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NHTB > SEC Filings for NHTB > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for NEW HAMPSHIRE THRIFT BANCSHARES INC

Form 10-K for NEW HAMPSHIRE THRIFT BANCSHARES INC


17-Mar-2014

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 $153.4 million, or 12.07%, to $1.4 billion at December 31, 2013, from $1.3 billion at December 31, 2012.

Net loans increased $231.9 million, or 25.70%, to $1.1 billion at December 31, 2013, from $902.2 million at December 31, 2012.

In 2013, the Company originated $414.0 million in loans, compared to $426.8 million in 2012.

The Company's loan servicing portfolio was $417.3 million at December 31, 2013, compared to $385.4 million at December 31, 2012.

Total deposits increased $138.8 million, or 14.62%, to $1.1 billion at December 31, 2013, from $949.3 million at December 31, 2012.

Net interest and dividend income for the year ended December 31, 2013, was $33.8 million compared to $29.0 million for the same period in 2012.

Net income available to common stockholders was $8.1 million for the year ended December 31, 2013, compared to $7.1 million for the same period in 2012

As a percentage of total loans, non-performing loans decreased to 1.86% at December 31, 2013, from 2.22% at December 31, 2012.


Table of Contents

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 our Consolidated Financial Statements located elsewhere in this report.

Comparison of Years Ended December 31, 2013 and 2012

Financial Condition

Total assets increased $153.4 million, or 12.07%, to $1.4 billion at December 31, 2013 from $1.3 million at December 31, 2012, which reflects $184.2 million of total assets related to the acquisitions of CFC and Charter Holding. Cash and cash items decreased $5.6 million, or 14.26%, to $33.6 million at December 31, 2013 from $39.2 million at December 31, 2012.

Total net loans receivable excluding loans held-for-sale increased $231.9 million, or 25.70%, to $1.1 billion at December 31, 2013, compared to $902.2 million at December 31, 2012, including $127.7 million from CFC. Our conventional real estate loan portfolio increased $130.8 million, or 27.75%, to $602.3 million at December 31, 2013, from $471.4 million at December 31, 2012, including $52.4 million from CFC. The outstanding balances on home equity loans and lines of credit increased $1.3 million to $70.6 million over the same period, including $6.8 million acquired from CFC. Construction loans increased $10.3 million, or 53.11%, to $29.7 million, including $3.7 million acquired from CFC. Commercial real estate loans increased $53.5 million, or 22.86%, over the same period to $287.8 million. In addition to commercial real estate loans acquired from CFC, 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 increased $2.5 million, or 34.41%, to $9.8 million, including $3.0 million acquired from CFC, and commercial and municipal loans increased $32.3 million, or 30.00%, to $140.1 million, including $8.7 million acquired from CFC. Sold loans serviced by the Company, not including participations, totaled $417.3 million at December 31, 2013, an increase of $31.9 million, or 8.28%, compared to $385.4 million at December 31, 2012. This includes $14.4 million of sold loans assumed with the acquisition of CFC. 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, 2013, adjustable-rate mortgages comprised approximately 58.33% of our real estate mortgage loan portfolio, which is consistent with prior year, as we continued to originate shorter-term loans in 2013, such as the 10-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. Impaired loans and non-performing assets were 1.58% of total assets and 2.36% of total loans originated at December 31, 2013, compared to 1.35% and 2.10%, respectively, at December 31, 2012.

The fair value of investment securities available-for-sale decreased $87.1 million, or 41.03%, to $125.2 million at December 31, 2013, from $212.4 million at December 31, 2012. We realized $964 thousand in the gains on the sales and calls of securities during 2013, compared to $3.8 million in gains on the sales and calls of securities recorded during 2012. At December 31, 2013, our investment portfolio had a net unrealized holding loss of $2.0 million, compared to a net unrealized holding gain of $2.0 million at December 31, 2012. The investments in our investment portfolio that are temporarily impaired as of December 31, 2013, consist primarily of financial institution equity securities, mortgage-backed securities issued by the Treasury, 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. 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.


