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

 

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 June 30, 2017

or

[ ]

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

 

For the transition period from _______ to __________

 

Commission File Number: 000-51832

 

SBT Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut

  20-4346972  

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 
       

86 Hopmeadow Street, Weatogue, CT

  06089  

(Address of Principal Executive Offices) 

  (Zip Code)  

 

(860) 408-5493

(Registrant's Telephone Number, Including Area Code)

 

 

(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 [ ]

 

- 1 -

 

 

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

 

Large accelerated filer [ ] Accelerated filer [ ]
   

Non-accelerated filer [ ]

(Do not check if a smaller reporting company)

Smaller reporting company [X]
  Emerging growth company [ ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

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 July 26, 2017, the registrant had 1,372,762 shares of its Common Stock, no par value per share, outstanding.

 

- 2 -

 

 

table of contents

 

SBT Bancorp, Inc. and Subsidiary

 

   

Page No.

     

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.  

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

4

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017  and 2016 (unaudited)

5

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

6

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2017 and 2016 (unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)

8 - 9

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

10-27

 

 

 

Item 2.  

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

28-41

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

Item 4.  

Controls and Procedures

42

 

 

 

PART II - OTHER INFORMATION

     

Item 1.  

Legal Proceedings

42

 

 

 

Item 1A.  

Risk Factors

42

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 3.  

Defaults Upon Senior Securities

42

 

 

 

Item 4.  

Mine Safety Disclosures

43

     

Item 5.  

Other Information

43

 

 

 

Item 6.  

Exhibits

44

 

 

 

SIGNATURES

45

 

 

 

EXHIBIT INDEX

46

 

- 3 -

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SBT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

 

   

6/30/17

   

12/31/16

 
   

(Unaudited)

         
ASSETS              

Cash and due from banks

  $ 11,404     $ 10,976  

Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank

    19,782       9,786  

Money market mutual funds

    682       95  

Federal funds sold

    103       150  

Cash and cash equivalents

    31,971       21,007  
                 

Certificates of deposit

    1,250       1,250  
                 

Investments in available-for-sale securities, at fair value

    58,069       58,728  

Federal Home Loan Bank stock, at cost

    3,663       2,896  
                 

Loans held-for-sale

    6,473       2,801  
                 

Loans

    410,268       409,164  

Less: allowance for loan losses

    3,924       3,753  

Loans, net

    406,344       405,411  
                 

Premises and equipment, net

    2,032       1,905  

Accrued interest receivable

    1,291       1,301  

Bank owned life insurance

    9,250       9,130  

Other assets

    5,386       5,570  

Total assets

  $ 525,729     $ 509,999  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Deposits:

               

Demand deposits

  $ 133,044     $ 134,341  

Savings and NOW deposits

    217,216       212,835  

Time deposits

    67,992       66,588  

Total deposits

    418,252       413,764  
                 

Securities sold under agreements to repurchase

    2,651       2,694  

Federal Home Loan Bank advances

    64,318       54,058  

Long-term subordinated debt

    7,266       7,252  

Other liabilities

    1,869       1,944  

Total liabilities

    494,356       479,712  

Stockholders' equity:

               

Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 1,372,823 shares and 1,372,409 shares, respectively, at June 30, 2017 and 1,372,394 shares and 1,371,980 shares, respectively, at December 31, 2016

    19,156       19,133  

Retained earnings

    12,708       12,017  

Treasury stock, 414 shares

    (7 )     (7 )

Unearned compensation-restricted stock awards

    (225 )     (293 )

Accumulated other comprehensive loss

    (259 )     (563 )

Total stockholders' equity

    31,373       30,287  

Total liabilities and stockholders' equity

  $ 525,729     $ 509,999  

   

 

See accompanying notes to the unaudited consolidated financial statements.

 

- 4 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

   

For the three months ended

   

For the six months ended

 
   

6/30/2017

   

6/30/2016

   

6/30/2017

   

6/30/2016

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 3,814     $ 3,305     $ 7,472     $ 6,380  

Investment securities

    348       388       691       782  

Interest-bearing deposits

    24       10       49       28  

Total interest and dividend income

    4,186       3,703       8,212       7,190  

Interest expense:

                               

Interest on deposits

    273       188       539       347  

Interest on securities sold under agreements to repurchase

    2       2       3       3  

Interest on Federal Home Loan Bank advances

    139       66       208       98  

Interest on long-term subordinated debt

    135       135       269       242  

Total interest expense

    549       391       1,019       690  

Net interest and dividend income

    3,637       3,312       7,193       6,500  
                                 

Provision for loan losses

    85       170       335       301  
                                 

Net interest and dividend income after provision for loan losses

    3,552       3,142       6,858       6,199  

Noninterest income:

                               

Service charges on deposit accounts

    91       91       183       181  

(Loss) gain on sales of available-for-sale securities, net

    (1 )     23       (2 )     70  

Other service charges and fees

    232       208       421       440  

Increase in cash surrender value of life insurance policies

    59       62       120       113  

Mortgage banking activities, net

    296       257       538       251  

Investment services fees and commissions

    45       52       74       79  

Other income

    49       11       72       29  

Total noninterest income

    771       704       1,406       1,163  

Noninterest expense:

                               

Salaries and employee benefits

    1,747       1,921       3,440       3,752  

Occupancy expense

    362       390       745       760  

Equipment expense

    121       113       230       206  

Advertising and promotions

    203       187       305       294  

Forms and supplies

    30       35       56       74  

Professional fees

    198       119       398       203  

Directors’ fees

    52       54       111       107  

Correspondent charges

    82       73       148       146  

FDIC assessment

    108       91       218       153  

Data processing

    225       197       454       409  

Internet banking costs

    47       93       91       145  

Other expenses

    412       323       724       663  

Total noninterest expense

    3,587       3,596       6,920       6,912  

Income before income taxes

    736       250       1,344       450  

Income tax provision (benefit)

    168       (1 )     274       (7 )

Net income

  $ 568     $ 251     $ 1,070     $ 457  

Net income available to common stockholders

  $ 568     $ 251     $ 1,070     $ 457  

Weighted average shares outstanding, basic

    1,359,033       1,351,924       1,358,590       1,350,247  

Earnings per common share, basic

  $ 0.42     $ 0.19     $ 0.79     $ 0.34  

Weighted average shares outstanding, assuming dilution

    1,362,532       1,352,239       1,361,341       1,351,365  

Earnings per common share, assuming dilution

  $ 0.42     $ 0.19     $ 0.79     $ 0.34  
                                 

Dividends declared per common share

  $ 0.14     $ 0.14     $ 0.28     $ 0.28  

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

- 5 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (Unaudited)

(Dollars in thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net income

  $ 568     $ 251     $ 1,070     $ 457  

Other comprehensive income net of tax:

                               

Net change in unrealized holding gain/loss on securities available-for-sale

    278       488       461       1,455  

Reclassification adjustment for realized gains in net income

    -       (21 )     -       (69 )

Other comprehensive income, before tax

    278       467       461       1,386  

Income tax expense

    (94 )     (159 )     (157 )     (473 )

Other comprehensive income, net of tax

    184       308       304       913  

Comprehensive income

  $ 752     $ 559     $ 1,374     $ 1,370  

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

- 6 -

 

 

 SBT BANCORP, INC. AND SUBSIDIARY

 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

 (Unaudited)

 (Dollars in thousands)

 

                           

Unearned

   

Accumulated

         
                           

Compensation-

   

Other

         
   

Common

   

Retained

   

Treasury

   

Restricted

   

Comprehensive

         
   

Stock

   

Earnings

   

Stock

   

Stock Awards

   

(Loss) Income

   

Total

 

Balance, December 31, 2015

  $ 18,856     $ 11,288     $ (7 )   $ (206 )   $ (189 )   $ 29,742  

Net income

    -       457       -       -       -       457  

Other comprehensive income, net of tax

    -       -       -       -       913       913  

Stock-based compensation

    10       -       -       67       -       77  

Forfeited restricted stock awards

    (12 )     -       -       12       -       -  

Common stock issued

    19       -       -       -       -       19  

Dividends declared on common stock ($.28 per share)

    -       (377 )     -       -       -       (377 )

Balance June 30, 2016

  $ 18,873     $ 11,368     $ (7 )   $ (127 )   $ 724     $ 30,831  
                                                 

Balance, December 31, 2016

  $ 19,133     $ 12,017     $ (7 )   $ (293 )   $ (563 )   $ 30,287  

Net income

    -       1,070       -       -       -       1,070  

Other comprehensive income, net of tax

    -       -       -       -       304       304  

Stock-based compensation

    4       -       -       68       -       72  

Common stock issued

    19       1       -       -       -       20  

Dividends declared on common stock ($.28 per share)

    -       (380 )     -       -       -       (380 )

Balance, June 30, 2017

  $ 19,156     $ 12,708     $ (7 )   $ (225 )   $ (259 )   $ 31,373  

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

- 7 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

For the six months ended

 
   

6/30/2017

   

6/30/2016

 

Cash flows from operating activities:

               

Net income

  $ 1,070     $ 457  

Adjustments to reconcile net income to net cash used in operating activities:

