Exhibit 13
[SBT Bancorp Letterhead]
April 10, 2009
Dear Fellow Shareholders:
Simsbury Bank was formed with two core commitments to the market: provide
excellent, respectful service to all customers all the time and provide
businesses and consumers with a locally managed loan source to help them achieve
their goals. By fulfilling these commitments, the Bank would provide its
shareholders with a competitive return and the communities we serve with a
trusted and involved partner. These commitments continue to guide Simsbury Bank
and its holding company, SBT Bancorp.
Last year, our letter to you noted the subprime mortgage crisis that began in
August 2007. We anticipated that "the continued unraveling of the subprime
mortgage crisis will impact the national economy for much of 2008 and,
therefore, banks such as yours." We did not, however, anticipate the depth and
breadth of the financial market crisis that has unfolded since the Treasury
Department nationalized Fannie Mae and Freddie Mac in early September 2008 and
its impact on the economy. We now navigate through a period of economic
uncertainty unlike any in the post-World War II period. The financial market
crisis and economic recession have disrupted many large national and regional
banks that serve our market. We are mindful now more than ever that our
commitment to the importance of a locally managed bank able to meet its market's
loan demand in good economic times and bad is critical to the wellbeing of our
region.
We are very pleased to report that Simsbury Bank's strong balance sheet and
dedicated staff position it extremely well to fulfill our enduring commitments
to the market during this most difficult economic period. We have a relatively
low risk loan portfolio comprised of loans secured by conventionally
underwritten residential mortgages and home equities (70%), commercial loans
(28%) and consumer loans (2%). We have only modest exposure to one of the
typically riskiest loan categories, non-owner occupied commercial real estate
secured loans, comprising less than 8.5% of our total loans, well below many
peer banks. Our deposit mix remains low cost and diversified with almost 32%
checking deposits, 29% money market and savings deposits, and 39% certificates
of deposit. Finally, our capital levels remain comfortably above levels
qualifying the Bank as "well capitalized" from a regulatory perspective.
However, as you know, we have chosen to participate in the Treasury Department's
Capital Purchase Program in order to ensure that we have adequate capital to
support loan demand and protect us from unexpected adverse consequences of the
uncertain economic conditions. This capital will permit us to continue to enjoy
the loan and deposit growth of the past year as more and more businesses and
consumers choose us as their banking and investment services partner.
2008 was a year of mixed results for your company. We enjoyed the best loan and
deposit growth in years. However, we reported a loss for the year due
principally to a number of one time events related to the financial market
crisis, weakening economy and our decision to align our Albany Turnpike market
presence with demonstrated customer demand.
Earnings
In 2008, Simsbury Bank's total revenue, net interest income plus other income
(excluding security writedowns and losses), increased 2% from 2007. While the
Bank enjoyed strong deposit growth of 18% and robust loan growth of 9%, our loan
to deposit ratio decreased from 89% at year end 2007 to 82% at year end 2008. As
deposits grew more quickly than loans, we increased our investment activity. The
almost 33% increase in our investment portfolio, whose components are generally
lower yielding than loans, resulted in a decline in our net interest margin from
4.16% in 2007 to 3.95% in 2008. As a result, our net interest income and
dividend increased only 2% in 2008. Meanwhile, Banking and Investment Services
Fees & Commissions declined 1% due principally to a 60% decline in investment
services commissions offset by a strong 12% increase in banking fees. Banking
fee increases were due principally to customer growth and more careful
management of fee waivers. Investment services commissions declined due
principally to lower capacity as we had only one financial advisor for more than
half the year, the attention required for our transition to LPL Financial for
brokerage services, and the difficult fourth quarter investment markets due to
the financial market crisis.
2004 2005 2006 2007 2008
Revenue 7868709 8647943 8694972 9021795 9159963
2004 2005 2006 2007 2008
Net Interest Margin 3.85% 4.06% 3.84% 4.16% 3.95%
2004 2005 2006 2007 2008
Banking and Investment Services Fees & Commissions 689620 886012 962595 1150014 1137723
however, did not translate into net income growth. The principal reasons that we
reported a net loss for the year were the almost total loss in value of our
Fannie Mae and Freddie Mac preferred stock holdings and the resulting
mark-to-market write-down, the repositioning of our Canton location in serving
the Albany Turnpike marketplace and resulting expenses, and the otherwise modest
increase in other operating expenses, offset somewhat by the proceeds from a
bank owned life insurance policy.
|X| As you know, when the Treasury Department nationalized Fannie Mae and
Freddie Mac in early September 2008, they chose to treat preferred
stockholders of these government sponsored enterprises in the same manner
as common shareholders, while fully guaranteeing the enterprises' debt
obligations. This resulted in a $1,755,600 Other Than Temporary Impairment
charge to mark our investments to market. While we joined with hundreds of
community banks and trade associations across the country to seek a change
in this treatment, community banks were ultimately able to achieve only,
though very importantly, more appropriate tax treatment of the write-down.
|X| In the first half of 2008, we took a close look at how our customers use
our full service branches. We found that four of the branches experienced
full utilization of all of the services we offer while one, Canton, was
used primarily for convenience transactions such as check cashing. Based on
our customers' preferences, we decided to reposition the Canton location to
continue to meet the convenience transaction service demand with an ATM and
night deposit drop, and to redeploy the branch space for mortgage,
commercial and investment services business development activities. This
decision resulted in the need to accelerate recognition of $485,000 in
costs associated with the former full service activities. These expenses
were recognized in the second half of the year.
|X| By far the largest component of our noninterest expenses, accounting for
slightly less than half, are salaries and employee benefits. In 2008, these
expenses increased only 2.8%. Occupancy and equipment expense increased
32.7%. However, excluding the accelerated expenses related to the
repositioning of the Canton location, occupancy and equipment expenses
increased only 0.4% for the year. Our remaining noninterest expenses,
comprising approximately 29% of the total, increased 14.4% due in part to
higher volume related costs (correspondent charges, postage, forms and
supplies), as well as higher marketing expenditures and professional fees.
|X| Finally, our earnings benefited from a $328,358 bank owned life insurance
death benefit related to a policy insuring our director and former
President & CEO Barry Loucks. Barry's premature death triggered payment of
the death benefit on a policy purchased to provide a source of income for
Bank employee benefits including a Supplemental Employee Retirement Plan
benefit for Barry.
2004 2005 2006 2007 2008
Net Income 1778250 1673677 716933 1139710 -644824
2004 2005 2006 2007 2008
EPS (Fully Diluted) 2.1 1.96 0.84 1.33 -0.75
2004 2005 2006 2007 2008
Efficiency Ratio 66% 71% 88% 84% 0.96
Loans and Deposits
2008 was an excellent year for loan and deposit growth. The Bank enjoyed an 8.7%
increase in net loans and an 18.2% increase in deposits. Commercial purpose
loans increased by 11.9% and residential property secured mortgages and home
equities increased by 10.9%. Consumer loans declined by 45% due to the runoff of
a purchased loan portfolio. At year end, 70% of the Bank's loans were
residential property secured mortgages and home equities, 28% were commercial
loans and the balance consumer. Deposit growth was led by time deposits which
increased by 33.5% as consumers and businesses sought the safety of FDIC
insured, guaranteed return certificates in the face of the unfolding financial
market crisis. Savings and NOW deposits also increased for the same reason by
17.8%. Demand deposits declined slightly by 4.7%. The Bank's deposit mix remains
favorable and relationship-based with 32% in checking deposits, 30% in savings
and money market, and 38% in time deposits. The Bank also experienced an
increase in the average deposit balance to over $10,800 from $9,200 at year end
2007.
2004 2005 2006 2007 2008
Net Loans $141,229,000 $145,806,000 $155,513,000 $163,765,000 $178,073,758
2004 2005 2006 2007 2008
Deposits $183,132,000 $191,116,000 $198,402,000 $186,806,000 $220,879,117
2004 2005 2006 2007 2008
Deposit Accounts 17,135 19,002 20,200 20,079 20,176
Asset Quality
The Bank's asset quality remains strong both absolutely and compared to our
competitors. Although nonaccruals and loan charge offs increased in 2008, they
remained at low levels. Nonaccruals increased to $560,917 (0.31% of gross loans
and leases) from $5,328 in 2007, while charge-offs net of recoveries increased
to $357,407 (0.21% of average loans and leases) from $23,777 in 2007. The Bank's
provision for loan losses in 2008 totaled $450,000 compared to $250,000 in 2007.
The loan loss reserve increased almost 5% to $2,017,145 equaling 1.12% of total
loans and leases.
With the likelihood of a difficult economy through 2009 high, we feel that our
relatively low exposure to commercial real estate secured loans is one of our
strengths. With only approximately 18% of our loans financing commercial real
estate, we are among banks with the lowest exposure to commercial real estate in
our market area. Construction and development loans total approximately 5% of
total loans and non-owner occupied commercial real estate secured loans total
approximately 8.5% of our total loans.
Capital
Due to the Company's net loss, shareholders' equity and book value per share
both declined in 2008 but were above 2006 year end levels.
2004 2005 2006 2007 2008
Stockholders' Equity $14,255,257 $15,375,598 $16,119,064 $17,318,059 $16,846,649
2004 2005 2006 2007 2008
Book Value per Share $ 17.18 $ 18.33 $ 19.14 $ 20.35 $ 19.48
The Bank's capital position was adversely impacted by our net loss in 2008;
however we remain comfortably "well capitalized" compared to the FDIC's capital
adequacy standards. Nevertheless, we believe that the current difficult economic
environment combined with steady business and consumer loan demand suggest that
we add to capital to ensure that your company continues to have the capital
necessary to weather these uncertain times and have the capacity to meet loan
demand as more businesses and households turn to locally managed banks to meet
their needs. The management and board of directors determined that the
Treasury's Capital Purchase Program offered the most advantageous source of
capital at this time. As such, on March 27, 2009, SBT Bancorp issued 4200 shares
of preferred stock to the Treasury in return for $4 million of capital. This
capital qualifies for treatment as "Tier 1" capital from a regulatory
perspective.
2004 2005 2006 2007 2008
Tier 1 Capital Ratio (Well Capitalized Standard: 5.0%) 7.11% 7.61% 7.31% 8.21% 7.00%
Tier 1 Risk Weighted Capital Ratio (Well Capitalized Standard: 6.0%) 12.02% 12.41% 11.50% 12.23% 10.88%
Total Risk Weighted Capital Ratio (Well Capitalized Standard: 10.0%) 13.27% 13.66% 12.75% 13.48% 12.13%
Financial Markets, Economic Conditions and SBT Bancorp
The financial market crisis began in August 2007 and then accelerated in
September 2008 with the Treasury's decision to nationalize Fannie Mae and
Freddie Mac. We have all learned a great deal about the causes of this crisis
and it is likely that more will be learned. We continue to witness unprecedented
intervention in the financial markets and economy by the federal government and
anticipate significant changes to the regulatory framework within which
financial companies, including yours, operate. At the same time, we are all
dealing with the consequences of the crisis in our households, businesses, and
local, state and federal governments. There is still great uncertainty as to the
ultimate severity and duration of the economic recession. Inevitably, there will
be a recovery of the economy. However, it is unclear to what degree the recovery
will resemble those of the past or instead reflect fundamental changes in
household and business consumption, saving, borrowing and investing behavior.
