Reclassification adjustments are comprised of realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in gain on sales of available-for-sale securities, net, the tax expense amount is included in income tax provision and the after tax amount is included in net income.

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

 

Certain statements contained in this Quarterly Report on Form 10-Q 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 markets 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;

 

●

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 (including the impact of the FASB’s recent issuance of ASU 2016-13, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments) 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.

 

Because of these and a wide variety of other uncertainties, many of which are beyond the Company’s control, the Company’s actual future results may be materially different from the results indicated by these forward-looking statements.

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a better understanding of the significant changes and trends related to the Company’s financial condition, results of operations, liquidity and capital resources. The discussion should be read in conjunction with the consolidated financial statements of the Company for the nine months ended September 30, 2016. All adjustments which, in the opinion of management, are necessary in order to make the consolidated financial statements for the nine months ended September 30, 2016 not misleading have been made.

 

The Company’s only business is its investment in The Simsbury Bank & Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. The Bank offers a full range of banking services, including commercial loans, real estate term loans, construction loans, SBA loans and a variety of consumer loans; checking, savings, certificates of deposit and money market deposit accounts; and safe deposit and other customary non-deposit banking services to consumers and businesses in north central Connecticut. Through a network of loan originators, the Bank also offers residential 1-4 family mortgages throughout Connecticut.

 

The Bank’s main office and its corporate offices are located in the town of Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon, Bloomfield, and West Hartford Connecticut. The Bank also maintains a mortgage center in Glastonbury, Connecticut. Services to the Bank’s customers are also provided through SBT Online Internet banking. The Bank’s customer base consists primarily of individual customers and small businesses in the surrounding towns located in north central Connecticut. In April 2016, the Bank opened a full service branch at 1232 Farmington Avenue in West Hartford, Connecticut. In May 2016, the Bank closed its mortgage centers in Warwick, Rhode Island, Mansfield, Massachusetts, and Mattapoisett, Massachusetts.

 

The Bank offers investment products and services to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, and its affiliation with the securities broker/dealer, LPL Financial LLC.

 

Disclosure of the Company’s significant accounting policies is included in Note 2 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management. One of these significant policies relates to the provision for loan losses. See the heading “Provision for Loan Losses” below for further details about the Bank’s current provision.

 

Overview

 

For the nine months ended September 30, 2016, net income amounted to $888 thousand, or $0.66 per basic and diluted share. This compares to net income of $1.05 million, or $1.08 per diluted share, for the nine months ended September 30, 2015. Total assets as of September 30, 2016 were $505 million compared to $445 million as of December 31, 2015.

 

Key financial highlights for the nine months ended September 30, 2016 compared to December 31, 2015 include a 13.5% increase in asset growth or $60.2 million, and a net loan increase of 21.3% or $69.0 million. Deposits increased by 16.1% or $60.0 million from December 31, 2015 due to a $59.8 million increase in savings and NOW accounts, and a $7.8 million increase in time deposits which were partially offset by a $7.6 million decrease in demand deposits.

 

At September 30, 2016, 29% of total deposits were in non-interest bearing demand accounts, 56% were in low-cost savings and NOW accounts, and 15% were in time deposits. At September 30, 2016, the Company had approximately 22,000 deposit accounts compared to approximately 21,000 deposit accounts at December 31, 2015.

 

At September 30, 2016, total gross loans were $394.8 million compared to $325.4 million as of December 31, 2015. During this time, residential loans remained relatively unchanged while commercial loans grew by $50.7 million or 42.9% and consumer loans, due primarily to the purchase of a $17.2 million portfolio of refinanced student loans, grew by $18.8 million or 97.1%.

 

For the three months ended September 30, 2016, the Company’s earnings per basic and diluted share was $0.32, a decrease of $0.05 compared to $0.37 for the three months ended September 30, 2015. Non-accrual loans decreased to $3.1 million as of September 30, 2016, which were 0.78% of total loans as of such date, from $4.1 million or 1.3% of total loans at December 31, 2015. Total delinquent loans decreased to 0.82% of total loans outstanding as of September 30, 2016 from 1.08% of total loans outstanding as of December 31, 2015. The Company’s allowance for loan losses was 0.92% of total loans at September 30, 2016.

