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NHTB > SEC Filings for NHTB > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for NEW HAMPSHIRE THRIFT BANCSHARES INC

Form 10-Q for NEW HAMPSHIRE THRIFT BANCSHARES INC


11-Aug-2014

Quarterly Report


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

Highlights and Overview

Our profitability is derived primarily from the Bank. The Bank's earnings in turn are generated 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 six months ended June 30, 2014:

Total assets increased $67.4 million, or 4.73%, to $1.5 billion at June 30, 2014 from $1.4 billion at December 31, 2013.

Net loans increased $67.3 million, or 5.93%, to $1.2 billion at June 30, 2014 from $1.1 billion at December 31, 2013.

During the six months ended June 30, 2014, the Company originated $190.8 million in loans, an increase of 7.49%, compared to $177.5 million during the same period in 2013. During the quarter ended June 30, 2014, we originated $110.9 million in loans, an increase of 11.12%, compared to $99.8 million during the same period in 2013.

Our loan servicing portfolio was $408.0 million at June 30, 2014, compared to $417.3 million at December 31, 2013.

Total deposits increased $23.1 million, or 2.12%, to $1.1 billion at June 30, 2014 from $1.1 billion at December 31, 2013.

Net interest and dividend income for the six months ended June 30, 2014 was $20.9 million compared to $16.0 million for the same period in 2013. Net interest and dividend income for the three months ended June 30, 2014 was $10.7 million compared to $7.8 million for the same period in 2013.

Net income available to common stockholders was $4.4 million for the six months ended June 30, 2014, compared to $3.7 million for the same period in 2013. Net income available to common stockholders was $2.3 million for the three months ended June 30, 2014, compared to $1.7 million for the same period in 2013.

As a percentage of total loans, non-performing and impaired loans decreased to 1.47% at June 30, 2014 from 1.86% at December 31, 2013.


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 contained elsewhere in this report.

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, 2014. 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 2013 Annual Report on Form 10-K.

Comparison of Financial Condition at June 30, 2014 (unaudited) and December 31, 2013

Assets. Total assets were $1.5 billion at June 30, 2014, compared to $1.4 billion at December 31, 2013, an increase of $67.4 million, or 4.73%.

Securities Portfolio. Securities available-for-sale decreased $13.7 million, or 10.93%, to $111.5 million at June 30, 2014 from $125.2 million at December 31, 2013. Net unrealized losses on securities available-for-sale were $297 thousand at June 30, 2014 compared to net unrealized losses of $2.0 million at December 31, 2013. During the six months ended June 30, 2014, we sold securities with a total book value of $73.7 million for a net gain on sales of $443 thousand, and $40.0 million of short-term U.S. Treasury notes matured. During the same period, we purchased securities totaling $113.4 million including U.S. Treasury notes and mortgage-backed securities. Our net unrealized loss (after tax) on our investment portfolio was $179 thousand at June 30, 2014 compared to an unrealized loss (after tax) of $1.2 million at December 31, 2013. The investments in our investment portfolio that are temporarily impaired as of June 30, 2014 consisted of U.S. Treasury notes, U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S. government-sponsored enterprises, and municipal bonds. The unrealized losses are primarily attributable to changes in market interest rates and market inefficiencies. Management has determined that we have the intent and the ability to hold debt securities until maturity, and therefore, no declines are deemed to be other than temporary.

Loans. Net loans held in portfolio increased $67.3 million, or 5.93%, to $1.2 billion at June 30, 2014 from $1.1 billion at December 31, 2013. The increase of loans held in portfolio was primarily due to increases in conventional real estate loans of $38.2 million, commercial real estate loans of $24.0 million, and commercial loans of $8.0 million offset in part by a decrease in construction loans of $2.1 million. As a percentage of total loans, non-performing loans decreased to 1.47% at June 30, 2014 from 1.86% at December 31, 2013. During the six months ended June 30, 2014, we originated $190.8 million in loans, an increase of 7.49%, compared to $177.5 million during the same period in 2013. During the quarter ended June 30, 2014, we originated $110.9 million in loans, an increase of 11.12%, compared to $99.8 million during the same period in 2013. At June 30, 2014, our mortgage servicing loan portfolio was $408.0 million compared to $417.3 million at December 31, 2013. 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, 2014, adjustable-rate mortgages comprised approximately 68.93% of our real estate mortgage loan portfolio, which represents a higher percentage compared to the mix at December 31, 2013 of 53.64%, due in part to increases in commercial real estate loans and increased origination of adjustable-rate residential loans.

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-homogeneous problem loans in accordance with ASC 310-10-35, "Receivables-Overall-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 homogeneous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment.


