Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2014

Commission File Number: 000-17859

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


State of Delaware		02-0430695
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer I.D. Number)

9 Main Street, PO Box 9, Newport, New Hampshire		03773
(Address of Principal Executive Offices)		(Zip Code)

603-863-0886

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of May 5, 2014 was 8,231,134.

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

INDEX


		Page

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			i

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets - March 31, 2014 (unaudited) and December 31, 2013		1

	Condensed Consolidated Statements of Income (unaudited) - For the Three Months Ended March 31, 2014 and 2013		2

	Condensed Consolidated Statements of Comprehensive Income (unaudited) - For the Three Months Ended March 31, 2014 and 2013		3

	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months Ended March 31, 2014 and 2013		4

	Notes to Condensed Consolidated Financial Statements (unaudited) -		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33

Item 4.	Controls and Procedures		34

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		34

Item 1A.	Risk Factors		34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3.	Defaults Upon Senior Securities		34

Item 4.	Mine Safety Disclosures		35

Item 5.	Other Information		35

Item 6.	Exhibits		35

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

•

local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;

•

continued volatility and disruption in national and international financial markets;

•

changes in the level of non-performing assets and charge-offs;

•

changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

•

adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;

•

inflation, interest rate, securities market and monetary fluctuations;

•

the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

•

changes in consumer spending, borrowings and savings habits;

•

technological changes;

•

the ability to increase market share and control expenses;

•

changes in the competitive environment among banks, financial holding companies and other financial service providers;

•

the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;

•

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;

•

the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews;

•

difficulties related to the integration of the businesses of The Randolph National Bank and Charter Trust Company; and

•

other factors detailed from time to time in our SEC filings.

Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Throughout this report, the terms “Company,” “we,” “our” and “us” refer to the consolidated entity of New Hampshire Thrift Bancshares, Inc., its wholly owned subsidiary, Lake Sunapee Bank, fsb (the “Bank”), and the Bank’s subsidiaries, McCrillis & Eldredge Insurance, Inc., Lake Sunapee Group, Inc., Lake Sunapee Financial Services Corporation and Charter Holding Corp., which wholly owns Charter Trust Company.

PART I. FINANCIAL INFORMATION

Item 1. Financial Information

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
(Dollars in thousands, except per share data)	2014			2013
	(Unaudited)
ASSETS
Cash and due from banks	$	20,697		$	12,005
Overnight deposits		15,179			21,573

Cash and cash equivalents		35,876			33,578
Interest-bearing time deposits with other banks		1,245			1,743
Securities available-for-sale		114,117			125,238
Federal Home Loan Bank stock		9,818			9,760
Loans held-for-sale		406			680
Loans receivable, net of allowance for loan losses of $9.8 million as of March 31, 2014 and December 31, 2013		1,155,053			1,134,110
Accrued interest receivable		3,292			2,628
Bank premises and equipment, net		24,576			23,842
Investments in real estate		3,644			3,681
Other real estate owned		1,208			1,343
Goodwill and other intangible assets		55,287			55,652
Bank-owned life insurance		19,702			19,544
Other assets		11,244			12,071

Total assets	$	1,435,468		$	1,423,870

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	94,394		$	101,446
Interest-bearing		973,824			986,646

Total deposits		1,068,218			1,088,092
Federal Home Loan Bank advances		155,986			121,734
Securities sold under agreements to repurchase		22,667			27,885
Subordinated debentures		20,620			20,620
Accrued expenses and other liabilities		17,201			16,282

Total liabilities		1,284,692			1,274,613

STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value per share: 2,500,000 shares authorized, non-cumulative perpetual Series B; 23,000 shares issued and outstanding at March 31, 2014 and December 31, 2013; liquidation value $1,000 per share		—			—
Common stock, $.01 par value per share: 10,000,000 shares authorized, 8,653,771 shares issued and 8,219,442 shares outstanding at March 31, 2014, and 8,651,076 shares issued and 8,216,747 shares outstanding at December 31, 2013		87			87
Paid-in capital		100,998			100,961
Retained earnings		59,363			58,347
Unearned stock awards		(478	)		(490	)
Accumulated other comprehensive loss		(2,443	)		(2,897	)
Treasury stock, 434,329 shares as of March 31, 2014 and December 31, 2013, at cost		(6,751	)		(6,751	)

Total stockholders’ equity		150,776			149,257

Total liabilities and stockholders’ equity	$	1,435,468		$	1,423,870

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended
	March 31,			March 31,
(Dollars in thousands, except for per share data)	2014			2013
Interest and dividend income
Interest and fees on loans	$	11,350		$	9,181
Interest on debt securities:
Taxable		325			524
Dividends		35			13
Other		170			139

Total interest and dividend income		11,880			9,857

Interest expense
Interest on deposits		1,102			1,025
Interest on advances and other borrowed money		525			684

Total interest expense		1,627			1,709

Net interest and dividend income		10,253			8,148
Provision for loan losses		—			414

Net interest and dividend income after provision for loan losses		10,253			7,734

Noninterest income
Customer service fees		1,438			1,186
Net gain on sales of loans		52			933
Gain on sales and calls of securities, net		8			167
Net loss on sales of other real estate and property owned.		(2	)		—
Net gain on sales of premisis and equipment.		2			—
Rental income		175			183
Income from equity interest in Charter Holding Corp.		—			98
Trust and investment management fee income.		2,076			—
Insurance commission income		484			485
Bank-owned life insurance income		149			128

Total noninterest income		4,382			3,180

Noninterest expense
Salaries and employee benefits		6,002			4,295
Occupancy and equipment		1,578			1,076
Advertising and promotion		155			99
Depositors’ insurance		271			177
Outside services		703			319
Professional services		272			336
ATM processing fees		221			151
Supplies		164			129
Telephone		295			163
Amortization of intangible assets		435			192
Other expenses		1,497			1,094

Total noninterest expense		11,593			8,031

Income before provision for income taxes		3,042			2,883
Provision for income taxes		899			831

Net income	$	2,143		$	2,052

Net income available to common stockholders	$	2,085		$	1,911

Earnings per common share, basic	$	0.25		$	0.27

Weighted average number of shares outstanding, basic		8,218,465			7,060,234
Earnings per common share, assuming dilution	$	0.25		$	0.27

Weighted average number of shares outstanding, assuming dilution		8,231,992			7,060,650
Dividends declared per common share	$	0.13		$	0.13

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended March 31,
(Dollars in thousands)	2014		2013
Net income	$	2,143	$	2,052
Net change in unrealized gain (loss) on available-for-sale securities, net of tax effect		454		(309	)
Net change in unrecognized pension plan costs, net of tax effect		—		—
Net change in derivatives, net of tax effect		—		52
Net change in unrealized gain on equity investment, net of tax effect		—		6

Comprehensive income	$	2,597	$	1,801

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the three months ended
(Dollars in thousands)	March 31, 2014			March 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,143		$	2,052
Depreciation and amortization		520			384
Amortization of fair value adjustments, net		92			57
Amortization of securities, net		150			247
Net decrease (increase) in mortgage servicing rights		80			(382	)
Loans originated for sale		(4,400	)		(27,952	)
Proceeds from loans sold		4,726			32,312
Increase in cash surrender value of life insurance		(158	)		(136	)
Amortization of intangible assets		435			151
Provision for loan losses		—			414
Decrease in accrued interest receivable and other assets		30			19
Net loss on sales of other real estate owned		7			—
Write-down of other real estate owned		6			—
Net gain on sales and calls of securities		(8	)		(167	)
Net gain on sales of loans		(52	)		(933	)
Income from equity interest in Charter Holding Corp.		—			(98	)
Change in deferred loan origination fees and cost, net		(110	)		(48	)
Increase in accrued expenses and other liabilities		621			2,382

Net cash provided by operating activities		4,082			8,302

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(1,217	)		(1,579	)
Disposal of fixed assets		—			40
Proceeds from sales and calls of securities available-for-sale		2,065			18,658
Proceeds from maturities of securities available-for-sale		40,012			—
Purchases of securities available-for-sale		(30,349	)		(740	)
Proceeds from maturities of interest-bearing time deposits with other banks		498			—
(Purchase) redemption of Federal Home Loan Bank stock		(58	)		213
Loan originations and principal collections, net		(15,306	)		2,681
Purchase of loans		(5,683	)		(990	)
Proceeds from sales of other real estate owned		176			—

Net cash (used in) provided by investing activities		(9,862	)		18,283

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(19,862	)		(36,934	)
Net (decrease) increase in securities sold under agreements to repurchase		(5,218	)		4,686
Net increase (decrease) in advances from Federal Home Loan Bank and other borrowings		34,250			(10,499	)
Dividends paid on preferred stock		(58	)		(64	)
Dividends paid on common stock		(1,034	)		(893	)

Net cash provided by (used in) financing activities		8,078			(43,704	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,298			(17,119	)
CASH AND CASH EQUIVALENTS, beginning of period		33,578			39,412

CASH AND CASH EQUIVALENTS, end of period	$	35,876		$	22,293

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposit accounts	$	1,104		$	1,052
Interest on advances and other borrowed money		529			721

Total interest paid	$	1,633		$	1,773

Income taxes paid	$	364		$	366

Loans transferred to other real estate owned	$	54		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NEW HAMPSHIRE THRIFT BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(Unaudited)

Nature of Operations

New Hampshire Thrift Bancshares, Inc. (the “Company”), a Delaware company organized on July 5, 1989, is the savings and loan holding company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank organized in 1868. The Bank has four wholly owned subsidiaries: Lake Sunapee Financial Services Corp.; Lake Sunapee Group, Inc., which owns and maintains all buildings and investment properties; McCrillis & Eldredge Insurance, Inc. (“M&E”), a full-line independent insurance agency, which offers a complete range of commercial insurance services and consumer products, and Charter Holding Corp (“Charter Holding”), which through its subsidiaries provides trust and wealth management services. The Company, through its direct and indirect subsidiaries, currently operates 27 locations in New Hampshire in Grafton, Hillsborough, Merrimack and Sullivan counties as well as 16 locations in Vermont in Orange, Rutland, and Windsor counties. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Company is regulated by the Federal Reserve Board, and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”).

