(1)
For purposes of these computations, non-accrual loans are included in average loans.
(2)
For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.
(3)
For purposes of these computations, interest income, net interest income and net interest margin are reported on a tax equivalent basi
40
s.
Net Interest Margin:
The net interest margin, expressed on a tax equivalent basis, represents the difference between interest and dividends earned on interest-earning assets and interest paid to depositors and other creditors, expressed as a percentage of average earning assets.
The net interest margin is determined by dividing tax equivalent net interest income by average interest-earning assets. The interest rate spread represents the difference between the average tax equivalent yield earned on interest earning-assets and the average rate paid on interest bearing liabilities. The net interest margin is generally higher than the interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, primarily demand deposits and shareholders equity.
41
For the three months ended March 31, 2013, the tax equivalent net interest margin amounted to 3.15%, compared with 3.30% in the first quarter of 2012, representing a decline of fifteen basis points. The decline in the net interest margin was attributed to earning asset yields, which declined faster than the Banks cost of funds. Specifically, the yield on earning assets declined 40 basis points to 4.16% while the rate paid on interest bearing liabilities declined 29 basis points to 1.14%.
The following table summarizes the net interest margin components, on a quarterly basis, over the past two years. Factors contributing to the changes in the net interest margin are further enumerated in the following discussion and analysis.
NET INTEREST MARGIN ANALYSIS
FOR QUARTER ENDED
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE RATES
|
2013
|
|
2012
|
|
2011
|
Quarter:
|
1
|
|
4
|
3
|
2
|
1
|
|
4
|
3
|
2
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
Loans (1,3)
|
4.59%
|
|
4.71%
|
4.72%
|
4.64%
|
4.82%
|
|
4.88%
|
4.83%
|
4.86%
|
Securities (2,3)
|
3.45%
|
|
3.72%
|
3.72%
|
3.96%
|
4.22%
|
|
4.29%
|
4.58%
|
4.78%
|
Federal Home Loan Bank stock
|
0.49%
|
|
0.50%
|
0.49%
|
0.49%
|
0.50%
|
|
0.30%
|
0.27%
|
0.30%
|
Fed Funds sold, money market funds,
|
|
|
|
|
|
|
|
|
|
|
and time deposits with other banks
|
0.00%
|
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
0.00%
|
0.00%
|
0.00%
|
Total Earning Assets
|
4.16%
|
|
4.32%
|
4.32%
|
4.35%
|
4.56%
|
|
4.61%
|
4.68%
|
4.77%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
0.96%
|
|
1.05%
|
1.07%
|
1.13%
|
1.18%
|
|
1.25%
|
1.27%
|
1.30%
|
Borrowings
|
1.46%
|
|
1.63%
|
1.72%
|
1.69%
|
1.91%
|
|
2.38%
|
2.57%
|
2.69%
|
Total Interest Bearing Liabilities
|
1.14%
|
|
1.24%
|
1.28%
|
1.33%
|
1.43%
|
|
1.58%
|
1.65%
|
1.74%
|
|
|
|
|
|
|
|
|
|
|
|
Rate Spread
|
3.02%
|
|
3.08%
|
3.04%
|
3.02%
|
3.13%
|
|
3.03%
|
3.03%
|
3.03%
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin (3)
|
3.15%
|
|
3.23%
|
3.20%
|
3.17%
|
3.30%
|
|
3.23%
|
3.24%
|
3.23%
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin without
Tax Equivalent Adjustments
|
3.02%
|
|
3.08%
|
3.06%
|
3.04%
|
3.17%
|
|
3.11%
|
3.12%
|
3.09%
|
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.
(3) For purposes of these computations, interest income, net interest income and net interest margin are reported on a tax equivalent basis.
For the three months ended March 31, 2013, the weighted average yield on average earning assets amounted to 4.16%, compared with 4.56% for the same quarter in 2012, representing a decline of 40 basis points. This decline largely resulted from the replacement of accelerated cash flows from the Banks mortgage-backed securities portfolio along with the purchase of additional securities during a period of historically low interest rates. The decline was also attributed to the origination and competitive re-pricing of certain commercial loans, as well as residential mortgage loan refinancing activity during a period of historically low interest rates.
42
For the three months ended March 31, 2013, the weighted average cost of interest bearing liabilities amounted to 1.14%, compared with 1.43% for the same quarter in 2012, representing a decline of 29 basis points. This decline principally reflected the ongoing re-pricing of maturing time deposits and borrowings, combined with the lowering of interest rates on certain of the Banks core deposit products.
Interest and Dividend Income:
For the three months ended March 31, 2013, total interest and dividend income on a tax-equivalent basis amounted to $12,765, compared with $12,944 in the first quarter of 2012, representing a decline of $179, or 1.4%. The decline in interest and dividend income was principally attributed to a 40 basis point decline in the weighted average earning asset yield, largely offset by earning asset growth of $103,287, or 9.0%.
For the three months ended March 31, 2013, tax-equivalent interest income from the securities portfolio amounted to $3,504, representing a decline of $509, or 12.7%, compared with the first quarter of 2012. The decline in interest income from securities was principally attributed to a 77 basis point decline in the weighted average securities portfolio yield to 3.45%, offset in part by a $29,297, or 7.7% increase in total average securities, compared with the first quarter of 2012. The decline in the weighted average securities yield was largely attributed to the ongoing replacement of accelerated mortgage-backed securities cash flows in a historically low interest rate environment combined with incremental securities purchases at low prevailing market yields. Accelerated cash flows were principally attributed to increased securitized loan refinancing activity driven by historically low interest rates, a variety of government stimulus programs, quantitative easing efforts by the Federal Reserve, as well as continuing credit defaults.
For the three months ended March 31, 2013, tax-equivalent interest income from the loan portfolio amounted to $9,239, representing an increase of $328, or 3.7% compared with the first quarter of 2012. The increased income from the loan portfolio was attributed to a $72,045 or 9.7% increase in total average loans, but was largely offset by a 23 basis point decline in the weighted average yield to 4.59%, compared with the first quarter of 2012. The decline in the weighted average loan yield principally reflected the origination and competitive re-pricing of certain commercial loans, as well as elevated levels of residential mortgage loan refinancing activity during a period of historically low interest rates.
As depicted on the rate/volume analysis table below, comparing the first quarter of 2013 with the same quarter in 2012, the impact of the lower weighted average earning asset yield contributed $1,351 to the decline in total tax-equivalent interest income, which was largely offset by $1,172 attributed to the increased volume of total average earning assets.