Banks are a reflection of the economy. Simsbury Bank's success is tied to the
success of the businesses and households in Central Connecticut. Simsbury Bank
manages its assets and liabilities conservatively and with the knowledge that
economic cycles will test any unhealthy loan or deposit concentrations. Most of
our loans are to businesses, families and individuals in our primary market
area. We try to mitigate this geographic concentration risk through careful
underwriting and by having a diverse loan portfolio by loan type and borrower.
Our deposits are adequate to fund most of our loan and investment activities and
reflect the strong relationship orientation of our focus with a healthy mix of
checking, savings and time deposits. We do not rely on wholesale funding such as
brokered CDs. We occasionally borrow from the Federal Home Loan Bank when it
offers rates, terms and flexibility better than we can obtain through local
deposits.
We feel very confident in the strength and diversity of our loan portfolio and
our deposit base. We are confident that we have the capital necessary to play
our role as local lender in difficult times that our founders envisioned. We
will continue to manage our risks closely as we execute our plans to grow
revenues and earnings and thereby enhance shareholder value.
In Memoriam
Barry Loucks, Simsbury Bank's first President and Chief Executive Officer,
passed away in May 2008. Barry's leadership and contributions to the Bank's
success were recounted in our annual shareholder report to you in 2005. In his
eulogy at Barry's funeral, Peter Pabich shared words written by Ralph Waldo
Emerson that truly captured Barry's life. We share those words below in honor of
Barry.
Looking Forward, Not Pulling Back
We look forward with confidence rooted in the strength of our people, our
performance culture, our commitment to customer service excellence and the
resilience of our market area. The current financial market and economic crisis
creates an opportunity for us. We are open for business and seeking to provide
the capital and financial strength that our market demands. We will manage risk
well and create value for you, our shareholders.
We appreciate your support and look forward to continuing to help our customers
achieve their life goals by being their banking and investment partner of
choice.
Sincerely,
Martin J. Geitz Lincoln S. Young
President & Chief Executive Officer Chairman of the Board of Directors
================================================================================
In Memoriam
================================================================================
To laugh often and much; [PICTURE OF BARRY R. LOUCKS]
To win the respect of intelligent people
and the affection of children;
To earn the appreciation of honest critics
and endure the betrayal of false friends; To appreciate
beauty; To find the best in others; To leave the world
a bit better whether by a healthy child, a garden patch,
or redeemed social conditions;
To know even one life has breathed easier because you lived.
This is to have succeeded. Barry R. Loucks
================================================================================
1943 to 2008
Ralph Waldo Emerson
================================================================================
Selected Financial and Other Data
- -----------------------------------------------------------------------------------
At 12/31/08 At 12/31/07 At 12/31/06
------------------- ------------------- -------------------
Balance Sheet Data:
Total assets $240,756,468 $210,390,282 $217,046,550
Loans, net 178,073,758 163,765,440 155,512,835
Investment securities 33,628,012 25,501,248 38,485,046
Federal funds sold, money market mutual
funds, and other interest-earning
deposits 4,943,261 2,330,187 4,944,524
Deposits 220,879,117 186,805,866 198,402,158
Stockholders' equity 16,846,649 17,318,059 16,119,064
For the Year For the Year For the Year
Ended 12/31/08 Ended 12/31/07 Ended 12/31/06
------------------- ------------------- -------------------
Statement of Income Data:
Total interest and dividend income $ 11,064,810 $ 11,349,114 $ 11,135,620
Total interest expense 3,042,570 3,477,333 3,596,887
Net interest and dividend income 8,022,240 7,871,781 7,538,733
Provision for loan losses 450,000 250,000 0
Net interest and dividend income after
provision for loan losses 7,572,240 7,621,781 7,538,733
(Loss) gains on loans sold, net 0 (414) 3,977
Writedown of available-for-sale
securities (1,755,600) (227,900) 0
Other noninterest income 1,601,042 1,821,379 1,152,262
Noninterest expense 8,830,965 7,901,091 7,679,952
Income tax (benefit) expense (768,459) 174,458 298,087
Net (loss) income (644,824) 1,139,711 716,933
(Loss) earnings per common share $( .75) $1.34 $ .85
(Loss) earnings per common share,
assuming dilution $( .75) $1.33 $ .84
Other Data:
Net interest spread 3.56% 3.64% 3.44%
Net interest margin 3.95% 4.16% 3.84%
Return on average assets (0.30)% 0.55% 0.34%
Return on average stockholders' equity (3.71)% 6.80% 4.52%
Dividend payout ratio n/a 32.8% 49.3%
Average stockholders' equity to
average assets 8.02% 8.11% 7.49%
Management's Discussion and Analysis of
Financial Conditions and Results of Operations
- --------------------------------------------------------------------------------
Forward-Looking Statements
When used in this Annual Report or any press release, public
announcement or filing, the words "intends," "expects," "plans," "estimates,"
"projects," "believes," "anticipates" and similar expressions are intended to
identify forward-looking statements. The Company (defined below) has made and
may continue to make various forward-looking statements with respect to
earnings, credit quality and other financial and business matters for periods
subsequent to December 31, 2008. All statements, other than statements of
historical facts, are forward-looking statements. The Company cautions that
these forward-looking statements are not guarantees of future performance and
are subject to numerous assumptions, risks and uncertainties, and that
statements relating to subsequent periods are subject to greater uncertainty
because of the increased likelihood of changes in underlying factors and
assumptions. Actual results could differ materially from forward-looking
statements. In addition to those factors previously disclosed by the Company or
the Bank (defined below) and those factors identified elsewhere herein, the
following factors could cause actual results to differ materially from such
forward-looking statements: competitive pressures on loan and deposit product
pricing; other actions of competitors; changes in economic conditions; the
extent and timing of actions of the Federal Reserve Board; customer deposit
disintermediation; changes in customers' acceptance of the Bank's products and
services; and the extent and timing of legislative and regulatory actions and
reforms.
Please do not rely unduly on any forward-looking statement, as such
statements speak only as of the date made and the Company undertakes no
obligation to revise or update such statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events or circumstances.
General
This discussion is designed to assist you in better understanding the
Company's financial condition, results of operations, liquidity and capital
resources and any significant changes and trends related thereto. This
discussion should be read in conjunction with the our financial statements.
SBT Bancorp, Inc. (the "Company") is the holding company for The
Simsbury Bank & Trust Company, Inc. (the "Bank"). The Company was incorporated
in the State of Connecticut on February 17, 2006. The Company became the Bank's
sole shareholder pursuant to a reorganization that occurred on March 7, 2006.
The Company's only business is its investment in the Bank, which is a
community-oriented financial institution providing a variety of banking and
investment services.
The Bank was incorporated on April 28, 1992 and commenced operations as
a Connecticut chartered bank on March 31, 1995. The Bank's deposit accounts are
insured under the Federal Deposit Insurance Act, up to the maximum applicable
limits thereof. The Bank is not a member of the Federal Reserve System. The
Bank's main office and its corporate offices are located in the town of
Simsbury, Connecticut. The Bank has branch offices in the towns of Granby, Avon,
and Bloomfield, Connecticut. The Bank also maintains a business office in
Canton, Connecticut. The aggregate population for the Bank's market area is
98,000, comprised of approximately 37,000 households. The Bank's customer base
consists primarily of individual consumers and small businesses in north central
Connecticut. The Bank has in excess of 20,175 deposit accounts.
The Bank offers a full range of commercial banking services to residents
and businesses in its primary and secondary markets through a wide variety of
mortgage programs, home equity lines and loans, FDIC-insured checking, savings,
and IRA accounts, 401K rollover, as well as safe deposit and other customary
non-deposit banking services. As of December 31, 2008, approximately 70% of the
Bank's loans were secured by residential property located in Connecticut. The
Bank has two ATMs at its main office and the Bloomfield branch, and one ATM at
each of its other branch/business office locations. The ATMs generate activity
fees based upon utilization by other banks' customers. The Bank offers
investment products to customers through SBT Investment Services, Inc., a
wholly-owned subsidiary of the Bank, and through its affiliation with the
securities broker/dealer LPL Financial Services Corporation.
The Bank's deposits increased by $34.1 million or 18.3% in 2008,
compared to an $11.6 million decrease in 2007. The Bank's total assets at
year-end 2008 were $241 million, an increase of $31 million or 14.4% from the
$210 million at year-end 2007. The Bank's loan portfolio increased by $14.4
million or 8.7% in 2008 and ended the year at $180.1 million. The Bank's
loan-to-deposit ratio, an important determinant of net interest income,
decreased to 82% at year-end 2008, compared to 89% at year-end 2007.
There was a net loss of $644,824 or $(.75) per common share for the
year ending December 31, 2008, a decrease of $1.78 million from the net income
of $1,139,711 or $1.34 per common share reported for the year ended December 31,
2007. The net loss in 2008 was principally attributable to an impairment charge
of $1,755,600 on investments in Fannie Mae and Freddie Mac securities
Results of Operations for the Years Ended December 31, 2008, 2007 and 2006
Net Interest Income and Net Interest Margin
The Bank's earnings depend largely upon the difference between the
income received from its loan portfolio and investment securities and the
interest paid on its liabilities, mainly interest paid on deposits. This
difference is "net interest income." The net interest income, when expressed as
a percentage of average total interest-earning assets, is referred to as the net
interest margin. The Bank's net interest income is affected by the change in the
level and the mix of interest-earning assets and interest-bearing liabilities,
referred to as volume changes. The Bank's net interest margin is also affected
by changes in yields earned on assets and rates paid on liabilities, referred to
as rate changes. Interest rates charged on the Bank's loans are affected
principally by the demand for such loans, the supply of money available for
lending purposes and competitive factors. These factors are in turn affected by
general economic conditions and other factors beyond the Bank's control, such as
federal economic policies, the general supply of money in the economy,
legislative tax policies, governmental budgetary matters, and the actions of the
Federal Reserve.
Net interest and dividend income after provision for loan losses
totaled $7,572,240 in 2008, which is a decrease of $49,541 from 2007, or 0.65%
in 2008. Earning assets have grown from $191 million on December 31, 2005 to
$226 million at December 31, 2008. The Bank's net interest spread and net
interest margin decreased to 3.56% and 3.95% during 2008 as compared to 3.64%
and 4.16% during 2007. This was primarily due to the historically low level of
interest rates prevalent for much of the year.
The following table presents the average amounts outstanding for the
major categories of the Bank's interest-earning assets and interest-bearing
liabilities and the average interest rates earned or paid thereon for the years
ended December 31, 2008, 2007 and 2006.