 

 

Total revenues, consisting of net interest and dividend income plus noninterest income, were $4.6 million in the third quarter of 2016 compared to $3.9 million a year ago due primarily to an increase in interest and fee income on loans of $685 thousand, an increase in gain on sale of mortgages of $185 thousand, which werepartially offset by an increase in interest expense on subordinated debt of $137 thousand.

 

The Company’s year-to-date 2016 taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 2.98% as of September 30, 2016 compared to 3.01% for the comparable 2015 period. The Company’s yield on earning assets increased 10 basis points to 3.32% while the cost of funds increased 19 basis points to 0.48% for the nine months ended September 30, 2016 compared to the same period of 2015. The increase in cost of funds was primarily related to the subordinated debt issued by the Company in the fourth quarter of 2015.

 

Total noninterest expenses for the third quarter of 2016 was $3.7 million, an increase of $344 thousand from the corresponding 2015 period primarily due to increases of $170 thousand in salaries and employee benefits, $104 thousand in advertising and promotions, $47 thousand in occupancy expenses, $38 thousand in forms and supplies, and $23 thousand in internet banking costs. These increases, mostly attributed to the new West Hartford branch, were partially offset by decreases in professional fees of $54 thousand.

 

Capital levels for the Bank on September 30, 2016 were above those required to meet the regulatory “well-capitalized” designation.

 

		Capital Ratios
		September 30, 2016
		The Simsbury Bank				Regulatory Standard
		and Trust Company, Inc.				for Well-Capitalized
Tier 1 Leverage Capital Ratio			7.63%				5.00%
Tier 1 Risk-Based Capital Ratio			10.70%				8.00%
Common Equity Tier 1 Risk-Based Capital Ratio			10.70%				6.50%
Total Risk-Based Capital Ratio			11.76%				10.00%

 

At September 30, 2016, the capital ratios of the Bank exceeded the minimum Basel III capital requirements. Management believes that the Bank’s capital levels will remain characterized as “well-capitalized” under the Basel III capital rules. It is management’s goal to monitor and maintain adequate capital levels to continue to support asset growth and the expansion of the Bank and to continue its status as a well capitalized institution. The Bank’s capital requirements are fully described in the “Capital Requirements” section under the heading “Financial Condition” in this Form 10-Q.

 

Results of Operations

 

Net Interest Income and Net Interest Margin

 

The Company’s earnings depend largely upon the difference between the income received from its loan portfolio and investment securities and the interest paid on its liabilities, including interest paid on deposits and borrowings. This difference is “net interest income.” The net interest income, when expressed as a percentage of average total interest-earning assets, is referred to as the net yield on interest-earning assets. The Company’s net interest income is affected by the change in the level and the mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. The Company’s net yield on interest-earning assets is also affected by changes in yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on the Company’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 Company’s control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the Federal Reserve Bank.

 

On a tax equivalent basis, net interest and dividend income before provision for loan losses was $3.4 million for the quarter ended September 30, 2016 compared to $3.0 million for the quarter ended September 30, 2015. The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, decreased to 2.90% for the quarter ended September 30, 2016 from 2.97% for the quarter ended September 30, 2015. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 2.74% for the quarter ended September 30, 2016 from 2.88% for the quarter ended September 30, 2015. The Company’s cost of deposits and borrowings increased to 0.53% for the quarter ended September 30, 2016 from 0.28% for the quarter ended September 30, 2015.

 

 

On a tax equivalent basis, net interest and dividend income before provision for loan losses was $10.1 million for the nine months ended September 30, 2016 compared to $8.9 million for the nine months ended September 30, 2015. The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, decreased to 2.98% for the nine months ended September 30, 2016 from 3.01% for the nine months ended September 30, 2015. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, decreased to 2.84% for the nine months ended September 30, 2016 from 2.93% for the nine months ended September 30, 2015. The Company’s cost of deposits and borrowings increased to 0.48% for the nine months ended September 30, 2016 from 0.29% for the first nine months ended September 30, 2015.