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OREO and property acquired in settlement of loans was $1.3 million at December 31, 2013, including $1.5 million acquired from CFC, and representing two properties located in New Hampshire and seven properties located in Vermont, compared to $102 thousand at December 31, 2012, representing one property located in New Hampshire. At December 31, 2013, one commercial property in Vermont was carried at $846 thousand, or 62.99% of total OREO and property acquired in settlement of loans at that time.

Goodwill increased $9.2 million, or 26.10%, to $44.6 million at December 31, 2013, compared to $35.4 million at December 31, 2012. The change in goodwill represents $4.6 million related to the 2013 acquisition of Charter Holding, $4.6 million related to the 2013 acquisition of CFC, and a post-closing adjustment of $41 thousand related to the 2012 acquisition of The Nashua Bank ("TNB"). An independent third-party analysis of goodwill indicated no impairment at December 31, 2013.

Intangible assets increased $7.6 million to $11.0 million at December 31, 2013, compared to $3.4 million at December 31, 2012. Intangible assets include core deposit intangibles of $6.7 million, including $4.5 million from the acquisition of CFC, and customer list intangibles of $4.3 million, including $3.1 million from the acquisition of Charter Holding. We amortized $759 thousand of core deposit intangibles during 2013 utilizing the sum-of-the-years-digits method over 12 years, on average. We amortized $241 thousand of customer list intangibles during 2013 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, 2013.

Total deposits increased $138.8 million, or 14.62%, to $1.1 billion at December 31, 2013 from $949.3 million at December 31, 2012. This increase includes $149.7 million assumed from CFC. Total brokered deposits of $20.8 million represent 1.91% of total deposits.

Advances from the FHLBB decreased $21.0 million, or 14.71%, to $121.7 million from $142.7 million at December 31, 2012. The weighted average interest rate for the outstanding FHLBB advances was 1.15% at December 31, 2013 compared to 1.34% at December 31, 2012. At December 31, 2013, the Company had $46.3 million of stand-by letters of credit issued by FHLB to secure customer deposits.

Securities sold under agreements to repurchase increased $13.3 million, or 90.74%, to $27.9 million at December 31, 2013, from $14.6 million at December 31, 2012.

Comparison of Years Ended December 31, 2013 and 2012

Net Interest and Dividend Income

Net interest and dividend income for the year ended December 31, 2013 increased $4.8 million, or 16.39%, to $33.8 million. The increase was a combination of a $5.4 million increase due to volume offset by a $649 thousand decrease related to rate adjustments. Total interest and dividend income increased $3.9 million, or 10.58%, to $40.3 million, and the yield on interest-earning assets decreased to 3.54% from 3.58% for the 12 months ended December 31, 2013. Interest and fees on loans increased $5.5 million, or 16.88%, to $38.0 million in 2013, due to an increase in average balances of $156.5 million offset by a decrease in the average yield on loans to 3.98% from 4.07%.

Interest on taxable investments decreased $1.9 million, or 58.64%, to $1.3 million in 2013 compared to $3.2 million in 2012, as a result of our deleveraging of the investment portfolio to fund loan growth. Dividends decreased $10 thousand, or 16.13%, to $52 thousand . Interest on other investments increased $263 thousand, or 44.28%, to $857 thousand. The yield on our investment portfolio declined to 1.23% for the year ended December 31, 2013 compared to 1.78% for the same period in 2012.

Total interest expense decreased $902 thousand, or 12.20%, to $6.5 million for the year ended December 31, 2013. The decrease is primarily due to the 22.08% decrease in the combined cost of funds on deposits and borrowings to 0.60% for the year ended December 31, 2013 from 0.77% for the year ended December 31, 2012. For the year ended December 31, 2013, interest on deposits decreased $326 thousand, or 7.45%, to $4.1 million despite an increase in average interest-bearing deposits of $122.8 million as the cost of deposits decreased to 0.44% from 0.55% compared to the same period in 2012. Interest on FHLBB advances and other borrowed money decreased $359 thousand, or 18.45%, for the 12 months ended December 31, 2013, to $1.6 million compared to the same period in 2012 as the average FHLBB advances outstanding and rate decreased in 2013 compared to 2012. Interest on debentures decreased $221 thousand, or 21.53%, for the 12 months ended December 31, 2013, due to the expiration of the interest rate swap on June 17, 2013, which had set a fixed rate of 6.65% on $10.0 million of the debenture.