NET INTEREST INCOME
(Dollars in thousands)
For the Year Ended 12/31/08
------------------------------------
Average (1)
Balance Interest Yield
------------- --------- ------------
Federal funds sold and overnight
deposits $9,717 $ 145 1.49%
Investments (1) 23,577 1,251 5.31
Mortgage loans 91,702 5,109 5.57
Commercial loans 44,671 2,747 6.15
Consumer loans 36,796 1,946 5.29
Term federal funds sold 475 10 2.11
-------- -------- -------
Total loans 173,644 9,812 5.65
-------- --------
Total interest-earning assets $206,938 11,208 5.42
======== ======
NOW deposits $ 29,990 $ 45 0.15%
Savings deposits 65,706 717 1.09
Time deposits 65,755 2,214 3.37
-------- --------
Total interest-bearing deposits 161,451 2,976 1.84
Securities sold under agreements to
repurchase 1,952 48 2.46
Federal Home Loan Bank advances 611 18 2.95
-------- --------
Total interest-bearing
liabilities $164,014 $3,042 1.85%
======== ======
Net interest income $8,166
======
Net interest spread 3.56%
=====
Net interest margin 3.95%
=====
For the Year Ended 12/31/07
------------------------------------
Average (1)
Balance Interest Yield
------------- --------- ------------
Federal funds sold and overnight
deposits $3,812 $ 201 5.27%
Investments (1) 33,092 1,597 4.83
Mortgage loans 78,901 4,343 5.50
Commercial loans 38,528 2,747 7.13
Consumer loans 39,864 2,566 6.44
Term federal funds sold 33 1 3.03
-------- --------
Total loans 157,326 9,657 6.14
------- -----
Total interest-earning assets $194,230 11,455 5.90
======== ======
NOW deposits $ 27,764 $ 51 0.18%
Savings deposits 57,754 546 0.95
Time deposits 65,016 2,758 4.24
-------- --------
Total interest-bearing deposits 150,534 3,355 2.23
Securities sold under agreements to
repurchase 1,529 37 2.42
Federal Home Loan Bank advances 1,632 85 5.21
-------- --------
Total interest-bearing $153,695 $ 3,477 2.26%
======== =======
liabilities
Net interest income $ 7,978
=======
Net interest spread 3.64%
=====
Net interest margin 4.16%
=====
NET INTEREST INCOME
(Dollars in thousands)
For the Year Ended 12/31/06
------------------------------------
Average (1)
Balance Interest Yield
------------- --------- ------------
Federal funds sold and overnight
deposits $4,348 $ 216 4.97%
Investments (1) 43,776 1,983 4.53
Mortgage loans 77,038 4,174 5.42
Commercial loans 36,727 2,594 7.06
Consumer loans 37,920 2,296 6.05
Term federal funds sold 137 6 4.38
------- --------
Total loans 151,822 9,070 5.97
------- --------
Total interest-earning assets $199,946 $11,269 5.64%
======== =======
NOW deposits $ 25,951 $ 26 0.10%
Savings deposits 61,444 558 0.91
Time deposits 72,271 2,878 3.98
-------- --------
Total interest-bearing deposits 159,666 3,462 2.17
Securities sold under agreements to
repurchase 1,903 41 2.15
Federal Home Loan Bank advances 1,763 94 5.33
------ --------
Total interest-bearing liabilities $163,332 $ 3,597 2.20%
======== =======
Net interest income $ 7,672
=======
Net interest spread 3.44%
======
Net interest margin 3.84%
======
(1) On a fully taxable equivalent basis based on a tax rate of 34 %. Interest
income on investments includes a fully taxable equivalent adjustment of
$143,000 in 2008, $106,000 in 2007 and $133,000 in 2006.
The following table sets forth the effects of changing rates and
volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the
prior columns. For purposes of this table, changes attributable to changes in
both rate and volume that cannot be segregated have been allocated
proportionally based on the changes due to rate and the changes due to volume.
Year Ended December 31, 2008 Year Ended December 31, 2007
Compared to Compared to
Year Ended December 31, 2007 Year Ended December 31, 2006
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------------- -------- ---------- ----------- --------- ----------
(In thousands)
Interest and dividend income:
Federal funds sold and overnight
Deposits $ 47 $(102) $(55) $ 11 $ (26) $ (15)
Investments 182 (529) (347) 143 (528) (385)
Loans (380) 535 155 253 334 587
Total interest-earning assets (151) (96) (247) 407 (220) 187
---- --- ---- --- ---- ---
Interest expense:
NOW deposits (11) 5 (6) 23 2 25
Savings deposits 90 81 171 26 (38) (12)
Time deposits (576) 32 (544) 225 (344) (119)
----- -- ----- --- ----- -----
Total interest-bearing deposits (497) 118 (379) 274 (380) (106)
Securities sold under agreements to
Repurchase 1 10 11 7 (11) (4)
FHLB advances (27) (40) (67) (2) (7) (9)
--- --- --- -- -- --
Total interest-bearing liabilities (523) 88 (435) 279 (398) (119)
---- -- ---- --- ---- ----
Net change in interest income $ 372 $(184) $ 188 $ 128 $ 178 $ 306
===== ====== ===== ===== ===== =====
Provision for Loan Losses
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by the Bank's management
("Management") based on such factors as historical experience, the volume and
type of lending conducted by the Bank, the amount of non-performing loans,
regulatory policies, generally accepted accounting principles, general economic
conditions, and other factors related to the collectability of loans in the
Bank's portfolio.
Each month the Bank reviews the allowance for loan losses and makes
additional provisions to the allowance, as needed. For the year ended December
31, 2008, the allowance was increased by $92,593, net of charge-offs and
recoveries. The total allowance for loan losses at December 31, 2008 was
$2,017,145 or 1.12% of outstanding loans. This compares with a total allowance
for loan losses of $1,924,552 at year-end 2007, which represented 1.16% of
outstanding loans. With the exclusion of loans to financial institutions (term
federal funds sold), this ratio was 1.18% at year-end 2008 and 1.18% at year-end
2007. During 2008, the Bank charged off thirteen loans for a total of $358,862.
During 2007, the Bank charged off four loans for a total of $23,777. The Bank
recovered 2 loans for $1,455 during 2008. There were no loan recoveries in 2007.
Management believes the allowance for loan losses is adequate.
Noninterest Income and Noninterest Expense
The following table sets forth the various components of the Bank's noninterest
(charges) income, and noninterest expense for the years ended December 31, 2008,
2007 and 2006.
NONINTEREST (CHARGES) INCOME
For Year % of Income For Year % of Income For Year % of Income
Ended excluding Ended excluding Ended excluding
12/31/08 Writedown 12/31/07 Writedown 12/31/06 Writedown
-----------------------------------------------------------------------------------------------
Service charges on
deposit accounts $479,210 29.9% $413,758 22.7% $336,664 29.1%
Safe deposit fees 74,039 4.6 79,764 4.3 74,039 6.4
Business manager 129,232 8.1 132,339 7.3 129,232 11.2
income
(Loss) gain on - - (414) - 3,977 0.3
loans sold, net
SBT Investment 82,295 5.2 210,630 11.6 165,496 14.3
Services, Inc
Other income 836,266 52.2 985,302 54.1 446,831 38.7
------- ---- ------- ---- ------- ----
Noninterest income--
excludes
write-down $1,601,042 100.0% $1,821,379 100.0% $1,156,239 100.0%
========== ====== ========== ====== ========== ======
Write-down of
securities-available
for sale (1,755,600) (227,900)
=========== =========
Total
noninterest
(charges) $(154,558) $1,593,479 $1,156,239
Income ========== ========== ==========
NONINTEREST EXPENSE
For Year For Year For Year
Ended % of Ended % of Ended % of
12/31/08 Total 12/31/07 Total 12/31/06 Total
--------------- ---------- -------------- ------------- ------------ ------------
Salaries and employee benefits $4,284,603 48.5% $4,166,414 52.7% $4,036,284 52.6%
Occupancy expense 1,287,076 14.5 1,115,588 14.1 1,028,280 13.4
Equipment expense 411,703 4.7 391,122 5.0 324,683 4.2
Impairment of Operating Lease 298,657 3.4
Professional fees 407,597 4.6 417,476 5.3 209,355 2.7
Advertising and promotions 384,404 4.4 335,999 4.3 346,677 4.5
Forms and supplies 152,212 1.7 126,826 1.6 364,181 4.7
Insurance 200,750 2.3 110,172 1.4 75,023 1.0
Loan expenses 68,393 0.8 77,603 1.0 120,846 1.6
Postage 151,522 1.7 130,700 1.6 147,885 1.9
Other expenses 1,184,048 13.4 1,029,191 13.0 1,026,738 13.4
----------- ------ ----------- ------ ----------- ------
Total $8,830,965 100.0% $7,901,091 100.0% $7,679,952 100.0%
========== ====== ========== ====== ========== ======
Noninterest income for the twelve months ended December 31, 2008,
excluding the writedown of securities available-for-sale decreased by
approximately $220,000 from the twelve months ended December 31, 2007. This 2008
decrease was due primarily to a decrease of $338,000 in cash surrender value of
bank owned life insurance ("BOLI") and BOLI death benefit income. Total
noninterest (charges) income was a loss in 2008 due to the writedown of
securities available-for-sale. Management deemed Fannie Mae and Freddie Mac
preferred stock holdings to be other-than-temporarily impaired. Service charges
and fee income grew by approximately $115,000 during 2008, an increase of 12%.
The Bank sold no mortgages in 2008. The Bank sold residential mortgage loans
with thirty-year maturities during 2007, resulting in a loss of $414. At
December 31, 2008, the Bank had over 20,175 deposit accounts, 100 or 0.50% more
than the number of accounts at year-end 2007 and approximating the same number
of accounts at year-end 2006. SBT Investment Services, Inc. revenue decreased by
approximately $125,000 in 2008 compared to 2007.
Noninterest expense for the year ended December 31, 2008 was
$8,831,000, an increase of $930,000, approximately 10%, over 2007. Noninterest
expense for the year ended December 31, 2007 was $7,901,000. This compares to an
increase of 3% from 2006 to 2007 in noninterest expense. The increases in 2008
were primarily related to one-time charges of $485,000 for reconfiguration of
the Company's Albany Turnpike service network, and the approximately $100,000
increase in FDIC insurance assessment. All banks experienced similar increases
in FDIC insurance in 2008.
Salaries and employee benefits comprised 49% of total noninterest
expense during 2008, as compared to 53% in 2007. Occupancy expense and equipment
expense, at approximately 19% in 2008 and 2007, respectively, continue to be the
other major categories in 2008.
Financial Condition at Years Ended December 31, 2008, 2007 and 2006
The following table sets forth the average balances of each principal
category of our assets, liabilities and capital accounts for the years ended
December 31, 2008, 2007 and 2006.