 

The following tables summarize the Company’s daily average balances, interest, average yields and net interest margin on a tax-equivalent basis:

 

		Three months ended September 30,
		2016												2015
		Average												Average
(In thousands)		Balance				Interest				Yield				Balance				Interest				Yield
Interest earning assets:
Fed funds sold & overnight Dep incl Non-Int Bearing FRB		$	15,193											$	22,292
Non-Interest Bearing FRB			(1,000	)											(1,000	)
Federal funds sold & overnight deposits			14,193			$	20				0.56	%			21,292			$	14				0.26	%
Certificates of deposit			1,500				6				1.60	%			-				-				-
Investments			69,834				394				2.26	%			77,846				432				2.22	%
Mortgage loans			145,467				1,235				3.40	%			144,664				1,271				3.51	%
Commercial loans			159,138				1,635				4.11	%			100,914				1,048				4.15	%
Consumer loans			84,774				598				2.82	%			62,550				456				2.92	%
Total loans			389,379				3,468				3.56	%			308,128				2,775				3.60	%
Total interest-earning assets		$	474,906			$	3,888				3.27	%		$	407,266			$	3,221				3.16	%
Interest on interest-bearing liabilities:
NOW deposits		$	44,362				9				0.08	%		$	38,108				8				0.08	%
Savings deposits			192,760				125				0.26	%			170,034				82				0.19	%
Certificates of deposit			64,199				137				0.85	%			57,787				102				0.71	%
Total deposits			301,321				271				0.36	%			265,929				192				0.29	%
Securities sold under agreements to repurchase			3,147				2				0.25	%			3,202				1				0.12	%
Subordinated debt			7,240				137				7.57	%			-				-				-
FHLB advances			26,772				36				0.54	%			14,099				8				0.23	%
Total interest-bearing liabilities		$	338,480			$	446				0.53	%		$	283,230			$	201				0.28	%
Tax-equivalent net interest income						$	3,442											$	3,020
Less: tax equivalent adjustments							(70	)											(66	)
Net Interest Income						$	3,372											$	2,954
Net Interest Spread											2.74	%											2.88	%
Net Interest Margin											2.90	%											2.97	%
(Taxable Equivalent Net Interest Margin)

 

 

 

 

		Nine months ended September 30,
		2016												2015
		Average												Average
(In thousands)		Balance				Interest				Yield				Balance				Interest				Yield
Interest earning assets:
Fed funds sold & overnight Dep incl Non-Int Bearing FRB		$	12,373											$	13,548
Non-Interest Bearing FRB			(1,000	)											(1,000	)
Federal funds sold & overnight deposits			11,373			$	49				0.57	%			12,548			$	26				0.28	%
Certificates of deposit			1,446				16				1.48	%			-				-				-
Investments			72,916				1,239				2.27	%			81,196				1,358				2.23	%
Mortgage loans			143,733				3,723				3.45	%			142,990				3,785				3.53	%
Commercial loans			145,360				4,563				4.18	%			95,090				2,955				4.14	%
Consumer loans			75,672				1,629				2.87	%			62,693				1,396				2.97	%
Total loans			364,765				9,915				3.62	%			300,773				8,136				3.61	%
Total interest-earning assets		$	450,500			$	11,219				3.32	%		$	394,517			$	9,520				3.22	%
Interest on interest-bearing liabilities:
NOW deposits		$	43,463				28				0.09	%		$	39,313				24				0.08	%
Savings deposits			167,630				256				0.20	%			152,845				223				0.19	%
Certificates of deposit			59,537				335				0.75	%			58,974				319				0.72	%
Total deposits			270,630				619				0.30	%			251,132				566				0.30	%
Securities sold under agreements to repurchase			2,410				5				0.28	%			3,223				3				0.12	%
Subordinated debt			7,233				379				6.99	%			-				-				-
FHLB advances			36,255				134				0.49	%			19,062				35				0.24	%
Total interest-bearing liabilities		$	316,528			$	1,137				0.48	%		$	273,417			$	604				0.29	%
Tax-equivalent net interest income						$	10,082											$	8,916
Less: tax equivalent adjustments							(210	)											(202	)
Net Interest Income						$	9,872											$	8,714
Net Interest Spread											2.84	%											2.93	%
Net Interest Margin											2.98	%											3.01	%
(Taxable Equivalent Net Interest Margin)