               

Amortization of securities, net

    164       178  

Loss (gain) on available-for-sale securities, net of writedowns

    2       (70 )

Change in deferred origination costs, net

    58       (93 )

Provision for loan losses

    335       301  

Loans originated for sale

    (43,383 )     (40,966 )

Proceeds from sales of loans originated for sale

    40,160       36,863  

Gain on sales of loans

    (449 )     (524 )

Loss on sale of other real estate owned

    13       -  

Depreciation and amortization

    208       188  

Amortization of long-term subordinated debt issuance costs

    14       14  

Decrease (increase) in other assets

    261       (195 )

Decrease (increase) in interest receivable

    10       (88 )

Increase in taxes receivable

    (234 )     (151 )

Increase in cash surrender value of bank owned life insurance

    (120 )     (113 )

Stock-based compensation

    72       77  

(Decrease) increase in other liabilities

    (94 )     114  

Increase (decrease) in interest payable

    19       (53 )
                 

Net cash used in operating activities

    (1,894 )     (4,061 )
                 

Cash flows from investing activities:

               

Purchases of certificates of deposit

    -       (250 )

Purchases of available-for-sale securities

    (2,772 )     (6,103 )

Proceeds from maturities of available-for-sale securities

    3,726       9,078  

Proceeds from sales of available-for-sale securities

    -       966  

Purchases of Federal Home Loan Bank stock

    (1,618 )     (1,772 )

Redemption of Federal Home Loan Bank stock

    851       456  

Loan originations and principal collections, net

    (1,906 )     (17,711 )

Loans purchased

    -       (25,748 )

Recoveries of loans previously charged off

    10       5  

Proceeds from sale of other real estate owned

    557       -  

Purchase of bank owned life insurance

    -       (1,500 )

Capital expenditures

    (335 )     (846 )
                 

Net cash used in investing activities

    (1,487 )     (43,425 )

 

- 8 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

(Dollars in thousands)

(continued)

 

 

   

For the six months ended

 
   

6/30/2017

   

6/30/2016

 
                 

Cash flows from financing activities:

               

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

    3,084       (220 )

Net increase in time deposits

    1,404       5,406  

Net (decrease) increase in securities sold under agreements to repurchase

    (43 )     933  

Net change in short-term Federal Home Loan Bank (FHLB) advances

    10,000       32,500  

Proceeds from long-term FHLB advances

    260       -  

Proceeds from issuance of common stock

    20       19  

Increase in subordinated debt issuance fees

    -       (7 )

Dividends paid - common stock

    (380 )     (377 )
                 

Net cash provided by financing activities

    14,345       38,254  
                 

Net increase (decrease) in cash and cash equivalents

    10,964       (9,232 )

Cash and cash equivalents at beginning of period

    21,007       28,890  

Cash and cash equivalents at end of period

  $ 31,971     $ 19,658  
                 

Supplemental disclosures of cash flow information:

               

Interest paid

  $ 986     $ 464  

Income taxes paid

    509       144  

Supplemental disclosures of non-cash transactions:

               

Loans transferred to other real estate owned

    570       -  

 

See accompanying notes to the unaudited consolidated financial statements.

 

- 9 -

 

 

SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited 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. The Bank offers investment products to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, and through its affiliation with the securities broker/dealer, LPL Financial Corporation. In May of 2010, the Bank formed NERE Holdings, Inc., a subsidiary to hold real estate primarily acquired through foreclosure. In January of 2011, the Bank formed Simsbury Bank Passive Investment Company, a subsidiary Passive Investment Company (PIC). Under current State of Connecticut statutes, Simsbury Bank Passive Investment Company is not subject to Connecticut corporation business taxes. 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, 2017. Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan losses, and the valuation and potential other-than-temporary impairment (“OTTI”) of available-for-sale securities.

 

While management believes that the disclosures presented are adequate so as to not make the information misleading, it is suggested that these unaudited consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2016.

 

NOTE 2 – STOCK-BASED COMPENSATION

 

At June 30, 2017, 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 six months ended June 30, 2017, the Company recognized $72 thousand in stock-based employee compensation expense. During the six months ended June 30, 2016, the Company recognized $77 thousand in stock-based employee compensation expense.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires 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 also requires 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. Management believes there will be no material impact to the consolidated financial statements upon adoption. 

 

- 10 -

 

 

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: (1) income tax consequences; (2) classification of awards as either equity or liabilities; and (3) classification on the statement of cash flows. The new guidance is effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 effective January 1, 2017. There was no significant impact to the Company’s consolidated financial statements for the six months ended June 30, 2017.

 

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 reducing 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 that adoption of ASU 2016-13 will have on its consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): 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 on how eight particular transactions are classified in the statement of cash flows. ASU No. 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 No. 2016-15 is not expected to have a material impact on the Company's consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

Management believes there will be no material impact to the consolidated financial statements upon adoption. 

 

 

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 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. This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities on a contract-by-contract basis. In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

- 11 -

 

 

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

 

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

 

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, which 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 six months ended June 30, 2017.

 

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 June 30, 2017 and December 31, 2016.

 

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, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information, and the instrument’s terms and conditions.

 

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

 

The company enters into interest rate lock commitments to make loans it intends to sell and enters into forward commitments to sell mortgage loans, both of which are considered derivatives to be measured at fair value. Fair values for these derivative financial instruments are based on prices currently charged to enter into similar arrangements, taking into account the probability the commitment will be exercised. The calculated fair value of these derivatives were not material at June 30, 2017 and December 31, 2016 and are therefore not included in the tables that follow. 

 

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

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

 

- 12 -

 

 

The following summarizes assets measured at fair value at June 30, 2017 and December 31, 2016.

 

 

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)

 

June 30, 2017:

                               

Debt securities issued by U.S. government corporations and agencies

  $ 5,520     $ -     $ 5,520     $ -  

Obligations of states and municipalities

    14,420       -       14,420       -  

Mortgage-backed securities

    37,189       -       37,189       -  

SBA loan pools

    940       -       940       -  

Totals

  $ 58,069     $ -     $ 58,069     $ -  
                                 

December 31, 2016:

                               

Debt securities issued by U.S. government corporations and agencies

  $ 4,253     $ -     $ 4,253     $ -  

Obligations of states and municipalities

    14,352       -       14,352       -  

Mortgage-backed securities

    39,140       -       39,140       -  

SBA loan pools

    983       -       983       -  

Totals

  $ 58,728     $ -     $ 58,728     $ -  

 

 

There were no assets measured at fair value on a nonrecurring basis at June 30, 2017 and December 31, 2016.

 

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 June 30, 2017 and December 31, 2016:

 

 

   

June 30, 2017

 
   

Carrying

   

Fair Value

 
    Amount     Level 1     Level 2     Level 3    

Total

 
   

(In Thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 31,971     $ 31,971     $ -     $ -     $ 31,971  

Certificates of deposit

    1,250       1,250       -       -       1,250  

Available-for-sale securities

    58,069       -       58,069       -       58,069  

Federal Home Loan Bank stock

    3,663       -       3,663       -       3,663  

Loans held-for-sale

    6,473       -       -       6,570       6,570  

Loans, net

    406,344       -       -       402,809       402,809  

Mortgage servicing rights, net

    1,982       -       -       2,671       2,671  

Accrued interest receivable

    1,291       1,291       -       -       1,291  

Bank owned life insurance

    9,250       -       9,250       -       9,250  
                                         

Financial liabilities:

                                       

Deposits

    418,252       350,260       67,808       -       418,068  

Securities sold under agreements to repurchase

    2,651       -       2,651       -       2,651  

Federal Home Loan Bank advances

    64,318       -       64,038       -       64,038  

Long-term subordinated debt

    7,266       -       7,298       -       7,298  

 

- 13 -

 

 

   

December 31, 2016

 
   

Carrying

                                 
   

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(In Thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 21,007       21,007     $ -     $ -     $ 21,007  

Certificates of deposit

    1,250       1,250       -       -       1,250  

Available-for-sale securities

    58,728       -       58,728       -       58,728  

Federal Home Loan Bank stock

    2,896       -       2,896       -       2,896  

Loans held-for-sale

    2,801       -       -       2,818       2,818  

Loans, net

    405,411       -       -       401,008       401,008  

Mortgage servicing rights, net

    1,996       -       -       2,432       2,432  

Accrued interest receivable

    1,301       1,301       -       -       1,301  

Bank owned life insurance

    9,130       -       9,130       -       9,130  
                                         

Financial liabilities:

                                       

Deposits

    413,764       347,176       66,504       -       413,680  

Securities sold under agreements to repurchase

    2,694       -       2,694       -       2,694  

Federal Home Loan Bank advances

    54,058       -       53,767       -       53,767  

Long-term subordinated debt

    7,252       -       7,268       -       7,268  

 

- 14 -

 

 

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 six months ended June 30, 2017 and 2016:

 

   

For the three months ended

 
   

6/30/17

   

6/30/16

 
   

(In Thousands, except share and per share data)

 

Basic earnings per share computation:

               