Distribution of Assets, Liabilities and Stockholders' Equity
(Dollars in thousands)
For the Year For the Year For the Year
Ended 12/31/08 Ended 12/31/07 Ended 12/31/06
---------------- ---------------- ----------------
Percent Percent Percent
of of of
Average Total Average Total Average Total
Balance Assets Balance Assets Balance Assets
---------------- ---------------- ----------------
Assets
Cash and due from banks $ 7,682 3.6% $7,604 3.7% $6,511 3.1%
Investment securities 22,873 10.5 33,092 16.0 43,776 20.7
Federal funds sold and overnight
Deposits 9,717 4.5 3,812 1.9 4,348 2.1
Loans, net 171,723 79.1 155,616 75.4 150,102 71.0
Premises and equipment 1,072 0.5 1,410 0.7 1,309 0.6
Accrued interest and other assets 3,960 1.8 4,942 2.3 5,462 2.5
-------- ------- -------- ------- -------- -------
Total assets $217,027 100.0% $206,476 100.0% $211,508 100.0%
======== ======= ======== ======= ======== =======
Liabilities and Stockholders' Equity
Deposits
Demand and NOW deposits $ 64,953 29.9% $62,955 30.5% $57,982 27.4%
Savings deposits 65,706 30.3 57,754 28.0 61,444 29.1
Time deposits 65,755 30.3 65,016 31.5 72,271 34.1
-------- ------- -------- ------- -------- -------
Total deposits 196,414 90.5 185,725 90.0 191,697 90.6
Accrued interest and other liabilities 3,210 1.5 3,995 1.9 3,964 1.9
-------- ------- -------- ------- -------- -------
Total liabilities 199,624 92.0 189,720 91.9 195,661 92.5
-------- ------- -------- ------- -------- -------
Stockholders' equity:
Common stock 9,177 4.2 8,576 4.2 8,555 4.1
Retained earnings and other
comprehensive income 8,226 3.8 8,180 3.9 7,292 3.4
-------- ------- -------- ------- -------- -------
Total stockholders' equity 17,403 8.0 16,756 8.1 15,847 7.5
-------- ------- -------- ------- -------- -------
Total liabilities and
stockholders' equity $217,027 100.0% $206,476 100.0% $211,508 100.0%
======== ======= ======== ======= ======== =======
Investment Portfolio
In order to maintain a reserve of readily marketable assets to meet the
Bank's liquidity and loan requirements, the Bank purchases United States
Treasury securities and other investments. Sales of "federal funds" (short-term
loans to other banks) are regularly utilized. Placement of funds in certificates
of deposit with other financial institutions may be made as alternative
investments pending utilization of funds for loans or other purposes.
Securities may be pledged to meet security requirements imposed as a
condition for receipt of deposits of public funds and repurchase agreements. At
December 31, 2008, the Bank had fifteen securities with a carrying value
totaling $4,968,163 pledged for such purposes.
As of December 31, 2008, the Bank's investment portfolio consisted of
U.S. government and agency securities and preferred stocks, mortgage-backed
securities, corporate bonds, municipal securities, and money market mutual
funds. The Bank's policy is to stagger the maturities of its investments to meet
overall liquidity requirements of the Bank.
The following table summarizes the amounts and distribution of the
Bank's investment securities held as of December 31, 2008, 2007, and 2006.
INVESTMENT PORTFOLIO
(Dollars in thousands)
December 31, 2008
-----------------------------------
Amortized Fair
Cost Value Yield
----------- ---------- ------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Agency securities
Due within one year $ 500 $ 503 4.91%
Due after one to five years 5,272 5,351 3.25
----- -----
Total U.S. Government and Agency
securities 5,772 5,854 3.40
State and municipal securities
Due after one to five years 1,493 1,546 5.39
Due after five to ten years 231 237 5.41
Due after ten to fifteen years 1,851 1,822 3.92
Due beyond fifteen years 2,373 2,249 4.12
----- -----
Total state and municipal securities 5,948 5,854 4.43
Corporate debt securities
Due within one year 2,159 2,176 6.00
Due after one to five years 512 514 5.00
--- ---
Total corporate debt securities 2,671 2,690 5.78
Mortgage-backed securities
WARM* within one year 234 234 3.72
WARM* after one to five years 2,216 2,236 3.88
WARM* after five to ten years 3,472 3,469 4.55
WARM* after ten to fifteen years 4,219 4,231 4.77
WARM* beyond fifteen years 6,658 6,533 5.22
----- -----
Total mortgage-backed securities 16,799 16,703 4.77
SBA loan pool
Due within one year 17 18 8.80
Due after one to five years 230 231 4.63
Due after five to ten years 0 0 0.00
Due after ten to fifteen years 1,583 1,630 5.11
----- -----
Total SBA loan pool 1,830 1,879 5.09
Preferred stocks 17 17 0.00
---------- ----------
Total available-for-sale securities $33,037 $32,997 4.64
-------- -------
* - Weighted-Average Remaining Maturity
December 31, 2007
------------------------------------
Amortized Fair
Cost Value Yield
------------ --------- -------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Agency securities
Due within one year $ 3,000 $ 2,999 4.85%
Due after one to five years 1,500 1,503 5.53
----- -----
Total U.S. Government and Agency 4,500 4,502 5.08
securities
State and municipal securities
Due after one to five years 2,325 2,393 5.30
Due after five to ten years 4,588 4,624 4.46
----- -----
Total state and municipal securities 6,913 7,017 4.79
Corporate debt securities
Due after one to five years 475 474 3.3
--- ---
Total corporate debt securities 475 474 3.3
Mortgage and asset-backed securities
WARM* after one to five years 11,636 11,625 5.02
------ ---------
Total mortgage-backed securities 11,636 11,625 5.02
Preferred stocks 1,772 1,253 5.09
------- --------
Total available-for-sale securities $ 25,296 $ 24,871 4.79%
======== ========
* - Weighted-Average Remaining Maturity
INVESTMENT PORTFOLIO
(Dollars in thousands)
December 31, 2006
--------------------------------------------
Amortized Fair
Cost Value Yield
------------- -------------- ---------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Agency securities
Due within one year $7,076 $ 7,016 3.45%
Due after one to five years 10,750 10,646 4.41
------ ------
Total U.S. Government and Agency
securities 17,826 17,662 4.03
State and municipal securities
Due after one to five years 2,261 2,261 4.31
Due after five to ten years 1,724 1,833 5.43
----- -----
Total state and municipal securities 3,985 4,094 4.79
Corporate debt securities
Due after one to fuve years 475 465 3.30
--- ---
Total corporate debt securities 475 465 3.30
Mortgage-backed securities
WARM* within one year 7,851 7,698 4.63
WARM* after one to five years 6,261 6,142 4.67
----- -----
Total mortgage-backed securities 14,112 13,840 4.65
Preferred stocks 2,000 1,756 4.18
----- -----
Total available-for-sale securities $ 38,398 $ 37,817 4.29%
======== ========
* - Weighted-Average Remaining Maturity
Loan Portfolio
General The following table presents the Bank's loan portfolio as of
December 31, 2008, 2007, 2006, 2005 and 2004.
LOAN PORTFOLIO
(Dollars in thousands)
December 31, 2008 December 31, 2007 December 31, 2006
---------------------- ----------------------- ------------------------
% Total % Total % Total
Balance Loans Balance Loans Balance Loans
---------------------- ----------------------- ------------------------
Commercial, financial and agricultural * $ 15,742 8.7% $ 16,585 10.0% $ 10,947 7.0%
Real estate - construction and land 8,871 4.9 10,756 6.5 11,113 7.1
development
Real estate - residential 126,042 70.1 113,629 68.7 106,375 67.7
Real estate - commercial 22,962 12.8 15,135 9.1 15,974 10.2
Municipal 2,082 1.2 1,916 1.2 987 0.6
Consumer 4,125 2.3 7,427 4.5 11,582 7.4
--------- --- ------------ --- --------- ---------
Total loans 179,824 100.0% 165,448 100.0% 156,978 100.0%
========= ======== ========
Allowance for loan losses (2,017) (1,925) (1,698)
Deferred costs, net 267 242 233
---------- ------------ ---
Net Loans $178,074 $163,765 $155,513
======== ======== ========
* - Includes Term federal funds sold of $2,000,000 at 12/31/2008, $3,000,000 at
12/31/2007 and $0 at 12/31/2006.
December 31, 2005 December 31, 2004
------------------------ -------------------------
% Total % Total
Balance Loans Balance Loans
------------------------ -------------------------
Commercial, financial and agricultural * $ 11,386 7.7% $ 14,089 9.9%
Real estate - construction and land 9,037 6.1 6,954 4.9
development
Real estate - residential 96,459 65.5 97,646 68.4
Real estate - commercial 16,101 10.9 11,197 7.8
Municipal 987 0.7 1,015 0.7
Consumer 13,381 9.1 11,850 8.3
---------- --------- ----------- ------------
Total loans 147,351 100.0% 142,751 100.0%
========== ============
Allowance for loan losses (1,720) (1,702)
Deferred costs, net 175 180
--- ---
Net Loans $145,806 $141,229
======== ========
* - Includes Term federal funds sold of $2,000,000 at 12/31/2005 and $4,000,000
at 12/31/2004.
The Bank's commercial loans are made for the purpose of providing
working capital, financing the purchase of equipment, or for other business
purposes. Such loans include loans with maturities ranging from thirty days to
one year and "term loans" which are loans with maturities normally ranging from
one to twenty-five years. Short-term business loans are generally intended to
finance current transactions and typically provide for periodic principal
payments, with interest payable monthly. Term loans normally provide for fixed
or floating interest rates, with monthly payments of both principal and
interest.
The Bank's construction loans are primarily interim loans made to
finance the construction of commercial and single-family residential property.
These loans are typically short-term. The Bank generally pre-qualifies
construction loan borrowers for permanent "take-out" financing as a condition to
making the construction loan. The Bank occasionally will make loans for
speculative housing construction or for acquisition and development of raw land.
The Bank's other real estate loans consist primarily of loans made
based on the borrower's cash flow and which are secured by deeds of trust on
commercial and residential property to provide another source of repayment in
the event of default. It is the Bank's policy to restrict real estate loans
without credit enhancement to no more than 80% of the lower of the appraised
value or the purchase price of the property depending on the type of property
and its utilization. The Bank offers both fixed and floating rate loans.
Maturities on such loans typically range from five to twenty years. However,
Small Business Administration (SBA) and certain other real estate loans easily
sold in the secondary market are made for longer maturities. The Bank has been
designated an approved SBA lender. The Bank's SBA loans are categorized as
commercial or real estate - commercial depending on the underlying collateral.
Also, the Bank has been approved as an originator of loans that can be sold to
the Federal Home Loan Mortgage Corporation.