43
Interest Expense:
For the three months ended March 31, 2013, total interest expense amounted to $3,076, compared with $3,570 in the first quarter of 2012, representing a decline of $494, or 13.8%. The decline in interest expense was principally attributed to a 29 basis point decline in the weighted average cost of interest bearing liabilities, the impact of which was largely offset by a $93,207 or 9.3% increase in total average interest bearing liabilities, compared with the first quarter of 2012.
The decline in the first quarter weighted average cost of interest bearing liabilities compared with the same quarter in 2012 was principally attributed to prevailing, historically low short-term and long-term market interest rates, with maturing time deposits and borrowings being added or replaced at a lower cost and other interest bearing deposits re-pricing into the lower interest rate environment. For the three months ended March 31, 2013, the total weighted average cost of interest bearing liabilities amounted to 1.14%, compared with 1.43% for the same quarter in 2012, representing a decline of 29 basis points. The weighted average cost of interest bearing deposits declined 22 basis points to 0.96%, compared with the first quarter of 2012, while the weighted average cost of borrowed funds declined 45 basis points to 1.46%.
As depicted on the rate/volume analysis table below, comparing the first quarter of 2013 with the same quarter in 2012, the impact of the lower weighted average rate paid on interest bearing liabilities contributed $844 to the decline in interest expense, offset in part by $350 attributed to the increased volume of interest bearing liabilities.
Rate/Volume Analysis:
The following tables set forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and interest bearing liabilities, and changes in average rates on such assets and liabilities. The income from tax-exempt assets has been adjusted to a fully tax equivalent basis, thereby allowing uniform comparisons to be made. Because of the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories in proportion to the relationships of the absolute dollar amounts of the change in each.
44
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
INCREASES (DECREASES) DUE TO:
|
|
|
|
|
Average
Volume
|
Average
Rate
|
Total
Change
|
|
|
|
|
Loans (1,3)
|
$ 862
|
$ (534)
|
$ 328
|
Securities (2,3)
|
308
|
(817)
|
(509)
|
Federal Home Loan Bank stock
|
2
|
---
|
2
|
Fed funds sold, money market funds, and time
|
|
|
|
deposits with other banks
|
---
|
---
|
---
|
|
|
|
|
TOTAL EARNING ASSETS
|
$1,172
|
$(1,351)
|
$(179)
|
|
|
|
|
Interest bearing deposits
|
150
|
(403)
|
(253)
|
Borrowings
|
200
|
(441)
|
(241)
|
TOTAL INTEREST BEARING LIABILITIES
|
$ 350
|
$ (844)
|
$(494)
|
|
|
|
|
NET CHANGE IN NET INTEREST INCOME
|
$ 822
|
$ (507)
|
$ 315
|
(1)
For purposes of these computations, non-accrual loans are included in average loans.
(2)
For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.
(3)
For purposes of these computations, net interest income and net interest margin are reported on a tax equivalent basis.
45
Provision for Loan Losses
The provision for loan losses (the provision) reflects the amount necessary to maintain the allowance for loan losses at a level that, in managements judgment, is appropriate for the amount of inherent risk of probable loss in the Banks current loan portfolio.
The credit quality of the Banks loan portfolio continued to improve during the three months ended March 31, 2013. This improvement was highlighted by a $1,275 or 12.9% decline in non-performing loans and a $413 or 4.0% decline in potential problem loans, compared with December 31, 2012. During the three months ended March 31, 2013, the Bank experienced a moderate level of loan loss experience, with total net loan charge-offs amounting to $395, or annualized net charge-offs to average loans outstanding of 0.19%, compared with $315 and 0.17% in the first quarter of 2012, respectively.
For the three months ended March 31, 2013, the Bank recorded a provision of $353, compared with $415 in the first quarter of 2012, representing a decline of $62, or 14.9%. The provision recorded for the three months ended March 31, 2013, was largely driven by the Banks charge-off experience, as the overall credit quality of the loan portfolio remained relatively stable and the growth of the loan portfolio slowed.
Refer below to Item 2 of this Part I, Financial Condition, Loans,
Non-Performing Loans, Potential Problem Loans
and
Allowance for Loan Losses,
in this report on Form 10-Q
for further discussion and analysis related to the provision for loan losses.
Non-interest Income
For the three months ended March 31, 2013, total non-interest income amounted to $1,950, compared with $1,700 for the same quarter in 2012, representing an increase of $250, or 14.7%.
Factors contributing to the changes in non-interest income are enumerated in the following discussion and analysis.
Trust and Other Financial Services:
Income from trust and other financial services is principally derived from fee income based on a percentage of the fair market value of client assets under management and held in custody and, to a lesser extent, revenue from brokerage services conducted through Bar Harbor Financial Services, an independent third-party broker.
For the three months ended March 31, 2013, trust and other financial service fees amounted to $906, compared with $779 for the same quarter in 2012, representing an increase of $127, or 16.3%. This increase was principally attributed to retail brokerage activities, the revenue from which was up $106 compared with the first quarter of 2012.
Reflecting new client relationships and improvement in the equity markets, quarter-end assets under management stood at $369,880, up from $355,461 at year end 2012 and representing an increase of $14,419 or 4.1% compared with March 31, 2012.
Service Charges on Deposit Accounts:
For the three months ended March 31, 2013, income from service charges on deposit accounts amounted to $295, compared with $250 for the same quarter of 2012, representing an increase of $45, or 18.0%. The increase in service charges on deposit accounts was largely attributed to customer overdraft fee increases instituted in the third quarter of 2012 as well as increased overdraft activity.
46
Credit and Debit Card Service Charges and Fees:
For the three months ended March 31, 2013, income generated from credit and debit card service charges and fees amounted to $336, compared with $316 for the first quarter of 2012, representing an increase of $20, or 6.3%. This increase was largely attributed to continued growth of the Banks retail deposit base, higher levels of merchant credit card processing volumes, and continued success with a program that offers rewards for certain debit card transactions.
Net Securities Gains:
For the three months ended March 31, 2013, total net securities gains amounted to $265, compared with $567 for the first quarter of 2012, representing a decline of $302, or 53.3%. The net realized securities gains recorded in the first quarter of 2013 were comprised of realized gains of $273, offset by realized losses of $8. The net realized securities gains recorded in the first quarter of 2012 were comprised of realized gains of $573, offset by realized losses of $6.