Net income available to common stockholders

  $ 568     $ 251  
                 

Weighted average shares outstanding, basic

    1,359,033       1,351,924  
                 

Basic earnings per share

  $ 0.42     $ 0.19  
                 

Diluted earnings per share computation:

               

Net income available to common stockholders

  $ 568     $ 251  
                 

Weighted average shares outstanding, before dilution

    1,359,033       1,351,924  

Dilutive potential shares

    3,499       315  

Weighted average shares outstanding, assuming dilution

    1,362,532       1,352,239  
                 

Diluted earnings per share

  $ 0.42     $ 0.19  

 

 

   

For the six months ended

 
   

6/30/17

   

6/30/16

 
   

(In Thousands, except share and per share data)

 

Basic earnings per share computation:

               

Net income available to common stockholders

  $ 1,070     $ 457  
                 

Weighted average shares outstanding, basic

    1,358,590       1,350,247  
                 

Basic earnings per share

  $ 0.79     $ 0.34  
                 

Diluted earnings per share computation:

               

Net income available to common stockholders

  $ 1,070     $ 457  
                 

Weighted average shares outstanding, before dilution

    1,358,590       1,350,247  

Dilutive potential shares

    2,751       1,118  

Weighted average shares outstanding, assuming dilution

    1,361,341       1,351,365  
                 

Diluted earnings per share

  $ 0.79     $ 0.34  

 

- 15 -

 

 

NOTE 6 – INVESTMENT SECURITIES

 

The following tables summarize the amounts and distribution of the Company’s investment securities held as of June 30, 2017 and December 31, 2016:

 

   

INVESTMENT PORTFOLIO

 
   

(Dollars In Thousands)

 
                                         
   

June 30, 2017

 
   

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

  $ 2,000     $ -       2       1,998       1.16

%

Due after one to five years

    3,516       10       4       3,522       1.55

%

Total U.S. government corporations and agencies

    5,516       10       6       5,520       1.41

%

Obligations of states and municipalities

                                       

Due within one year

    -       -       -       -       -

%

Due after one to five years

    1,680       22       -       1,702       1.80

%

Due after five to ten years

    7,287       91       28       7,350       1.64

%

Due after ten to fifteen years

    5,300       85       17       5,368       2.38

%

Total obligations of states and municipalities

    14,267       198       45       14,420       1.93

%

Mortgage-backed securities

                                       

Due after one to five years

    677       4       2       679       1.56

%

Due after five to ten years

    4,810       13       28       4,795       2.04

%

Due after ten to fifteen years

    19,112       9       339       18,782       2.26

%

Due beyond fifteen years

    13,151       11       229       12,933       2.50

%

Total mortgage-backed securities

    37,750       37       598       37,189       2.30

%

SBA loan pools

                                       

Due after five to ten years

    929       11       -       940       2.79

%

Total SBA loan pools

    929       11       -       940       2.79

%

                                         

Total available-for-sale securities

  $ 58,462     $ 256     $ 649     $ 58,069       2.13

%

 

- 16 -

 

 

   

INVESTMENT PORTFOLIO

 
   

(Dollars In Thousands)

 
                                         
   

December 31,2016

 
   

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     $ 1     $ -     $ 1,001       1.00

%

Due after one to five years

    3,250       6       4       3,252       1.24

%

Total obligations of states and municipalities

    4,250       7       4       4,253       1.18

%

Obligations of states and municipalities

                                       

Due after one to five years

    250       1       -       251       4.00

%

Due after five to ten years

    6,253       100       41       6,312       2.91

%

Due after ten to fifteen years

    7,417       78       100       7,395       2.76

%

Due beyond fifteen years

    389       5       -       394       3.30

%

Total obligations of states and municipalities

    14,309       184       141       14,352       2.86

%

Mortgage-backed securities

                                       

Due after one to five years

    718       7       4       721       2.25

%

Due after five to ten years

    3,480       13       21       3,472       1.80

%

Due after ten to fifteen years

    20,272       9       539       19,742       1.69

%

Due beyond fifteen years

    15,580       11       386       15,205       2.00

%

Total mortgage-backed securities

    40,050       40       950       39,140       1.83

%

SBA loan pools

                                       

Due after five to ten years

    973       13       3       983       3.30

%

Total SBA loan pools

    973       13       3       983       3.30

%

                                         

Total available-for-sale securities

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

%

 

- 17 -

 

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, were as follows as of June 30, 2017 and December 31, 2016:

 

   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(In Thousands)

 

June 30, 2017:

                                               

Debt securities issued by U.S. Government corporations and agencies

  $ 3,244     $ 6     $ -     $ -     $ 3,244     $ 6  

Obligations of states and municipalities

    3,148       45       -       -       3,148       45  

Mortgage-backed securities

    28,943       467       3,780       106       32,723       573  

Total temporarily impaired securities

    35,335       518       3,780       106       39,115       624  
                                                 
                                                 

Other-than-temporarily impaired securities:

                                               

Mortgage-backed securities

    -       -       136       25       136       25  

Total temporarily impaired and other-than-temporarily impaired securities

  $ 35,335     $ 518     $ 3,916     $ 131     $ 39,251     $ 649  
                                                 
                                                 

December 31, 2016:

                                               

Debt securities issued by U.S. Government corporations and agencies

  $ 1,246     $ 4     $ -     $ -     $ 1,246     $ 4  

SBA loan pools

    743       3       -       -       743       3  

Obligations of states and municipalities

    5,934       141       -       -       5,934       141  

Mortgage-backed securities

    32,817       788       2,890       136       35,707       924  

Total temporarily impaired securities

    40,740       936       2,890       136       43,630       1,072  
                                                 

Other-than-temporarily impaired securities:

                                               

Mortgage-backed securities

    9       -       158       26       167       26  

Total temporarily impaired and other-than-temporarily impaired securities

  $ 40,749     $ 936     $ 3,048     $ 162     $ 43,797     $ 1,098  

 

 

The securities in the Company’s investment portfolio that were temporarily impaired as of June 30, 2017 consisted of debt securities issued by states of the United States, political subdivisions of the states, and U.S. government corporations and agencies as well as mortgage-backed securities. The Company’s management anticipates that the fair value of securities that are currently 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 more likely than not that the Company will not 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 and six months ended June 30, 2017, there were no sales of available-for-sale securities.

 

During the three months ended June 30, 2016, there were proceeds of $401 thousand from sales of available-for-sale securities. Gross realized gains on these sales amounted to $23 thousand. The tax expense applicable to these gross realized gains amounted to $8 thousand. During the six months ended June 30, 2016, there were proceeds of $966 thousand from sales of available-for-sale securities. Gross realized gains on these sales amounted to $70 thousand. The tax expense applicable to these gross realized gains amounted to $24 thousand. 

 

- 18 -

 

 

NOTE 7 – LOAN INFORMATION

 

Loans consisted of the following as of June 30, 2017 and December 31, 2016:

 

   

June 30, 2017

   

December 31, 2016

 
   

(In Thousands)

 

Real estate - residential

  $ 140,807     $ 143,212  

Real estate - commercial

    85,570       79,629  

Real estate - municipal

    9,015       8,733  

Real estate - residential construction and land development

    2,227       2,932  

Real estate - commercial construction and land development

    20,851       15,960  

Home equity

    49,055       48,876  

Commercial and industrial

    68,474       69,254  

Municipal

    4,657       4,215  

Consumer

    28,228       34,911  

Total loans

    408,884       407,722  

Allowance for loan losses

    (3,924 )     (3,753 )

Deferred costs, net

    1,384       1,442  

Net loans

  $ 406,344     $ 405,411  

 

 

 

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 six months ended June 30, 2017.

 

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

 

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

 

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

 

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

 

- 19 -

 

 

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

 

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

 

Allocated component:

 

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

 

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

 

The Company 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.

 

- 20 -

 

 

The following tables present activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2017 and June 30, 2016:

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and

Land Development

   

Home Equity

   

Commercial

& Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

June 30, 2017:

                                                               

Allowance for loan losses:

                                                               

Beginning balance

  $ 1,050     $ 1,030     $ 287     $ 344     $ 937     $ 188     $ 33     $ 3,869  

Charge-offs

    -       -       -       -       (8 )     (30 )     -       (38 )

Recoveries

    -       -       -       -       7       1       -       8  

Provision (benefit)

    (60 )     46       (29 )     37       74       22       (5 )     85  

Ending balance

  $ 990     $ 1,076     $ 258     $ 381     $ 1,010     $ 181     $ 28     $ 3,924  

 

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and

Land Development

   

Home Equity

   

Commercial

& Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

June 30, 2016:

                                                               

Allowance for loan losses:

                                                               

Beginning balance

  $ 1,067     $ 800     $ 286     $ 323     $ 509     $ 174     $ 1     $ 3,160  

Charge-offs

    -       -       -       -       -       (5 )     -       (5 )

Recoveries

    -       -       -       -       -       4       -       4  

Provision(benefit)

    (2 )     62       (28 )     2       67       67       2       170  

Ending balance

  $ 1,065     $ 862     $ 258     $ 325     $ 576     $ 240     $ 3     $ 3,329  

 

 