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 June 30, 2014 was $9.8 million and at December 31, 2013 was $9.7 million. The allowance for loan losses represents 0.81% of total loans held at June 30, 2014 compared to 0.85% at December 31, 2013. Total non-performing assets at June 30, 2014 were approximately $6.2 million, representing 63.59% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with internal risk rating changes, resulted in us making $700 in provisions to the allowance for loan losses during the six months ended June 30, 2014 compared to $550 thousand for the same period in 2013. Loan charge-offs (excluding the overdraft program) were $949 thousand during the six month period ended June 30, 2014 compared to $1.1 million for the same period in 2013. Recoveries were $294 thousand during the six month period ended June 30, 2014 compared to $298 thousand for the same period in 2013. This activity resulted in net charge-offs of $655 thousand for the six month period ended June 30, 2014 compared to $847 thousand for the same period in 2013. One-to-four family residential mortgages, commercial real estate, commercial, and consumer loans accounted for 38%, 32%, 26%, and 4%, respectively, of the amounts charged-off during the six month period ended June 30, 2014.

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 $9.8 million. The growth in the portfolio has been offset by net loan recoveries and modestly improving economic conditions that affect the risk of loss inherent in the loan portfolio. Management anticipates making additional provisions during the remainder of 2014 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, 2014, the overdraft allowance was $20 thousand, compared to $24 thousand at December 31, 2013. There were provisions of $9 thousand for overdraft losses recorded during the six month period ended June 30, 2014 compared to provisions of $26 thousand that were recorded for the same period during 2013. 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.

The following is a summary of activity in the allowance for loan losses account (excluding overdraft allowances) for the periods indicated:

                                                                 Six Months Ended
(Dollars in thousands)                                            June 30, 2014
                                                    Originated          Acquired         Total
Balance, beginning of year                         $      9,733        $       -        $ 9,733

Charge-offs:
Conventional                                               (360 )              -           (360 )
Commercial real estate                                     (306 )              -           (306 )
Construction                                                 -                 -             -
Consumer loans                                              (37 )              -            (37 )
Commercial and municipal loans                             (246 )              -           (246 )

Total charged-off loans                                    (949 )              -           (949 )

Recoveries:
Conventional                                                242                -            242
Commercial real estate                                        1                -              1
Construction                                                 -                 -             -
Consumer loans                                                6                -              6
Commercial and municipal loans                               45                -             45

Total recoveries                                            294                -            294

Net charge-offs:                                           (655 )              -           (655 )
Provision (benefit) for loan loss charged to
income:
Conventional                                               (304 )              -           (304 )
Commercial real estate                                      811                -            811
Construction                                                248                -            248
Consumer loans                                               19                -             19
Commercial and municipal loans                               35                -             35
Unallocated                                                (109 )              -           (109 )

Total provision                                             700                -            700

Ending balance                                     $      9,778        $       -        $ 9,778


Table of Contents
                                                           Six Months Ended
 (Dollars in thousands)                                     June 30, 2013
                                               Originated        Acquired        Total
 Balance, beginning of year                   $      9,909      $       -       $  9,909

 Charge-offs:
 Conventional                                         (541 )            -           (541 )
 Commercial real estate                               (344 )          (102 )        (446 )
 Construction                                           -               -             -
 Consumer loans                                        (24 )            -            (24 )
 Commercial and municipal loans                       (236 )            -           (236 )

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

 Recoveries
 Conventional                                          181              -            181
 Commercial real estate                                101              -            101
 Construction                                           -               -             -
 Consumer loans                                          3              -              3
 Commercial and municipal loans                         13              -             13

 Total recoveries                                      298              -            298

 Net charge-offs                                      (847 )          (102 )        (949 )

 Provision for loan loss charged to income:
 Conventional                                          279              -            279
 Commercial real estate                                180              -            180
 Construction                                           15              -             15
 Consumer loans                                          3              -              3
 Commercial and municipal loans                         73              -             73

 Total provision                                       550              -            550

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

The following is a summary of activity in the allowance for overdraft privilege accounts for the periods indicated:

                                                  Six Months Ended
                                                      June 30,
               (Dollars in thousands)            2014           2013
               Beginning balance                $    24        $   14

               Overdraft charge-offs                (77 )        (110 )
               Overdraft recoveries                  64            81

               Net overdraft charge-offs            (13 )         (29 )

               Provision for overdraft losses         9            26

               Ending balance                   $    20        $   11


Table of Contents

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, 2014                          December 31, 2013
                                                       % of           % of                      % of           % of
                                                     Allowance       Loans                    Allowance       Loans
Real estate loans
Conventional, 1-4 family and home
equity loans                            $ 4,893              51 %        59 %    $ 5,314              55 %        59 %
Commercial                                2,528              26 %        26 %      2,027              21 %        25 %
Land and construction                       601               6 %         2 %        353               3 %         3 %
Collateral and consumer loans                39              -            1 %         51               1 %         1 %
Commercial and municipal loans            1,383              14 %        12 %      1,551              16 %        12 %
Unallocated                                 131               1 %        -           240               2 %        -
Impaired loans                              203               2 %        -           197               2 %        -

Allowance                               $ 9,778             100 %       100 %    $ 9,733             100 %       100 %