 

 

The table below describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume), and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

 

		Three months ended September 30,												Nine months ended September 30,
		2016 vs. 2015												2016 vs. 2015
		Increase (decrease) due to:												Increase (decrease) due to:
		Rate				Volume				Total				Rate				Volume				Total
Interest on interest-bearing assets:
Federal funds sold & overnight deposits		$	16			$	(10	)		$	6			$	28			$	(5	)		$	23
Certificates of deposit			-				6				6				-				16				16
Investments			7				(41	)			(34	)			23				(128	)			(105	)
Mortgage loans			(43	)			7				(36	)			(81	)			19				(62	)
Commercial loans			(6	)			585				579				36				1,550				1,586
Consumer loans			(15	)			157				142				(46	)			279				233
Total interest income			(41	)			704				663				(40	)			1,731				1,691
Interest on interest-bearing liabilities:
NOW deposits			-				1				1				1				3				4
Savings deposits			28				15				43				10				23				33
Certificates of deposit			21				14				35				13				3				16
Securities sold under agreements to repurchase			1				-				1				4				(2	)			2
Subordinated debt			-				137				137				-				379				379
FHLB advances			11				17				28				35				64				99
Total interest expense			61				184				245				63				470				533
Net change in net interest income		$	(102	)		$	520			$	418			$	(103	)		$	1,261			$	1,158

 

Provision for Loan Losses

 

The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, 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 Company’s portfolio.

 

Each month, the Company reviews the allowance for loan losses and makes additional provisions to the allowance, as determined by the Company’s guidelines. The total allowance for loan losses at September 30, 2016 was $3.6 million or 0.92% of outstanding loans compared to $3.0 million or 0.93% of outstanding loans as of December 31, 2015. The Company charged off two loans in the third quarter 2016 totaling $5 thousand compared to one loan for $2 thousand for the same period in 2015. During the third quarter of 2016, the Company had three recoveries totaling $2 thousand compared to three recoveries totaling $1 thousand for the third quarter of 2015. For the nine months ended September 30, 2016, the Company charged off four loans totaling $10 thousand compared to five loans for a total of $18 thousand for the nine months ended September 30, 2015. The Company had ten recoveries totaling $7 thousand for the nine months ended September 30, 2016 compared to twelve recoveries totaling $9 thousand for the nine months ended September 30, 2015. The Company believes the allowance for loan losses is appropriate.

 

Noninterest Income and Noninterest Expense

 

Total noninterest income (which is derived mainly from service and overdraft charges and gain on sale of mortgages) for the quarter ended September 30, 2016 was $1.2 million compared to $921 thousand for the same period in the prior year. Total noninterest income for the nine months ended September 30, 2016 was $2.4 million compared to $2.3 million for the nine months ended September 30, 2015. The increase in noninterest income for the three and nine months ended September 30, 2016 was mainly due to an increase in the gain on sale of mortgages in the amount of $185 thousand and $243 thousand, respectively. Income from mortgage banking activities declined primarily due to an impairment charge of $41 thousand for the three months ended September 30, 2016 and $234 thousand for the nine months ended September 30, 2016. The impairment charge on the servicing asset relates to prepayment assumptions in the loans serviced-for-others portfolio as interest rates remained at historic lows in the first nine months of 2016.

 

 

 

Total noninterest expense for the quarter ended September 30, 2016 was $3.7 million compared to $3.4 million for the same period in the prior year. The ratio of annualized operating expenses to average assets was 3.0% for the third quarter of 2016 compared to 3.3% for the third quarter of 2015. Total noninterest expense for the nine months ended September 30, 2016 was $10.6 million compared to $9.6 million for the nine months ended September 30, 2015.