The Bank has an agreement with Taylor, Bean, and Whitaker (TB&W), to
sell mortgage loans originated by the Bank to TB&W. During 2008 there were no
sold loans. During the year ended December 31, 2007, the Bank sold one loan with
total principal balance of $268,000 resulting in a total net loss of $414 for
the Bank. During the year ended December 31, 2006, the Bank sold four loans with
total principal balances of $598,000 resulting in total net gains of $3,977 for
the Bank.
Consumer loans are made for the purpose of financing automobiles,
various types of consumer goods, and other personal purposes. Consumer loans
generally provide for the monthly payment of principal and interest. Most of the
Bank's consumer loans are secured by the personal property being purchased.
With certain exceptions, the Bank is permitted under applicable law to
make related extensions of credit to any one borrowing entity up to 15% of the
Bank's capital and reserves. An additional 10% is allowable if the credit is
fully secured by qualified collateral. The Bank sells participations in its
loans when necessary to stay within lending limits. As of December 31, 2008,
these lending limits for the Bank were $2,727,485 and $4,545,800 respectively.
Loan Concentrations The Bank does not have any significant
concentrations in its loan portfolio by industry or group of industries. As of
December 31, 2008, approximately 70% of the Bank's loans were secured by
residential property located in Connecticut. As of December 31, 2007, 74% of the
Bank's loans were secured by such property.
Loan Portfolio Maturities and Interest Rate Sensitivity The following
table summarizes the maturities and interest rate sensitivity of the Bank's loan
portfolio.
MATURITIES AND RATE SENSITIVITY OF LOANS
As of December 31, 2008
(In thousands)
Over One
but less
One Year than Over
Or Less Five Years Five Years Total
---------- ------------- ------------ -----------
Commercial, financial and agricultural $ 5,449 $ 10,293 $ - $15,742
Real Estate - construction and land 8,871 - - 8,871
development
Real Estate - residential 37,821 52,697 35,524 126,042
Real Estate - commercial 17,197 3,844 1,921 22,962
Municipal 2,082 - - 2,082
Consumer 1,777 2,348 - 4,125
----- ---- ----- --------
Total loans $ 73,197 $ 69,182 $ 37,445 $179,824
========= ======== ======== ========
Loans with fixed interest rates $ 19,261 $ 50,037 $ 34,205 $103,503
Loans with variable interest rates 53,936 19,145 3,240 76,321
--------- ------ --------- ---------
Total loans $ 73,197 $ 69,182 $ 37,445 $179,824
========= ======== ======== ========
The following table sets forth at December 31, 2008, 2007 and 2006 the
Bank's loan commitments, standby letters of credit, and unadvanced portions of
loans.
LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In thousands)
12/31/08 12/31/07 12/31/06
-------- -------- --------
Commitments to originate
loans $ 1,273 $ 2,222 $ 3,521
Standby letters of credit 337 557 428
Unadvanced portion of loans:
Construction 5,987 8,480 6,698
Commercial lines of 9,479 6,801 6,380
credit
Consumer 715 730 780
Home equity lines of 22,894 22,721 22,898
------ ------ ------
credit
Total $ 40,685 $ 41,511 $ 40,705
======== ======== ========
Non-Performing Assets Interest on performing loans is accrued and taken
into income daily. Loans over 90 days past due are deemed "non-performing" and
are placed on a nonaccrual status, unless the loan is well collateralized and in
the process of collection. Interest received on nonaccrual loans is credited to
income only upon receipt and in certain circumstances may be applied to
principal until the loan has been repaid in full, at which time the interest
received is credited to income. The Bank had 12 nonaccrual loans with a balance
of approximately $561,000 as of December 31, 2008, one with a balance of
approximately $5,000 as of December 31, 2007, one with a balance of
approximately $78,000 as of December 31, 2006, and one with a balance of $32,000
as of December 31, 2005. There were no nonaccrual loans as of December 31, 2004.
Gross interest that would have been recorded in the period ended December 31,
2008 if the nonaccrual loans had been current was approximately $26,000. The
amount of interest on nonaccrual loans included in net income for 2008 was
approximately $19,000. As of December 31, 2008 and 2007, the Bank had four loans
with a balance of approximately $90,000 and one with a balance of approximately
$1,000 respectively that were more than 90 days past due and still accruing
interest. The Bank had no loans more than 90 days past due and still accruing
interest as of year-end 2006, 2005, and 2004.
When appropriate or necessary to protect the Bank's interests, real
estate taken as collateral on a loan may be taken by the Bank through
foreclosure or a deed in lieu of foreclosure. Real property acquired in this
manner by the Bank is referred to as "other real estate owned" ("OREO"), and is
carried on the books of the Bank as an asset, at the lesser of the Bank's
recorded investment or the fair value less estimated costs to sell. As of
December 31, 2008, 2007 and 2006, there was no OREO held by the Bank.
The risk of nonpayment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the collateral
which is utilized to secure payment, and ultimately, the credit worthiness of
the borrower. In order to minimize this credit risk, the Bank requires that most
loans be approved by at least two officers, one of whom must be an executive
officer. Commercial loans greater than $100,000 as well as other loans in
certain circumstances must be approved by the Loan Committee of the Company's
Board of Directors.
The Bank also maintains a program of annual review of certain new and
renewed loans by an outside loan review consultant. Loans are graded from "pass"
to "loss," depending on credit quality, with "pass" representing loans that are
fully satisfactory as additions to the Bank's portfolio. These are loans which
involve a degree of risk that is not unwarranted given the favorable aspects of
the credit and which exhibit both primary and secondary sources of repayment.
Classified loans identified in the review process are added to the Bank's
Internal Watchlist and an additional allowance for loan losses is established
for such loans if appropriate. Additionally, the Bank is examined regularly by
the Federal Deposit Insurance Corporation and the State of Connecticut
Department of Banking at which time a further review of the loan portfolio is
conducted.
There were forty-one classified loans with a combined outstanding
balance of $ 5,944,355 as of December 31, 2008 and twenty-four classified loans
with a combined outstanding balance of $4,157,400 as of December 31, 2007.
Allowance for Loan Losses
The Bank maintains an allowance for loan losses to provide for
potential losses in the loan portfolio. Additions to the allowance are made by
charges to operating expenses in the form of a provision for loan losses. All
loans that are judged to be uncollectible are charged against the allowance
while any recoveries are credited to the allowance. Management conducts a
critical evaluation of the loan portfolio monthly. This evaluation includes an
assessment of the following factors: the results of the Bank's internal loan
review, any external loan review, any regulatory examination, loan loss
experience, estimated potential loss exposure on each credit, concentrations of
credit, value of collateral, any known impairment in the borrower's ability to
repay, and present and prospective economic conditions.
The following table summarizes the Bank's loan loss experience,
transactions in the allowance for loan losses, and certain prominent ratios at
or for the years ended December 31, 2008, 2007, 2006, 2005 and 2004.
ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
At or For At or For At or For
the Year the Year the Year
Ended Ended Ended
12/31/08 12/31/07 12/31/06
----------- ------------ --------------
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 1,924 $ 1,698 $ 1,720
------- ------- -------
Charge-offs:
Commercial, financial and agricultural (130) (3)
Installment loans to individuals (229) (21) (22)
----- ---- ----
Total charge-offs (359) (24) (22)
----- ---- ----
Total recoveries (installment loans to individuals) -
2 -
Net loans (charged-off) recovered (357) (24) (22)
---------- ----------- -------------
Provision for loan losses 450 250 -
---------- ----------- -------------
Balance at end of period $2,017 $1,924 $1,698
====== ====== ======
BALANCES
Average total loans $173,168 $157,326 $144,749
Total loans at end of period 179,824 165,448 156,978
RATIOS
Allowance for loan losses to average loans 1.17% 1.22% 1.19%
Allowance for loan losses to loans at end of period 1.12 1.16 1.08
At or For At or For
the Year the Year
Ended Ended
12/31/05 12/31/04
----------- ------------
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 1,702 $ 1,670
------- -------
Total charge-offs (installment loans to (12) (14)
individuals)
Total recoveries (installment loans to individuals) - 21
--- --
Net loans (charged-off) recovered (12) 7
--- -
Provision for loan losses 30 25
------- -----------
Balance at end of period $1,720 $1,702
====== ======
BALANCES
Average total loans $144,749 $133,719
Total loans at end of period 147,351 142,751
RATIOS
Allowance for loan losses to average loans 1.19% 1.28%
Allowance for loan losses to loans at end of period 1.17 1.19
The following table summarizes the allocation of the allowance for loan
losses by loan type and the percent of loans in each category compared to total
loans at December 31, 2008, 2007, 2006, 2005 and 2004.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
December 31, 2008 December 31, 2007 December 31, 2006
-------------------- ------------------- -------------------
Allocation % of Allocation % of Allocation % of
of Loans by of Loans by of Loans by
Allowance Category Allowance Category Allowance Category
-------------------- ------------------- -------------------
Real estate - residential $639 70.1% $563 68.7% $ 464 67.7%
Real estate - commercial 823 12.8 316 9.1 465 10.2
Real estate - construction and land
development 77 4.9 464 6.5 212 7.1
Commercial, financial and agricultural 345 8.8 363 10.0 331 7.0
Municipal 33 1.2 31 1.2 9 0.6
Consumer 100 2.2 188 4.5 217 7.4
---------- --------- ---------- -------- ---------- --------
Total $2,017 100.0% $1,925 100.0% $1,698 100.0%
========== ========= ========== ======== ========== ========
December 31, 2005 December 31, 2004
------------------- -------------------
Allocation % of Allocation % of
of Loans by of Loans by
Allowance Category Allowance Category
------------------- -------------------
Real estate - residential $418 65.5% $513 68.4%
Real estate - commercial 455 10.9 264 7.8
Real estate - construction and land
development 208 6.1 116 4.9
Commercial, financial and agricultural 370 7.7 525 9.9
Municipal 9 0.7 26 0.7
Consumer 260 9.1 258 8.3
---------- -------- ---------- --------
Total $1,720 100.0% $1,702 100.0%
========== ======== ========== ========
Deposits
Deposits are the Bank's primary source of funds. At December 31, 2008,
the Bank had a deposit mix of 32% checking, 30% savings and 38% certificates.
Seventeen percent of the total deposits of $220.9 million were noninterest
bearing at December 31, 2008. At December 31, 2007, the Bank had a deposit mix
of 37% checking, 29% savings and 34% certificates. Twenty-two percent of the
total deposits of $186.8 million were noninterest bearing at December 31, 2007.
At December 31, 2008 $15.2 million of the Bank's deposits were from public
sources. At December 31, 2007, $7.5 million of the Bank's deposits were from
public sources. The Bank's net interest income is enhanced by its percentage of
noninterest bearing deposits.
The Bank's deposits are obtained from a cross-section of the
communities it serves. No material portion of the Bank's deposits has been
obtained from or is dependent upon any one person or industry. The Bank's
business is not seasonal in nature. The Bank accepts deposits in excess of
$100,000 from customers. Those deposits are priced to remain competitive. As of
December 31, 2008 and 2007, the Bank had no brokered funds on deposit.