Note A - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2013 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill and other intangible assets for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets.

Note B - Accounting Policies

The condensed consolidated financial statements include the accounts of the Company, the Bank, M&E, Lake Sunapee Group, Inc., Lake Sunapee Financial Services Corp., and Charter Holding and its subsidiaries Charter Trust Company and Charter New England Agency. All significant intercompany accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third-party trust pool. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, “Consolidation-Overall,” these affiliates have not been included in the condensed consolidated financial statements.

Note C - Impact of New Accounting Standards

In July 2013, FASB issued ASU 2013-11, “Income Taxes Topic 740 – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments apply to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

In January 2014, FASB issued ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

1. For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

2. For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In January 2014, FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In April 2014, FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

Note D – Fair Value Measurements

In accordance with ASC 820-10, “Fair Value Measurements and Disclosures,” the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The Company’s cash instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s investment in mortgage-backed securities, asset-backed securities, preferred stock with maturities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

The Company’s derivative financial instruments are generally classified within Level 2 of the fair value hierarchy. For these financial instruments, the Company obtains fair value measurements from independent pricing services. The fair value measurements utilize a discounted cash flow model that incorporates and considers observable data that may include publicly available third party market quotes in developing the curve utilized for discounting future cash flows.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available-for-Sale. The fair value of the Company’s available-for-sale securities portfolio is estimated using Level 1 and Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. For Levels 1 and 2, the fair value measurements consider (i) quoted prices in active markets for identical assets and (ii) observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and a bond’s terms and conditions, among other factors, respectively.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Fair values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service discounted by management based on historical losses for similar collateral.

Other Real Estate Owned. Other real estate owned is reported at the fair value of the underlying collateral less costs to sell. Collateral values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service.

The following summarizes assets and liabilities measured at fair value at March 31, 2014 and December 31, 2013.

Assets Measured at Fair Value on a Recurring Basis


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	March 31, 2014		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. Treasury notes	$	29,978	$	—	$	29,978	$	—
U.S. government-sponsored enterprise bonds		7,202		—		7,202		—
Mortgage-backed securities		55,230		—		55,230		—
Municipal bonds		20,480		—		20,480		—
Other bonds and debentures		184		—		184		—
Equity securities		1,043		1,043		—		—

Totals	$	114,117	$	1,043	$	113,074	$	—


(Dollars in thousands)	December 31, 2013		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. Treasury notes	$	50,016	$	—	$	50,016	$	—
U.S. government-sponsored enterprise bonds		7,160		—		7,160		—
Mortgage-backed securities		46,647		—		46,647		—
Municipal bonds		20,106		—		20,106		—
Other bonds and debentures		275		—		275		—
Equity securities		1,034		1,034		—		—

Totals	$	125,238	$	1,034	$	124,204	$	—

Assets Measured at Fair Value on a Nonrecurring Basis


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	March 31, 2014		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	2,349	$	—	$	—	$	2,349
Other real estate owned		1,208		—		—		1,208

	$	3,557	$	—	$	—	$	3,557


(Dollars in thousands)	December 31, 2013		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	2,321	$	—	$	—	$	2,321
Other real estate owned		1,343		—		—		1,343

	$	3,664	$	—	$	—	$	3,664

There were no loans measured for impairment using the fair value of the underlying collateral at March 31, 2014. Collateral dependent loans are valued using third party appraisals primarily using the sales comparison approach. The appraisals may be discounted between 25-40% to reflect realizable value based on historical losses which represents an unobservable input. Impaired loans measured for impairment, using the net present value of cash flows, had a recorded investment of $2.5 million with a valuation allowance of $182 thousand at March 31, 2014. Loans valued using the net present value of cash flows are calculated using expected future cash flows with a discount rate equal to the effective yield of the loan. At December 31, 2013, impaired loans had a recorded investment of $2.5 million with a valuation allowance of $197 thousand.

The estimated fair values of the Company’s financial instruments at March 31, 2014, and December 31, 2013, all of which are held or issued for purposes other than trading, were as follows:


			Fair Value Measurements at Reporting Date Using:
(Dollars in thousands) March 31, 2014	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	35,876	$	35,876	$	—	$	—	$	35,876
Interest-bearing time deposits with other banks		1,245		—		—		1,245		1,245
Securities available-for-sale		114,117		1,043		113,074		—		114,117
Federal Home Loan Bank stock		9,818		9,818		—		—		9,818
Loans held-for-sale		406		—		406		—		406
Loans, net		1,155,053		—		—		1,148,727		1,148,727
Investment in unconsolidated subsidiaries		620		—		—		417		417
Accrued interest receivable		3,292		3,292		—		—		3,292
Financial liabilities:
Deposits		1,068,218		—		—		1,070,740		1,070,740
Federal Home Loan Bank advances		155,986		—		—		157,206		157,206
Securities sold under agreements to repurchase		22,667		22,667		—		—		22,667
Subordinated debentures		20,620		—		—		13,857		13,857

			Fair Value Measurements at Reporting Date Using
(Dollars in thousands) December 31, 2013	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	33,578	$	33,578	$	—	$	—	$	33,578
Interest-bearing time deposits with other banks		1,743		—		—		1,743		1,743
Securities available-for-sale		125,238		1,034		124,204		—		125,238
Federal Home Loan Bank stock		9,760		9,760		—		—		9,760
Loans held-for-sale		680		—		683		—		683
Loans, net		1,134,110		—		—		1,136,761		1,136,761
Investment in unconsolidated subsidiaries		620		—		—		587		587
Accrued interest receivable		2,628		2,628		—		—		2,628
Financial liabilities:
Deposits		1,088,092		—		—		1,091,419		1,091,419
Federal Home Loan Bank advances		121,734		—		—		123,166		123,166
Securities sold under agreements to repurchase		27,885		27,885		—		—		27,885
Subordinated debentures		20,620		—		—		19,519		19,519

The carrying amounts of financial instruments shown in the above tables are included in the condensed consolidated balance sheets under the indicated captions, except for investment in unconsolidated subsidiaries which is included in other assets.

The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2014. The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the 12 month period ended December 31, 2013.

Note E – Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

The amortized cost of securities available-for-sale and their approximate fair values at March 31, 2014, and December 31, 2013, are summarized as follows:


(Dollars in thousands) March 31, 2014	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Bonds and notes
U.S. Treasury notes	$	30,610	$	—	$	632	$	29,978
U.S. government-sponsored enterprise bonds		7,384		2		184		7,202
Mortgage-backed securities		55,957		35		762		55,230
Municipal bonds		20,482		240		242		20,480
Other bonds and debentures		175		9		—		184
Equity securities		742		301		—		1,043

Total available-for-sale	$	115,350	$	587	$	1,820	$	114,117


(Dollars in thousands) December 31, 2013	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Bonds and notes
U.S. Treasury notes	$	50,683	$	—	$	667	$	50,016
U.S. government-sponsored enterprise bonds		7,388		4		232		7,160
Mortgage-backed securities		47,612		27		992		46,647
Municipal bonds		20,532		63		489		20,106
Other bonds and debentures		263		12		—		275
Equity securities		742		292		—		1,034

Total available-for-sale	$	127,220	$	398	$	2,380	$	125,238

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of March 31, 2014:


(Dollars in thousands)	Fair Value
U.S. Treasury notes	$	76

Total due in less than one year	$	76

U.S. Treasury notes	$	19,839

Total due after one year through five years	$	19,839

U.S. Treasury notes	$	10,063
U.S. government-sponsored enterprise bonds		6,820
Municipal bonds		10,558

Total due after five years through ten years	$	27,441

Municipal bonds	$	9,922
U.S. government-sponsored enterprise bonds		382
Other bonds and debentures		184

Total due after ten years	$	10,488

For the three months ended March 31, 2014, the proceeds from sales of securities available-for-sale were $96 thousand. Gross gains of $8 thousand were realized during the same period on the sales. The tax provision applicable to these net realized gains amounted to $3 thousand. For the three months ended March 31, 2013, the proceeds from sales of securities available-for-sale were $18.7 million. Gross gains of $167 thousand were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $66 thousand. Securities, carried at $108.7 million and $120.1 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) advances, and securities sold under agreements to repurchase as of March 31, 2014, and December 31, 2013, respectively.