 

Salaries and employee benefits comprised approximately 52% of total noninterest expense for the three months ended September 30, 2016 compared to 53% of total noninterest expense for the same period in the prior year. Other major categories included occupancy expenses, which comprised approximately 10% of noninterest expense for the three months ended September 30, 2016 and September 30, 2015, data processing fees, which comprised 5.9% of noninterest expense for the third quarter of 2016 and 2015, advertising and promotion, which comprised 5.7% of noninterest expense for the third quarter of 2016 compared to 3.2% of noninterest expenses for the same period in 2015, and professional fees and equipment expenses, which comprised 6.8% and 8.9% of non-interest expense for the third quarter of 2016 and 2015, respectively.

 

Salaries and employee benefits comprised approximately 54% of total noninterest expense for the nine months ended September 30, 2016, compared to 53% of total noninterest expense for the same period in the prior year. Other major categories included occupancy expenses, which comprised approximately 11% of noninterest expense for each of the nine months ended September 30, 2016 and September 30, 2015, data processing fees, which comprised 5.9% of noninterest expense for the nine months ended September 30, 2016 compared to 5.5% of noninterest expenses for the same period in 2015, advertising and promotions, which comprised 4.8% and 3.8% of noninterest expense for the first nine month of 2016 and 2015, respectively, and equipment expenses which remained relatively constant in the 3.0% to 3.2% range for each of the nine months ended September 30, 2016 and September 30, 2015.

 

Income Taxes

 

The effective income tax rate for the three months ended September 30, 2016 and September 30, 2015 was 18.8% and 17.5%, respectively. For the nine months ended September 30, 2016 and September 30, 2015, the effective tax rate was 9.5% and 15.0%, respectively. Due to the creation on January 1, 2011 of a Passive Investment Company (“PIC”) under Connecticut tax legislation for the purpose of holding certain mortgage loans, the Company no longer incurs state income tax liability except for the minimum tax since the PIC’s earnings, net of certain allocated expenses, are exempt from Connecticut state income tax as long as the PIC meets certain ongoing qualifications.

 

Financial Condition

 

Investment Portfolio

 

The fair value of investments in available-for-sale securities as of September 30, 2016 was $63.6 million, which was 1.42% above amortized cost, compared to $71.5 million, which was 0.39% below amortized cost as of December 31, 2015. The Company has the intent and ability to hold debt securities until maturity or for the foreseeable future if classified as available-for-sale.

 

Management periodically reviews all investment securities with significant declines in fair value for potential other-than-temporary impairment pursuant to the guidance in ASC 320-10, “Investments – Debt and Equity Securities.” ASC 320-10 addresses the determination as to when an investment is considered impaired, whether the impairment is other-than-temporary, and the measurement of an impairment loss. Management evaluates the Company’s investment portfolio on an ongoing basis. As of September 30, 2016, there were $185 thousand in investment securities in the investment portfolio that management determined to be other-than-temporarily impaired. During the quarter ended September 30, 2016, the par values of these securities were written down $3 thousand by the issuers. As of December 31, 2015, there were $234 thousand in investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.  For the year ended December 31, 2015, the par values of these three securities were written down by $7 thousand by the issuers.

 

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

 

Securities may be pledged to meet regulatory requirements imposed as a condition to receipt of deposits of public funds and repurchase agreements. At September 30, 2016, the Company had 35 securities with a carrying value totaling $15.0 million pledged for such purposes. At December 31, 2015, the Company had 33 securities with a carrying value totaling $14.3 million pledged for such purposes.

 

As of September 30, 2016 and December 31, 2015, respectively, the Company’s investment portfolio consisted of U.S. government and agency securities, state and municipal securities, mortgage-backed securities and one SBA loan pool. The Company’s policy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company.

 

 

Loan Portfolio

 

The Company’s loan portfolio as of the end of the third quarter of 2016 was comprised of approximately 57% residential mortgage and consumer loans and 43% commercial loans. The Company does not have any concentrations in its loan portfolio by industry or group of industries.