Allowance as a percentage of
originated loans                                           0.94 %                                   1.02 %
Impaired loans as a percentage of
allowance                                                180.21 %                                 217.35 %

The following table shows total allowances including overdraft allowances:

         (Dollars in thousands)       June 30, 2014       December 31, 2013
         Allowance for loan losses   $         9,778     $             9,733
         Overdraft allowance                      20                      24

         Total allowance             $         9,798     $             9,757

Asset Quality. Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans were $29.9 million at June 30, 2014 compared to $30.3 million at December 31, 2013. Other real estate owned was $297 thousand at June 30, 2014 compared to $1.3 million at December 31, 2013. 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. Twenty-two loans considered to be impaired loans at June 30, 2014, have specific allowances identified and assigned. The 22 loans are secured by real estate, business assets or a combination of both. At June 30, 2014, the allowance included $203 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2013 was $197 thousand.

At June 30, 2014, we had 59 loans totaling $12.9 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, 2014, 54 of the troubled debt restructurings were performing under contractual terms. Of the loans classified as troubled debt restructured, 5 were more than 30 days past due at June 30, 2014. The balances of these past due loans were $519 thousand. At December 31, 2013, we had 57 loans totaling $12.5 million considered to be troubled debt restructurings.

Loans over 90 days past due were $2.0 million at June 30, 2014 compared to $3.9 million at December 31, 2013. Loans 30 to 89 days past due were $4.5 million at June 30, 2014 compared to $5.7 million at December 31, 2013. As a percentage of assets, the recorded investment in non-performing loans decreased from 0.65% at December 31, 2013 to 0.40% at June 30, 2014 and, as a percentage of total loans, decreased from 0.82% at December 31, 2013 to 0.49% at June 30, 2014.

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, 2014, 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, 2014, 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.


Table of Contents

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 as of the dates indicated:

                                                          June 30, 2014                                December 31, 2013
                                                         Percentage       Percentage                     Percentage       Percentage
                                                          of Total         of Total                       of Total         of Total
(Dollars in thousands)                      Amount       Allowance          Assets          Amount       Allowance          Assets
Non-accrual loans(1)                        $ 5,921            60.55 %           0.40 %    $  9,303            95.35 %           0.65 %
Other real estate owned and chattel             297             3.04 %           0.02 %       1,343            13.76 %           0.09 %

Total non-performing assets                 $ 6,218            63.59 %           0.42 %    $ 10,646           109.11 %           0.74 %

(1) All loans 90 days or more delinquent are placed on non-accruing status.

The following table sets forth the recorded investment in nonaccrual loans by category at the dates indicated:

          (Dollars in thousands)      June 30, 2014       December 31, 2013
          Real estate:
          Conventional               $         2,633     $             3,821
          Home equity                            182                     104
          Commercial                           2,710                   4,512
          Construction                            -                      230
          Consumer                                -                       15
          Commercial and municipal               396                     621

          Total                      $         5,921     $             9,303

We believe the allowance for loan losses is at a level sufficient to cover inherent losses, given the current level of risk in the loan portfolio. At the same time, we recognize that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary due to increases in the loan portfolio, or if economic, real estate and other conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.

Goodwill. Goodwill amounted to $44.8 million, or 3.00% of total assets, as of June 30, 2014 compared to $44.6 million, or 3.13% of total assets, as of December 31, 2013.

Other intangible assets. Other intangible assets amounted to $10.2 million, or 0.68% of total assets, as of June 30, 2014 compared to $11.0 million, or 0.77% of total assets, as of December 31, 2013. The decrease was due to normal amortization of core deposit intangible and customer list assets.

Other Real Estate Owned. Other real estate owned ("OREO") was $297 thousand, representing one property, at June 30, 2014 compared to $1.3 million, representing seven properties, of OREO and property acquired in settlement of loans at December 31, 2013.

Deposits. Total deposits increased $23.1 million, or 2.13%, to $1.1 billion at June 30, 2014 from $1.1 billion at December 31, 2013. Non-interest bearing deposit accounts increased $71 thousand, or 0.07%, and interest-bearing deposit accounts increased $23.1 million, or 2.34%, over the same period. The balances at June 30, 2014, included $51.0 million of brokered deposits, which is an increase of $30.2 million compared to December 31, 2013. This increase represents receipt of additional brokered deposits. Deposit balances at June 30, 2014 also included $6.5 million of deposits obtained through listing services, which is unchanged compared to December 31, 2013.

Borrowings. Securities sold under agreements to repurchase decreased $7.0 million, or 25.26%, to $20.8 million at June 30, 2014, from $27.9 million at December 31, 2013. Repurchase agreements are collateralized by some of our U.S. government and agency investment securities. We had outstanding balances of $171.0 million in advances from the Federal Home Loan Bank ("FHLB") at June 30, 2014, an increase of $49.3 million from $121.7 million at December 31, 2013. In addition to advances, we had ten letters of credit totaling $40.2 million with the FHLB to secure customer deposits under pledge agreements. These letters of . . .

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