Net Other-than-temporary Impairment Losses Recognized in Earnings:
For the three months ended March 31, 2013, there were no OTTI losses recognized in earnings compared with $344 for the same quarter of 2012.
During the three months ended March 31, 2012, the Company determined that certain private-label mortgage-backed securities were other-than-temporarily impaired (OTTI), because the Company could no longer conclude that it was probable it would recover all of the principal and interest on these securities. The credit losses principally reflected an increase in the loss severity and constant default rate estimates of the underlying residential mortgage loan collateral, resulting from seriously depressed real estate values, extended foreclosure and collateral liquidation timelines, and depressed economic conditions overall. The OTTI losses recorded in the first quarter of 2012 represented managements best estimate of credit losses or additional credit losses on the residential mortgage loan collateral underlying these securities. The credit losses were previously recorded, net of taxes, in unrealized gains or losses on securities available for sale within accumulated other comprehensive income or loss, a component of total shareholders equity on the Companys consolidated balance sheet.
Further information regarding impaired securities, other-than-temporarily impaired securities, and evaluation of securities for impairment is incorporated by reference to Notes 2 and 5 of the unaudited consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.
Non-interest Expense
For the three months ended March 31, 2013, total non-interest expense amounted to $6,307, compared with $5,808 in the first quarter of 2012, representing an increase of $499, or 8.6%.
Factors contributing to the changes in non-interest expense are more fully enumerated in the following discussion and analysis.
Salaries and Employee Benefits:
For the three months ended March 31, 2013, total salaries and employee benefits expense amounted to $3,607, compared with $3,182 in the first quarter of 2012, representing an increase of $425, or 13.4%.
The increase in salaries and employee benefits was attributed to a variety of factors including normal increases in base salaries, increased costs of contributory health insurance, higher levels of employee incentive compensation, as well as changes in staffing levels and mix. The increase in salaries and employee benefits also reflects the Banks previously reported acquisition of three branch offices in the third quarter of 2012. First quarter salaries and benefits also included $96 in expenses related to certain restricted stock awards to the Companys Board of Directors, compared with none in the first quarter of 2012.
Occupancy Expense:
For the three months ended March 31, 2013, total occupancy expense amounted to $484, compared with $405 for the same quarter in 2012, representing an increase of $79, or 19.5%. This increase was largely attributed to the three new branch office locations acquired in connection with the Border Trust transaction, which was consummated in the third quarter of 2012. The increase in occupancy expense was also attributed to the Banks substantial reconfiguration of its Ellsworth campus, including the replacement of its Ellsworth retail banking office, which was put in service in the third quarter of 2012.
Furniture and Equipment Expense:
For the three months ended March 31, 2013, total furniture and equipment expense amounted to $510, compared with $415 for the same quarter in 2012, representing an increase of $95, or 22.9%. Approximately $66 of this increase was attributed to the three new branch office locations acquired in the third quarter of 2012. The increase in furniture and expense was also attributed to the Banks substantial reconfiguration of its Ellsworth campus, including the replacement of its Ellsworth retail banking office, which was put in service in the third quarter of 2012.
FDIC Assessments:
For the three months ended March 31, 2013, total FDIC insurance assessments amounted to $196, compared with $185 for the same quarter of 2012, representing an increase of $11, or 6.0%. This increase was largely attributed to higher levels of insured deposits.
Other Operating Expenses:
For the three months ended March 31, 2013, total other operating expenses amounted to $1,414, compared with $1,533 for the same quarter of 2012, representing a decline of $119, or 7.8%.
This decline was principally attributed to lower levels of loan collection and other real estate owned expenses, as well as fees for professional services.
47
Efficiency Ratio
The Companys efficiency ratio measures the relationship of operating expenses to revenues. The efficiency ratio is calculated by dividing non-interest operating expenses by the sum of tax-equivalent net interest income and non-interest income other than net securities gains, other-than-temporary impairments, and other significant non-recurring expenses, including the non-recurring expenses related to the Border Trust transaction. For the three months ended March 31, 2013, the Companys efficiency ratio amounted to 55.3%, compared with 53.4% for the same quarter of 2012.
Income Taxes
For the three months ended March 31, 2013, total income taxes amounted to $1,363, compared with $1,331 for the same quarter of 2012, representing an increase of $32, or 2.4%.
The Company's effective tax rates for the three months ended March 31, 2013, amounted to 29.8%, compared with 29.6% for the same quarter of 2012. The income tax provisions for these periods were less than the expense that would result from applying the federal statutory rate of 35% to income before income taxes, principally because of the impact of tax exempt interest income on certain investment securities, loans and bank owned life insurance.
Fluctuations in the Companys effective tax rate are generally attributed to changes in the relationship between non-taxable income and non-deductible expense, and income before income taxes, during any given reporting period.
FINANCIAL CONDITION
Total Assets
The Companys assets principally consist of loans and securities, which at March 31, 2013, represented 62.5% and 32.4% of total assets, compared with 62.6% and 32.1% at December 31, 2012, respectively.
At March 31, 2013, the Companys total assets amounted to $1,307,252, compared with $1,302,935 at December 31, 2012, representing an increase of $4,317, or 0.3%.
Securities
The securities portfolio is comprised of mortgage-backed securities (MBS) issued by U.S. Government agencies, U.S. Government sponsored enterprises, and other non-agency, private label issuers. The portfolio also includes tax-exempt obligations of state and political subdivisions, and debt obligations of other U.S. Government sponsored enterprises.
Bank management considers securities as a relatively attractive means to effectively leverage the Banks strong capital position, as securities are typically assigned a significantly lower risk weighting compared with the Banks other earning assets for the purpose of calculating the Banks and the Companys risk-based capital ratios. The overall objectives of the Banks strategy for the securities portfolio include maintaining appropriate liquidity reserves, diversifying earning assets, managing interest rate risk, leveraging the Banks strong capital position, and generating acceptable levels of net interest income.
48
Securities available for sale represented 100% of total securities at March 31, 2013, and December 31, 2012. Securities available for sale are reported at their fair value with unrealized gains or losses, net of taxes, excluded from earnings but shown separately as a component of shareholders equity. At March 31, 2013, total net unrealized securities gains amounted to $8,891, compared with net unrealized gains of $12,271 at December 31, 2012. The decline in unrealized gains principally resulted from changes in market yields and pricing spreads compared with year end 2012, as well as first quarter realized gains on the sale of certain securities.