Note F – Other-Than-Temporary Impairment Losses

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 months or more, and are not other than temporarily impaired, are as follows as of March 31, 2014:


	Less Than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Bonds and notes
U.S. Treasury notes	$	19,915	$	268	$	10,063	$	364	$	29,978	$	632
U.S. government-sponsored enterprise bonds		7,000		184		—		—		7,000		184
Mortgage-backed securities		34,954		233		14,918		529		49,872		762
Municipal bonds		3,008		138		2,387		104		5,395		242

Total temporarily impaired securities	$	64,877	$	823	$	27,368	$	997	$	92,245	$	1,820

The investments in the Company’s investment portfolio that are temporarily impaired as of March 31, 2014, consist 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 the Company has the intent and the ability to hold these debt securities until maturity and therefore, no declines are deemed to be other than temporary.

Note G – Loan Portfolio

Loans receivable consisted of the following as of the dates indicated:


(Dollars in thousands)	Originated			Acquired		Total
March 31, 2014:
Real estate loans:
Conventional	$	547,356		$	64,931	$	612,287
Home equity		62,197			6,699		68,896
Construction		24,961			3,348		28,309
Commercial		215,461			85,498		300,959

		849,975			160,476		1,010,451
Consumer loans		6,351			2,614		8,965
Commercial and municipal loans		124,923			16,768		141,691

Total loans		981,249			179,858		1,161,107
Allowance for loan losses		(9,774	)		—		(9,774	)
Deferred loan origination costs, net		3,720			—		3,720

Loans receivable, net	$	975,195		$	179,858	$	1,155,053


(Dollars in thousands)	Originated			Acquired		Total
December 31, 2013:
Real estate loans:
Conventional	$	536,588		$	65,682	$	602,270
Home equity		63,736			6,828		70,564
Construction		26,062			3,660		29,722
Commercial		198,741			89,072		287,813

		825,127			165,242		990,369
Consumer loans		6,829			2,988		9,817
Commercial and municipal loans		121,256			18,815		140,071

Total loans		953,212			187,045		1,140,257
Allowance for loan losses		(9,757	)		—		(9,757	)
Deferred loan origination costs, net		3,610			—		3,610

Loans receivable, net	$	947,065		$	187,045	$	1,134,110

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of the dates indicated:


	Real Estate:								Commercial
(Dollars in thousands)	Conventional			Commercial			Construction		and Municipal			Consumer			Unallocated			Total
March 31, 2014
Allowance for loan losses:
Originated:
Beginning balance	$	5,385		$	2,143		$	353	$	1,561		$	75		$	240		$	9,757
Charge-offs		(65	)		(132	)		—		(13	)		(54	)		—			(264	)
Recoveries		241			—			—		2			38			—			281
(Benefit) provision		(592	)		557			65		(30	)		21			(21	)		—

Ending balance	$	4,969		$	2,568		$	418	$	1,520		$	80		$	219		$	9,774

Acquired:
Beginning balance	$	—		$	—		$	—	$	—		$	—		$	—		$	—
Charge-offs		—			—			—		—			—			—			—
Recoveries		—			—			—		—			—			—			—
Provision (benefit)		—			—			—		—			—			—			—

Ending balance	$	—		$	—		$	—	$	—		$	—		$	—		$	—

Originated:
Individually evaluated for impairment	$	7		$	106		$	—	$	69		$	—		$	—		$	182
Collectively evaluated for impairment		4,962			2,462			418		1,451			80			219			9,592
Acquired loans (Discounts related to Credit Quality)		—			—			—		—			—			—			—

Total allowance for loan losses ending balance	$	4,969		$	2,568		$	418	$	1,520		$	80		$	219		$	9,774

Loans:
Originated:
Individually evaluated for impairment	$	6,064		$	10,949		$	1,267	$	1,656		$	—		$	—		$	19,936
Collectively evaluated for impairment		603,489			204,512			23,694		123,267			6,351			—			961,313
Acquired loans (Discounts related to Credit Quality)		71,630			85,498			3,348		16,768			2,614			—			179,858

Total loans ending balance	$	681,183		$	300,959		$	28,309	$	141,691		$	8,965		$	—		$	1,161,107


	Real Estate:								Commercial
(Dollars in thousands)	Conventional			Commercial			Construction		and Municipal			Consumer			Unallocated		Total
December 31, 2013:
Allowance for loan losses:
Originated:
Beginning balance	$	4,897		$	3,616		$	208	$	918		$	58		$	226	$	9,923
Charge-offs		(851	)		(593	)		—		(302	)		(230	)		—		(1,976	)
Recoveries		268			284			—		154			142			—		848
Provision (benefit)		1,071			(1,164	)		145		791			105			14		962

Ending balance	$	5,385		$	2,143		$	353	$	1,561		$	75		$	240	$	9,757

Acquired:
Beginning balance	$	—		$	—		$	—	$	—		$	—		$	—	$	—
Charge-offs		—			—			—		—			—			—		—
Recoveries		—			—			—		—			—			—		—
Provision (benefit)		—			—			—		—			—			—		—

Ending balance	$	—		$	—		$	—	$	—		$	—		$	—	$	—

Originated:
Individually evaluated for impairment	$	71		$	116		$	—	$	10		$	—		$	—	$	197
Collectively evaluated for impairment		5,314			2,027			353		1,551			75			240		9,560
Acquired loans (Discounts related to Credit Quality)		—			—			—		—			—			—		—

Total allowance for loan losses ending balance	$	5,385		$	2,143		$	353	$	1,561		$	75		$	240	$	9,757

Loans:
Originated:
Individually evaluated for impairment	$	6,716		$	11,363		$	1,494	$	1,582		$	—		$	—	$	21,155
Collectively evaluated for impairment		593,608			187,378			24,568		119,674			6,829			—		932,057
Acquired loans (Discounts related to Credit Quality)		72,510			89,072			3,660		18,815			2,988			—		187,045

Total loans ending balance	$	672,834		$	287,813		$	29,722	$	140,071		$	9,817		$	—	$	1,140,257

The following tables set forth information regarding nonaccrual loans and past-due loans as of the dates indicated:


March 31, 2014 (Dollars in thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Nonaccrual Loans
Originated:
Real estate:
Conventional	$	2,745	$	164	$	438	$	3,347	$	1,708
Home equity		29		49		89		167		119
Commercial		1,971		101		116		2,188		2,492
Construction		—		—		—		—		126
Commercial and municipal		489		—		127		616		524
Consumer		6		—		1		7		1

Total	$	5,240	$	314	$	771	$	6,325	$	4,970

Acquired:
Real estate:
Conventional	$	2,168	$	—	$	842	$	3,010	$	1,260
Home equity		22		—		—		22		22
Commercial		2,639		—		856		3,495		2,042
Commercial and municipal		294		—		45		339		178
Consumer		62		—		—		62		—

Total	$	5,185	$	—	$	1,743	$	6,928	$	3,502


December 31, 2013 (Dollars in thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Nonaccrual Loans
Real estate:
Conventional	$	2,654	$	498	$	2,812	$	5,964	$	3,821
Commercial		1,859		267		903		3,029		4,512
Home equity		53		57		52		162		104
Construction		95		—		—		95		230
Commercial and municipal		133		10		159		302		621
Consumer		29		60		15		104		15

Total	$	4,823	$	892	$	3,941	$	9,656	$	9,303

Troubled Debt Restructurings

The following tables present the recorded investment in troubled debt restructured loans as of March 31, 2014, and December 31, 2013, based on payment performance status:


	March 31, 2014
	Real Estate:
(Dollars in thousands)	Residential		Commercial		Construction		Commercial		Total
Performing	$	3,060	$	5,296	$	1,141	$	954	$	10,451
Non-performing		830		693		—		—		1,523

Total	$	3,890	$	5,989	$	1,141	$	954	$	11,974


	December 31, 2013
	Real Estate:
(Dollars in thousands)	Residential		Commercial		Construction		Commercial		Total
Performing	$	2,915	$	6,514	$	1,263	$	962	$	11,654
Non-performing		715		85		—		—		800

Total	$	3,630	$	6,599	$	1,263	$	962	$	12,454

Troubled debt restructured loans are considered impaired and are included in the impaired loan disclosures in this footnote.