The following tables present activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2017 and June 30, 2016:

 

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and

Land Development

   

Home Equity

   

 

Commercial

& Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

June 30, 2017:

                                                               

Allowance for loan losses:

                                                               

Beginning balance

  $ 1,057     $ 1,044     $ 212     $ 346     $ 824     $ 249     $ 21     $ 3,753  

Charge-offs

    (36 )     -       -       (99 )     (8 )     (31 )     -       (174 )

Recoveries

    -       -       -       -       8       2       -       10  

Provision (benefit)

    (31 )     32       46       134       186       (39 )     7       335  

Ending balance

  $ 990     $ 1,076     $ 258     $ 381     $ 1,010     $ 181     $ 28     $ 3,924  

 

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and

Land Development

   

Home Equity

   

Commercial

& Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

June 30, 2016:

                                                               

Allowance for loan losses:

                                                               

Beginning balance

  $ 1,065     $ 706     $ 324     $ 331     $ 398     $ 157     $ 47     $ 3,028  

Charge-offs

    -       -       -       -       -       (5 )     -       (5 )

Recoveries

    -       -       -       -       1       4       -       5  

Provision(benefit)

    -       156       (66 )     (6 )     177       84       (44 )     301  

Ending balance

  $ 1,065     $ 862     $ 258     $ 325     $ 576     $ 240     $ 3     $ 3,329  

 

- 21 -

 

 

The following tables set forth information regarding loans and the allowance for loan losses by portfolio segment as of June 30, 2017 and December 31, 2016:

 

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and Land

Development

   

Home Equity

   

Commercial

and Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

June 30, 2017:

                                                               

Allowance for loan losses

                                                               

Ending balance: Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 85     $ -     $ -     $ 85  

Ending balance: Collectively evaluated for impairment

    990       1,076       258       381       925       181       28       3,839  

Total allowance for loan losses ending balance

  $ 990     $ 1,076     $ 258     $ 381     $ 1,010     $ 181     $ 28     $ 3,924  
                                                                 
Loans:                                                                

Ending balance: Individually evaluated for impairment

  $ -     $ 1,150     $ 222     $ -       367     $ -     $ -     $ 1,739  

Ending balance: Collectively evaluated for impairment

    140,807       93,435       22,856       49,055       72,764       28,228       -       407,145  

Total loans ending balance

  $ 140,807     $ 94,585     $ 23,078     $ 49,055     $ 73,131     $ 28,228     $ -     $ 408,884  

 

 

   

Real Estate:

                                 
   

Residential

   

Commercial

   

Construction and Land Development

   

Home Equity

   

Commercial

& Industrial

   

Consumer

   

Unallocated

   

Total

 
   

(In Thousands)

 

December 31, 2016:

                                                               

Allowance for loan losses:

                                                               

Ending balance: Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ 1     $ -     $ -     $ 1  

Ending balance: Collectively evaluated for impairment

    1,057       1,044       212       346       823       249       21       3,752  

Total allowance for loan losses ending balance

  $ 1,057     $ 1,044     $ 212     $ 346     $ 824     $ 249     $ 21     $ 3,753  
                                                                 

Loans:

                                                               

Ending balance:  Individually evaluated for impairment

  $ -     $ 1,150     $ 222     $ -     $ 415     $ -     $ -     $ 1,787  

Ending balance: Collectively evaluated for impairment

    143,212       87,212       18,670       48,876       73,054       34,911       -       405,935  

Total loans ending balance

  $ 143,212     $ 88,362     $ 18,892     $ 48,876     $ 73,469     $ 34,911     $ -     $ 407,722  

 

- 22 -

 

 

The following tables present the Company’s loans by risk rating as of June 30, 2017 and December 31, 2016:

 

   

Real Estate

                         
   

Residential

   

Commercial

   

Construction

and Land

Development

   

Home Equity

   

Commercial

and Industrial

   

Consumer

   

Total

 
   

(In Thousands)

 

June 30, 2017:

                                                       

Grade:

                                                       

Pass

  $ -     $ 85,887     $ 20,629     $ -     $ 71,489     $ -     $ 178,005  

Special mention

    -       6,099       -       -       533       -       6,632  

Substandard

    1,339       2,599       222       214       1,109       -       5,483  

Loans not formally rated

    139,468       -       2,227       48,841       -       28,228       218,764  

Total

  $ 140,807     $ 94,585     $ 23,078     $ 49,055     $ 73,131     $ 28,228     $ 408,884  
                                                         

December 31, 2016:

                                                       

Grade:

                                                       

Pass

  $ -     $ 79,800     $ 15,738     $ -     $ 71,939     $ -     $ 167,477  

Special mention

    -       5,900       -       -       324       -       6,224  

Substandard

    1,947       2,662       222       319       1,206       -       6,356  

Loans not formally rated

    141,265       -       2,932       48,557       -       34,911       227,665  

Total

  $ 143,212     $ 88,362     $ 18,892     $ 48,876     $ 73,469     $ 34,911     $ 407,722  

 

 

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 3.75. A description of each rating class is as follows:

 

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

 

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

 

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

 

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

 

Risk Rating 3.75 (Technically Deficient) - Loans in this category have all of the attributes of risk ratings 1, 2, 3, or 3.5. However, the borrower is technically in default due to the lack of current financial statements and/or other required financial information.

 

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

 

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

 

Risk Rating 5.5 (Substandard – Non-Accrual) - Loans in this category have all the characteristics of risk rating 5 (Substandard – Accrual), but the loan is past due over 90 days. This category includes non-accrual loans and loans where the Bank has initiated action to foreclose on any pledged or available collateral, or where such foreclosure is imminent.

 

- 23 -

 

 

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

 

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

 

Loans not formally rated include residential, home equity and consumer loans. As of June 30, 2017, $218.8 million of the total residential, home equity and consumer loan portfolio of $220.1 million was not formally rated. As of December 31, 2016, $227.7 million of the total residential, home equity and consumer loan portfolio of $229.9 million was not formally rated. The performance of these loans is measured by delinquency status. The Bank underwrites first mortgage residential 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. Total non-accrual and delinquent loans as of June 30, 2017 were 0.91% of total loans outstanding compared to 1.07% of total loans outstanding as of December 31, 2016. The Company’s allowance for loan losses as of June 30, 2017 was 0.96% of total loans compared to 0.92% of total loans as of December 31, 2016.

 

An age analysis of past-due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016 is as follows:

 

                                                   

90 Days

         
                   

90 Days

                           

or More

         
   

30-59 Days

   

60-89 Days

   

or More

   

Total

   

Total

   

Total

   

Past Due

   

Nonaccrual

 
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Current

   

Loans

   

and Accruing

   

Loans

 
   

(In Thousands)

 

June 30, 2017:

                                                               

Real estate:

                                                               

Residential

  $ -     $ 389     $ 869     $ 1,258     $ 139,549     $ 140,807     $ -     $ 1,339  

Commercial

    -       -       1,150       1,150       84,420       85,570       -       1,150  

Municipal

    -       -       -       -       9,015       9,015       -       -  

Construction and land development

    -       -       222       222       22,856       23,078       -       222  

Home equity

    85       76       71       232       48,823       49,055       -       214  

Commercial and industrial

    -       -       367       367       68,107       68,474       -       367  

Municipal

    -       -       -       -       4,657       4,657       -       -  

Consumer

    88       -       12       100       28,128       28,228       -       12  

Total

  $ 173     $ 465     $ 2,691     $ 3,329     $ 405,555     $ 408,884     $ -     $ 3,304  
                                                                 

December 31, 2016:

                                                               

Real estate:

                                                               

Residential

  $ -     $ 297     $ 1,811     $ 2,108     $ 141,104     $ 143,212     $ -     $ 1,947  

Commercial

    -       -       1,150       1,150       78,479       79,629       -       1,150  

Municipal

    -       -       -       -       8,733       8,733       -       -  

Construction and land development

    -       -       222       222       18,670       18,892       -       222  

Home equity

    -       219       169       388       48,488       48,876       -       248  

Commercial and industrial

    767       42       415       1,224       68,030       69,254       -       415  

Municipal

    -       -       -       -       4,215       4,215       -       -  

Consumer

    114       43       1       158       34,753       34,911       -       70  

Total

  $ 881     $ 601     $ 3,768     $ 5,250     $ 402,472     $ 407,722     $ -     $ 4,052  

 

- 24 -

 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 for which the Company has measured impairment on a loan-by-loan basis is as follows as of and for the six months ended June 30, 2017 and the year ended December 31, 2016:

 

           

Unpaid

           

Average

   

Interest

 
   

Recorded

   

Principal

   

Related

   

Recorded

   

Income

 
   

Investment

   

Balance

   

Allowance

   

Investment

   

Recognized

 
   

(In Thousands)

 

June 30, 2017:

                                       

With no related allowance recorded:

                                       

Real Estate:

                                       

Residential & commercial construction and land development

  $ 222     $ 222     $ -     $ 222     $ -  

Commerical and industrial

    134       134       -       134       -  

Total impaired with no related allowance

    356       356       -       356       -  
                                         

With an allowance recorded:

                                       

Real Estate:

                                       