Total Securities:
At March 31, 2013, total securities amounted to $423,914, compared with $418,040 at December 31, 2012, representing an increase of $5,874, or 1.4%. Securities purchased during the three months ended March 31, 2013, consisted of MBS issued and guaranteed by U.S. Government agencies and sponsored-enterprises, and to a lesser extent, obligations of states and political subdivisions thereof (municipal securities).
The following tables summarize the securities available for sale portfolio as of March 31, 2013, and December 31, 2012:
|
|
|
|
|
March 31, 2013
Available for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
US Government-sponsored enterprises
|
$244,075
|
$ 7,008
|
$ 2,149
|
$248,934
|
US Government agency
|
87,716
|
1,810
|
259
|
89,267
|
Private label
|
7,416
|
733
|
275
|
7,874
|
Obligations of states and political subdivisions thereof
|
75,816
|
2,932
|
909
|
77,839
|
Total
|
$415,023
|
$12,483
|
$3,592
|
$423,914
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
Available for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
US Government-sponsored enterprises
|
$238,974
|
$ 7,913
|
$1,064
|
$245,823
|
US Government agency
|
82,397
|
2,080
|
216
|
84,261
|
Private label
|
8,063
|
571
|
521
|
8,113
|
Obligations of states and political subdivisions thereof
|
76,335
|
4,040
|
532
|
79,843
|
Total
|
$405,769
|
$14,604
|
$2,333
|
$418,040
|
Impaired Securities:
The securities portfolio contains certain securities where amortized cost exceeds fair value, which at March 31, 2013, amounted to an excess of $3,592, or 0.8% of the amortized cost of the total securities portfolio. At December 31, 2012 this amount represented an excess of $2,333, or 0.6% of the total securities portfolio. As of March 31, 2013, unrealized losses on securities in a continuous unrealized loss position more than twelve-months amounted to $618, compared with $744 at December 31, 2012.
As a part of the Companys ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of an available for sale security is judged to be other-than-temporary, a charge is recorded in pre-tax earnings equal to the estimated credit losses inherent in the security.
Further information regarding impaired securities, other-than-temporarily impaired securities and evaluation of securities for impairment is incorporated by reference to above Notes 2 and 5 of the interim unaudited consolidated financial statements in Part I, Item 1 of this report on Form 10-Q.
49
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of Boston (the FHLB). The FHLB is a cooperatively owned wholesale bank for housing and finance in the six New England states. Its mission is to support the residential mortgage and community-development lending activities of its members, which include over 450 financial institutions across New England. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for most of its wholesale funding needs.
At March 31, 2013, the Banks investment in FHLB stock totaled $18,108, compared with $18,189 at December 31, 2012, representing a decline of $81, or 0.4%.
FHLB stock is a non-marketable equity security and therefore is reported at cost, which generally equals par value. Furthermore, the ratio of the FHLBs market value of equity to its par value of capital stock was 112% at March 31, 2013, compared with 108% at December 31, 2012.
Shares held in excess of the minimum required amount are generally redeemable at par value.
The Company periodically evaluates its investment in FHLB stock for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. The FHLB recently reported that it remained in compliance with all regulatory capital ratios as of March 31, 2013, and was classified as adequately capitalized by its regulator, the Federal Housing Finance Agency, based on the FHLBs financial information at December 31, 2012. Based on the capital adequacy, liquidity position and sustained profitability of the FHLB, management believes there is no impairment related to the carrying amount of the Banks FHLB stock as of March 31, 2013. The Bank will continue to monitor its investment in FHLB stock.
50
Loans
Total Loans:
At March 31, 2013, total loans stood at $817,226, compared with $815,004 at December 31, 2012, representing an increase of $2,222, or 0.3%.
The loan portfolio is primarily secured by real estate in the counties of Hancock, Washington and Knox, Kennebec, and Sagadahoc, Maine. The following table summarizes the components of the Bank's loan portfolio as of the dates indicated.
LOAN PORTFOLIO SUMMARY
|
|
|
|
March 31,
2013
|
December 31,
2012
|
|
|
|
Commercial real estate mortgages
|
$315,661
|
$324,493
|
Commercial and industrial
|
78,043
|
59,373
|
Commercial construction and land development
|
15,523
|
22,120
|
Agricultural and other loans to farmers
|
26,399
|
24,922
|
Total commercial loans
|
435,626
|
430,908
|
|
|
|
Residential real estate mortgages
|
296,017
|
297,103
|
Home equity loans
|
52,965
|
53,303
|
Other consumer loans
|
18,025
|
19,001
|
Total consumer loans
|
367,007
|
369,407
|
|
|
|
Tax exempt loans
|
15,111
|
15,244
|
|
|
|
Net deferred loan costs and fees
|
(518)
|
(555)
|
Total loans
|
817,226
|
815,004
|
Allowance for loan losses
|
(8,055)
|
(8,097)
|
Total loans net of allowance for loan losses
|
$809,171
|
$806,907
|
Commercial Loans:
At March 31, 2013, total commercial loans amounted to $435,626, compared with $430,908 at December 31, 2012, representing an increase of $4,718, or 1.1%.
Commercial loan growth has generally been challenged by a still-troubled economy, continuing economic uncertainty, diminished demand, and strong competition for quality loans. Bank management attributes the continued growth in commercial loans to an effective business banking team, deep local market knowledge, sustained new business development efforts, and a local economy that has fared better than the nation as a whole.
Consumer Loans:
At March 31, 2013, total consumer loans, which principally consisted of residential real estate mortgage loans, amounted to $367,007, compared with $369,407 at December 31, 2012, representing a decline of $2,400, or 0.6%.
During the three months ended March 31, 2013, loans originated and closed by the Bank were
51
more than offset by accelerated loan re-financings and principal pay-downs from the existing residential real estate loan portfolio, as borrowers continued to take advantage of historically low interest rates.
Tax Exempt Loans:
At March 31, 2013, tax exempt loans amounted to $15,111, compared with $15,244 at December 31, 2012, representing a decline of $133, or 0.9%. Tax-exempt loans generally include loans to or guaranteed by local government municipalities, federal agencies, not-for-profit organizations, and other organizations that qualify for tax-exempt treatment. Government municipality loans typically have short maturities (e.g., tax anticipation notes). Government municipality loans are normally originated through a bid process among local financial institutions and are typically priced aggressively, thus generating relatively narrow net interest margins.