During the three month period ending March 31, 2014, certain loan modifications were executed that constituted troubled debt restructurings. Substantially all of these modifications included one or a combination of the following: (1) an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; (2) temporary reduction in the interest rate or (3) change in scheduled payment amount

The following table presents pre-modification balance information on how loans were modified as TDRs during the three months ended March 31, 2014:


(Dollars in thousands)	Combination of Interest Only Payments, Rate, and Maturity		Interest Only Payments and Maturity		Re-amortized Payment		Total
Real estate:
Conventional	$	118	$	356	$	—	$	474
Commercial		—		—		103		103

Total TDRs	$	118	$	356	$	103	$	577

The following table presents pre-modification balance information on how loans were modified as TDRs during the 12 months ended December 31, 2013:


(Dollars in thousands)	Extended Maturity		Combination of Payments, Rate And Maturity Date		Interest Only Payments and Maturity		Combination of Interest Rate, Maturity and Reamortized		Other (a)		Total
Real estate:
Conventional	$	—	$	996	$	1,273	$	219	$	192	$	2,680
Commercial		764		1,143		1,111		—		—		3,018
Construction		700		—		—		—		—		700
Commercial and municipal		—		—		524		—		36		560

Total TDRs	$	1,464	$	2,139	$	2,908	$	219	$	228	$	6,958

^(a)	Other includes covenant modifications, forbearance and/or other modifications.

The following table summarizes troubled debt restructurings that occurred during the period indicated:


	For the three months ended March 31, 2014
(Dollars in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Real estate:
Conventional		6	$	474	$	474
Commercial		1		103		103

Total		7	$	577	$	577

At March 31, 2014, there were no specific loan loss reserves related to troubled debt restructurings that occurred during the three month period ended March 31, 2014. There were no troubled debt restructurings for which there was a payment default during the three month period ending March 31, 2014, which occurred within 12 months following the date of the restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent Measurement,” is as follows as of March 31, 2014:


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Conventional	$	5,280	$	5,869	$	—	$	5,735	$	128
Home equity		189		221		—		189		—
Commercial		9,492		10,193		—		10,339		159
Construction		1,267		1,267		—		1,381		15
Commercial and municipal		1,176		1,229		—		1,133		14

Total impaired with no related allowance	$	17,404	$	18,779	$	—	$	18,777	$	316

With an allowance recorded:
Real estate:
Conventional	$	594	$	627	$	69	$	594	$	6
Commercial		1,457		1,457		106		1,464		26
Commercial and municipal		480		480		7		482		6

Total impaired with an allowance recorded	$	2,531	$	2,564	$	182	$	2,540	$	38

Total:
Real estate:
Conventional	$	5,874	$	6,496	$	69	$	6,329	$	134
Home equity		189		221		—		189		—
Commercial		10,949		11,650		106		11,803		185
Construction		1,267		1,267		—		1,381		15
Commercial and municipal		1,656		1,709		7		1,615		20

Total impaired loans	$	19,935	$	21,343	$	182	$	21,317	$	354

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2013:


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2013:
With no related allowance recorded:
Real estate:
Conventional	$	6,084	$	7,029	$	—	$	5,387	$	261
Home equity		153		312		—		104		9
Commercial		9,807		10,432		—		10,832		534
Construction		1,494		1,515		—		1,749		69
Commercial and municipal		1,099		1,141		—		728		65

Total impaired with no related allowance	$	18,637	$	20,429	$	—	$	18,800	$	938

With an allowance recorded:
Real estate:
Conventional	$	479	$	512	$	71	$	618	$	23
Commercial		1,556		1,556		116		1,622		105
Commercial and municipal		483		483		10		527		24

Total impaired with an allowance recorded	$	2,518	$	2,551	$	197	$	2,767	$	152

Total
Real estate:
Conventional	$	6,563	$	7,541	$	71	$	6,005	$	284
Home equity		153		312		—		104		9
Commercial		11,363		11,988		116		12,454		639
Construction		1,494		1,515		—		1,749		69
Commercial and municipal		1,582		1,624		10		1,255		89

Total impaired loans	$	21,155	$	22,980	$	197	$	21,567	$	1,090

The following tables present a summary of credit impaired loans acquired through the merger with The Nashua Bank as of:


	March 31, 2014		December 31, 2013
(Dollars in thousands)	Commercial Real Estate and Commercial and Municipal		Commercial Real Estate and Commercial and Municipal
Contractually required payments receivable	$	993	$	1,012
Nonaccretable difference		—		—

Cash flows expected to be collected		993		1,012
Accretable yield		—		—

Fair value of purchased credit impaired loans acquired	$	993	$	1,012

The following tables present a summary of credit impaired loans acquired through the merger with Central Financial Corporation:


(Dollars in thousands)	Commercial Real Estate and Commercial and Municipal		Conventional Real Estate
March 31, 2014
Contractually required payments receivable	$	1,229	$	948
Nonaccretable difference		—		—

Cash flows expected to be collected		1,229		948
Accretable yield		—		—

Fair value of purchased credit impaired loans acquired	$	1,229	$	948


(Dollars in thousands)	Commercial Real Estate and Commercial and Municipal		Conventional Real Estate
December 31, 2013
Contractually required payments receivable	$	1,604	$	984
Nonaccretable difference		—		—

Cash flows expected to be collected		1,604		984
Accretable yield		—		—

Fair value of purchased credit impaired loans acquired	$	1,604	$	984

The following table presents the Company’s loans by risk ratings:


	Real Estate:						Commercial and
(Dollars in thousands)	Residential		Commercial		Construction		Municipal		Consumer		Total
March 31, 2014 (unaudited)
Originated:
Grade:
Pass		—		182,349		14,572		96,365		—		293,286
Special mention		—		3,261		796		656		—		4,713
Substandard		5,090		11,756		1,647		1,252		—		19,745
Loans not formally rated	$	604,463	$	18,095	$	7,946	$	26,650	$	6,351	$	663,505

Total	$	609,553	$	215,461	$	24,961	$	124,923	$	6,351	$	981,249

Acquired:
Grade:
Pass		—		75,430		1,850		13,495		—		90,775
Special mention		—		2,423		189		496		—		3,108
Substandard		1,482		6,177		225		1,863		—		9,747
Loans not formally rated	$	70,148	$	1,468	$	1,084	$	914	$	2,614	$	76,228

Total	$	71,630	$	85,498	$	3,348	$	16,768	$	2,614	$	179,858

The following table presents the Company’s loans by risk ratings:


	Real Estate:						Commercial
(Dollars in thousands)	Conventional		Commercial		Construction		and Municipal		Consumer		Total
December 31, 2013:
Originated:
Grade:
Pass	$	—	$	164,554	$	13,337	$	98,469	$	—	$	276,360
Special mention		—		3,885		812		674		—		5,371
Substandard		5,708		12,373		1,880		1,193		—		21,154
Loans not formally rated		594,616		17,929		10,033		20,920		6,829		650,327

Total	$	600,324	$	198,741	$	26,062	$	121,256	$	6,829	$	953,212

Acquired:
Grade:
Pass	$	—	$	80,730	$	2,148	$	16,577	$	—	$	99,455
Special mention		—		1,341		—		—		—		1,341
Substandard		1,521		5,518		228		1,876		—		9,143
Loans not formally rated		70,989		1,483		1,284		362		2,988		77,106

Total	$	72,510	$	89,072	$	3,660	$	18,815	$	2,988	$	187,045

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

•

Loans rated 10-35: Loans in these categories are considered “pass” rated loans with low to average risk.

•

Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

•

Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

•

Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

•

Loans rated 70: Loans in this category are considered uncollectible or a loss, and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans over $250 thousand. The assessment of those loans less than $250 thousand are based on the borrower’s ability to pay and not on overall risk. Additionally, the Company monitors the repayment activity for loans less than $250 thousand and if a loan becomes delinquent over 60 days past due, it is reviewed for risk and is subsequently risk rated based on available information such as ability to repay based on current cash flow conditions and workout discussions with the borrower.

Loan Servicing

The Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates.

Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

The balance of capitalized servicing rights, net of valuation allowances, included in other assets at March 31, 2014, was $2.6 million. The fair value of capitalized servicing rights was $4.3 million as of March 31, 2014. Servicing rights of $49 thousand were capitalized during the three months ended March 31, 2014, compared to $57 thousand for the same period in 2013. Amortization of capitalized servicing rights was $152 thousand for the three months ended March 31, 2014, compared to $246 thousand for the same period in 2013.

Following is an analysis of the aggregate changes in the valuation allowance for capitalized servicing rights during the periods indicated:


	Three months ended March 31,
(Dollars in thousands)	2014			2013
Balance, beginning of period	$	65		$	69
Decrease		(23	)		(54	)

Balance, end of period	$	42		$	15

Note H – Stock-based Compensation

At March 31, 2014, the Company had one equity plan (2004 Stock Incentive Plan) with 159,500 shares remaining available for issuance. The Company accounts for the plan under ASC 718-10, “Compensation-Stock Compensation-Overall.” During the three months ended March 31, 2014 and 2013, stock-based compensation expense of $28 thousand and $20 thousand, respectively, was recognized for the Company’s equity plan. No options or awards were granted during the three month period ended March 31, 2014 and expense recognized relates to the vesting of previously granted stock awards.