Commercial

    1,150       1,150       -       1,150       -  

Commerical and industrial

    233       233       85       256       -  

Total impaired with an allowance recorded

    1,383       1,383       85       1,406       -  
                                         
                                         

Total

                                       

Real Estate:

                                       

Commercial

    1,150       1,150       -       1,150       -  

Residential & commercial construction and land development

    222       222       -       222       -  

Commerical and industrial

    367       367       85       390       -  

Total impaired loans

  $ 1,739     $ 1,739     $ 85     $ 1,762     $ -  
                                         
                                         

December 31, 2016:

                                       

With no related allowance recorded:

                                       

Real Estate:

                                       

Commercial

  $ 1,150     $ 1,150     $ -     $ 3,029     $ 272  

Residential & commercial construction and land development

    222       222       -       222       4  

Commercial and industrial

    134       134       -       135       4  

Total impaired with no related allowance

    1,506       1,506       -       3,386       280  
                                         

With an allowance recorded:

                                       

Real Estate:

                                       

Commercial and industrial

    281       281       1       321       -  

Total impaired with an allowance recorded

    281       281       1       321       -  
                                         

Total

                                       

Real Estate:

                                       

Commercial

    1,150       1,150       -       3,029       272  

Residential & commercial construction and land development

    222       222       -       222       4  

Commercial and industrial

    415       415       1       456       4  

Total impaired loans

  $ 1,787     $ 1,787     $ 1     $ 3,707     $ 280  

 

 

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 were no loans modified as a troubled debt restructuring during the six months ended June 30, 2017.

 

As of June 30, 2017, 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 June 30, 2017. The aggregate balance of the loans in the process of foreclosure is approximately $580 thousand at June 30, 2017.

 

There was one loan modified as a TDR during the year ended December 31, 2016. 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. The loan was deemed uncollectible and charged off prior to December 31, 2016.

 

- 25 -

 

  

The balance of mortgage servicing rights (net) included in other assets at June 30, 2017 and December 31, 2016 was approximately $2.0 million. Mortgage servicing rights of $147 thousand and $246 thousand were capitalized for the three months ended June 30, 2017 and June 30, 2016, respectively. Amortization of mortgage servicing rights was $209 thousand and $173 thousand for the three months ended June 30, 2017 and June 30, 2016, respectively. The fair value of these rights was $2.7 million and $2.1 million as of June 30, 2017 and December 31, 2016, respectively.

 

Mortgage servicing rights of $287 thousand and $383 thousand were capitalized for the six months ended June 30, 2017 and June 30, 2016, respectively.

 

The Company includes capitalized mortgage servicing rights as part of the recognized gains on sales of mortgages. The total recognized gains on sales of mortgages, net (net of costs, including direct and indirect origination costs), were $227 thousand and $317 thousand for the three months ended June 30, 2017 and 2016, respectively. The total recognized gains on sales of mortgages, net (net of costs, including direct and indirect origination costs), were $449 thousand and $524 thousand for the six months ended June 30, 2017 and 2016, respectively.

 

Other significant amounts included in mortgage banking activities, net on the consolidated statements of income for the three months ended June 30, 2017 were $195 thousand of servicing fee income, amortization of mortgage servicing rights of ($209) thousand, and a decrease in the valuation allowance of $82 thousand. Other significant amounts included in mortgage banking activities, net on the consolidated statements of income for the three months ended June 30, 2016 were $153 thousand of servicing fee income, amortization of mortgage servicing rights of ($173) thousand, and an increase in the valuation allowance of ($41) thousand. 

 

Other significant amounts included in mortgage banking activities, net on the consolidated statements of income for the six months ended June 30, 2017 were $388 thousand of servicing fee income, amortization of mortgage servicing rights of ($419) thousand, and a decrease in the valuation allowance of $116 thousand. Other significant amounts included in mortgage banking activities on the consolidated statements of income for the three months ended June 30, 2016 were $299 thousand of servicing fee income, amortization of mortgage servicing rights of $346 thousand, and an increase in the valuation allowance of ($235) thousand.

 

The following is an analysis of the aggregate changes in the valuation allowance for mortgage servicing rights for the six months ended June 30:

 

 

   

2017

   

2016

 
   

(In Thousands)

 

Balance, beginning of year

  $ 206     $ 20  

Additions

    -       233  

Reductions

    (116 )     -  

Balance, end of period

  $ 90     $ 253  

 

 

 

Mortgage loans serviced for others were not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $324.6 million and $303.4 million as of June 30, 2017 and December 31, 2016, respectively.

 

Management uses derivative financial instruments in connection with the Bank’s risk management activities and to accommodate the needs of the Bank’s customers.  The Bank enters into interest rate lock commitments with borrowers and forward sales commitments with investors.

 

Mortgage banking derivatives are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, interest rate lock commitments are generally extended to the borrowers. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans causing a reduction in the anticipated gain on sale of the loans and possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established under which the Company agrees to deliver whole mortgage loans to investors. Mandatory forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

 

As of June 30, 2017 and December 31, 2016, the Company did not have interest in any derivative financial instruments designated as formal hedging relationships.  The Company’s free-standing derivative financial instruments are required to be carried at their fair value on the Company’s consolidated statements of condition.  These financial instruments have been limited to interest rate lock commitments and forward sale commitments. The fair value of these derivatives was not material at June 30, 2017 and December 31, 2016

 

- 26 -

 

 

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 Morgan Stanley, 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 INCOME

 

The following tables present the reclassification disclosure for the three and six months ended June 30, 2017 and 2016:

 

Three months ended:

 

6/30/2017

   

6/30/2016

 
   

( In Thousands)

 

Net change in unrealized holding gain/loss on securities available-for-sale

  $ 278     $ 488  

Reclassification adjustment for realized gains in net income (1)

    -       (21 )

Other comprehensive income before tax

    278       467  

Income tax expense

    (94 )     (159 )

Other comprehensive income, net of tax

  $ 184     $ 308  

 

 

Six months ended:

 

6/30/2017

   

6/30/2016

 
   

( In Thousands)

 

Net change in unrealized holding gain/loss on securities available-for-sale

  $ 461     $ 1,455  

Reclassification adjustment for realized gains in net income (1)

    -       (69 )

Other comprehensive income before tax

    461       1,386  

Income tax expense

    (157 )     (473 )

Other comprehensive income, net of tax

  $ 304     $ 913  

 

 

 

(1)

Reclassification adjustments are comprised of realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive loss 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 (benefit) and the after tax amount is included in net income.

 

Accumulated other comprehensive loss as of June 30, 2017 and December 31, 2016 consists entirely of net unrealized losses on available-for-sale securities, net of taxes.

 

- 27 -

 

 

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;

 

 

In June 2016, the FASB issued a new standard on accounting for credit losses that will be effective to the Company for fiscal years beginning after December 31, 2019 (and interim periods within those fiscal years). The standard will replace multiple existing impairment models, including replacing an “incurred loss” model for loans with an “expected loss” model. The adoption of this standard may have a material impact on the Company’s allowance for loan losses and retained earnings in the period of adoption.

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

adverse changes may occur in the equity markets;

 

 

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

 

 

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

 

- 28 -

 

 

As a result 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 unaudited consolidated financial statements of the Company for the six months ended June 30, 2017. All adjustments that, in the opinion of management, are necessary in order to make the unaudited consolidated financial statements for the six months ended June 30, 2017 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 that provides 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, Small Business Administration ("SBA") loans and a variety of consumer loans; checking, savings, and money market deposit accounts and certificates of deposit; 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 1-4 family residential mortgages throughout southern New England.

 

The Bank’s main office and its corporate offices are located in the town of Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon, Bloomfield, and West Hartford, Connecticut. The full service West Hartford branch was opened in April of 2016 after the Bank received regulatory approval from the Connecticut Department of Banking and the Federal Deposit Insurance Corporation ("FDIC") in 2015 to open this branch. The Bank also maintains a mortgage center in Glastonbury, Connecticut. Services to the Bank’s customers are also provided through SBT Online Internet banking. The Bank’s customer base consists primarily of individual customers and small businesses in north central Connecticut. The Bank has in excess of 22,000 deposit accounts.

 

The Bank offers investment products and services to customers through SBT Investment Services, Inc., a wholly-owned subsidiary of the Bank, which has an 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, 2016. There are no material changes to the critical acounting policies from those disclosed on the 10-K. 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 determination of the allowance for loan losses. See the heading “Provision for Loan Losses” below for further details about the Bank’s current provision.

 

Overview

 

For the six months ended June 30, 2017, net income amounted to $1.1 million, or $0.79 per diluted share. This compares to net income of $457 thousand, or $0.34 per diluted share, for the six months ended June 30, 2016. Total assets as of June 30, 2017 were $526 million compared to $510 million as of December 31, 2016.

 

Key financial highlights for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 include total asset growth since June 30, 2016 of $41.0 million or 8.5%, and net loan growth of $40 million or 10.8%, over the last 12 months. Deposits increased in the same 12 month period by $40.4 million primarily due to a $30.5 million increase in savings and NOW accounts, a $5.3 million increase in time deposits, and an increase in demand deposits of $4.7 million. When compared to December 31, 2016, net loans increased by $0.9 million or 0.2%, for the six months ended June 30, 2017. When compared to December 31, 2016, deposits increased $4.5 million, or 1.1% for the six months ended June 30, 2017.