 

As of September 30, 2016 there were approximately $137 million of gross residential mortgage loans which were relatively unchanged from the total at December 31, 2015. The Company sold one hundred thirty-four (134) loans with an aggregate principal balance of $31.7 million during the three months ended September 30, 2016, which resulted in an aggregate gain on sales of these loans of $607 thousand. For the nine months ended September 30, 2016, the Company sold two hundred ninety-seven (297) loans with an aggregate principal balance of $68.5 million, which resulted in an aggregate gain on sale of $1.2 million. The Company is an approved originator of loans that can be sold to the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank.

 

At September 30, 2016, the Company had consumer loan balances of approximately $38.1 million, representing a 97% increase from the consumer loan balances at December 31, 2015. The increase was primarily driven by the purchase of a $9.5 million portfolio of refinanced student loans during the three months ended June 30, 2016, and the purchase of a $9.3 million portfolio of refinanced student loans during the three months ended September 30, 2016. As of September 30, 2016, the Company had approximately $19.1 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $17.9 million in auto loans purchased from BCI on its books as of December 31, 2015. The Company has an agreement with BCI pursuant to which the Company purchases auto loans from BCI. As part of the agreement, BCI services the loans for the Company.

 

The September 30, 2016 gross loan balance for municipal and commercial real estate loans, including construction loans, was $104.5 million, a 29.2% increase from the gross loan balance for municipal and commercial real estate loans at December 31, 2015. The Company’s commercial loans are made to borrowers for the purpose of providing working capital, financing the purchase of equipment, or financing other business purposes. Such loans include loans with maturities ranging from thirty days to one year and “term loans,” which are loans with maturities normally ranging from one year to twenty-five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for fixed or floating interest rates, with monthly payments of both principal and interest.

 

The Company’s construction loans are primarily interim loans made by the Company to finance the construction of commercial and single-family residential property. These loans are typically short-term. The Company generally pre-qualifies construction loan borrowers for permanent “take-out” financing as a condition to making the construction loan. The Company will also occasionally make loans for speculative housing construction or for acquisition and development of raw land.

 

The Company’s other real estate loans consist primarily of loans originated based on the borrower’s cash flow and which are secured by deeds of trust on commercial and residential property to provide another source of repayment in the event of default. It is the Company’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 Company offers both fixed and floating rate loans. Maturities on such loans typically range from five to thirty years. The Company has been designated as an approved SBA lender. The Company’s SBA loans are categorized as commercial or real estate, depending on the underlying collateral. In addition, the Company has been approved as an originator of loans that can be sold to the Federal Home Loan Mortgage Corporation.

 

The Bank is subject to certain lending limits. With certain exceptions, the Bank is permitted under applicable law to make related extensions of credit to any single borrowing entity of up to 15% of the Bank’s capital and reserves. Credit equaling an additional 10% of the Bank’s capital and reserves may be extended if the credit is fully secured by limited types of qualified collateral. As of September 30, 2016, the Bank’s lending limits were $6.2 million and $10.3 million, respectively. As of December 31, 2015, these lending limits were $5.9 million and $9.8 million, respectively. The Bank sells participations in its loans when necessary to stay within lending limits.

 

Interest on performing loans is accrued and taken into income daily. Loans over 90 days past due are deemed non-performing and are placed on non-accrual status. Interest received on non-accrual loans is credited to income only upon receipt and, in certain circumstances, may be applied to principal until the loan has been repaid in full, at which time the interest received is credited to income. The Company had 16 non-accrual loans at September 30, 2016 with an aggregate balance of $3.1 million compared to 19 non-accrual loans at December 31, 2015 with an aggregate balance of $4.1 million.

 

 

When appropriate or necessary to protect the Company’s interests, real estate pledged as collateral on a loan may be taken by the Company through foreclosure or a deed in lieu of foreclosure. Real estate property acquired in this manner by the Company is known as “other real estate owned” (“OREO”) and is carried on the books of the Company as an asset at the fair value less estimated costs to sell. The Company had no OREO properties at September 30, 2016.

