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NHTB > SEC Filings for NHTB > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for NEW HAMPSHIRE THRIFT BANCSHARES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for NEW HAMPSHIRE THRIFT BANCSHARES INC


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Highlights and Overview

Our profitability is derived from the Bank. The Bank's earnings are primarily generated from the difference between the yield on its loans and investments and the cost of its deposit accounts and borrowings. Loan origination fees, retail-banking service fees, and gains on security and loan transactions supplement these core earnings.

Total assets increased $228.7 million, or 21.95%, to $1.3 billion at December 31, 2012, from $1.0 billion at December 31, 2011.

Net loans increased $187.3 million, or 26.20%, to $902.2 million at December 31, 2012, from $715.0 million at December 31, 2011.

In 2012, we originated $426.8 million in loans, compared to $289.1 million in 2011.

Our loan servicing portfolio was $385.4 million at December 31, 2012, compared to $365.8 million at December 31, 2011.

Total deposits increased $146.3 million, or 18.22%, to $949.3 million at December 31, 2012, from $803.0 million at December 31, 2011.

Net interest and dividend income for the year ended December 31, 2012, was $29.0 million compared to $28.5 million for the same period in 2011.

Net income available to common stockholders was $7.1 million for the year ended December 31, 2012, compared to $7.0 million for the same period in 2011

Our returns on average assets and average equity for the 12 months ended December 31, 2012, were 0.69% and 6.99%, respectively, compared to 0.74% and 7.96%, respectively, for the same period in 2011.

As a percentage of total loans, non-performing loans decreased to 2.22% at December 31, 2012, from 2.29% at December 31, 2011.

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our Consolidated Financial Statements and accompanying notes located elsewhere in this report.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the Consolidated Financial Statements located elsewhere in this report.


Table of Contents

Comparison of Years Ended December 31, 2012 and 2011

Financial Condition

Total assets increased $228.7 million, or 21.95%, to $1.3 billion at December 31, 2012, from $1.0 million at December 31, 2011. This increase includes an increase of $122.5 million from the acquisition of The Nashua Bank ("TNB"). Cash and cash items increased $14.7 million, or 59.30%.

Total net loans receivable excluding loans held-for-sale increased $187.3 million, or 26.20%, to $902.2 million at December 31, 2012, compared to $715.0 million at December 31, 2011, including $89.0 million from TNB. Our conventional real estate loan portfolio increased $74.4 million, or 18.75%, to $471.4 million at December 31, 2012, from $397.0 million at December 31, 2011, including $13.2 million from TNB. The outstanding balances on home equity loans and lines of credit decreased $2.7 million to $69.0 million over the same period, net of $1.1 million acquired from TNB. Construction loans increased $6.7 million, or 52.48%, to $19.4 million including $4.2 million acquired from TNB. Commercial real estate loans increased $85.8 million, or 57.83%, over the same period to $234.3 million. In addition to $55.7 million of commercial real estate loans acquired from TNB, the increase in commercial real estate loans represents loans to existing commercial customers and new commercials customers offset by normal amortizations and prepayments as well as principal pay-downs. Additionally, consumer loans decreased $39 thousand, or 0.53%, to $7.3 million including $709 thousand from TNB, and commercial and municipal loans increased $23.9 million, or 28.53%, to $107.8 million including $14.0 million acquired from TNB. Sold loans totaled $385.4 million at December 31, 2012, an increase of $19.6 million, or 5.36%, compared to $365.8 million at December 31, 2011. Sold loans are loans originated by us and sold to the secondary market with the Company retaining the majority of servicing of these loans. We expect to continue to sell fixed-rate loans into the secondary market, retaining the servicing, in order to manage interest rate risk and control growth. Typically, we hold adjustable-rate loans in portfolio. At December 31, 2012, adjustable-rate mortgages comprised approximately 57% of our real estate mortgage loan portfolio, which is lower than in prior years as we originated shorter-term loans in 2012, such as the ten-year fixed mortgage loan, which are held in portfolio as well as holding a portion of 15-year fixed mortgage loans and experiencing higher refinancing from adjustable-rate products into fixed rate products. Non-performing assets were 1.35% of total assets and 2.10% of total loans originated at December 31, 2012, compared to 1.70% and 2.45%, respectively, at December 31, 2011.

The fair value of investment securities available-for-sale increased $2.1 million, or 0.98%, to $212.4 million at December 31, 2012, from $210.3 million at December 31, 2011. We realized $3.8 million in the gains on the sales and calls of securities during 2012, compared to $2.6 million in gains on the sales and calls of securities recorded during 2011. At December 31, 2012, our investment portfolio had a net unrealized holding gain of $2.0 million, compared to a net unrealized holding gain of $2.8 million at December 31, 2011. The investments in our investment portfolio that are temporarily impaired as of December 31, 2012, consist primarily of financial institution equity securities, mortgage-backed securities issued by U.S. government sponsored enterprises and agencies, municipal bonds and other bonds and debentures. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The unrealized losses on equity securities are primarily attributable to lack of trading activity related to the security and are not considered credit related losses. As management has the ability and intent to hold debt securities until maturity and equity securities for the foreseeable future, no declines are deemed to be other than temporary.