Note I - Pension Benefits

The following summarizes the net periodic pension cost for the periods indicated:


	Three months ended March 31,
(Dollars in thousands)	2014			2013
Interest cost	$	85		$	83
Expected return on plan assets		(134	)		(145	)
Amortization of unrecognized actuarial loss		65			76

Net periodic pension cost	$	16		$	14

Note J – Earnings Per Share (EPS)

Basic and diluted net income per common share calculations are as follows:


(Dollars in thousands, except for per share data)	For the three months ended March 31,
	2014			2013
Basic EPS:
Net income as reported	$	2,143		$	2,052
Cumulative preferred stock dividend earned		(58	)		(141	)

Net income available to common stockholders	$	2,085		$	1,911

Weighted average common shares outstanding		8,218,465			7,060,234
Earnings per common share – basic	$	0.25		$	0.27

Diluted EPS:
Net income available to common stockholders	$	2,085		$	1,911

Weighted average common shares outstanding		8,218,465			7,060,234
Effect of dilutive securities, options		13,527			416

Weighted average common shares outstanding – diluted		8,231,992			7,060,650
Earnings per common share – diluted	$	0.25		$	0.27

Note K – Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:


(Dollars in thousands)	As of
(Dollars in thousands)	March 31, 2014			December 31, 2013
Net unrealized holding loss on available-for-sale securities, net of taxes	$	(744	)	$	(1,198	)
Unrecognized net actuarial loss, defined benefit pension plan, net of tax		(1,699	)		(1,699	)

Accumulated other comprehensive loss	$	(2,443	)	$	(2,897	)

Reclassification disclosures for the periods ended March 31, 2014 and 2013 follows:


(Dollars in thousands)	For the three months ended March 31,
(Dollars in thousands)	2014			2013
Net unrealized holding gain (loss) on available-for-sale securities	$	757		$	(346	)
Reclassification adjustment for realized gains in net income		(8	)		(167	)

Other comprehensive income (loss) before income tax effect		749			(513	)
Income tax (expense) benefit		(295	)		204

		454			(309	)

Other comprehensive loss – pension plan		—			—
Income tax benefit		—			—

		—			—

Change in fair value of derivatives used for cash flow hedges		—			101
Income tax expense		—			(49	)

		—			52

Other comprehensive income - equity investment		—			6
Income tax expense		—			—

		—			6

Other comprehensive income (loss), net of tax effect	$	454		$	(251	)

Reclassification adjustments are comprised of realized securities gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the condensed consolidated statements of income as follows: the pre-tax amounts are included in gain on sales and calls of securities, net, the tax expense amounts are included in provision for income taxes and the after tax amounts are included in net income.

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 three months ended March 31, 2014:

•

Total assets increased $11.6 million, or 0.82%, to $1.4 billion at March 31, 2014, from $1.4 billion at December 31, 2013.

•

Net loans increased $20.9 million, or 1.85%, to $1.2 billion at March 31, 2014, from $1.1 billion at December 31, 2013.

•

In the three months ended March 31, 2014, we originated $79.9 million in loans, compared to $77.7 million during the same period in 2013.

•

The Company’s loan servicing portfolio was $413.2 million at March 31, 2014, compared to $417.3 million at December 31, 2013.

•

Total deposits decreased $19.9 million, or 1.83%, to $1.1 billion at March 31, 2014, from $1.1 billion at December 31, 2013.

•

Net interest and dividend income for the three months ended March 31, 2014, was $10.3 million compared to $8.1 million for the same period in 2013.

•

Net income available to common stockholders was $2.1 million for the three months ended March 31, 2014, compared to $1.9 million for the same period in 2013.

•

As a percentage of total loans, non-performing loans decreased to 1.73% at March 31, 2014, from 1.86% at December 31, 2013.

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 three months ended March 31, 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 March 31, 2014 (unaudited) and December 31, 2013

Assets. Total assets were $1.4 billion at March 31, 2014, compared to $1.4 billion at December 31, 2013, an increase of $11.6 million, or 0.82%.

Securities Portfolio. Securities available-for-sale decreased $11.1 million, or 8.88%, to $114.1 million at March 31, 2014, from $125.2 million at December 31, 2013. Net unrealized losses on securities available-for-sale were $1.2 million at March 31, 2014, compared to net unrealized losses of $2.0 million at December 31, 2013. During the three months ended March 31, 2014, we sold securities with a total book value of $88 thousand for a net gain on sales of $8 thousand, and $40.0 million of short-term U.S. Treasury notes matured. During the same period, we purchased securities totaling $30.3 million including U.S. Treasury notes and mortgage-backed securities. Our net unrealized loss (after tax) on our investment portfolio was $744 thousand at March 31, 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 March 31, 2014, consist 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 $20.9 million, or 1.85%, to $1.2 billion at March 31, 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 $10.0 million, commercial real estate loans of $13.1 million, and commercial loans of $1.6 million offset in part by a decrease in home equity loans of $1.7 million. As a percentage of total loans, non-performing loans decreased to 1.73% at March 31, 2014, from 1.86% at December 31, 2013. During the three months ended March 31, 2014, we originated $79.9 million in loans compared to $77.7 million for the same period in 2013. At March 31, 2014, our mortgage servicing loan portfolio was $413.2 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 March 31, 2014, adjustable-rate mortgages comprised approximately 67.53% of our real estate mortgage loan portfolio, which represents a higher percentage compared to the mix at December 31, 2013, 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-Loans and Debt Securities Acquired with Deteriorated Credit Quality-Subsequent Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogeneous loans such as residential mortgage, home equity, or installment loans that are collectively evaluated for impairment.

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

The allowance for loan losses (not including allowance for losses from the overdraft program described below) at March 31, 2014 was $9.8 million and at December 31, 2013 was $9.7 million. The allowance for loan losses represents 0.84% of total loans held, compared to 0.85% at December 31, 2013. Total non-performing assets at March 31, 2014, were approximately $9.7 million, representing 99.03% of the allowance for loan losses. Modestly improving economic and market conditions, coupled with net recoveries of charged off loans from prior periods, resulted in us making no provisions to the allowance for loan losses during the three months ended March 31, 2014, compared to $400 thousand for the same period in 2013. Loan charge-offs (excluding the overdraft program) were $223 thousand during the three month period ended March 31, 2014, compared to $734 thousand for the same period in 2013. Recoveries were $243 thousand during the three month period ended March 31, 2014, compared to $180 thousand for the same period in 2013. This activity resulted in net recoveries of $20 thousand for the three month period ended March 31, 2014, compared to $554 thousand for the same period in 2013. One-to-four family residential mortgages, commercial real estate, commercial, and consumer loans accounted for 29%, 59%, 6%, and 6%, respectively, of the amounts charged-off during the three month period ended March 31, 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 March 31, 2014, the overdraft allowance was $21 thousand, compared to $24 thousand at year-end 2013. There were no provisions for overdraft losses recorded during the three month period ended March 31, 2014, compared to provisions of $14 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:


(Dollars in thousands)	Three months ended March 31, 2014
	Originated			Acquired		Total
Balance, beginning of year	$	9,733		$	—	$	9,733

Charge-offs:
Conventional		(65	)		—		(65	)
Commercial real estate		(132	)		—		(132	)
Construction		—			—		—
Consumer loans		(13	)		—		(13	)
Commercial and municipal loans		(13	)		—		(13	)

Total charged-off loans		(223	)		—		(223	)

Recoveries:
Conventional		241			—		241
Commercial real estate		—			—		—
Construction		—			—		—
Consumer loans		—			—		—
Commercial and municipal loans		2			—		2

Total recoveries		243			—		243

Net recoveries:		20			—		20
Provision (benefit) for loan loss charged to income:
Conventional		(592	)		—		(592	)
Commercial real estate		557			—		557
Construction		65			—		65
Consumer loans		21			—		21
Commercial and municipal loans		(30	)		—		(30	)
Unallocated		(21	)		—		(21	)

Total provision		—			—		—

Ending balance	$	9,753		$	—	$	9,753


(Dollars in thousands)	Three months ended March 31, 2013
	Originated			Acquired		Total
Balance, beginning of year	$	9,909		$	—	$	9,909

Charge-offs:
Conventional		(219	)		—		(219	)
Commercial real estate		(389	)		—		(389	)
Construction		—			—		—
Consumer loans		(20	)		—		(20	)
Commercial and municipal loans		(106	)		—		(106	)

Total charged-off loans		(734	)		—		(734	)

Recoveries
Conventional		178			—		178
Commercial real estate		—			—		—
Construction		—			—		—
Consumer loans		1			—		1
Commercial and municipal loans		1			—		1

Total recoveries		180			—		180

Net charge-offs		(554	)		—		(554	)

Provision for loan loss charged to income:
Conventional		201			—		201
Commercial real estate		143			—		143
Construction		6			—		6
Consumer loans		2			—		2
Commercial and municipal loans		48			—		48

Total provision		400			—		400

Ending balance	$	9,755		$	—	$	9,755

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


	Three months ended March 31,
(Dollars in thousands)	2014			2013
Beginning balance	$	24		$	14

