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NHTB > SEC Filings for NHTB > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for NEW HAMPSHIRE THRIFT BANCSHARES INC

Form 10-Q for NEW HAMPSHIRE THRIFT BANCSHARES INC


13-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Highlights and Overview

Our profitability is derived primarily from the Bank. The Bank's earnings in turn are generated from the net income from the earnings on its loan and investment portfolios less the cost of its deposit accounts and borrowings. These core revenues are supplemented by gains on sales of loans originated for sale, retail banking service fees, gains on the sale of investment securities and brokerage fees. The following is a summary of key financial results for the quarter and three months ended June 30, 2013:

Total assets were $1.2 billion at June 30, 2013, from $1.3 billion at December 31, 2012, a decrease of $50.5 million, or 3.97%.

Net loans were $909.6 million at June 30, 2013, from $902.5 million at December 31, 2012, an increase of $7.3 million, or 0.81%.

During the six months ended June 30, 2013, we originated $177.5 million in loans compared to $206.8 million for the same period in 2012. During the quarter ended June 30, 2013, we originated $99.8 million in loans compared to $134.1 million for the same period in 2012.

Our loan servicing portfolio was $405.1 million at June 30, 2013, compared to $385.4 million at December 31, 2012.

Total deposits were $912.4 million at June 30, 2013, from $949.3 million at December 31, 2012, a decrease of $36.9 million, or 3.89%.

Net interest and dividend income for the six months ended June 30, 2013, was $16.0 million compared to $14.4 million for the same period in 2012, an increase of $1.6 million, or 11.11%. Net interest and dividend income for the quarter ended June 30, 2013, was $7.8 million compared to $7.3 million for the same period in 2012, an increase of $479 thousand, or 6.53%.

Net income available to common stockholders increased $52 thousand to $3.6 million for the six months ended June 30, 2013, compared to the same period in 2012. Common shares outstanding, assuming dilution, were 7,069,896 at June 30, 2013, compared to 5,850,456 at June 30, 2012, due primarily to the issuance of 1,153,544 shares in conjunction with the acquisition of The Nashua Bank on December 21, 2012. Net income available to common stockholders was $1.7 million for the quarter ended June 30, 2013, compared to $1.8 million for the same period in 2012. Common shares outstanding, assuming dilution for the quarter, were 7,079,171 at June 30, 2013, compared to 5,857,022 at June 30, 2012.

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 contained elsewhere in this report.

Pending Mergers

On February 15, 2013, the Bank entered into a purchase and sale agreement with MVSB, pursuant to which the Bank will acquire all of the shares of common stock of Charter Holding held by MVSB for a total purchase price of $6.2 million in cash or its equivalent. As of the date hereof, each of the Bank and MVSB own 50% of Charter Holding's outstanding shares of common stock; upon completion of the transaction the Bank will own all of the outstanding shares of Charter Holding, and Charter Holding will become a wholly owned subsidiary of the Bank. Completion of the transaction is subject to closing conditions, including the receipt of all regulatory approvals by the Bank and the satisfactory completion of purchase accounting valuations by an independent third party. The transaction is expected to close during the third quarter of 2013.

On April 3, 2013, the Company and CFC jointly announced that they entered into a definitive agreement pursuant to which the Company will acquire CFC in an all-stock transaction. The transaction, approved by the boards of directors of both companies, is valued at approximately $14.4 million or approximately $115.00 per share of CFC common stock, based on the 10-day average closing price of our common stock for the period ended April 2, 2013. The terms of the agreement call for each outstanding share of CFC common stock to be converted into the right to receive 8.699 shares of our common stock. Following the merger, CFC's wholly owned subsidiary, The Randolph National Bank, will be merged with and into the Bank, with the Bank surviving. Completion of the transaction is subject to customary closing conditions, including the receipt of regulatory approval and the approval of CFC's shareholders. The transaction is expected to close in the fourth quarter of 2013.