OREO and property acquired in settlement of loans was $102 thousand at December 31, 2012, representing one residential property located in New Hampshire, compared to $1.3 million at December 31, 2011, representing five properties, four located in New Hampshire and one in Vermont. At December 31, 2011, one commercial property in Vermont was carried at $950 thousand, or 70.70% of total OREO and property acquired in settlement of loans at that time.

Goodwill increased $6.8 million, or 23.77%, to $35.4 million at December 31, 2012, compared to $28.6 million at December 31, 2011. The change in goodwill represents $6.7 million related to the 2012 acquisition of TNB and post-closing adjustment of $52 thousand related to the 2011 acquisition of McCrillis & Eldredge. Additionally, goodwill includes $7.5 million related to the acquisition of First Brandon Financial Corporation and $7.7 million related to the acquisition of First Community Bank, both of which occurred in 2007. Goodwill also includes $2.5 million relating to the acquisition of Landmark Bank in 1998 and $9.7 million relating to the acquisition of three branch offices of New London Trust in 2001. An independent third-party analysis of goodwill indicates no impairment at December 31, 2012.

Intangible assets increased $1.7 million, or 94.63%, to $3.4 million at December 31, 2012, compared to $1.8 million at December 31, 2011. Intangible assets include core deposit intangibles of $2.9 million, including $2.1 million from the acquisition of TNB, and customer list intangibles of $538 thousand. We amortized $348 thousand of core deposit intangibles during 2012 utilizing the sum-of-the-years-digits method over 10 years. We amortized $78 thousand of customer list intangibles during 2012 utilizing the sum-of-the-years-digits method over 15 years. An independent third-party analysis of core deposit intangibles indicates no impairment at December 31, 2012.


Table of Contents

Total deposits increased $146.3 million, or 18.22%, to $949.3 million at December 31, 2012 from $803.0 million at December 31, 2011. This increase includes $98.5 million assumed from TNB. During 2012, in addition to retaining and attracting deposits, we obtained $15.0 million of additional brokered deposits as part of ongoing liquidity planning and contingency testing and $5 million of brokered deposits were assumed through the acquisition of TNB. Total brokered deposits of $25.0 million represent 2.67% of total deposits.

Advances from the FHLBB increased $61.8 million, or 76.28%, to $142.7 million from $81.0 million at December 31, 2011, including $1.8 million of advances assumed from TNB. The weighted average interest rate for the outstanding FHLBB advances was 1.34% at December 31, 2012 compared to 2.09% at December 31, 2011.

Securities sold under agreements to repurchase decreased $895 thousand, or 5.77%, to $14.6 million at December 31, 2012, from $15.5 million at December 31, 2011.

There were no other borrowings at December 31, 2012, compared to $543 thousand at December 31, 2011. The balance at December 31, 2011, reflected a note payable issued to the principals of McCrillis & Eldredge as part of the was paid in full by December 31, 2012.

Liquidity and Capital Resources

We are required to maintain sufficient liquidity for safe and sound operations. At year-end 2011, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $39.8 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLBB. At December 31, 2012, we had approximately $154.0 million in additional borrowing capacity from the FHLBB.

At December 31, 2012, stockholders' equity totaled $129.5 million compared to $108.7 million at December 31, 2011. The increase of $20.8 million reflects net income of $7.8 million, the payout of $3.1 million in common stock dividends, $666 thousand in preferred stock dividends declared, the repurchase of $652 thousand of warrants, the assumption of $3.0 million of preferred stock, other comprehensive loss in the amount of $557 thousand, and $14.7 million from the acquisition of TNB.

On June 12, 2007, the Board of Directors reactivated a previously adopted but incomplete stock repurchase program to repurchase up to 253,776 shares of common stock. At December 31, 2012, 148,088 shares remained to be repurchased under the plan. The Board of Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity; three performing benchmarks against which bank and thrift holding companies are measured. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. During 2011, no shares were repurchased. As a participant in the Capital Purchase Program
("CPP") established by the United States Department of the Treasury ("Treasury")
under the Emergency Economic Stabilization Act of 2009 (the "EESA"), we were prohibited from repurchasing shares of our common stock prior to exiting the program on August 25, 2011.