Credit Risk:
Credit risk is managed through loan officer authorities, loan policies, and oversight from the Banks Senior Credit Officer, the Bank's Senior Loan Officers Committee, the Directors Loan Committee, and the Bank's Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management's review, of individual credits is performed by an independent loan review consulting firm, which reports to the Audit Committee of the Board of Directors.
As a result of managements ongoing review of the loan portfolio, loans are placed on non-accrual status, either due to the delinquent status of principal and/or interest, or a judgment by management that, although payments of principal and or interest are current, such action is prudent because collection in full of all outstanding principal and interest is in doubt. Loans are generally placed on non-accrual status when principal and or interest is 90 days overdue, or sooner if judged appropriate by management. Consumer loans are generally charged-off when principal and/or interest payments are 120 days overdue, or sooner if judged appropriate by management.
Non-performing Loans:
Non-performing loans include loans on non-accrual status and loans past due 90 days or more and still accruing interest. The following table sets forth the details of non-performing loans as of the dates indicated:
TOTAL NON-PERFORMING LOANS
|
|
|
|
March 31,
2013
|
December 31,
2012
|
|
|
|
Commercial real estate mortgages
|
$1,633
|
$1,888
|
Commercial and industrial loans
|
632
|
818
|
Commercial construction and land development
|
2,029
|
2,359
|
Agricultural and other loans to farmers
|
562
|
664
|
Total commercial loans
|
4,856
|
5,729
|
|
|
|
Residential real estate mortgages
|
2,841
|
3,017
|
Home equity loans
|
767
|
814
|
Other consumer loans
|
81
|
72
|
Total consumer loans
|
3,689
|
3,903
|
|
|
|
Total non-accrual loans
|
8,545
|
9,632
|
Accruing loans contractually past due 90 days or more
|
47
|
235
|
Total non-performing loans
|
$8,592
|
$9,867
|
|
|
|
Allowance for loan losses to non-performing loans
|
93.8%
|
82.1%
|
Non-performing loans to total loans
|
1.05%
|
1.21%
|
Allowance to total loans
|
0.99%
|
0.99%
|
52
At March 31, 2013, total non-performing loans amounted to $8,592, compared with $9,867 at December 31, 2012, representing a decline of $1,275, or 12.9%. As more fully discussed below, one commercial real estate loan to a local, non-profit affordable housing authority in support of an affordable housing project accounted for $2,029, or 23.6% of total non-performing loans.
Non-performing commercial real estate mortgages totaled to $1,633 at March 31, 2013, down from $1,888 at December 31, 2012. At March 31, 2013, non-performing commercial real estate mortgages were represented by nine business relationships, with outstanding balances ranging from $24 to $311.
Non-performing commercial and industrial loans totaled $632 at March 31, 2013, down from $818 at December 31, 2012. At March 31, 2013, non-performing commercial and industrial loans were represented by eight business relationships, with outstanding balances ranging from $20 to $164.
Non-performing commercial construction and land development loans totaled $2,029 at March 31, 2013, down from $2,359 at December 31, 2012. At March 31, 2013, non-performing commercial construction and land development loans were entirely represented by a commercial real estate loan to a local, non-profit affordable housing authority in support of an affordable housing project. This loan is principally secured by the housing units from the project. The project is fully constructed and there is no construction risk associated with the loan. The primary source of repayment is the sale of the existing housing units. This loan is impaired and was put on non-accrual status in late 2010. To date, the Bank has charged off $2,014 of the original outstanding balance of this collateral dependent impaired loan. These charge-offs were based on current appraisals and revised prospects for future cash flows. This loan is recorded at fair value in the Companys financial statements.
Non-performing residential real estate mortgages totaled $2,841 at March 31, 2013, down from $3,017 at December 31, 2012. At March 31, 2013, non-performing residential real estate loans were represented by thirty-one, conventional, 1-4 family mortgage loans, with outstanding balances ranging from $2 to $409.
Non-performing home equity loans totaled $767 at March 31, 2013, down from $814 at December 31, 2012. At March 31, 2013, non-performing home equity loans were represented by nine relationships with outstanding balances ranging from $0 to $389.
While the level and mix of non-performing loans continued to reflect favorably on the overall quality of the Banks loan portfolio at March 31, 2013, Bank management is cognizant of the weakened real estate market, elevated unemployment rates and soft economic conditions overall. Bank management believes that the current credit cycle has yet to reach a definitive turning point and it may be some time before the overall level of credit quality in the Banks loan portfolio shows lasting improvement. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Banks customers, including debt service levels, declining collateral values, tourism activity, consumer confidence and other factors existing at the time. Management believes the economic activity and conditions in the local real estate markets will continue to be significant determinants of the quality of the loan portfolio in future periods and, thus, the Companys results of operations and financial condition.
53
Delinquencies and Potential Problem Loans:
In addition to the non-performing loans discussed above, the Bank also has loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $6,902 and $3,529 at March 31, 2013 and December 31, 2012, or 0.84% and 0.43% of total loans, respectively, net of any loans classified as non-performing that are within these delinquency categories. These loans and delinquency trends in general are considered in the evaluation of the allowance for loan losses and the related determination of the provision for loan losses.
Periodically, the Bank reviews the commercial loan portfolio for evidence of potential problem loans. Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower causes doubt about the ability of the borrower to comply with the loan payment terms and may result in disclosure of such loans as non-performing at some time in the future.
At March 31, 2013, the Bank identified twenty-seven commercial relationships totaling $9,884 as potential problem loans, or 1.21% of total loans. At December 31, 2012, the Bank identified thirty-three commercial relationships totaling $10,297 as potential problem loans, or 1.26% of total loans. Factors such as payment history, value of supporting collateral, and personal or government guarantees led the Bank to conclude that the current risk exposure on these potential problem loans did not warrant accounting for the loans as non-performing. Although in a performing status as of quarter-end, these loans exhibited certain risk factors, which have the potential to cause them to become non-performing at some point in the future.
Troubled Debt Restructures:
A Troubled Debt Restructure (TDR) results from a modification to a loan to a borrower who is experiencing financial difficulty in which the Bank grants a concession to the debtor that it would not otherwise consider but for the debtors financial difficulties. Financial difficulty arises when a debtor is bankrupt or contractually past due, or is likely to become so, based upon its ability to pay. A concession represents an accommodation not generally available to other customers, which may include below-market interest rate, deferment of principal payments, extension of maturity dates, etc. Such accommodations extended to customers who are not experiencing financial difficulty do not result in TDR classification.