Regulatory Updates

On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the Office of the Comptroller of the Currency issued interim final rules that revise the existing regulatory capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III, and to implement certain provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank Act"). The final and interim final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final and interim final rules, among other things:

revise minimum capital requirements and adjust prompt corrective action thresholds;


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revise the components of regulatory capital, add a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, increase the minimum Tier 1 capital ratio requirement from 4% to 6%;

retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;

permit most banking organizations, including us, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;

implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;

increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;

require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and

remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.

Under the final and interim rules, compliance is required beginning January 1, 2015, for most banking organizations, subject to a transition period for several aspects of the rule, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. We are still in the process of assessing the impacts of these complex final and interim final rules, however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with 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 our consolidated 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. There have been no material changes to our critical accounting policies during the six months ended June 30, 2013. For additional information on our critical accounting policies, please refer to the information contained in Notes A, B and C of the accompanying unaudited condensed consolidated financial statements and Note 1 of the consolidated financial statements included in our 2012 Annual Report on Form 10-K.

Financial Condition and Results of Operations

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

Total assets were $1.2 billion at June 30, 2013, compared to $1.3 billion at December 31, 2012, a decrease of $50.5 million, or 3.97%. Securities available-for-sale decreased $61.1 million, or 28.78%, to $151.3 million at June 30, 2013, from $212.4 million at December 31, 2012. Net unrealized losses on securities available-for-sale were $1.7 million at June 30, 2013, compared to net unrealized gains of $2.0 million at December 31, 2012. During the six months ended June 30, 2013, we sold securities with a total book value of $111.3 million for a net gain on sales of $781 thousand. During the same period, we purchased securities totaling $52.7 million including U.S. Treasury notes, government agency bonds, and a municipal bond. Our net unrealized loss (after tax) on our investment portfolio was $1.0 million at June 30, 2013, compared to an unrealized gain (after tax) of $1.2 million at December 31, 2012. The investments in our investment portfolio that are temporarily impaired as of June 30, 2013, consist of U.S. Treasury notes, mortgage-backed securities issued by U.S. government sponsored enterprises, municipal bonds, other bonds and equity securities. The unrealized losses are primarily attributable to changes in market interest rates and market inefficiencies. Management has determined that the Company has the intent and the ability to hold debt securities until maturity and equity securities until the recovery of cost basis, and therefore, no declines are deemed to be other than temporary.

Net loans held in portfolio increased $7.3 million, or 0.81%, to $909.5 million at June 30, 2013, from $902.2 million at December 31, 2012. The allowance for loan losses decreased $407 thousand to $9.5 million at June 30, 2013, from $9.9 million at December 31, 2012. The change in the allowance for loan losses, excluding reserves for overdrafts, is the net of the effect of provisions of $550 thousand, charge-offs of $1.2 million, and recoveries of 298 thousand. The increase of loans held in portfolio was primarily due to increases in conventional real estate loans of $11.3 million and commercial loans of $8.6 million offset in part by decreases in commercial real estate loans of $7.1 million and land and constructions loans of $3.3 million. As a percentage of total


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loans, non-performing loans decreased from 2.22% at December 31, 2012, to 0.51% at June 30, 2013. During the six months ended June 30, 2013, we originated $177.5 million in loans compared to $206.8 million for the same period in 2012. During the quarter ended June 30, 2013, we originated $99.8 million in loans compared to $134.1 million for the same period in 2012. At June 30, 2013, our mortgage servicing loan portfolio was $405.1 million compared to $385.4 million at December 31, 2012. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At June 30, 2013, adjustable-rate mortgages comprised approximately 65.7% of our real estate mortgage loan portfolio, which is consistent with the mix at December 31, 2012.

Goodwill and other intangible assets amounted to $38.5 million, or 3.15% of total assets, as of June 30, 2013, compared to $38.8 million, or 3.05% of total assets, as of December 31, 2012. The decrease was due to normal amortization of core deposit intangible and customer list assets.

We had no other real estate owned at June 30, 2013, and we held $102 thousand, representing a single property, of other real estate owned ("OREO") and property acquired in settlement of loans at December 31, 2012.