At December 31, 2012, we had unrestricted funds in the amount of $3.3 million. Our total cash needs during 2013 are estimated to be approximately $5.4 million with $3.7 million projected to be used to pay dividends on our common stock, $1.0 million to pay interest on our capital securities, $230 thousand to pay dividends on our Series B Preferred Stock (as defined below), and approximately $500 thousand for ordinary operating expenses. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC and the FRB. Since the Bank is well capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover additional cash requirements for 2013, if needed, as long as earnings at the Bank are sufficient to maintain adequate Tier I capital.

Net cash provided by operating activities were $1.1 million for 2012 compared to net cash provided by operating activities of $10.6 million in 2011. The change includes an increase in the amount of $1.4 million in provision for loan losses, an increase in gains on sales and calls of securities of $1.2 million, a decrease in amortization of securities, net, of $142 thousand, a change in mortgage servicing rights of $510 thousand, an increase in loans held-for sale of $11.0 million, a decrease in deferred tax benefit of $312 thousand, an increase of $183 thousand in impairment losses on other real estate owned, an increase in accrued interest receivable and other assets of $492 thousand, and an increase of $2.7 million in the change in accrued expenses and other liabilities.

Net cash flows used in investing activities totaled $88.6 million in 2012, compared to net cash flows used in investing activities of $54.8 million in 2011, an increase of $33.8 million. During 2012, net cash used by loan originations and net principal collections decreased by $61.0 million while our loans held in portfolio increased and net cash provided by securities available-for-sale increased $30.5 million.


Table of Contents

Net cash flows provided by financing activities totaled $102.1 million in 2012, compared to net cash flows provided by financing activities of $35.7 million in 2011, a change of $66.4 million. Net cash provided by deposits increased $23.0 million. Net cash provided by net change in advances from FHLBB increased $55.0 million. Net cash provided by the issuance of preferred stock, net of redemptions, decreased $10.0 million.

We expect to be able to fund loan demand and other investing activities during 2012 by continuing to utilize the FHLBB's advance program and cash flows from securities and loans. On December 31, 2012, approximately $32.0 million in commitments to fund loans had been made. Management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have, a material effect on our liquidity, capital resources or results of operations.

On August 25, 2011, as part of the SBLF program, we entered into a Purchase Agreement with Treasury pursuant to which we issued and sold to Treasury 20,000 shares of our Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per preferred share, having a liquidation preference of $1,000 per preferred share (the "Series B Preferred Stock"). The SBLF is Treasury's effort to bring main street banks and small businesses together to help create jobs and promote economic growth in local communities. We used $10.0 million of the SBLF proceeds to repurchase the Series A Preferred Stock issued under Treasury's CPP.

The initial rate payable on SBLF capital is, at most, five percent, and the rate falls to one percent if a bank's small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank's lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be paid only when declared by our Board of Directors. The Series B Preferred Stock has no maturity date and ranks senior to our common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

The Series B Preferred Stock generally is non-voting, other than class voting on certain matters that could adversely affect the Series B Preferred Stock. Please refer to Note 20 of our Consolidated Financial Statements located elsewhere in this report for further discussion.

The OCC requires that the Bank maintain tangible, level, and total risk-based capital ratios of 1.50%, 4.00% (or 3.00% under certain conditions), and 8.00%, respectively. At December 31, 2012, the Bank's ratios were 8.82%, 8.82%, and 14.66%, respectively, well in excess of the OCC requirements for well capitalized banks. Additional information on these requirements can be found under "Regulations" of this report.

Book value per common share was $15.09 at December 31, 2012, compared to $15.20 per common share at December 31, 2011. Tangible book value per common share was $9.59 at December 31, 2012. Tangible book value per common share is a non-GAAP financial measure. Tangible book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of shareholder's equity. We believe that tangible book value per common share provides information to investors that is useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

A reconciliation of these non-GAAP financial measures is provided below:

  (Dollars in thousands)                  December 31, 2012       December 31, 2011
  Shareholders' equity                   $           129,494     $           108,660
  Less goodwill                                       35,395                  28,597
  Less other intangible assets                         3,416                   1,755
  Less preferred stock                                23,000                  20,000

  Tangible common equity                 $            67,683     $            58,308

  Ending common shares outstanding                 7,055,946               5,832,360
  Tangible book value per common share   $              9.59     $             10.00

Impact of Inflation

The financial statements and related data presented elsewhere herein are prepared in accordance with GAAP, which require the measurement of our financial position and operating results generally in terms of historical dollars and current market value, for certain loans and investments, without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations.


Table of Contents

Unlike other companies, nearly all of the assets and liabilities of a bank are monetary in nature. As a result, interest rates have a far greater impact on a bank's performance than the effects of the general level of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services, since such prices are affected by inflation. Liquidity and the maturity structure of our assets and liabilities are important to the maintenance of acceptable performance levels.