As of March 31, 2013, the Bank had six real estate secured loans, three commercial and industrial loan, and one consumer loan, to five relationships totaling $1,148 that were classified as TDRs. At March 31, 2013, five of these TDRs totaling $1,016 were past due and classified as non-accrual.
As of December 31, 2012, the Bank had four real estate secured and three commercial and industrial loans to four relationships totaling $934 that were classified as TDRs, of which three TDRs totaling $114 were past due or classified as non-performing
Allowance for Loan Losses
:
At March 31, 2013, the allowance for loan losses (the allowance) stood at $8,055, compared with $8,097 at December 31, 2012, representing a decline of $42, or 0.5%. The small decline in the allowance from December 31, 2012 largely reflected an overall improvement in the Banks credit quality metrics, combined with relatively flat loan growth during the quarter.
At March 31, 2013, the allowance expressed as a percentage of total loans stood at 0.99%, unchanged compared with December 31, 2012. As of March 31, 2013, total non-performing loans to total loans stood at 1.05%, down from 1.21% at December 31, 2012. At March 31, 2013, the allowance expressed as a percentage of non-performing loans stood at 93.8%, up from 82.1% at December 31, 2012.
54
The allowance is available to absorb probable losses on loans. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated quarterly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration.
The allowance is maintained at a level that, in managements judgment, is appropriate for the amount of risk inherent in the current loan portfolio, and adequate to provide for estimated, probable losses. Allowances are established for specific impaired loans, a pool of reserves based on historical net loan charge-offs by loan types, and supplemental reserves that adjust historical net loss experience to reflect current economic conditions, industry specific risks, and other qualitative and environmental considerations impacting the inherent risk of loss in the current loan portfolio.
Specific allowances for impaired loans are determined based upon a discounted cash flows analysis, or as appropriate, a collateral shortfall analysis. The amount of collateral dependent impaired loans totaled $2,826 as of March 31, 2013, compared with $3,149 as of December 31, 2012. The related allowances for loan losses on these loans amounted to $120 as of March 31, 2013, compared with $120 as of December 31, 2012.
Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses. The Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Non-residential mortgage consumer loan losses are recognized no later than the point at which a loan is 120 days past due. Residential mortgage losses are recognized during the foreclosure process, or sooner, when that loss is quantifiable and reasonably assured. For commercial loans, the Bank applies a risk grading system, which stratifies the portfolio and allows management to focus appropriate efforts on the highest risk components of the portfolio. The risk grades include ratings that correlate substantially with regulatory definitions of Pass, Other Assets Especially Mentioned, Substandard, Doubtful, and Loss.
While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.
55
The following table details changes in the allowance and summarizes loan loss experience by loan type for the three-month periods ended March 31, 2013, and 2012.
ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED
MARCH 31, 2013 AND 2012
|
|
|
|
2013
|
2012
|
|
|
|
Balance at beginning of period
|
$ 8,097
|
$8,221
|
Charge offs:
|
|
|
Commercial real estate mortgages
|
---
|
$ 25
|
Commercial and industrial
|
164
|
17
|
Commercial construction and land development
|
---
|
---
|
Agricultural and other loans to farmers
|
---
|
10
|
Residential real estate mortgages
|
228
|
182
|
Other consumer loans
|
28
|
119
|
Home equity loans
|
9
|
---
|
Tax exempt loans
|
---
|
---
|
Total charge-offs
|
429
|
353
|
|
|
|
Recoveries:
|
|
|
Commercial real estate mortgages
|
---
|
$ 1
|
Commercial and industrial loans
|
10
|
6
|
Commercial construction and land development
|
---
|
---
|
Agricultural and other loans to farmers
|
1
|
25
|
Residential real estate mortgages
|
---
|
---
|
Other consumer loans
|
5
|
6
|
Home equity loans
|
18
|
---
|
Tax exempt loans
|
---
|
---
|
Total recoveries
|
34
|
38
|
|
|
|
Net charge-offs
|
395
|
315
|
|
|
|
Provision charged to operations
|
353
|
415
|
|
|
|
Balance at end of period
|
$8,055
|
$8,321
|
For the three months ended March 31, 2013, total net loan charge-offs amounted to $395, or annualized net charge-offs to average loans outstanding of 0.19%, compared with $315, or annualized net charge-offs to average loans outstanding of 0.17%, in the first quarter of 2012.
General allowances for loan losses account for the risk and estimated loss inherent in certain pools of industry and geographic loan concentrations within the loan portfolio. There were no material changes in loan concentrations during the three months ended March 31, 2013.
Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, Company management believes the allowance for loan losses at March 31, 2013, is appropriate for the amount of risk inherent in the current loan portfolio and adequate to provide for estimated probable losses.
56
Further information regarding loans and the allowance for loan losses, is incorporated by reference to above Notes 6, Loans and Allowance for Loan Losses, of the interim unaudited consolidated financial statements in Part I, Item 1 of this report on Form 10-Q.
Other Real Estate Owned:
Real estate acquired in satisfaction of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to other real estate owned (OREO) and recorded at the lower of cost or fair market value less estimated costs to sell based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent reductions in fair value below the carrying value are charged to other operating expenses.
At March 31, 2013, the Banks OREO amounted to $2,805, compared with $2,780 as of December 31, 2012. Nine residential and seven commercial properties comprised the March 31, 2013 balance of OREO.
Deposits
Historically, the banking business in the Banks market area has been seasonal, with lower deposits in the winter and spring and higher deposits in summer and autumn. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Seasonal swings in deposits have been typically absorbed by the Banks strong liquidity position, including borrowing capacity from the FHLB of Boston, brokered certificates of deposit obtained from the national market and cash flows from the securities portfolio.
At March 31, 2013, total deposits stood at $801,100, compared with $795,765 at December 31, 2012, representing an increase of $5,335, or 0.7%. Demand, NOW, and savings and money market accounts experienced a combined seasonal decline of $24,022, or 5.6%, compared with December 31, 2012, while time deposits were up $29,357, or 7.9%. The increase in time deposits was largely attributed to brokered deposits obtained from the national market, which were utilized to replace seasonal deposit outflows while preserving the Companys strong, on-balance sheet liquidity position.
Borrowed Funds
Borrowed funds principally consist of advances from the FHLB of Boston (the FHLB) and, to a lesser extent, securities sold under agreements to repurchase, Fed funds purchased and borrowings from the Federal Reserve Bank of Boston. Advances from the FHLB are secured by stock in the FHLB, investment securities, blanket liens on qualifying mortgage loans and home equity loans, and certain commercial real estate loans. Borrowings from the Federal Reserve Bank of Boston are principally secured by municipal securities and liens on certain commercial real-estate loans.