 

A loan whose terms have been modified due to financial difficulties of a borrower is reported as a troubled debt restructuring (“TDR”). All TDRs are placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once borrowers have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months.

 

Non-payment of loans is an inherent risk in the banking business. That risk varies with the type and purpose of the loan, the collateral which is utilized to secure payment and, ultimately, the creditworthiness of the borrower. In order to minimize this credit risk, the Company requires that all loans be approved by at least two officers, one of whom must be an executive officer. Commercial loans greater than $500 thousand, as well as other loans in certain circumstances, must be approved by the Loan Committee of the Company’s Board of Directors.

 

The Company has an internal review process to verify credit quality and risk classifications. In addition, the Company also maintains a program of annual review of certain new and renewed loans by an outside loan review consultant. Loans are graded from “pass” to “loss” depending on credit quality, with “pass” representing loans that are fully satisfactory as additions to the Company’s portfolio. These are loans which involve a degree of risk that is not unwarranted given the favorable aspects of the credit and which exhibit both primary and secondary sources of repayment. Classified loans identified in the review process are added to the Company’s internal watch list and an allowance for credit losses is established for such loans, if appropriate. Additionally, the Bank is examined regularly by the Federal Deposit Insurance Corporation and the State of Connecticut Department of Banking, at which times a further review of loans is conducted.

 

The Company had criticized and classified loans with an aggregate outstanding balance of $11.4 million as of September 30, 2016 compared to $9.2 million as of December 31, 2015. The Company had no exposure to sub-prime loans in its loan portfolio as of September 30, 2016 and December 31, 2015. The Company’s allowance for loan losses was 0.92% of outstanding loans as of September 30, 2016.

 

The Company maintains an allowance for loan losses to provide for potential losses in the loan portfolio. Additions to the allowance are made by charges to operating expenses in the form of a provision for loan losses. All loans that are judged to be uncollectible are charged against the allowance, while all 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 Company’s internal loan review, any external loan review and 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, qualitative risk factors, and present and prospective economic conditions.

 

Deposits

 

Deposits are the Company’s primary source of funds. At September 30, 2016, the Company had a deposit mix of 40% checking, 45% savings and 15% certificates of deposit. The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits. As of December 31, 2015, the deposit mix was 48% checking, 37% savings, and 15% certificates of deposit. At September 30, 2016, 30% of the total deposits of $433 million were non-interest-bearing compared to 36% of the Company’s total deposits of $373 million that were non-interest-bearing at December 31, 2015. As of September 30, 2016 and December 31, 2015, the Company had $80.3 million and $43.8 million, respectively, in deposits from public sources.

 

The Company’s deposits are obtained from a cross-section of the communities it serves. No material portion of the Company’s deposits has been obtained from or is dependent upon any one person or industry. The Company’s business is not seasonal in nature. The Company accepts deposits in excess of $250 thousand from customers. Those deposits are priced to remain competitive. Through the Promontory Interfinancial Network LLC’s Certificate of Deposit Account Registry Service (“CDARS”) program, the Bank had brokered deposits of $1.5 million as of September 30, 2016 compared to $1.3 million as of December 31, 2015.

 

Borrowings

 

As of September 30, 2016, the Company had $29.0 million in borrowings from the Federal Home Loan Bank of Boston (FHLBB) on its balance sheet compared to $31.5 million in borrowings outstanding as of December 31, 2015.

 

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

 

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

 

 

 

Liquidity and Asset-Liability Management

 

Liquidity management for banks requires that funds always be available to pay any 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 the bank utilizes 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 LLC’s Certificate of Deposit Account Registry Service (“CDARS”). This allows the Company to offer its customers FDIC insurance on deposits in excess of $250 thousand, which reflects the deposit insurance limits currently in effect, by placing the deposits in the CDARS network. Accounts placed in this manner are considered brokered deposits. As of September 30, 2016, the Company had $1.5 million of deposits in the CDARS network compared to $1.3 million of deposits in the CDARS network as of December 31, 2015.