Total deposits decreased $36.9 million, or 3.89%, to $912.4 million at June 30, 2013, from $949.3 million at December 31, 2012. Non-interest bearing deposit accounts increased $6.1 million, or 8.27%, and interest-bearing deposit accounts decreased $43.0 million, or 4.92%, over the same period. The balances at June 30, 2013, included $5.8 million of brokered deposits, which is a decrease of $16.0 million compared to December 31, 2012. This decrease includes the call by us of $15.0 million of brokered deposits. Deposit balances at June 30, 2013, also includes $7.0 million of deposits obtained through listing services, which is unchanged compared to December 31, 2012.

Securities sold under agreements to repurchase increased $4.3 million, or 29.48%, to $18.9 million at June 30, 2013, from $14.6 million at December 31, 2012. Repurchase agreements are collateralized by some of our U.S. government and agency investment securities and letters of credit issued by FHLB.

We maintained balances of $127.2 million in advances from the FHLB at June 30, 2013, a decrease of $15.5 million from $142.7 million at December 31, 2012.

Allowance and Provision for Loan Losses

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses. We test the adequacy of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, we consider historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogenous problem loans in accordance with ASC 310-10-35, "Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent Measurement." In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan's effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogenous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment.

Our commercial loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. We also have loan review, internal audit and compliance programs with results reported directly to the Audit Committee of the Board of Directors.

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at June 30, 2013, was $9.5 million and at December 31, 2012, was $9.9 million. At approximately $9.5 million, the allowance for loan losses represents 1.04% of total loans, compared to 1.08% at December 31, 2012. Total non-performing assets at June 30, 2013, were approximately $4.7 million, representing 49.51% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us adding $550 thousand to the allowance for loan losses during the six months ended June 30, 2013, compared to $1.2 million for the same period in 2012. Loan charge-offs (excluding the overdraft program) were $1.2 million during the six month period ended June 30, 2013, compared to $1.3 thousand for the same period in 2012. Recoveries were $298 thousand during the six month period ended June 30, 2013, compared to $99 thousand for the same period in 2012. This activity resulted in net charge-offs of $949 thousand for the six month period ended June 30, 2013, compared to $1.2 million for the same period in 2012. One-to-four family residential mortgages, commercial real estate, commercial, and consumer loans accounted for 43%, 36%, 19%, and 2%, respectively, of the amounts charged-off during the six month period ended June 30, 2013.


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The effects of national economic issues that continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to maintain our allowance for loan losses of $9.5 million. The provisions made in 2013 reflect growth in the portfolio, loan loss experience and changes in economic conditions that affect the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions during the remainder of 2013 to maintain the allowance at an adequate level.

In addition to the allowance for loan losses, there is an allowance for losses from the fee for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days. At June 30, 2013, the overdraft allowance was $11 thousand, compared to $14 thousand at year-end 2012. Provisions for overdraft losses in the amount of $26 thousand were recorded during the six month period ended June 30, 2013, compared to provisions of $29 thousand that were recorded for the same period during 2012. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.


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The following is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for the six month period ended June 30:

(Dollars in thousands)                                   June 30, 2013                          June 30, 2012
                                          Originated          Acquired          Total               Total
Balance, beginning of year               $      9,909        $       -         $  9,909        $         9,113

Charge-offs:
Residential real estate                          (541 )              -             (541 )                 (556 )
Commercial real estate                           (344 )            (102 )          (446 )                 (393 )
Land and construction                              -                 -               -                      -
Consumer loans                                    (24 )              -              (24 )                   (8 )
Commercial loans                                 (236 )              -             (236 )                 (349 )

Total charged-off loans                        (1,145 )            (102 )        (1,247 )               (1,306 )

Recoveries
Residential real estate                           181                -              181                     65
Commercial real estate                            101                -              101                     10
Land and construction                              -                 -               -                       1
Consumer loans                                      3                -                3                      5
Commercial loans                                   13                -               13                     18