Interest Rate Sensitivity

The principal objective of our interest rate management function is to evaluate the interest rate risk inherent in certain balance sheet accounts and determine the appropriate level of risk given our business strategies, operating environment, capital and liquidity requirements and performance objectives, and to manage the risk consistent with the Board of Director's approved guidelines. The Board of Directors has established an Asset/Liability Committee to review our asset/liability policies and interest rate position. Trends and interest rate positions are reported to the Board of Directors monthly.

Gap analysis is used to examine the extent to which assets and liabilities are "rate sensitive." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specified period of time and the amount of interest-bearing liabilities maturing or repricing within the same specified period of time. The strategy of matching rate sensitive assets with similar liabilities stabilizes profitability during periods of interest rate fluctuations.

Our one-year cumulative interest-rate gap at December 31, 2012, was negative 0.80% compared to the December 31, 2011 gap of positive 1.65%. At December 31, 2012, repricing liabilities over the next 12 months were $9.1 million more than repricing assets for the same period compared to $15.3 million lower than assets repricing at December 31, 2011. With a liability sensitive (negative) gap, if rates were to rise, net interest margin would likely decrease and if rates were to fall, the net interest margin would likely increase. At negative 0.80%, the assets and liabilities scheduled to reprice during 2013 are fairly well-matched.

We continue to offer adjustable-rate mortgages, which reprice at one, three, five, seven- and ten-year intervals. In addition, we sell most fixed-rate mortgages with terms of 20 or more years into the secondary market in order to minimize interest rate risk and provide liquidity.

As another part of our interest rate risk analysis, we use an interest rate sensitivity model, which generates estimates of the change in our net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the NPV model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the NPV measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on our net interest income and will likely differ from actual results.


Table of Contents

The following table shows our interest rate sensitivity (gap) table at December 31, 2012:

                                               0-3             3-6         6 Months-          1-3           Beyond
                                              Months         Months          1 Year          Years         3 Years           Total
                                                                             (Dollars in thousands)
Interest-earning assets:
Loans                                       $  147,350      $  98,124      $  125,929      $ 268,089      $  269,978      $   909,470
Investments and overnight deposit               24,172         10,597          19,377         58,271         113,217          225,634

Total                                          171,522        108,721         145,306        326,360         383,195        1,135,104

Interest-bearing liabilities:
Deposits                                       220,488         62,428          56,139         98,984         511,302          949,341
Repurchase agreements                           14,619             -               -              -               -            14,619
Borrowings                                      50,500         10,000          20,500         36,750          24,980          142,730

Total                                          285,607         72,428          76,639        135,734         536,282        1,106,690

Period sensitivity gap                        (114,085 )       36,293          68,667        190,626        (153,087 )    $    28,414
Cumulative sensitivity gap                  $ (114,085 )    $ (77,792 )    $   (9,125 )    $ 181,501      $   28,414
Cumulative sensitivity gap as a
percentage of interest-earning assets           -10.05 %        -6.85 %         -0.80 %        15.99 %          2.50 %           2.50 %

The following table sets forth our NPV at December 31, 2012:

       Change              Net Portfolio Value                  NPV as % of PV Assets
       in Rates   $ Amount      $ Change       % Change        NPV Ratio         Change
                          (Dollars in thousands)
       +400 bp    $  94,637     $ (31,614 )          -25 %           8.43 %         -176 bp
       +300 bp      104,579       (21,672 )          -17 %           9.09 %         -111 bp
       +200 bp      114,463       (11,788 )           -9 %           9.70 %          -50 bp
       +100 bp      122,403        (3,848 )           -3 %          10.11 %           -8 bp
          0 bp      126,251            -              -             10.19 %           -
       -100 bp      110,564       (15,687 )          -12 %           8.86 %         -133 bp

Comparison of Years Ended December 31, 2012 and 2011

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2012, increased $523 thousand, or 1.84%, to $29.0 million. The increase was a combination of a $2.5 million increase due to volume offset by a $2.0 million decrease related to rate adjustments. Total interest and dividend income decreased $767 thousand, or 2.06%, to $36.4 million, despite higher average balances on interest-earning assets during 2012, as the yield on interest-earning assets decreased to 3.58% from 3.98%. Interest and fees on loans increased $902 thousand, or 2.85%, to $32.5 million in 2012, due to an increase in average balances of $84.7 million offset by a decrease in the average yield on loans to 4.07% from 4.42%.

Interest on taxable investments decreased $1.4 million, or 29.95%, to $3.2 million in 2012 compared to $4.6 million in 2011. Dividends increased $27 thousand, or 77.14%, to $62 thousand. Interest on other investments decreased $318 thousand, or 34.87%, to $594 thousand due primarily to a decrease in . . .

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