The Bank is not dependent upon funds from sources outside the United
States and has not made loans to any foreign entities.
The following table summarizes the distribution of average deposits and
the average annualized rates paid for the years ended December 31, 2008, 2007
and 2006.
AVERAGE DEPOSITS
(Dollars in thousands)
For the Year Ended For the Year Ended For the Year Ended
December 31, 2008 December 31, 2007 December 31, 2006
----------------------- -------------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------- -------------------------- -------------------------
Demand deposits $34,963 0.00% $35,189 0.00% $32,031 0.00%
NOW deposits 29,990 0.15 27,764 0.18 25,951 0.10
Savings deposits 65,706 1.09 57,754 0.94 61,444 0.91
Time deposits 65,755 3.37 64,999 4.24 72,271 3.98
--------- ---------- ------------
Total average deposits $196,414 1.51% $185,706 1.81% $191,697 1.81%
======== ======== ========
The following table indicates the maturity schedule for the Bank's time
deposits of $100,000 or more as of December 31, 2008, 2007 and 2006.
SCHEDULED MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
December 31, 2008 December 31, 2007 December 31, 2006
------------------------ ---------------------- ---------------------
% of % of % of
Balance Total Balance Total Balance Total
------------------------ ---------------------- ---------------------
Three months or less $21,148 62.6% $ 9,723 47.4% $ 15,322 60.5%
Over three through six months 5,180 15.4 6,474 31.5 6,036 23.9
Over six through twelve months 3,923 11.6 2,938 14.3 1,998 7.9
Over twelve months 3,503 10.4 1,388 6.8 1,948 7.7
----------- ---- --------- ------- --------- --------
Total Time Deposits $33,754 100.0% $20,523 100.0% $25,304 100.0%
======= ====== ======= ====== ======= ======
Liquidity and Asset-Liability Management
Liquidity management for banks requires that funds always be available
to pay anticipated deposit withdrawals and maturing financial obligations
promptly and fully in accordance with their terms. The balance of the funds
required is generally provided by payments on loans, sale of loans, liquidation
of assets and the acquisition of additional deposit liabilities. One method
banks utilize for acquiring additional liabilities is through the acceptance of
"brokered deposits" (defined to include not only deposits received through
deposit brokers, but also deposits bearing interest in excess of 75 basis points
over market rates), typically attracting large certificates of deposit at high
interest rates. The Bank, however, has not accepted and does not anticipate
accepting "brokered deposits" in the future.
To meet liquidity needs, the Bank maintains a portion of its funds in
cash deposits in other banks, federal funds sold, and available-for-sale
securities. As of December 31, 2008, the Bank's liquidity ratio was 21%, defined
as the sum of $1.8 million in federal funds sold, $33 million in
available-for-sale securities at fair value, and $11.5 million in cash and due
from banks and interest-bearing deposits at the Federal Home Loan Bank, as a
percentage of deposits. As of December 31, 2007, the Bank's liquidity ratio was
22%, defined as the sum of $2.3 million in federal funds sold, $24.9 million in
available-for-sale securities at fair value, and $13.4 million in cash and due
from banks and interest bearing deposits at the Federal Home Loan Bank, as a
percentage of deposits.
The careful planning of asset and liability maturities and the matching
of interest rates to correspond with this maturity matching is an integral part
of the active management of an institution's net yield. To the extent maturities
of assets and liabilities do not match in a changing interest rate environment,
net yields may be affected. Even with perfectly matched repricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates, and basis risk. In its overall attempt to match assets
and liabilities, Management takes into account rates and maturities to be
offered in connection with its time deposits and by offering variable rate
loans. The Bank has generally been able to control its exposure to changing
interest rates by maintaining shorter-term investments and offering floating
interest rate loans and a majority of its time deposits at relatively short
maturities.
The table below sets forth the interest rate sensitivity of the Bank's
interest-sensitive assets and interest-sensitive liabilities as of December 31,
2008, 2007 and 2006, using the interest rate sensitivity gap ratio. For the
purposes of the following table, an asset or liability is considered
rate-sensitive within a specified period when it can be repriced or matures
within its contractual terms.
INTEREST RATE SENSITIVITY
(Dollars in thousands)
December 31, 2008
------------------------------------------------
Due
After
Due in One Due
Due Within Three to Year to After
Three Twelve Five Five
Months Months Years Years Total
---------- ---------- -------- -------- --------
Rate sensitive assets
Federal funds sold and overnight deposits $ 3,800 $ - $ - $ - $ 3,800
Available-for-sale securities 1,099 1,872 13,206 16,820 32,997
Total loans 58,283 14,914 69,182 37,445 179,824
---------- ---------- -------- -------- --------
Total $ 63,182 $ 16,786 $82,388 $54,265 $216,621
========== ========== ======== ======== ========
Rate sensitive liabilities
NOW deposits $ 1,608 $ - $ - $30,549 $ 32,157
Savings deposits 41,121 - - 24,986 66,107
Time deposits 44,349 29,977 10,001 - 84,327
Borrowings 1,000 - 1,000
Securities sold under agreements to repurchase 577 - - - 577
---------- ---------- -------- -------- --------
Total $ 88,655 $ 29,977 $10,001 $55,535 $184,168
========== ========== ======== ======== ========
Interest rate sensitivity gap (25,473) $(13,191) $72,387 $(1,270) $ 32,453
========== ========== ======== ======== ========
Cumulative gap $(25,473) $(38,664) $33,723 $32,453
========== ========== ======== ========
Cumulative gap ratio to total assets (11)% (16)% 14% 13%
INTEREST RATE SENSITIVITY
(Dollars in thousands)
December 31, 2007
----------------------------------------------
Due
After
Due Due in One Due
Within Three to Year to After
Three Twelve Five Five
Months Months Years Years Total
-------- ---------- -------- -------- --------
Rate sensitive assets
Federal funds sold and overnight deposits $ 5,300 $ - $ - $ - $ 5,300
Available-for-sale securities 3,728 524 15,995 4,624 24,871
Total loans 56,231 4,263 39,608 65,346 165,448
-------- ---------- -------- -------- --------
Total $65,259 $ 4,787 $55,603 $69,970 $195,619
======== ========== ======== ======== ========
Rate sensitive liabilities
NOW deposits $ 1,311 $ - $ - $24,905 $ 26,216
Savings deposits 29,988 - - 24,241 54,229
Time deposits 25,118 32,840 5,201 7 63,166
Borrowings 2,000 - - - 2,000
-------- ---------- -------- -------- --------
Total $58,417 $ 32,840 $ 5,201 $49,153 $145,611
======== ========== ======== ======== ========
Interest rate sensitivity gap $ 6,842 $(28,053) $50,402 $20,817 $ 50,008
======== ========== ======== ======== ========
Cumulative gap $ 6,842 $(21,211) $29,191 $50,008
======== ========== ======== ========
Cumulative gap ratio to total assets 3% (10)% 13% 24%
December 31, 2006
------------------------------------------------
Due
After
Due in One Due
Due Within Three to Year to After
Three Twelve Five Five
Months Months Years Years Total
---------- ---------- -------- -------- --------
Rate sensitive assets
Federal funds sold and overnight deposits $ 4,875 $ - $ - $ - $ 4,875
Available-for-sale securities 3,001 13,469 19,514 1,833 37,817
Total Loans 54,835 6,512 31,140 64,491 156,978
---------- ---------- -------- -------- --------
< Total $ 62,711 $ 19,981 $50,654 $66,324 $199,670
========== ========== ======== ======== ========
Rate sensitive liabilities
NOW deposits $ 1,458 $ - $ - $27,701 $ 29,159
Savings deposits 32,641 - - 23,235 55,876
Time deposits 40,294 26,336 7,945 - 74,575
Securities sold under agreements to repurchase 1,628 - - - 1,628
---------- ---------- -------- -------- --------
Total $ 76,021 $ 26,336 $ 7,945 $50,936 $161,238
========== ========== ======== ======== ========
Interest rate sensitivity gap $(13,310) $ (6,355) $42,709 $15,388 $ 38,432
========== ========== ======== ======== ========
Cumulative gap $(13,310) $(19,665) $23,044 $38,432
========== ========== ======== ========
Cumulative gap ratio to total assets (6)% (9)% 11% 18%
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Bank's interest rate sensitivity position. To supplement
traditional gap analysis, the Bank performs simulation modeling to estimate the
potential effects of changing interest rates. This process allows the Bank to
explore complex relationships among repricing assets and liabilities over time
in various interest rate environments.
The Company's Executive Committee meets at least quarterly to monitor
the Bank's investments, liquidity needs and oversee its asset-liability
management. Between meetings of the Executive Committee, Management oversees the
Bank's liquidity.
Capital Reserve
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) defines specific capital categories based upon an institution's capital
ratios. The capital categories, in declining order, are: (i) well capitalized;
(ii) adequately capitalized; (iii) undercapitalized; (iv) significantly
undercapitalized; and (v) critically undercapitalized. Under FDICIA and the
FDIC's prompt corrective action rules, the FDIC may take any one or more of the
following actions against an undercapitalized bank: restrict dividends and
management fees, restrict asset growth, and prohibit new acquisitions, new
branches or new lines of business without prior FDIC approval. If a bank is
significantly undercapitalized, the FDIC may also require the bank to raise
capital, restrict interest rates a bank may pay on deposits, require a reduction
in assets, restrict any activities that might cause risk to the bank, require
improved management, prohibit the acceptance of deposits from correspondent
banks and restrict compensation to any senior executive officer. When a bank
becomes critically undercapitalized, (i.e., the ratio of tangible equity to
total assets is equal to or less than 2%), the FDIC must, within 90 days
thereafter, appoint a receiver for the bank or take such action as the FDIC
determines would better achieve the purposes of the law. Even where such other
action is taken, the FDIC generally must appoint a receiver for a bank if the
bank remains critically undercapitalized during the calendar quarter beginning
270 days after the date on which the bank became critically undercapitalized.
To be considered "adequately capitalized," an institution must
generally have a leverage ratio of at least 4%, a Tier 1 capital to
risk-weighted assets ratio of at least 4% and total Tier 1 and Tier 2 capital to
risk-weighted assets ratio of at least 8%. As of December 31, 2008, the most
recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no conditions that Management believes have
changed the Bank's category.
At December 31, 2008, 2007 and 2006, the Bank's capital exceeded all
minimum regulatory requirements and the Bank was considered to be "well
capitalized" as defined in the regulations issued by the FDIC.