For the year ended December 31, 2013, our combined cost of funds decreased to 0.60% as compared to 0.77% for 2012, due primarily to the downward repricing of maturing time deposits and advances combined with increases in lower-costing checking accounts and the expiration of the previously referenced interest rate swap agreement.

Our interest rate spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, increased to 2.94% in 2013 from 2.81% in 2012. Our net interest margin, representing net interest income as a percentage of average interest-earning assets, increased to 2.97% during 2013, from 2.85% during 2012.


Table of Contents

The following table sets forth the average yield on loans and investments, the average interest rate paid on deposits and borrowings, the interest rate spread, and the net interest rate margin:

                                                               For the Years Ended December 31,
                                                     2013        2012        2011        2010        2009
Yield on loans                                        3.98 %      4.07 %      4.42 %      4.87 %      5.16 %
Yield on investment securities
                                                      1.23 %      1.78 %      2.54 %      2.80 %      3.94 %
Combined yield on loans and investments               3.54 %      3.58 %      3.98 %      4.32 %      4.92 %
Cost of deposits, including repurchase agreements
                                                      0.44 %      0.55 %      0.75 %      0.93 %      1.34 %
Cost of other borrowed funds                          1.63 %      1.97 %      2.40 %      2.33 %      3.29 %
Combined cost of deposits and borrowings
                                                      0.60 %      0.77 %      0.97 %      1.14 %      1.60 %
Interest rate spread                                  2.94 %      2.81 %      3.01 %      3.18 %      3.32 %
Net interest margin
                                                      2.97 %      2.85 %      3.05 %      3.23 %      3.41 %


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The following table presents, for the years indicated, the total dollar amount of interest income from interest-earning assets and the resultant yields as well as the interest paid on interest-bearing liabilities, and the resultant costs:

Years ended December 31,                               2013                                           2012                                           2011
                                       Average                        Yield/          Average                        Yield/          Average                        Yield/
                                     Balance(1)       Interest         Cost         Balance(1)       Interest         Cost         Balance(1)       Interest         Cost
                                                                                             (dollars in thousands)
Assets:
Interest-earning assets:

Loans (2)                            $   956,796      $  38,034          3.98 %     $   800,290      $  32,542          4.07 %     $   715,637      $  31,640          4.42 %
Investment securities and other          182,358          2,242          1.23 %         217,390          3,879          1.78 %         218,127          5,548          2.54 %

Total interest-earning assets          1,139,154         40,276          3.54 %       1,017,680         36,421          3.58 %         933,764         37,188          3.98 %

Noninterest-earning assets:

Cash                                      21,351                                         19,751                                         18,490
Other noninterest-earning assets
(3)                                      106,722                                         81,775                                         88,228

Total noninterest-earning assets         128,072                                        101,526                                        106,718

Total                                $ 1,267,226                                    $ 1,119,206                                    $ 1,040,482

Liabilities and Stockholders' Equity:
Interest-bearing liabilities:

Savings, NOW and MMAs                $   579,126      $     386          0.07 %     $   462,684      $     619          0.13 %     $   410,571      $     727          0.18 %
Time deposits
                                         338,920          3,669          1.08 %         332,545          3,762          1.13 %         348,730          5,044          1.45 %
Repurchase agreements                     20,050             52          0.25 %          16,449             47          0.29 %          14,250             47          0.33 %
Capital securities and other
borrowed funds                           146,663          2,390          1.63 %         150,750          2,971          1.97 %         119,421          2,871          2.40 %

Total interest-bearing
liabilities                            1,084,759          6,497          0.60 %         962,428          7,399          0.77 %         892,972          8,689          0.97 %

Noninterest-bearing liabilities:

Demand deposits                           26,647                                         29,657                                         26,832
Other
                                          12,313                                         16,086                                         30,047

Total noninterest-bearing
liabilities                               38,960                                         45,743                                         56,879

Stockholders' equity                     143,507                                        111,035                                         90,631

Total                                $ 1,267,226                                    $ 1,119,206                                    $ 1,040,482

Net interest income/Net interest
rate spread                                           $  33,779          2.94 %                      $  29,022          2.81 %                      $  28,499          3.01 %

Net interest margin                                                      2.97 %                                         2.85 %                                         3.05 %

Percentage of interest-earning
assets to interest-bearing
liabilities                                                            105.01 %                                       105.74 %                                       104.57 %

(1) Monthly average balances have been used for all periods.