The Bank utilizes borrowed funds to leverage its strong capital position and support its earning asset portfolios. Borrowed funds are principally utilized to support the Banks investment securities portfolio and, to a lesser extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet interest rate risk, given the Banks ability to select desired amounts, terms and maturities on a daily basis.
57
At March 31, 2013, total borrowings amounted to $371,663, compared with $371,567 at December 31, 2012, representing an increase of $96, or 0.03%.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable organization, at March 31, 2013, the Company maintained its strong capital position and continued to be a well-capitalized financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.
Capital Ratios:
The Company and the Bank are subject to the risk-based capital guidelines administered by the Companys and the Bank's principal regulators. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of risk-weighted assets and off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to risk-weighted assets of 8%, including a minimum ratio of Tier I capital to total risk-weighted assets of 4% and a Tier I capital to average assets of 4% (Leverage Ratio). Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements.
As of March 31, 2013, the Company and the Bank were considered
well
-
capitalized
under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines, a
well-capitalized
institution must maintain a minimum total risk-based capital to total risk-weighted assets ratio of at least 10.0%, a minimum Tier I capital to total risk-weighted assets ratio of at least 6.0%, and a minimum Tier I Leverage ratio of at least 5.0%. At March 31, 2013, the Companys Total Risk-based, Tier I Risk-based, and Tier I Leverage ratios were 16.20%, 14.56% and 9.04%, respectively.
The following tables set forth the Company's and the Banks regulatory capital at March 31, 2013, and December 31, 2012, under the rules applicable at that date.
|
|
|
|
|
|
|
|
Consolidated
|
For Capital
Adequacy Purposes
|
Capitalized under
Prompt corrective
Action provisions
|
|
Actual
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
March 31, 2013
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$130,150
|
16.20%
|
$64,270
|
8.0%
|
N/A
|
|
Bank
|
$130,805
|
16.30%
|
$64,209
|
8.0%
|
$80,261
|
10.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$116,972
|
14.56%
|
$32,135
|
4.0%
|
N/A
|
|
Bank
|
$117,627
|
14.66%
|
$32,105
|
4.0%
|
$48,157
|
6.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Average Assets)
|
|
|
|
|
|
|
Consolidated
|
$116,972
|
9.04%
|
$51,765
|
4.0%
|
N/A
|
|
Bank
|
$117,627
|
9.09%
|
$51,735
|
4.0%
|
$64,669
|
5.0%
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
Consolidated
|
For Capital
Adequacy Purposes
|
To be well
Capitalized under
Prompt corrective
Action provisions
|
|
Actual
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
December 31, 2012
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$127,857
|
15.78%
|
$64,812
|
8.0%
|
N/A
|
|
Bank
|
$128,791
|
15.92%
|
$64,718
|
8.0%
|
$80,897
|
10.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$114,667
|
14.15%
|
$32,406
|
4.0%
|
N/A
|
|
Bank
|
$115,601
|
14.29%
|
$32,359
|
4.0%
|
$48,538
|
6.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Average Assets)
|
|
|
|
|
|
|
Consolidated
|
$114,667
|
8.87%
|
$51,730
|
4.0%
|
N/A
|
|
Bank
|
$115,601
|
8.94%
|
$51,701
|
4.0%
|
$64,626
|
5.0%
|
Trends, Events or Uncertainties:
There are no known trends, events or uncertainties, nor any recommendations by any regulatory authority, that are reasonably likely to have a material effect on the Companys capital resources, liquidity, or financial condition.
Cash Dividends:
The Company's principal source of funds to pay cash dividends and support its commitments is derived from Bank operations.
The Company paid a regular cash dividend of $0.305 per share of common stock in the first quarter of 2013, representing an increase of $0.02 or 7.0% compared with the dividend paid for the same quarter in 2012. The Companys Board of Directors recently declared a second quarter 2013 regular cash dividend of $0.31 per share of common stock, representing an increase of $0.02, or 6.9% compared with the second of 2012.
Stock Repurchase Plan:
In August 2008, the Companys Board of Directors approved a program to repurchase up to 300,000 shares of the Companys common stock, or approximately 10.2% of the shares then currently outstanding. The new stock repurchase program became effective as of August 21, 2008, and was authorized to continue for a period of up to twenty-four consecutive months. In August of 2010, the Companys Board of Directors authorized the continuance of this program through August 17, 2012. In August of 2012, the Companys Board of Directors authorized the continuance of this program through August 17, 2014. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.
As of March 31, 2013, the Company had repurchased 104,252 shares of stock under this plan, at a total cost of $2,912 and an average price of $27.94 per share. During the three months ended March 31, 2013, no shares were repurchased under the plan. The Company records repurchased shares as treasury stock.
Off-Balance Sheet Arrangements
The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be considered material to investors.
59
Standby Letters of Credit:
The Bank guarantees the obligations or performance of certain customers by issuing standby letters of credit to third parties. These letters of credit are sometimes issued in support of third party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.
At March 31, 2013, commitments under existing standby letters of credit totaled $245, compared with $307 at December 31, 2012. The fair value of the standby letters of credit was not significant as of the foregoing dates.
Commitments to Extend Credit:
Commitments to extend credit represent agreements by the Bank to lend to a customer provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis using the same credit policies as it does for its balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Bank upon the issuance of commitment, is based on management's credit evaluation of the customer.
The following table details the notional or contractual amount for financial instruments with off-balance sheet risk as of March 31, 2013, and December 31, 2012:
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2013
|
|
2012
|
|
|
|
|
Commitments to originate loans
|
$ 30,376
|
|
$ 20,843
|
Unused lines of credit
|
102,106
|
|
106,773
|
Commitment to purchase loans
|
20,000
|
|
---
|
Un-advanced portions of construction loans
|
24,497
|
|
22,047
|
Total
|
$176,979
|
|
$149,663
|
Liquidity
Liquidity is measured by the Companys ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer-initiated needs. Many factors affect the Companys ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The Bank actively manages its liquidity position through target ratios established under its asset liability management policy. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. A portion of the Banks deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Banks liquidity position tightens.