CAPITAL RATIOS
Minimum
Actual Actual Actual Regulatory Well-
12/31/08 12/31/07 12/31/06 Requirements Capitalized
-------- -------- -------- ------------ -----------
Bank:
Total capital (to risk weighted assets) 12.13% 13.48% 12.75% 8.00% 10.00%
Tier 1 capital (to risk weighted assets) 10.88% 12.23% 11.50% 4.00% 6.00%
Tier 1 capital (to average assets) 7.00% 8.21% 7.31% 4.00% 5.00%
Inflation
The impact of inflation on a financial institution can differ
significantly from that exerted on other companies. Banks, as financial
intermediaries, have many assets and liabilities that may move in concert with
inflation both as to interest rates and value. This is especially true for
companies, such as the Bank, with a high percentage of interest rate sensitive
assets and liabilities. A bank can reduce the impact of inflation if it can
manage its interest rate sensitivity position. The Bank attempts to structure
its mix of financial instruments and manage its interest rate sensitivity
position in order to minimize the potential adverse effects of inflation or
other market forces on its net interest income and therefore its earnings and
capital.
Financial institutions are also affected by inflation's impact on
non-interest expenses, such as salaries and occupancy expenses. During the
period 1992 through 2008 inflation has remained relatively stable, due primarily
to continuous management of the money supplied by the Federal Reserve. As such,
indirectly, the management of the money supply by the Federal Reserve to control
the rate of inflation may have an impact on the earnings of the Bank. Also, the
changes in interest rates may have a corresponding impact on the ability of
borrowers to repay loans with the Bank.
Options Outstanding
The following table sets forth the securities authorized for issuance under
equity compensation plans.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation plans
issued upon exercise of exercise price of (excluding securities
outstanding options outstanding options reflected in column (a))
(a) (b) (c)
----------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 51,189 $30.33 10,870
Equity compensation plans not
approved by security
holders 0 0 0
----------------------------------------------------------------------------
Total 51,189 $30.33 10,870
============================================================================
[SHATSWELL, MacLEOD & COMPANY, P.C. LETTERHEAD]
The Board of Directors and Stockholders
SBT Bancorp, Inc.
Simsbury, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of SBT Bancorp,
Inc. and Subsidiary as of December 31, 2008 and 2007 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SBT
Bancorp, Inc. and Subsidiary as of December 31, 2008 and 2007 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
-------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 23, 2009
83 PINE STREET o WEST PEABODY, MASSACHUSETTS 01960-0635 o
TELEPHONE (978) 535-0206 o FASCMILE (978) 535-9908
smc@shatswell.com www.shatswell.com
SBT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
ASSETS 2008 2007
- ------ ------------------ -----------------
Cash and due from banks $ 11,392,151 $ 13,423,626
Interest-bearing deposits with the Federal Home Loan Bank 115,582 25,982
Money market mutual funds 3,027,679 4,205
Federal funds sold 1,800,000 2,300,000
--------------- ---------------
Cash and cash equivalents 16,335,412 15,753,813
Interest-bearing time deposits with other banks 7,320,434
Investments in available-for-sale securities (at fair value) 32,997,312 24,870,548
Federal Home Loan Bank stock, at cost 630,700 630,700
Loans 180,090,903 165,689,992
Less allowance for loan losses 2,017,145 1,924,552
--------------- ---------------
Loans, net 178,073,758 163,765,440
Premises and equipment 845,836 1,222,955
Accrued interest receivable 835,559 808,430
Bank owned life insurance 1,203,693 1,818,081
Other assets 2,513,764 1,520,315
--------------- ---------------
Total assets $240,756,468 $210,390,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits $ 38,288,288 $ 40,195,563
Savings and NOW deposits 98,263,788 83,444,482
Time deposits 84,327,041 63,165,821
-------------- --------------
Total deposits 220,879,117 186,805,866
Federal Home Loan Bank advances 1,000,000 2,000,000
Securities sold under agreements to repurchase 576,933 1,363,033
Due to broker 1,433,223
Other liabilities 1,453,769 1,470,101
--------------- ---------------
Total liabilities 223,909,819 193,072,223
------------- -------------
Stockholders' equity:
Common stock, no par value; authorized 2,000,000 shares; issued and
outstanding 864,976 shares in 2008 and 850,896 shares in 2007 9,328,313 8,975,051
Retained earnings 7,542,863 8,602,875
Accumulated other comprehensive loss (24,527) (259,867)
---------------- ----------------
Total stockholders' equity 16,846,649 17,318,059
-------------- --------------
Total liabilities and stockholders' equity $240,756,468 $210,390,282
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
SBT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2008 and 2007
2008 2007
---------------- ----------------
Interest and dividend income:
Interest and fees on loans $ 9,814,080 $ 9,656,912
Interest on debt securities:
Taxable 792,641 1,191,681
Tax-exempt 281,339 205,940
Dividends 31,407 94,034
Other interest 145,343 200,547
-------------- --------------
Total interest and dividend income 11,064,810 11,349,114
------------ ------------
Interest expense:
Interest on deposits 2,975,985 3,355,094
Interest on Federal Home Loan Bank advances 18,420 85,312
Interest on securities sold under agreements to repurchase 48,165 36,927
--------------- ---------------
Total interest expense 3,042,570 3,477,333
------------- -------------
Net interest and dividend income 8,022,240 7,871,781
Provision for loan losses 450,000 250,000
-------------- --------------
Net interest and dividend income after provision for loan losses 7,572,240 7,621,781
------------- -------------
Noninterest (charges) income:
Service charges on deposit accounts 479,210 413,758
Gain (loss) on sales and calls of available-for-sale securities 10,000 (85,669)
Writedown of securities (1,755,600) (227,900)
Investment services fees and commissions 82,295 210,631
Other service charges and fees 576,218 525,625
Increase in cash surrender value of life insurance policies 61,152 114,772
BOLI death benefit income 328,358 613,349
Loss on loans sold, net (414)
Other income 63,809 29,327
------------- -------------
Total noninterest (charges) income (154,558) 1,593,479
------------- -------------
Noninterest expense:
Salaries and employee benefits 4,284,603 4,166,414
Occupancy expense 1,287,076 1,115,588
Impairment of operating lease 298,657
Equipment expense 411,703 391,122
Professional fees 407,597 417,476
Advertising and promotions 384,404 335,999
Forms and supplies 152,212 126,826
Correspondent charges 241,461 187,484
Postage 106,038 92,744
Directors' fees 145,829 140,500
Other expense 1,111,385 926,938
------------- --------------
Total noninterest expense 8,830,965 7,901,091
------------- -------------
(Loss) income before income tax (benefit) expense (1,413,283) 1,314,169
Income tax (benefit) expense (768,459) 174,458
------------- --------------
Net (loss) income $ (644,824) $ 1,139,711
============ ============
(Loss) earnings per common share $ (.75) $ 1.34
============ ============
(Loss) earnings per common share, assuming dilution $ (.75) $ 1.33
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
SBT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2008 and 2007
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Loss Total
-------------- ------------ ---------------- ----------------
Balance, December 31, 2006 $8,636,380 $7,837,022 $(354,338) $16,119,064
Comprehensive income:
Net income 1,139,711
Net change in unrealized holding loss on
available-for-sale securities, net of tax
effect 94,471
Comprehensive income 1,234,182
8,905 shares issued on stock options exercised 122,657 122,657
Tax benefit on stock options exercised 82,847 82,847
Stock based compensation 133,167 133,167
Dividends declared ($.44 per share) (373,858) (373,858)
------------------ ------------ ---------------- -------------
Balance, December 31, 2007 8,975,051 8,602,875 (259,867) 17,318,059
Comprehensive loss:
Net loss (644,824)
Net change in unrealized holding loss on
available-for-sale securities, net of tax
effect 235,340
Comprehensive loss (409,484)
14,080 shares issued on stock options exercised 195,289 195,289
Tax benefit on stock options exercised 43,699 43,699
Stock based compensation 114,274 114,274
Dividends declared ($.48 per share) (415,188) (415,188)
------------------ ------------ ----------------- -------------
Balance, December 31, 2008 $9,328,313 $7,542,863 $ (24,527) $16,846,649
========== ========== ========== ===========
Reclassification disclosure for the years ended December 31:
2008 2007
-------------- ------------
Net unrealized holding gains (losses) on available-for-sale securities $2,131,086 $(158,826)
Reclassification adjustment for realized (gains) losses in net (loss) income (1,745,600) 313,569
----------- ----------
Other comprehensive income before income tax effect 385,486 154,743
Income tax expense (150,146) (60,272)
------------ -----------
Other comprehensive income, net of tax $ 235,340 $ 94,471
=========== ==========
Accumulated other comprehensive loss as of December 31, 2008 and 2007 consists
of net unrealized holding losses on available-for-sale securities, net of taxes.
The accompanying notes are an integral part of these consolidated financial statements.
SBT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
2008 2007
---------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (644,824) $ 1,139,711
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Amortization of securities, net 4,126 5,607
(Gain) loss on sales and calls of available-for-sale securities (10,000) 85,669
Writedown of securities 1,755,600 227,900
Change in deferred loan costs, net (24,734) (8,919)
Provision for loan losses 450,000 250,000
Decrease in loans held-for-sale 268,000
Depreciation and amortization 486,310 356,731
Impairment of operating lease 298,657
Accretion on impairment of operating lease (7,374)
Decrease in other assets 85,413 261,809
(Increase) decrease in interest receivable (27,129) 86,569
(Increase) decrease in taxes receivable (180,622) 187,616
Increase in cash surrender value of bank owned life insurance (61,152) (114,772)
BOLI death benefit income (328,358) (613,349)
Stock based compensation 114,274 133,167
(Decrease) increase in other liabilities (87,351) 357,223
(Decrease) increase in interest payable (220,264) 215,446
Deferred tax benefit (1,002,837) (252,771)
------------- --------------
Net cash provided by operating activities 599,735 2,585,637
--------------- -------------
Cash flows from investing activities:
Purchases of interest-bearing time deposits with other banks (7,320,434)
Purchases of available-for-sale securities (17,860,336) (5,576,817)
Proceeds from maturities of available-for-sale securities 6,936,109 11,555,855
Proceeds from sales of securities 8,236,450
Redemption of Federal Home Loan Bank stock 69,000
Purchase of Federal Home Loan Bank stock (31,900)
Loan originations and principal collections, net (14,735,039) (6,243,686)
Loan purchases (2,250,000)
Recoveries of loans previously charged off 1,455
Capital expenditures (111,041) (21,656)
Redemption of life insurance policies 1,010,330 1,752,937
Premiums paid on life insurance policy (6,432) (15,437)
---------------- ---------------
Net cash (used in) provided by investing activities (32,085,388) 7,474,746
------------ -------------
SBT BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
(continued)
2008 2007
---------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and savings accounts 12,912,031 (186,746)
Net increase (decrease) in time deposits 21,161,220 (11,409,546)
Long-term advances received from Federal Home Loan Bank 1,000,000
Net change in short term advances from the Federal Home Loan Bank (2,000,000) 2,000,000
Net decrease in securities sold under agreements to repurchase (786,100) (264,863)
Proceeds from exercise of stock options 195,289 122,657
Dividends paid (415,188) (373,858)
------------- --------------
Net cash provided by (used in) financing activities 32,067,252 (10,112,356)
------------ ------------
Net increase (decrease) in cash and cash equivalents 581,599 (51,973)
Cash and cash equivalents at beginning of year 15,753,813 15,805,786
------------ ------------
Cash and cash equivalents at end of year $16,335,412 $15,753,813
=========== ===========
Supplemental disclosures:
Interest paid $3,262,834 $3,261,887
Income taxes paid 415,000 239,613
The accompanying notes are an integral part of these consolidated financial statements.