Overdraft charge-offs		(41	)		(65	)
Overdraft recoveries		38			52

Net overdraft charge-offs		(3	)		(13	)

Provision for overdrafts losses		—			14

Ending balance	$	21		$	15

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)	March 31, 2014								December 31, 2013
			% of Allowance			% of Loans					% of Allowance			% of Loans
Real estate loans
Conventional, 1-4 family and home equity loans	$	4,900		50	%		59	%	$	5,314		55	%		59	%
Commercial		2,462		25	%		26	%		2,027		21	%		25	%
Land and construction		418		4	%		2	%		353		3	%		3	%
Collateral and consumer loans		59		1	%		1	%		51		1	%		1	%
Commercial and municipal loans		1,513		16	%		12	%		1,551		16	%		12	%
Unallocated		219		2	%		—			240		2	%		—
Impaired loans		182		2	%		—			197		2	%		—

Allowance	$	9,753		100	%		100	%	$	9,733		100	%		100	%

Allowance as a percentage of originated loans				0.99	%							1.02	%
Impaired loans as a percentage of allowance				204.40	%							217.35	%

The following table shows total allowances including overdraft allowances:


(Dollars in thousands)	March 31, 2014		December 31, 2013
Allowance for loan and lease losses	$	9,753	$	9,733
Overdraft allowance		21		24

Total allowance	$	9,774	$	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 $27.1 million at March 31, 2014, compared to $30.3 million at December 31, 2013. Other real estate owned was $1.2 million at March 31, 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. Ten loans considered to be impaired loans at March 31, 2014, have specific allowances identified and assigned. The 10 loans are secured by real estate, business assets or a combination of both. At March 31, 2014, the allowance included $182 thousand allocated to impaired loans. The portion of the allowance allocated to impaired loans at December 31, 2013, was $197 thousand.

At March 31, 2014, we had 54 loans totaling $12.0 million considered to be “troubled debt restructurings” as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” included in impaired loans. At March 31, 2014, 46 of the “troubled debt restructurings” were performing under contractual terms. Of the loans classified as troubled debt restructured, 9 were more than 30 days past due at March 31, 2014. The balances of these past due loans were $1.5 million. 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 $2.5 million at March 31, 2014, compared to $3.9 million at December 31, 2013. Loans 30 to 89 days past due were $10.7 million at March 31, 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 0.59% at March 31, 2014, and, as a percentage of total loans, decreased from 0.82% at December 31, 2013, to 0.73% at March 31, 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 March 31, 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 March 31, 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.

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:


	March 31, 2014								December 31, 2013
(Dollars in thousands)	Amount		Percentage of Total Allowance			Percentage of Total Assets			Amount		Percentage of Total Allowance			Percentage of Total Assets
Non-accrual loans ⁽¹⁾	$	8,472		86.68	%		0.59	%	$	9,303		95.35	%		0.65	%
Other real estate owned and chattel		1,208		12.36	%		0.08	%		1,343		13.76	%		0.09	%

Total non-performing assets	$	9,680		99.04	%		0.67	%	$	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)	March 31, 2014		December 31, 2013
Real estate:
Conventional	$	2,967	$	3,821
Home equity		141		104
Commercial		4,534		4,512
Construction		126		230
Consumer		1		15
Commercial and municipal		702		621

Total	$	8,471	$	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 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 and Other Intangible. Goodwill and other intangible assets amounted to $55.3 million, or 3.85% of total assets, as of March 31, 2014, compared to $55.7 million, or 3.91% 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 $1.2 million, representing four properties, at March 31, 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 decreased $19.9 million, or 1.83%, to $1.1 billion at March 31, 2014, from $1.1 billion at December 31, 2013. Non-interest bearing deposit accounts decreased $7.1 million, or 6.95%, and interest-bearing deposit accounts decreased $12.8 million, or 1.30%, over the same period. The balances at March 31, 2014, included $20.0 million of brokered deposits, which is a decrease of $804 thousand compared to December 31, 2013. This decrease represents the maturities of $804 thousand of brokered deposits. Deposit balances at March 31, 2014, also includes $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 $5.2 million, or 18.71%, to $22.7 million at March 31, 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 $156.0 million in advances from the Federal Home Loan Bank (“FHLB”) at March 31, 2014, an increase of $34.3 million from $121.7 million at December 31, 2013. In addition to advances, we had nine letters of credit totaling $46.3 million with the FHLB to secure customer deposits under pledge agreements. These letters of credit are factored against borrowing capacity with the FHLB.

Comparison of the Operating Results for the Three months Ended March 31, 2014 and March 31, 2013 (unaudited)

Overview. Consolidated net income for the three months ended March 31, 2014, was $2.1 million, or $0.25 per diluted common share, compared to $2.1 million, or $0.27 per diluted common share, for the same period in 2013, an increase of $91 thousand, or 4.49%. Our net interest margin increased to 3.20% at March 31, 2014, from 2.88% at March 31, 2013, due in part to the higher interest margin from the acquisition of The Randolph National Bank in the fourth quarter of 2013. Our return on average assets and average equity for the three months ended March 31, 2014, were 0.60% and 6.81%, respectively, compared to 0.67% and 6.29%, respectively, for the same period in 2013.

Net Interest and Dividend Income. Net interest and dividend income increased $2.1 million, or 25.85%, to $10.3 million for the three month period ended March 31, 2014, compared to $8.1 million for the three month period ended March 31, 2013, as a result of the increase in interest-earning assets including the assets acquired from The Randolph National Bank in October of 2013 and originated portfolio growth since March 31, 2013.

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.


*Three month period ended March 31,*	2014							2013
	Average Balance ⁽¹⁾		Interest		Yield/ Cost			Average Balance ⁽¹⁾		Interest		Yield/ Cost
	(dollars in thousands)
Assets:
Interest-earning assets:
Loans ⁽²⁾	$	1,154,224	$	11,350		3.93	%	$	922,834	$	9,181		3.98	%
Investment securities and other		162,135		530		1.31	%		217,986		676		1.24	%

Total interest-earning assets		1,316,359		11,880		3.61	%		1,140,820		9,857		3.46	%

Noninterest-earning assets:
Cash		9,857							21,686
Other noninterest-earning assets ⁽³⁾		102,259							86,480

Total noninterest-earning assets		112,116							108,166

Total	$	1,428,475						$	1,248,986

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Savings, NOW and MMAs	$	676,290	$	196		0.12	%	$	550,317	$	191		0.14	%
Time deposits		370,672		892		0.96	%		350,241		821		0.94	%
Repurchase agreements		22,682		14		0.25	%		16,907		13		0.31	%
Capital securities and other borrowed funds		149,276		525		1.41	%		157,975		684		1.73	%

Total interest-bearing liabilities		1,218,920		1,627		0.53	%		1,075,440		1,709		0.64	%

Noninterest-bearing liabilities:
Demand deposits		44,712							26,898
Other		16,663							17,032

Total noninterest-bearing liabilities		61,375							43,930

Stockholders’ equity		148,180							129,616

Total	$	1,428,475						$	1,248,986

Net interest income/Net interest rate spread			$	10,253		3.08	%			$	8,148		2.82	%

Net interest margin						3.12	%						2.86	%

Percentage of interest-earning assets to interest-bearing liabilities						107.99	%						106.08	%

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

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

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

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the periods indicated. Volume changes are computed by multiplying the volume difference by the prior period’s rate. Rate changes are computed by multiplying the rate difference by the prior period’s balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in thousands).


	Three months ended March 31, 2014 vs. 2013 Increase (Decrease) *due to*
	*Volume*			*Rate*			*Total*
	(Dollars in thousands)
Interest income on loans	$	2,274		$	(105	)	$	2,169
Interest income on investments		(185	)		39			(146	)

Total interest income		2,089			(66	)		2,023

Interest expense on savings, NOW and MMAs		17			(12	)		5
Interest expense on time deposits		50			21			71
Interest expense on repurchase agreements		2			(1	)		1
Interest expense on capital securities and other borrowings		(36	)		(123	)		(159	)

Total interest expense		33			(115	)		(82	)

Net interest income	$	2,056		$	49		$	2,105


	Three months ended March 31, 2013 vs. 2012 Increase (Decrease) *due to*
	*Volume*			*Rate*			*Total*
	(Dollars in thousands)
Interest income on loans	$	1,950		$	(476	)	$	1,474
Interest income on investments		(126	)		(525	)		(651	)

Total interest income		1,824			(1,001	)		823

Interest expense on savings, NOW and MMAs		37			(3	)		34
Interest expense on time deposits		31			(229	)		(198	)
Interest expense on repurchase agreements		2			—			2
Interest expense on capital securities and other borrowings		(1,204	)		1,149			(55	)

Total interest expense		(1,134	)		917			(217	)

Net interest income	$	2,958		$	(1,918	)	$	1,040

Interest and Dividend Income. For the three months ended March 31, 2014, total interest and dividend income increased $2.0 million, or 20.52%, to $11.9 million compared to $9.9 million for the same period in 2013. Interest and fees on loans increased $2.2 million, or 23.62%, to $11.4 million for the three month period ended March 31, 2014, compared to $9.2 million for the same period in 2013, due primarily to increased portfolio balances, including The Randolph National Bank loans acquired in October 2013, offset in part by loans repricing to lower rates. Interest and dividends on investments and other interest decreased $146 thousand, or 21.60%, for the three month period ended March 31, 2014, due primarily to a decreased position in investments as the Company implemented a deleveraging strategy during 2013 coupled with lower yields on investments held comparing periods.