(2) Loans include 90-day delinquent loans which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans in loans caused any material difference in the information presented.

(3) Other noninterest-earning assets include non-earning assets and OREO.


Table of Contents

The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and rates. The net change attributable to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

                                                                Year ended December 31,
                                                                     2013 vs. 2012
                                                                  Increase (Decrease)
                                                                        due to
                                                        Volume           Rate           Total
                                                                (Dollars in thousands)
Interest income on loans                                $ 6,203        $   (711 )      $  5,492
Interest income on investments                             (559 )        (1,078 )        (1,637 )

Total interest income                                     5,644          (1,789 )         3,855

Interest expense on savings, NOW and MMAs
                                                            234            (471 )          (237 )
Interest expense on time deposits                            75            (164 )           (89 )
Interest expense on repurchase agreements
                                                              8              (4 )             4
Interest expense on capital securities and other
borrowings                                                  (79 )          (501 )          (580 )

Total interest expense                                      238          (1,140 )          (902 )

Net interest income                                     $ 5,406        $   (649 )      $  4,757


                                                                Year ended December 31,
                                                                     2012 vs. 2011
                                                                  Increase (Decrease)
                                                                        due to
                                                        Volume           Rate           Total
                                                                (Dollars in thousands)
Interest income on loans                                $ 2,789        $ (1,887 )      $    902
Interest income on investments                              (19 )        (1,650 )        (1,669 )

Total interest income                                     2,770          (3,537 )          (767 )

Interest expense on savings, NOW and MMAs
                                                            106            (214 )          (108 )
Interest expense on time deposits                          (223 )        (1,059 )        (1,282 )
Interest expense on repurchase agreements
                                                             -               -               -
Interest expense on capital securities and other
borrowings                                                  314            (214 )           100

Total interest expense                                      197          (1,487 )        (1,290 )

Net interest income                                     $ 2,573        $ (2,050 )      $    523

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 collectibility of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 are 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 homogeneous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment. Please refer to Note 4 to our Consolidated Financial Statements located elsewhere in this report for information regarding impaired loans.


Table of Contents

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 December 31, 2013, was $9.7 million compared to $9.9 million at December 31, 2012. At $9.7 million, the allowance for loan losses represents 0.85% of total loans held, down from 1.09% at December 31, 2012. Total impaired loans and non-performing assets at December 31, 2013, were $22.5 million, representing 231.15% of the allowance for loan losses. Modestly improving economic and market conditions coupled with internal risk rating changes offset by portfolio growth resulted in us adding $888 thousand to the allowance for loan and lease losses during 2013 compared to $2.7 million in 2012. The provisions during the 12 months ended December 31, 2013, have been offset by loan charge-offs of $1.8 million and recoveries of $712 thousand during the same period. Modestly improving economic conditions and decreases in delinquencies and charge-offs, resulted in our decision to decrease the provision for loan losses during 2013 compared to 2012. The provisions made in 2013 reflect loan loss experience in 2013 and changes in economic conditions that decreased the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions in 2014 as needed 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. We seek 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 December 31, 2013, the overdraft allowance was $24 thousand compared to $14 thousand at year-end 2012. Provisions for overdraft losses were $74 thousand during the 12 month period ended December 31, 2013, compared to $55 thousand 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.

Loan charge-offs (excluding the overdraft program) were $1.8 million during the 12 months ended December 31, 2013 compared to $2.3 million for the same period in 2012. Recoveries (excluding the overdraft program) were $712 thousand during the 12 months ended December 31, 2013, compared to $455 thousand for the same period in 2012. This activity resulted in net charge-offs of $1.1 million for the 12 months ended December 31, 2013, compared to $1.9 million for the same period in 2012. One-to-four family residential mortgages, commercial real estate . . .

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