 

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 September 30, 2016, the Company held $13.7 million in cash and cash equivalents and CDs, net of required FRB reserves of $7.3 million, and $48.7 million in available-for-sale securities, net of pledged investments of $15.0 million, for total liquid assets of $62.4 million. 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 September 30, 2016, the Company’s anticipated short-term liability obligations were $86.6 million, which resulted in a basic liquidity deficit of $24.2 million that represented 4.8% of total assets. 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.

 

The careful planning of asset and liability maturities and the matching of interest rates to correspond with this matching of maturities is an integral part of the active management of an institution’s net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may be affected. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of assets, timing lags in adjusting certain assets and liabilities that have varying sensitivities to market interest rates and basis risk. In its overall attempt to match assets and liabilities, management takes into account rates and maturities offered in connection with its certificates of deposit and provides for the extension of variable rate loans to borrowers. The 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 certificates of deposit with relatively short maturities.

 

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

 

Capital Requirements

 

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 Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

 

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Bank became subject to revised capital regulations adopted by the Board of Governors of the Federal Reserve System (“FRB”) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. These regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under revised prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged). In addition, these regulations established a capital conservation buffer above the required capital ratios that was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets with increases in each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Effective 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. At September 30, 2016, the Bank had a capital conservation buffer of 3.76%.

 

These regulations implemented changes to what constitutes regulatory capital. Certain instruments no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital. The 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 reduces the impact of market volatility on the Bank’s regulatory capital ratios.

 

These 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 100%.

 

As of September 30, 2016 (unaudited) and 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 such notification that management believes have changed the institution’s category.

 

Inflation and Deflation

 

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 so as 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 Board to control the general price level of goods or services has an indirect impact on the earnings of the Company. In addition, changes in interest rates may have a corresponding impact on the ability of borrowers to repay loans made by the Company.

 

Off Balance Sheet Arrangements

 

As of September 30, 2016, the Company had in place mandatory commitments to sell approximately $ 8.2 million of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac). As of December 31, 2015, the Company had in place mandatory commitments to sell approximately $2.2 million of loans secured by 1-to-4 family residential properties to Freddie Mac.

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

The Company has initiatives in place to ensure compliance with the Sarbanes-Oxley Act of 2002. The Company has an Internal Compliance Committee that is responsible for the monitoring of, and compliance with, all federal regulations. This committee makes reports on compliance matters to the Audit and Compliance Committee of the Company’s Board of Directors.

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2016. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, the Company’s disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis.

 

As used herein, “disclosure controls and procedures” mean controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. 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 or officers, or their respective affiliates, or a beneficial owner 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 1A. Risk Factors

 

Not required.

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.     Other Information

 

None.

 

 

Item 6. Exhibits

Exhibit No.	Description
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 (SEC File No. 000-51832) 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 (Sec File No. 000-51832) filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K (SEC File No. 000-51832) filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer
32.2	Section 1350 Certification by Chief Financial Officer
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

 

 

 

SIGNATURES

   

 

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

 

 

		SBT BANCORP, INC.
Date:	November 14, 2016	By:	/s/ Martin J. Geitz
			Martin J. Geitz
			Chief Executive Officer
Date:	November 14, 2016	By:	/s/ Richard J. Sudol
			Richard J. Sudol
			Chief Financial Officer

 

 

EXHIBIT INDEX

 

Exhibit No.	Description
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 (SEC File No. 000-51832) 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 (SEC File No. 000-51832) filed on August 12, 2011)
3(ii)	Amended and Restated Bylaws (incorporated by reference to Exhibit 3(ii) of the Company's Form 8-K (SEC File No. 000-51832) filed on March 22, 2012)
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Company’s Form 10-QSB (SEC File No. 000-51832) filed on May 15, 2006)
31.1	Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
32.1	Section 1350 Certification by Chief Executive Officer
32.2	Section 1350 Certification by Chief Financial Officer
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

 

 

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