 

For the three months ended June 30, 2017, the Company’s basic and diluted earnings per share were $0.42, an increase of $0.23 per share compared to basic and diluted earnings per share of $0.19 for the second quarter of 2016. Non-accrual loans decreased to $3.3 million as of June 30, 2017, which was 0.81% of total loans as of such date, from $3.7 million, or 1.01% of total loans, a year ago. Total non-accrual and delinquent loans decreased to 0.91% of total loans outstanding as of June 30, 2017 from 1.6% of total loans outstanding as of June 30, 2016. The Company’s allowance for loan losses was 0.96% of total loans at June 30, 2017, compared to 0.92% of total loans at December 31, 2016.

  

- 29 -

 

 

Total deposits as of June 30, 2017 were $418.3 million, an increase of $40.5 million, or 10.7%, from total deposits of $377.8 million a year ago. At June 30, 2017, 31.8% of total deposits were in non-interest bearing demand accounts, 51.9% were in low-cost savings and NOW accounts, and 16.3% were in time deposits. At June 30, 2017, the Company had 22,090 deposit accounts compared to 21,678 deposit accounts at June 30, 2016.

 

At June 30, 2017, total gross loans were $410 million compared to $370 million a year ago. Compared to June 30, 2016, commercial loans grew by $35.0 million, or 22.8%, residential mortgage loans increased by $4.7 million, or 3.4%, and consumer loans increased by $319 thousand or 0.4%.

 

Total revenues, consisting of net interest and dividend income plus noninterest income, were $4.4 million in the second quarter of 2017 compared to $4.0 million a year ago due to an increase in interest income on loans of $509 thousand, which was partially offset by an increase in interest expense of $158 thousand.

 

The Company’s taxable-equivalent net interest margin (taxable-equivalent net interest and dividend income divided by average earning assets) was 3.03% for the six months ended June 30, 2017 as compared to 3.03% for the comparable 2016 period. The Company’s yield on earning assets increased 10 basis points to 3.45% while its cost of funds increased 14 basis points to 0.59% for the six months ended June 30, 2017 compared to the same period of 2016. The increase in cost of funds is primarily related to interest on savings and time deposits and Federal Home Loan Bank advances.

 

Total noninterest expenses for the second quarter of 2017 were $3.6 million, equivalent to the second quarter of 2016. Total noninterest expense for the six months ended June 30, 2017 was $6.9 million, equivalent to the comparable 2016 period.

 

Capital levels for the Bank on June 30, 2017 and December 31, 2016 were above those required to meet the regulatory “well-capitalized” designation.

 

   

Capital Ratios

   
   

June 30, 2017

   
   

The Simsbury Bank

   
   

and Trust Company, Inc.

 

Regulatory Standard for Well-Capitalized

Tier 1 Leverage Capital Ratio

  7.49%   5.00

Tier 1 Risk-Based Capital Ratio

  10.66%   8.00

Common Equity Tier 1 Risk-Based Capital Ratio

  10.66%   6.50

Total Risk-Based Capital Ratio

  11.76%   10.00

 

 

    Capital Ratios    

 

 

December 31, 2016

 

 

 

 

The Simsbury Bank

 

 

 

 

and Trust Company, Inc.

 

Regulatory Standard for Well-Capitalized

Tier 1 Leverage Capital Ratio

 

7.46%

 

5.00%

Tier 1 Risk-Based Capital Ratio

 

10.65%

 

8.00%

Common Equity Tier 1 Risk-Based Capital Ratio

 

10.65%

 

6.50%

Total Risk-Based Capital Ratio

 

11.72%

 

10.00%

 

 

At June 30, 2017, 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.” 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.

 

- 30 -

 

 

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 changes in the level and 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 ("FRB").

  

On a tax equivalent basis, net interest and dividend income after provision for loan losses plus noninterest income was $4.4 million for the quarter ended June 30, 2017 compared to $3.9 million for the quarter ended June 30, 2016. The Company’s net interest margin, defined as the ratio of taxable equivalent net interest and dividend income to interest-earning assets or net yield on earning assets, increased to 3.06% for the quarter ended June 30, 2017 from 3.01% for the quarter ended June 30, 2016. The Company’s net interest spread, defined as the difference between the yield on earning assets and the cost of deposits and borrowings, increased to 2.89% for the quarter ended June 30, 2017 from 2.86% for the quarter ended June 30, 2016. The Company’s cost of deposits and borrowings increased to 0.63% for the quarter ended June 30, 2017 from 0.49% for the quarter ended June 30, 2016.

 

On a tax equivalent basis, net interest and dividend income after provision for loan losses plus noninterest income was $8.4 million for the six months ended June 30, 2017 compared to $7.5 million for the six months ended June 30, 2016. 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, was 3.03% for the six months ended June 30, 2017 compared to 3.03% for the six months ended June 30, 2016. 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 2.86% for the six months ended June 30, 2017 from 2.90% for the six months ended June 30, 2016. The yield on interest earning assets for the six months ended June 30, 2017 increased 10 basis points to 3.45% compared to the six months ended June 30, 2016. The Company’s cost of deposits and borrowings increased to 0.59% for the six months ended June 30, 2017 from 0.45% for the six months ended June 30, 2016.

 

- 31 -

 

 

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

 

NET INTEREST INCOME

 

(Dollars in thousands)

 
                                                 
   

For the three months ended 06/30/17

   

For the three months ended 6/30/16

 
   

Average Balance (1)

   

Interest

   

Yield

   

Average Balance (1)

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 9,416     $ 24       1.02 %   $ 7,729     $ 10       0.52 %
                                                 

Certificates of deposit

    1,250       5       1.60 %     1,500       6       1.60 %

Investments (2)

    62,499       377       2.41 %     74,543       419       2.25 %
                                                 

Mortgage loans

    149,422       1,277       3.42 %     143,746       1,244       3.46 %

Commercial loans

    183,341       1,943       4.24 %     147,484       1,555       4.22 %

Consumer loans

    78,140       630       3.22 %     75,174       540       2.87 %

Total loans (2)

    410,903       3,850       3.75 %     366,404       3,339       3.65 %
                                                 

Total interest-earning assets (2)

    484,068     $ 4,256       3.52 %     450,176     $ 3,774       3.35 %

Non-interest earning assets

    22,954                       22,809                  

Total Assets

  $ 507,022                     $ 472,985                  
                                                 

NOW deposits

  $ 49,183     $ 11       0.09 %   $ 44,734     $ 9       0.08 %

Savings deposits

    165,451       110       0.27 %     150,182       73       0.19 %

Certificates of deposit

    67,686       152       0.90 %     58,009       106       0.73 %

Total interest bearing deposits

    282,320       273       0.39 %     252,925       188       0.30 %
                                                 

Securities sold under agreements to repurchase

    2,566       2       0.31 %     2,157       2       0.37 %

Long-term subordinated debt

    7,262       135       7.44 %     7,233       135       7.47 %

Federal Home Loan Bank advances

    54,326       139       1.02 %     56,242       66       0.47 %
                                                 

Total interest-bearing liabilities

    346,474     $ 549       0.63 %     318,557     $ 391       0.49 %

Non-interest bearing liabilities

    129,048                       123,908                  

Total Liabilities

    475,522                       442,465                  
                                                 

Total stockholders' equity

    31,500                       30,520                  

Total liabilities and stockholders' equity

  $ 507,022                     $ 472,985                  
                                                 

Tax equivalent net interest income

          $ 3,707                     $ 3,383          

Less: tax equivalent adjustments

          $ (70 )                   $ (71 )        

Net interest income

          $ 3,637                     $ 3,312          

Net interest spread

                    2.89 %                     2.86 %

Net interest margin

                    3.06 %                     3.01 %

 

 

 

(1)

Average balances presented are daily averages

 

(2)

On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $70 thousand in 2017, and $71 thousand in 2016. Loan balances contain the carrying amount of nonaccrual loans.