Total recoveries                                  298                -              298                     99

Net charge-offs                                  (847 )            (102 )          (949 )               (1,207 )

Provision for loan loss charged to
income:
Residential real estate                           279                -              279                    788
Commercial real estate                            180                -              180                    264
Land and construction                              15                -               15                     24
Consumer loans                                      3                -                3                     10
Commercial loans                                   73                -               73                    114

Total provision                                   550                -              550                  1,200

Ending balance                           $      9,612        $     (102 )      $  9,510        $         9,106

The following is a summary of activity in the allowance for overdraft privilege account for the six month periods ended June 30:

                                               Six months ended
                                                   June  30,
                  (Dollars in thousands)       2013          2012
                  Beginning balance          $     14       $   18

                  Overdraft charge-offs          (110 )       (105 )
                  Overdraft recoveries             81           74

                  Net overdraft losses            (29 )        (31 )

                  Provision for overdrafts         26           29

                  Ending balance             $     11       $   16

The following table sets forth the allocation of the allowance for loan losses (excluding overdraft allowances), the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated:

(Dollars in thousands)                                June 30, 2013                      December 31, 2012
Real estate loans
Residential, 1-4 family and home equity
loans                                         $ 4,640          49 %       60 %    $ 5,073           52 %       62 %
Commercial                                      3,004          31 %       25 %      3,305           33 %       26 %
Land and construction                             259           3 %        2 %        208            2 %        2 %
Collateral and consumer loans                      48           1 %        1 %         44           -           1 %
Commercial and municipal loans                  1,224          13 %       12 %        918            9 %        9 %
Impaired loans                                    335           3 %       -           361            4 %       -

Allowance                                     $ 9,510         100 %      100 %    $ 9,909          100 %      100 %

Allowance as a percentage of total loans                     1.04 %                               1.08 %
Non-performing loans as a percentage of
allowance                                                   49.51 %                             171.57 %


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The following table shows total allowances including overdraft allowances:

    (Dollars in thousands)                  June 30, 2013       December 31, 2012
    Allowance for loan and lease losses   $           9,510     $            9,909
    Overdraft allowance                                  11                     14

    Total allowance                       $           9,521     $            9,923

Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans were $25.5 million at June 30, 2013, compared to $25.9 million at December 31, 2012. There was no other real estate owned at June 30, 2013, compared to $102 thousand at December 31, 2012. Losses have occurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Fourteen loans considered to be impaired loans at June 30, 2013, have specific allowances identified and assigned. The 14 loans are secured by real estate, business assets or a combination of both. At June 30, 2013, the allowance included $335 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2012, was $361 thousand.

At June 30, 2013, we had 56 loans totaling $12.7 million considered to be "troubled debt restructurings" as defined in ASC 310-40, "Receivables-Troubled Debt Restructurings by Creditors," included in impaired loans. At June 30, 2013, 45 of the "troubled debt restructurings" were performing under contractual terms. Of the loans classified as troubled debt restructured, 11 were more than 30 days past due at June 30, 2013. The balances of these past due loans were $1.8 million. At December 31, 2012, we had 65 loans totaling $13.1 million considered to be "troubled debt restructurings."

Loans over 90 days past due were $2.2 million at June 30, 2013, compared to $3.2 million at December 31, 2012. Loans 30 to 89 days past due were $3.3 million at June 30, 2013, compared to $10.1 million at December 31, 2012. As a percentage of assets, the recorded investment in non-performing loans decreased from 1.60% at December 31, 2012, to 0.39% at June 30, 2013, and, as a percentage of total loans, decreased from 2.22% at December 31, 2012, to 0.51% at June 30, 2013.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention do not reflect trends or uncertainties which we reasonably expect will materially impact future operating results, liquidity, or capital resources. For the period ended June 30, 2013, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers' ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At June 30, 2013, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

The following table shows the breakdown of the amount of non-performing assets and non-performing assets as a percentage of the total allowance and total assets for the periods indicated:

                                                      June 30, 2013                                 December 31, 2012
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