Interest Expense. For the three months ended March 31, 2014, total interest expense decreased $82 thousand, or 4.86%, to $1.6 million compared to $1.7 million for the same period in 2013. Interest on deposits increased $77 thousand, or 7.51%, due in part to the carrying costs of deposits acquired from The Randolph National Bank. Interest on advances and other borrowed money decreased $159 thousand, or 23.39%, to $525 thousand from $684 thousand for the same period in 2013 due in part to maturing higher cost advances which were renewed at lower costs since March 31, 2013.

Provision for Loan Losses. There were no provisions for loan losses (not including overdraft allowances) for the three months ended March 31, 2014 compared to $400 thousand for the same period in 2013; the volume of provisions is consistent with activity in the portfolio during the related periods and allowance adequacy models. We made no provisions for overdraft losses in the three months ended March 31, 2014, compared to $14 thousand for the same period in 2013. For additional information on provisions and adequacy, please refer to the section herein on the Allowances for Loan Losses.

Noninterest Income. For the three months ended March 31, 2014, total noninterest income increased $1.2 million, or 37.80%, to $4.4 million compared to $3.2 million for the same period in 2013, as discussed below. For the three month period ended March 31, 2014, the increase in noninterest income primarily consisted of the following:

•

Trust and investment management fee income was $2.1 million for the three months ended March 31, 2014, compared to no recorded activity for the same period in 2013 when the Bank recognized earnings under equity method accounting.

•

Customer service fees increased $252 thousand, or 21.25%, to $1.4 million from $1.2 million for the three months ended March 31, 2014. The increase includes increases of $154 thousand related to increased volume of ATM and debit cards and $72 thousand in fees related to overdraft processing.

•

Bank-owned life insurance income increased $21 thousand to $149 thousand from $128 thousand for the three months ended March 31, 2013.

partially offset by:

•

Net gain on sales of loans decreased $881 thousand, or 94.43%, to $52 thousand compared to $933 thousand for the same period in 2013, represented by a decrease of $26.7 million in loans sold into the secondary market, to $4.7 million for the three months ended March 31, 2014, from $31.4 million for the three months ended March 31, 2013. This decrease reflects changes in pipelines, market rates and shifts in consumer demand of adjustable rate products that we typically hold in our portfolio.

•

Gain on sales and calls of securities, net decreased $159 thousand, or 95.21%, to $8 thousand for the three months ended March 31, 2014, from $167 thousand for the three months ended March 31, 2013. This decrease primarily reflects the gain on the sales of approximately $88 thousand of securities sold during the three months ended March 31, 2014, compared to $18.5 million during the same period in 2013.

•

Income from equity interest in Charter Holding Corp. (“Charter Holding”) decreased $98 thousand compared to the same period in 2013 due to the acquisition of the Charter Holding during the second quarter of 2013. Accordingly, the Bank began recording the entity’s activities as trust income and in related expense categories.

Noninterest Expense. For the three months ended March 31, 2014, total noninterest expenses increased $3.6 million, or 44.35%, to $11.6 million compared to $8.0 million for the same period in 2013, as discussed below. For the three month period ended March 31, 2014, the increase in noninterest expenses primarily consisted of the following:

•

Salaries and employee benefits increased $1.7 million, or 39.73%, to $6.0 million compared to $4.3 million for the three months ended March 31, 2013. Gross salaries and benefits paid, which excludes the deferral of expenses associated with the origination of loans, increased $1.6 million, or 33.51%, from $4.7 million for the three months ended March 31, 2013, to $6.3 million for the three months ended March 31, 2014. Salary expense increased $1.3 million, or 36.46%, reflecting ordinary cost-of-living adjustments and additional staffing primarily related to acquisition of Charter Holding and Central Financial Corporation, which represented $947 thousand, or 77.05%, of the increase. Additional expenses from the acquisitions include $367 thousand of benefit expenses. The deferral of expenses in conjunction with the origination of loans decreased $128 thousand, or 30.97%, to $286 thousand from $414 thousand for the same period in 2013.

•

Occupancy and equipment increased $502 thousand, or 46.65 %, to $1.6 million compared to $1.1 million for the same period in 2013, which included $370 thousand related to the cost of the additional buildings acquired as a result of the acquisition of Charter Holding and Central Financial Corporation.

•

Advertising and promotion increased $56 thousand, or 56.89%, to $155 thousand from $99 thousand for the same period in 2013. This increase related to trust and investment management services coupled with promotions and media related to our new markets in the greater Randolph area of Vermont and our second location in Nashua, New Hampshire, which opened in December 2013.

•

Depositors’ insurance increased $94 thousand, or 53.18%, to $271 thousand from $177 thousand for the same period in 2013 due primarily to increased aggregate account balances.

•

Outside services increased $384 thousand, or 120.36%, to $703 thousand compared to $319 thousand for the same period in 2013. This increase includes expenses of $246 thousand related to Charter Holding operations, increases in expenses associated with our core processing system of $83 thousand and payroll-related services of $5 thousand.

•

Professional services decreased $64 thousand, or 19.04%, to $272 thousand compared to $336 thousand for the same period in 2013, reflecting decreases in legal fees and valuation services.

•

ATM processing fees increased $70 thousand to $221 thousand compared to $151 thousand for the same period in 2013. This increase is related to the same volume increases discussed under customer service fee income previously in this report.

•

Supplies increased $35 thousand to $164 thousand compared to $129 thousand for the same period in 2013.

•

Telephone expense increased $132 thousand to $295 thousand for the three months ended March 31, 2014, from $163 thousand in 2013, which includes $62 thousand from the addition of Randolph National Bank locations and $53 thousand from Charter operations.

•

Amortization of intangible assets increased $243 thousand, or 126.56%, to $435 thousand for the three months ended March 31, 2014, compared to $192 thousand for the same period in 2013. This increase includes $117 thousand related to the amortization of core deposit intangibles related to Randolph National Bank and $126 thousand related to amortization of customer list intangibles related to Charter Trust Company.

•

Other expenses increased $400 thousand, or 36.40%, to $1.5 million for the three months ended March 31, 2014, compared to $1.1 million for the same period in 2013. This increase includes $347 thousand in expenses related to the addition of Charter operations.

Liquidity and Capital Resources

We are required to maintain sufficient liquidity for safe and sound operations. At March 31, 2014, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $69.3 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At March 31, 2014, we had approximately $160.2 in additional borrowing capacity from the FHLB.

At March 31, 2014, stockholders’ equity totaled $150.8 million, compared to $149.3 million at December 31, 2013. This reflects net income of $2.1 million, the declaration and payment of $1.0 million in common stock dividends, the declaration of $58 thousand in preferred stock dividends, cash contribution in the dividend reinvestment program of $2 thousand, and a decrease of $454 thousand in accumulated other comprehensive loss.

At March 31, 2014, 148,088 shares remained to be repurchased under the repurchase plan previously approved by the Board of Directors. The repurchase plan permits the repurchase of up to 253,776 shares of our common stock. The Board of Directors has determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity, which are three performance benchmarks against which bank and thrift holding companies are measured. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. During the three months ended March 31, 2014, no shares were repurchased.

At March 31, 2014, we had unrestricted funds available in the amount of $1.3 million. As of March 31, 2014, our total cash needs for the remainder of 2014 are estimated to be approximately $4.2 million with $3.1 million projected to be used to pay dividends on our common stock, $440 thousand to pay interest on our capital securities, $173 thousand to pay dividends on our Series B Preferred Stock (as defined below), and approximately $444 thousand for ordinary operating expenses. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC. Since the Bank is well-capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the additional Company cash requirements for 2014, as needed, as long as earnings at the Bank are sufficient to maintain adequate leverage capital.

For the three months ended March 31, 2014, net cash provided by operating activities decreased $4.2 million to $4.1 million compared to cash provided of $8.3 million for the same period in 2013. Cash provided by loans sold decreased $27.6 million for the three months ended March 31, 2014, compared to the same period in 2013. Net gain on sales of loans decreased $881 thousand for the three months ended March 31, 2014. Net gain on sales and calls of securities decreased $159 thousand for the three months ended March 31, 2014, compared to the same period in 2013, as a result of the sale of $96 thousand of securities sold during the three months ended March 31, 2014, with lower net gains compared to approximately $18.7 million of securities sold during the same period in 2013. The provision for loan losses decreased $414 thousand for the three months ended March 31, 2014, compared to the same period in 2013. The change in accrued interest receivable and other assets went from a decrease of $19 thousand for the three months ended March 31, 2013 compared to a decrease of $30 thousand for the same period in 2014. The increase in accrued expenses and liabilities decreased $1.8 million.