 

- 32 -

 

 

   

NET INTEREST INCOME

 
   

(Dollars in thousands)

 
                                                 
   

For the six months ended 06/30/17

   

For the six months ended 06/30/16

 
                                                 
   

Average Balance (1)

   

Interest

   

Yield

   

Average Balance (1)

   

Interest

   

Yield

 

Federal funds sold & overnight deposits

  $ 10,359     $ 49       0.95 %   $ 9,947     $ 28       0.56 %
                                                 

Certificates of deposit

    1,250       10       1.60 %     1,419       11       1.55 %

Investments (2)

    62,207       750       2.41 %     74,473       844       2.27 %
                                                 

Mortgage loans

    149,422       2,548       3.41 %     142,857       2,489       3.48 %

Commercial loans

    182,335       3,748       4.11 %     138,395       2,928       4.23 %

Consumer loans

    80,003       1,265       3.16 %     71,071       1,030       2.90 %

Total loans (2)

    411,760       7,561       3.67 %     352,323       6,447       3.66 %
                                                 

Total interest-earning assets (2)

    485,576     $ 8,370       3.45 %     438,162     $ 7,330       3.35 %

Non-interest earning assets

    23,166                       21,773                  

Total Assets

  $ 508,742                     $ 459,935                  
                                                 

NOW deposits

  $ 48,618     $ 23       0.09 %   $ 43,008     $ 18       0.08 %

Savings deposits

    172,837       218       0.25 %     154,927       131       0.17 %

Certificates of deposit

    67,366       298       0.88 %     57,181       198       0.69 %

Total interest bearing deposits

    288,821       539       0.37 %     255,116       347       0.27 %
                                                 

Securities sold under agreements to repurchase

    2,549       3       0.24 %     2,037       3       0.29 %

Long-term subordinated debt

    7,258       269       7.41 %     7,230       242       6.69 %

Federal Home Loan Bank advances

    46,340       208       0.90 %     41,049       98       0.48 %
                                                 

Total interest-bearing liabilities

    344,968     $ 1,019       0.59 %     305,432     $ 690       0.45 %

Non-interest bearing liabilities

    132,543                       124,002                  

Total Liabilities

    477,511                       429,434                  
                                                 

Total stockholders' equity

    31,231                       30,501                  

Total liabilities and stockholders' equity

  $ 508,742                     $ 459,935                  
                                                 

Tax equivalent net interest income

          $ 7,351                     $ 6,640          

Less: tax equivalent adjustments

          $ (158 )                   $ (140 )        

Net interest income

          $ 7,193                     $ 6,500          

Net interest spread

                    2.86 %                     2.90 %

Net interest margin

                    3.03 %                     3.03 %

 

 

  (1)

Average balances presented are daily averages

 

(2)

On a fully taxable equivalent basis based on a tax rate of 34%. Interest income on investments and loans includes fully taxable equivalent adjustments of $158 thousand in 2017, and $140 thousand in 2016. Loan balances contain the carrying amount of nonaccrual loans.

 

- 33 -

 

 

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 June 30,

 
   

2017 vs. 2016

 
   

Increase (decrease) due to:

 
   

Rate

   

Volume

   

Total

 
   

(In thousands)

 

Interest on interest-bearing assets:

                       

Federal funds sold & overnight deposits

  $ 10     $ 4     $ 14  

Certificates of deposit

    -       (1 )     (1 )

Investments

    31       (73 )     (42 )

Mortgage loans

    (16 )     49       33  

Commercial loans

    8       380       388  

Consumer loans

    66       24       90  

Total interest income

    99       383       482  
                         

Interest on interest-bearing liabilities:

                       

NOW deposits

  $ 1     $ 1     $ 2  

Savings deposits

    27       10       37  

Certificates of deposit

    24       22       46  

Securities sold under agreements to repurchase

    -       -       -  

Subordinated debt

    (1 )     1       -  

FHLB advances

    78       (5 )     73  

Total interest expense

    129       29       158  
                         

Net change in net interest income

  $ (30 )   $ 354     $ 324  

 

- 34 -

 

 

   

Six months ended June 30,

 
   

2017 vs. 2016

 
   

Increase (decrease) due to:

 
   

Rate

   

Volume

   

Total

 
   

(In thousands)

 

Interest on interest-bearing assets:

                       

Federal funds sold & overnight deposits

  $ 19     $ 2     $ 21  

Certificates of deposit

    -       (1 )     (1 )

Investments

    54       (148 )     (94 )

Mortgage loans

    (53 )     112       59  

Commercial loans

    (83 )     903       820  

Consumer loans

    94       141       235  

Total interest income

    31       1,009       1,040  
                         

Interest on interest-bearing liabilities:

                       

NOW deposits

  $ 2     $ 3     $ 5  

Savings deposits

    64       23       87  

Certificates of deposit

    55       45       100  

Securities sold under agreements to repurchase

    (1 )     1       -  

Subordinated debt

    26       1       27  

FHLB advances

    86       24       110  

Total interest expense

    232       97       329  
                         

Net change in net interest income

  $ (201 )   $ 912     $ 711  

 

 

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, GAAP, general economic conditions, and other factors related to the collectability of loans in the Company’s portfolio.

 

The Company recorded an $85 thousand provision for loan losses for the three months ended June 30, 2017 compared to $170 thousand for the three months ended June 30, 2016, a decrease of $85 thousand. The Company recorded a $335 thousand provision for loan losses for the six months ended June 30, 2017 compared to $301 thousand for the six months ended June 30, 2016, an increase of $34 thousand. The provision for the six months ended June 30, 2017 was mainly driven by the charge-off of a residential loan relationship and the addition of a specific reserve of $84 thousand on a commercial loan that was deemed impaired.

 

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 June 30, 2017 was $3.9 million or 0.96% of outstanding loans compared to $3.8 million or 0.92% of outstanding loans as of December 31, 2016. The Company recorded charge-offs of eight loans in the amount of $38 thousand in the second quarter of 2017 and recorded charge-offs of two loans in the amount of $5 thousand in the second quarter of 2016. During the second quarter of 2017, the Company had eight recoveries totaling $8 thousand compared to three recoveries totaling $4 thousand for the second quarter of 2016. For the six months ended June 30, 2017, the Company recorded charge-offs of nine loans in the amount of $174 thousand compared to charge-offs of two loans in the amount of $5 thousand in the six months ended June 30, 2016. During the six months ended June 30, 2017, the Company had thirteen recoveries totaling $10 thousand compared to seven recoveries totaling $5 thousand for the six months ended June 30, 2016. Management believes the allowance for loan losses is adequate.

  

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Noninterest Income and Noninterest Expense

 

Total noninterest income (which is derived mainly from service and overdraft charges and mortgage banking activities) for the three months ended June 30, 2017 was $771 thousand compared to $704 thousand for the same period in the prior year. The increase was mainly due to an increase in mortgage banking activities in the amount of $39 thousand and a $24 thousand increase in other service charges and fees. The increase was partially offset by a $24 thousand decrease in gain on available-for-sale securities.

 

Total noninterest income (which is derived mainly from service and overdraft charges and mortgage banking activities) for the six months ended June 30, 2017 was $1.4 million compared to $1.2 million for the same period in the prior year. The increase was mainly due to an increase in mortgage banking activities in the amount of $287 thousand and a $43 thousand increase in other income. As it relates to mortgage banking activities, the increase is primarily attributed to an impairment charge of $234 thousand for the six months ended June 30, 2016, versus a reduction of the impairment reserve of $116 thousand for the six months ended June 30, 2017. The increase was partially offset by a $72 thousand decrease in gain on available-for-sale securities.

 

Total noninterest expense for the three months ended June 30, 2017 was unchanged at $3.6 million when compared to the same period in the prior year. The ratio of annualized operating expenses to average assets was 2.8% for the second quarter of 2017 compared to 3.1% for the second quarter of 2016. Salaries and employee benefits for the three months ended June 30, 2017 decreased $174 thousand when compared to the three months ended June 30, 2016, primarily driven by lower incentive compensation and fewer full time equivalent employees. Professional fees increased $79 thousand for the three months ended June 30, 2017 when compared to the three months ended June 30, 2016, primarily driven by consulting expenses related to corporate initiatives. Data Processing expenses increased $28 thousand for the three months ended June 30, 2017 when compared to the three months ended June 30, 2016. FDIC assessment increased $17 thousand for the three months ended June 30, 2017 when compared to the three months ended June 30, 2016, primarily driven by higher loan balances and a change in the assessment formula adopted by the FDIC in the fourth quarter of 2016.

 

Salaries and employee benefits comprised approximately 49% of total noninterest expense for the three months ended June 30, 2017 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 June 30, 2017 compared to 11% for the three months ended June 30, 2016, and data processing fees, which comprised 6.3% of noninterest expense for the second quarter of 2017 compared to 5.5% of noninterest expenses for the same period in 2016. Advertising and promotions remained relatively constant in the 5% to 6% range and equipment expenses remained relatively constant in the 3% to 3.5% range for each of the three months ended June 30, 2017 and 2016. 

 

Total noninterest expense for the six months ended June 30, 2017 was unchanged at $6.9 million when compared to the same period in the prior year. The ratio of annualized operating expenses to average assets was 2.7% for the six months ended June 30, 2017 compared to 3.0% for the six months ended June 30, 2016. Salaries and employee benefits for the six months ended June 30, 2017 decreased $312 thousand when compared to the six months ended June 30, 2016, primarily driven by lower incentive compensation and fewer full time equivalent employees. Professional fees increased $195 thousand for the six months ended June 30, 2017 when compared to the six months ended June 30, 2016, primarily driven by consulting expenses related to corporate initiatives. FDIC assessment increased $65 thousand for the six months ended June 30, 2017 when compared to the three months ended June 30, 2016, primarily driven by higher loan balances and a change in the assessment formula adopted by the FDIC in the fourth quarter of 2016.