60
The Bank uses a basic surplus model to measure its liquidity over 30 and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Banks general policy is to maintain a liquidity position of at least 4.0% of total assets over the 30 day horizon. At March 31, 2013, liquidity, as measured by the basic surplus/deficit model, was 6.2% over the 30-day horizon and 5.6% over the 90-day horizon, in part reflecting the impact of seasonal deposit outflows.
At March 31, 2013, the Bank had unused lines of credit and net unencumbered qualifying collateral availability to support its credit line with the FHLB of Boston approximating $124 million. The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower-In-Custody (BIC) program and the Discount Window at the Federal Reserve Bank of Boston. At March 31, 2013, the Banks available secured line of credit at the Federal Reserve Bank of Boston stood at $190,782, or 14.6% of the Banks total assets. The Bank also has access to the national brokered deposit market, and periodically uses this funding source to bolster its on-balance sheet liquidity position.
The Bank maintains a liquidity contingency plan approved by the Banks Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. The Company believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Companys liquidity position.
Recent Accounting Developments
The following information presents a summary of Accounting Standards Updates (ASUs) that were recently adopted by the Company, as well as those that will be subject to implementation in future periods.
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ASU No. 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11 amends Topic 210,
Balance Sheet,
to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and did not have a material impact on the Companys consolidated financial statements.
ASU 2012-02, Intangibles
Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.
Under the guidance in this ASU, an entity has the option to bypass the qualitative assessment outlined in ASU 2011-08, IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment, for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entitys financial statements for the most recent annual or interim period have not yet been issued or, for non-public entities, have not yet been made available for issuance. The adoption of this ASU did not have a significant impact to the Companys financial statements.
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ASU 2012-03,
Technical Amendments and Corrections to SEC SectionsAmendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22
.
The amendments in ASU 2012-03 that have no transition guidance are effective immediately for public and private entities. Amendments that are subject to transition guidance will be effective for public companies for fiscal periods beginning after December 15, 2012, and for nonpublic entities for fiscal periods beginning after December 15, 2013. The adoption of this ASU did not have a significant impact to the Companys financial statements.
ASU 2013-02,
Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this update apply to all entities that issue financial statements that are presented in conformity with U.S. GAAP and that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods presented, including interim periods. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. Adoption of this update did not have a material impact on our financial condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Companys business activities.
Interest Rate Risk:
Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.
The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by the Asset/Liability Committee ("ALCO") and the Banks Board of Directors.
The Bank's Asset Liability Management Policy, approved annually by the Banks Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense of all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.
The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call. Prepayment assumptions for mortgage loans and mortgage backed securities are developed from industry median
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estimates of prepayment speeds, based upon similar coupon ranges and seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:
·
A flat interest rate scenario in which current prevailing rates are locked in and the only balance sheet fluctuations that occur are due to cash flows, maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption.
·
A 200 basis point rise or decline in interest rates applied against a parallel shift in the yield curve over a twelve-month period together with a dynamic balance sheet anticipated to be consistent with such interest rate changes.
·
Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes.
·
An extension of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the rate conditions.
Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.
The following table summarizes the Bank's net interest income sensitivity analysis as of March 31, 2013, over one and two-year horizons and under rising and declining interest rate scenarios. In light of the Federal Funds rate of 0% to 0.25% and the two-year U.S. Treasury note of 0.26% on the date presented, the analysis incorporates a declining interest rate scenario of 100 basis points, rather than the 200 basis points, as would traditionally be the case.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
MARCH 31, 2013
|
|
|
|
-100 Basis Points Parallel Yield Curve Shift
|
+200 Basis Points Parallel Yield Curve Shift
|
Year 1
|
|
|
Net interest income ($)
|
$ (559)
|
$142
|
Net interest income (%)
|
-1.44%
|
0.37%
|
Year 2
|
|
|
Net interest income ($)
|
$(1,124)
|
$807
|
Net interest income (%)
|
-2.90%
|
2.08%
|
As more fully discussed below, the March 31, 2013, interest rate sensitivity modeling results indicate that the Banks balance sheet was about evenly matched over the one and two-year horizons.
Assuming interest rates remain at or near their current levels and the Banks balance sheet structure and size remain at current levels, the interest rate sensitivity simulation model suggests that net interest income will remain relatively stable over the one and two-year horizons. The relatively stable trend over the one and two-year horizons principally results from funding costs rolling over at lower prevailing rates, while largely offsetting expected declines in earning asset yields.
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Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Banks balance sheet structure and size remain at current levels, management believes net interest income will decline moderately over the one and two-year horizons as declining earning assets yields outpace reductions in funding costs. Should the yield curve steepen as rates fall, the model suggests that accelerated earning asset prepayments will slow, resulting in a more stabilized level of net interest income. Management anticipates that moderate to strong earning asset growth will be needed to meaningfully increase the Banks current level of net interest income should both long-term and short-term interest rates decline in parallel.
Assuming the Banks balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will increase moderately over the one-year horizon and then trend steadily upward over the two-year horizon and beyond. The interest rate sensitivity simulation model suggests that as interest rates rise, the Banks funding costs will initially re-price proportionately with earning asset yields. As funding costs begin to stabilize late in the first year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Banks earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and increases in net interest income over the two year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year horizon should short-term and long-term interest rates rise in parallel. Over the two-year horizon and beyond, management believes moderate earning asset growth will be necessary to meaningfully increase the current level of net interest income.
Interest rates plummeted during 2008 and have remained historically low ever since, as the global economy slowed at unprecedented levels, unemployment levels soared, delinquencies on all types of loans increased along with decreased consumer confidence and dramatic declines in housing prices. Management believes the most significant ongoing factor affecting market risk exposure and the impact on net interest income continues to be the very slow recovery from the severe nationwide recession and the U.S. Governments extraordinary responses, including a variety of government stimulus programs and quantitative easing strategies. Recent actions by the Federal Reserve have posed a further threat to net interest income, given its determination to maintain interest rates at historically low levels for an extended period of time. Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curve, and changes in the size and composition of the Banks loan, investment and deposit portfolios.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate change caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Banks ALCO and board of directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Banks net interest income.
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ITEM 4. CONTROLS AND PROCEDURES
Company management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and regulations and are operating in an effective manner.
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management based upon currently available information will have no material effect on the Company's consolidated financial statements.
Item 1A: Risk Factors
There have been no material changes to the Risk Factors previously disclosed in Part I, Item 1A of the Companys Annual Report on Form 10-K for the year-ended December 31, 2012.
Item 6: Exhibits
The exhibits required to be furnished as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index hereto and are incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.