Net cash used in investing activities was $9.9 million for the three months ended March 31, 2014, compared to cash provided of $18.3 million for the same period in 2013, a change of $28.2 million. The cash provided by net securities activities was $11.7 million for the three months ended March 31, 2014, compared to cash provided by net securities activities of $17.9 million for the same period in 2013. Cash used to purchase FHLB stock was $58 thousand for the three months ended March 31, 2014, compared to cash provided by redemption of FHLB stock of $213 thousand for the same period in 2013. Cash used in loan originations and principal collections, net, was $15.3 million for the three months ended March 31, 2014, a decrease of $18.0 million, compared to cash provided of $2.7 million for the same period in 2013.

For the three months ended March 31, 2014, net cash flows provided by financing activities increased $51.8 million to cash provided of $8.1 million compared to net cash used in financing activities of $43.7 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, we experienced a net decrease of $7.1 million in cash used by deposits and securities sold under agreements to repurchase comparing cash used of $25.1 million to cash used of $32.2 million for the same period in 2013. For the three months ended March 31, 2014, we had an increase of $44.7 million of cash provided by FHLB advances and other borrowings comparing cash provided of $34.3 million for the three months ended March 31, 2014 to cash used of $10.5 million for the same period in 2013.

On August 25, 2011, as part of the U.S. Treasury’s (“Treasury”) Small Business Lending Fund (“SBLF”) program, we entered into a letter agreement with Treasury pursuant to which we issued and sold to Treasury 20,000 shares of our Non-Cumulative Perpetual Preferred Stock, Series B, par value $.01 per preferred share, having a liquidation preference of $1,000 per preferred share (the “Series B Preferred Stock”.) We used $10.0 million of the proceeds to redeem the Series A Preferred Stock issued under Treasury’s Capital Purchase Program.

On March 20, 2013, we entered into the First Amendment to the Securities Purchase Agreement (the “SPA Amendment”) with the Secretary of the Treasury, pursuant to which we issued an additional 3,000 shares of its Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation preference of $1,000 per share (“SBLF Preferred Stock”). The SBLF Preferred Stock was issued in exchange for the cancellation of the outstanding shares of The Nashua Bank’s Senior Non-Cumulative Perpetual Preferred Stock, Series A, that was assumed in the merger that was completed on December 21, 2012.

The initial rate payable on SBLF capital is, at most, 5%, and the rate falls to one percent if a bank’s small business lending increases by ten percent or more. Banks that increase their lending by less than ten percent pay rates between two percent and four percent. If a bank’s lending does not increase in the first two years, however, the rate increases to seven percent, and after 4.5 years total, the rate for all banks increases to nine percent (if the bank has not already repaid the SBLF funding). The dividend will be paid only when declared by our Board of Directors. The Series B Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

The Series B Preferred Stock generally is non-voting, other than class voting on certain matters that could adversely affect the Series B Preferred Stock.

Banks are required to maintain tier one leverage capital and total risk based capital ratios of 4.00% and 8.00%, respectively. As of March 31, 2014, the Bank’s ratios were 8.42% and 12.86%, respectively, well in excess of the regulators’ requirements.

Book value per common share was $15.55 at March 31, 2014, compared to $15.37 per common share at December 31, 2013. Tangible book value per common share was $8.82 at March 31, 2014, compared to $8.59 per common share at December 31, 2013. Tangible book value per common share is a non-GAAP financial measure calculated using GAAP amounts. Tangible book value per common share is calculated by dividing tangible common equity by the total number of shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of shareholders’ equity. We believe that tangible book value per common share provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

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


(Dollars in thousands except for per share data)	March 31, 2014		December 31, 2013
Shareholders’ equity	$	150,776	$	149,257
Less goodwill		44,702		44,632
Less other intangible assets		10,585		11,020
Less preferred stock		23,000		23,000

Tangible common equity	$	72,489	$	70,605

Ending common shares outstanding		8,219,442		8,216,747
Tangible book value per common share	$	8.82	$	8.59

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures (“Debentures II”). Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities and used the net proceeds from the offering to purchase a like amount of our 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”). Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160 thousand are included in other assets and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first 5 years of the stated liquidation amount of $10 per capital security. We have fully and unconditionally guaranteed all of the obligations of the Trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that the Trust has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures III, in whole or in part at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset-Liability Management

Market risk and interest rate risk management is governed by the Asset/Liability Committee (“ALCO”). The ALCO establishes exposure limits that define our tolerance for interest rate risk. The ALCO manages the composition of the balance sheet over a range of potential fluctuations in interest rates while responding, as appropriate, to market demand for loan and deposit products. Current exposures versus limits are reported to the Board of Directors at least quarterly. The policy limits and guidelines serve as benchmarks for measuring interest rate risk and for providing a framework for evaluation and interest rate risk-management decision-making.

Market Risk

Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

Interest Rate Risk

The principal market risk facing us is interest rate risk, which may include repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk exists when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. A change in sensitivity could reflect an imbalance in the repricing opportunities of our assets and liabilities. Yield curve risk reflects the possibility that the changes in the shape of the yield curve could have different effects on our assets and liabilities. Basis risk exists when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity often at a time of disadvantage to the person selling the option; this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.

Interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.

Income simulation is the primary tool for measuring the interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over a 12-month period, of a variety of interest rate shocks. These simulations take into account repricing, maturity and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether the exposure resulting from changes in market interest rates remains within established tolerance levels over a 12-month horizon, and develops appropriate strategies to manage this exposure.

Our one-year cumulative interest rate gap at March 31, 2014, was positive 3.30%, compared to the December 31, 2013, gap of positive 0.58%. With an asset sensitive (positive) gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease. Over the next 12 months, $62.4 million more assets are subject to repricing than liabilities.

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

The following table sets forth our EVE at March 31, 2014, as calculated by an independent third party agent:


(Dollars in thousands)	Book Value			-100 bp			0 bp			+100 bp			+200 bp			+300 bp			+400 bp
EVE:
Amount	$	168,929		$	146,525		$	140,874		$	128,676		$	117,124		$	106,102		$	95,076
Percent of Change					4.0	%					-8.7	%		-16.9	%		-24.7	%		-32.5	%
EVE Ratio:
Ratio		11.79	%		10.44	%		10.28	%		9.64	%		9.00	%		8.35	%		7.66	%
Change in basis points					-16						-64			-128			-193			-262

Management controls the Company’s interest rate exposure using several strategies, which include adjusting the maturities of securities in the Company’s investment portfolio, limiting or expanding the terms of loans originated, monitoring and limiting, as appropriate, long-term fixed rate deposits, and laddering maturities of FHLB advances. The Company limits this risk by monitoring and limiting, as appropriate securities it invests in to those with limited average life changes under certain interest rate shock scenarios, or securities with embedded prepayment penalties. The Company also may use derivative instruments, principally interest rate swaps, to manage its interest rate risk. The Company had no derivative fair value hedges or derivative cash flows hedges at March 31, 2014 or December 31, 2013.

Item 4. Controls and Procedures

Management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during our last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There is no material litigation pending to which we or any of our subsidiaries are a party or to which our property or the property of any of our subsidiaries is subject, other than ordinary routine litigation incidental to our business.

Item 1A. Risk Factors

There are risks inherent to our business. As of March 31, 2014, the risk factors of the Company have not changed materially from those disclosed within Part I, Item 1A, “Risk Factors” of our 2013 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

SIGNATURES

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 on May 12, 2014.

NEW HAMPSHIRE THRIFT BANCSHARES, INC.

(Registrant)

/s/ Stephen R. Theroux

Stephen R. Theroux

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Laura Jacobi

Laura Jacobi

First Senior Vice President, Chief Financial Officer and Chief Accounting Officer

(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

3.1		Certificate of Incorporation, as amended (filed as Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Commission on March 25, 2012, and incorporated herein by reference).

3.2		Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 22, 2009, and incorporated herein by reference).

3.3		Amended and Restated Certificate of Designations establishing the rights of the Company’s Non-Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 25, 2013, and incorporated herein by reference).

3.4		Amended and Restated Bylaws, as amended (filed as Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013, and incorporated herein by reference).

4.1		Stock Certificate (filed as an exhibit to the Company’s Registration Statement on Form S-4 filed with the Commission on March 1, 1989, and incorporated herein by reference).

4.2		Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Floating Rate Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.3		Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.4		Indenture by and between New NHTB, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004 for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 29, 2005 and incorporated herein by reference).

4.5		Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association dated March 30, 2004 (filed as Exhibit A to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 29, 2005, and incorporated herein by reference).

10.1		Executive Salary Continuation Agreement by and between Lake Sunapee Bank, fsb and Laura Jacobi, dated March 17, 2014 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on March 19, 2014, and incorporated herein by reference).

31.1 *		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2 *		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1 *		Section 1350 Certification of the Chief Executive Officer.

32.2 *		Section 1350 Certification of the Chief Financial Officer.

101 **		Financial statements from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

*	Filed herewith.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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