 

Salaries and employee benefits comprised approximately 50% of total noninterest expense for the six months ended June 30, 2017 compared to 54% of total noninterest expense for the same period in the prior year. Other major categories included occupancy expenses, which comprised approximately 10.8% of noninterest expense for the six months ended June 30, 2017 compared to 11.0% for the six months ended June 30, 2016, and data processing fees, which comprised 6.6% of noninterest expense for the six months ended June 30, 2017 compared to 5.9% of noninterest expenses for the same period in 2016. Advertising and promotions remained relatively constant in the 3% to 5% range and equipment expenses remained relatively constant in the 3% to 3.5% range for each of the six months ended June 30, 2017 and 2016. 

 

Income Taxes

 

The effective income tax rate for the three months ended June 30, 2017 and 2016 was 22.8% and (0.40%), respectively. For the six months ended June 30, 2017 and 2016, respectively, the effective tax rate was 20.4% and (1.6)%. The Company realized a tax benefit in the first and second quarter of 2016 as its core earnings were lower in relation to tax exempt income, thereby creating a tax benefit. 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.

 

- 36 -

 

 

Financial Condition

 

Investment Portfolio

 

The fair value of investments in available-for-sale securities as of June 30, 2017 was $58.1 million, which was 0.66% below amortized cost, compared to $58.7 million, which was 1.4% below amortized cost, as of December 31, 2016. 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 June 30, 2017, there were $136 thousand in investment securities in the investment portfolio that management determined to be other-than-temporarily impaired.

 

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 June 30, 2017, the Company had 45 securities with a carrying value totaling $19.6 million that were pledged for such purposes. At December 31, 2016, the Company had 33 securities with a carrying value totaling $13.6 million that were pledged for such purposes.

 

As of June 30, 2017 and December 31, 2016, 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 June 30, 2017 was comprised of approximately 54% mortgage and consumer loans and 46% commercial loans. The Company does not have any concentrations in its loan portfolio by industry or group of industries.

 

There were approximately $143.0 million of gross residential mortgage loans as of June 30, 2017 compared to $146.1 million at December 31, 2016. The Company sold 79 loans during the three months ended June 30, 2017 with an aggregate principal balance of $17.3 million, which resulted in an aggregate gain on sales of these loans of $227 thousand. For the six months ended June 30, 2017, the Company sold 148 loans with an aggregate principal balance of $40.2 million, which resulted in an aggregate gain on sales of these loans of $449 thousand. 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 June 30, 2017, the Company had consumer and home equity loan balances of approximately $77.3 million, representing a 7.8% decrease from the consumer and home equity loan balances at December 31, 2016. As of June 30, 2017, the Company had approximately $13.6 million in consumer auto loans purchased from BCI Financial Corp. (“BCI”) on its books compared to approximately $17.1 million in auto loans purchased from BCI on its books as of December 31, 2016. 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 Company had approximately $13.3 million in purchased student loans on its books as of June 30, 2017 compared to $16.1 million on its books as of December 31, 2016.

 

At June 30, 2017, commercial and industrial loans totaled $68.5 million compared to $69.3 million at December 31, 2016. The Company’s commercial and industrial 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.

 

- 37 -

 

 

The June 30, 2017 gross balance for municipal and commercial real estate loans, including construction loans, was $115.4 million, a 10.7% increase from the gross loan balance for municipal and commercial real estate loans at December 31, 2016. 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 interest 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 June 30, 2017, the Bank’s lending limits were $6.3 million and $10.5 million, respectively. As of December 31, 2016, these lending limits were $6.2 million and $10.3 million, respectively. The Bank sells participations in its loans when necessary to stay within its 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 June 30, 2017 with an aggregate balance of $3.3 million compared to 17 non-accrual loans at December 31, 2016 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 one OREO property at March 31, 2017 totaling $570 thousand which was sold in the second quarter of 2017. The Company charged off approximately $134 in the first quarter of 2017 thousand against the allowance for loan losses to record the OREO at fair value less estimated costs to sell. The Company recorded an additional loss of $13 thousand on the sale of the property that was recognized in the three months ended June 30, 2017.

 

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 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.

 

- 38 -

 

 

The Company had criticized and classified loans with an aggregate outstanding balance of $12.1 million as of June 30, 2017 compared to $12.6 million as of December 31, 2016. The Company had no exposure to sub-prime loans in its loan portfolio as of June 30, 2017 and December 31, 2016. The Company’s allowance for loan losses was 0.96% of outstanding loans as of June 30, 2017 compared to 0.92% of outstanding loans as of December 31, 2016.

 

The Company maintains an allowance for loan losses to cover 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 June 30, 2017, the Company had a deposit mix of 44.3% checking, 39.4% savings and 16.3% certificates of deposit. The Company’s net interest income is enhanced by its percentage of non-interest-bearing deposits. As of December 31, 2016, the deposit mix was 45.0% checking, 38.9% savings, and 16.1% certificates of deposit. At June 30, 2017, 32% of the total deposits of $418 million were non-interest-bearing compared to 32% of the Company’s total deposits of $414 million that were non-interest-bearing at December 31, 2016. As of June 30, 2017 and December 31, 2016, the Company had $46.4 million and $43.2 million, respectively, in municipal deposits.

 

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 June 30, 2017 which was unchanged from December 31, 2016.

 

Borrowings

 

As of June 30, 2017, the Company had $64.3 million in borrowings from the Federal Home Loan Bank of Boston ("FHLBB") on its balance sheet compared to $54.1 million in outstanding borrowings from the FHLBB as of December 31, 2016.

 

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 $7.5 million due October 1, 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 June 30, 2017 and December 31, 2016, the Company had $1.5 million of deposits in the CDARS network.

 

- 39 -

 

 

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 June 30, 2017, the Company held $26.1 million in cash and cash equivalents and certificates of deposit, net of required FRB reserves of $7.1 million, and $38.4 million in available-for-sale securities, net of pledged investments of $19.6 million, for total liquid assets of $64.5 million. As of December 31, 2016, the Company held $15.3 million in cash and cash equivalents and certificates of deposit, net of required FRB reserves of $6.9 million, and $45.4 million in available-for-sale securities, net of pledged investments of $13.3 million, for total liquid assets of $60.7 million. As of June 30, 2017, the Company’s anticipated short-term liability obligations were $115.6 million, which resulted in a basic liquidity deficit of $51.1 million that represented 9.7% of total assets. As of December 31, 2016, the Company’s anticipated short-term liability obligations were $104.9 million, which resulted in a basic liquidity shortfall of $44.5 million that represented 8.7% of total assets. The liquidity shortfall does not indicate an inability of the Company to meet its short-term obligations as the Company has borrowing capacity in excess of the amount of the shortfall.

 

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 regulators about components, risk weightings and other factors.

 

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

 

Subsequently, in July 2013, the FRB and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implemented and addressed the revised standards of Basel III and addressed relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FRB's and the FDIC's rules apply to all depository institutions and top-tier bank holding companies with total consolidated assets of $500 million or more (this threshold was subsequently increased to $1 billion or more in May 2015) ("banking organizations"). Among other things, the rules established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). Banking organizations are required to have a total capital ratio of 8% (unchanged from prior rules) and a Tier 1 leverage ratio of 4% (unchanged from prior rules). The rules also limit a banking organization's ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% (fully phased-in amount effective January 1, 2019) of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The rules became effective for the Bank on January 1, 2015 (subject to phase-in periods for certain components.). The capital conservation buffer is being phased-in beginning January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and will increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets. As of January 1, 2017, the Bank was required to maintain a capital conservation buffer of 1.25%.

 

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

 

Management believes, as of June 30, 2017 and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject. In addition, as of June 30, 2017, the Bank exceeded the fully phased-in regulatory requirements for the capital conservation buffer. 

 

As of June 30, 2017 (unaudited) and December 31, 2016, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

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. Also, 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

 

Mortgage banking derivatives are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, interest rate lock commitments are generally extended to the borrowers. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans causing a reduction in the anticipated gain on sale of the loans and possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established under which the Company agrees to deliver whole mortgage loans to investors. Mandatory forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

 

As of June 30, 2017, the Company had in place mandatory commitments to sell approximately $15.4 million of loans secured by 1-to-4 family residential properties to the Federal Home Loan Mortgage Corporation (Freddie Mac). As of December 31, 2016, the Company had in place mandatory commitments to sell approximately $7.4 million of loans secured by 1-to-4 family residential properties to Freddie Mac. The Company recorded a $21 thousand liability and loss on its forward commitments in place as of June 30, 2017.

 

As of June 30, 2017, the Company had in place interest rate locks on approximately $5.9 million in lending commitments. The Company recorded a $28 thousand asset and gain on its interest rate locks in place as of June 30, 2017.

 

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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 June 30, 2017. 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 June 30, 2017 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.

 

- 42 -

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

None.

 

- 43 -

 

 

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

 

- 44 -

 

 

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: August 11, 2017

By:

/s/ Martin J Geitz

 

 

 

Martin J. Geitz

Chief Executive Officer

 

 

 

 

 

 

Date: August 11, 2017

By:

/s/ Richard J. Sudol

 

 

 

Richard J. Sudol 

 

 

 

Chief Financial Officer 

 

 

- 45 -

 

 

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

 

- 46 -