SBT BANCORP, INC. AND SUBSIDIARY
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2008 and 2007
--------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
On March 2, 2006, The Simsbury Bank & Trust Company, Inc. (the "Bank")
reorganized into a holding company structure. As a result, the Bank became a
wholly-owned subsidiary of SBT Bancorp, Inc. (the "Company") and each
outstanding share of common stock of the Bank was converted into the right to
receive one share of the common stock, no par value, of the Company. The Company
files reports with the Securities and Exchange Commission and is supervised by
the Board of Governors of the Federal Reserve System.
The Bank is a state chartered bank which was incorporated on April 28, 1992 and
is headquartered in Simsbury, Connecticut. The Bank commenced operations on
March 31, 1995 engaging principally in the business of attracting deposits from
the general public and investing those deposits in securities, residential and
commercial real estate, consumer and small business loans.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company and its subsidiary conform
to accounting principles generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated financial
statements of the Company were prepared using the accrual basis of accounting.
The significant accounting policies of the Company are summarized below to
assist the reader in better understanding the consolidated financial statements
and other data contained herein.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary the Bank and the Bank's
wholly-owned subsidiary, SBT Investment Services, Inc. SBT Investment
Services, Inc. was established solely for the purpose of providing
investment products, financial advice and services to its clients and
the community. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, Federal Home Loan Bank
interest-bearing demand and overnight deposits, money market mutual
funds and federal funds sold.
Cash and due from banks as of December 31, 2008 and 2007 includes
$3,154,000 and 2,676,000, respectively, which is subject to withdrawals
and usage restrictions to satisfy the reserve requirements of the
Federal Reserve Bank and Banker's Bank Northeast.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts computed so as to approximate the
interest method. Gains or losses on sales of investment securities are
computed on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading. These
security classifications may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are measured at amortized cost
in the consolidated balance sheets. Unrealized holding gains
and losses are not included in earnings, or in a separate
component of capital. They are merely disclosed in the notes
to the consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the consolidated balance sheets. Unrealized holding gains
and losses are not included in earnings but are reported as
a net amount (less expected tax) in a separate component of
capital until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses.
On December 8, 2008, the Federal Home Loan Bank of Boston announced a
moratorium on the repurchase of excess stock held by its members. The
moratorium will remain in effect indefinitely.
LOANS HELD-FOR-SALE:
Loans held-for-sale in the secondary market are carried at the lower of
cost or estimated fair value in the aggregate. Net unrealized losses
are provided for in a valuation allowance by charges to operations.
Interest income on mortgages held-for-sale is accrued currently and
classified as interest on loans.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances adjusted for amounts due to borrowers on unadvanced loans, any
charge-offs, the allowance for loan losses and any deferred fees or
costs on originated loans, or unamortized premiums or discounts on
purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Company is amortizing these amounts over
the contractual life of the related loans.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line in the
process of foreclosure are placed on nonaccrual status. Secured
consumer loans are written down to realizable value and unsecured
consumer loans are charged-off upon reaching 120 or 180 days past due
depending on the type of loan. Commercial real estate loans and
commercial business loans and leases which are 90 days or more past due
are generally placed on nonaccrual status, unless secured by sufficient
cash or other assets immediately convertible to cash. When a loan has
been placed on nonaccrual status, previously accrued and uncollected
interest is reversed against interest on loans. A loan can be returned
to accrual status when collectability of principal is reasonably
assured and the loan has performed for a period of time, generally six
months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectability of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the un-collectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectability of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets. Estimated lives are 3 to
20 years for furniture and equipment. Leasehold improvements are
amortized over the lesser of the life of the lease or the estimated
life of the improvements.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments," requires that
the Company disclose estimated fair values for its financial
instruments. Fair value methods and assumptions used by the Company in
estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair
values.
Interest-bearing time deposits with banks: The fair values of interest
bearing time deposits with banks are estimated using discounted cash
flow analyses using interest rates currently being offered for deposits
with similar terms to investors.
Securities: Fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
Loans held-for-sale: Fair values for loans held-for-sale are estimated
based on outstanding investor commitments, or in the absence of such
commitments, are based on current investor yield requirements.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated by
discounting the future cash flows, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits,
regular savings, NOW accounts, and money market accounts are equal to
the amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: Fair values of Federal Home Loan Bank
advances are estimated using discounted cash flow analyses based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Securities sold under agreements to repurchase: The carrying amounts of
securities sold under agreements to repurchase approximate their fair
values.
Due to broker: The carrying amount of due to broker approximates its
fair value.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the un-advanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled.
STOCK BASED COMPENSATION:
At December 31, 2008, the Company has a stock-based employee
compensation plan which is described more fully in Note 17. The Company
accounts for the plan under SFAS No. 123(R) "Share-Based Payment".
During the years ended December 31, 2008 and 2007, $114,274 and
$133,167, respectively, in stock-based employee compensation was
recognized.
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement 109" (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return and provides guidance on
de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2007. The Company's adoption
of FIN 48 did not have a material impact on its financial statements.
In September 2006, the FASB ratified the consensus reached by the
Emerging Issues Task Force ("EITF") on Issue No. 06-4 "Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements," (EITF Issue 06-4). EITF 06-4
requires companies with an endorsement split-dollar life insurance
arrangement to recognize a liability for future postretirement
benefits. The effective date is for fiscal years beginning after
December 15, 2007, with earlier application permitted. The Company
should recognize the effects of applying this issue through either (a)
a change in accounting principle through a cumulative effect adjustment
to retained earnings or (b) a change in accounting principle through
retrospective application to all periods. The adoption of the new issue
did not have a material impact on the Company's financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS 157). SFAS No. 157 defines fair value, establishes
a framework for measuring fair value under generally accepted
accounting principles (GAAP) and expands disclosures about fair value
measurements. The FASB's FSP FAS 157-2, "Effective Date of FASB
Statement No. 157", defers until January 1, 2009, the application of
SFAS 157 to nonfinancial assets and nonfinancial liabilities not
recognized or disclosed at least annually at fair value. This includes
nonfinancial assets and nonfinancial liabilities initially measured at
fair value in a business combination or other new basis event, but not
measured at fair value in subsequent periods. The Company adopted this
statement on January 1, 2008. See Note 11 - Fair Value Measurements for
additional information.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115" (SFAS 159). SFAS 159 permits entities, at
specified election dates, to choose to measure certain financial
instruments at fair value that are not currently required to be
measured at fair value. The fair value option is applied on an
instrument-by-instrument basis, is irrevocable and can only be applied
to an entire instrument and not to specified risks, specific cash
flows, or portions of that instrument. Unrealized gains and losses on
items for which the fair value option has been elected will be reported
in earnings at each subsequent reporting date and upfront fees and
costs related to those items will be recognized in earnings as incurred
and not deferred. SFAS No. 159 is effective in fiscal years beginning
after November 15, 2007 and may not be applied retrospectively. The
Company adopted SFAS 159 effective January 1, 2008. (See Note 11).
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements and Amendment of ARB No.
51 ("SFAS No. 160"). The new pronouncement requires all entities to
report noncontrolling (minority) interests in subsidiaries as a
component of stockholders' equity. SFAS No. 160 will be effective for
fiscal years beginning after December 15, 2008. Early adoption is
prohibited. Management does not anticipate that this statement will
have a material impact on the Company's financial condition and results
of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business Combinations" (SFAS 141(R)). SFAS 141(R) will significantly
change the accounting for business combinations. Under SFAS 141(R), an
acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. It also amends the accounting treatment
for certain specific items including acquisition costs and non
controlling minority interests and includes a substantial number of new
disclosure requirements. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after January 1,
2009. The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of
operations.
In February 2008, the FASB issued FSP FAS 140-3, "Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions."
This FSP provides guidance on how the transferor and transferee should
separately account for a transfer of a financial asset and a related
repurchase financing if certain criteria are met. This guidance will be
effective January 1, 2009. The adoption of this new FSP is not expected
to have a material effect on the Company's results of operations or
financial position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133" (SFAS 161). SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement
133 and its related interpretations, and (c) how derivative instruments
and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in SFAS 161 is
effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The
Company does not expect the adoption of this statement to have a
material impact on its financial condition and results of operations.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the
Useful Life of Intangible Assets." This FSP provides guidance as to
factors considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under
SFAS 142, "Goodwill and Other Intangible Assets." This guidance will be
effective January 1, 2009. The adoption is not expected to have a
material effect on the Company's results of operations or financial
position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This standard formalizes minor changes
in prioritizing accounting principles used in the preparation of
financial statements that are presented in conformity with GAAP. This
standard became effective November 18, 2008.
NOTE 3 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2008:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 5,772,147 $ 83,213 $ 1,273 $ 5,854,087
Obligations of states and municipalities 5,948,405 60,480 154,755 5,854,130
Corporate debt securities 2,670,815 19,063 13 2,689,865
Mortgage-backed securities 16,799,358 143,417 239,440 16,703,335
SBA loan pools 1,830,262 49,132 1,879,394
U.S. government sponsored enterprises
perpetual/callable preferred stocks 16,501 16,501
Marketable equity securities 3,027,679 3,027,679
36,065,167 355,305 395,481 36,024,991
Money market mutual funds included in cash
and cash equivalents (3,027,679) (3,027,679)
------------ --------- ---------- ------------
Total available-for-sale securities $33,037,488 $355,305 $395,481 $32,997,312
=========== ======== ======== ===========
December 31, 2007:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 4,500,000 $ 3,404 $ 1,778 $ 4,501,626
Obligations of states and municipalities 6,913,444 107,323 3,681 7,017,086
Corporate debt securities 475,000 892 474,108
Mortgage-backed securities 11,284,240 37,627 53,944 11,267,923
SBA loan pools 351,426 5,879 357,305
U.S. government sponsored enterprises
perpetual/callable preferred stocks 1,772,100 400 520,000 1,252,500
Marketable equity securities 4,205 4,205
------------ --------- ---------- ------------
25,300,415 154,633 580,295 24,874,753
Money market mutual funds included in cash
and cash equivalents (4,205) (4,205)
------------ --------- ---------- ------------
Total available-for-sale securities $25,296,210 $154,633 $580,295 $24,870,548
=========== ======== ======== ===========
The scheduled maturities of debt securities were as follows as of December 31,
2008:
Fair
Value
-----
Due within one year $ 2,678,538
Due after one year through five years 7,411,124
Due after five years through ten years 237,052
Due after ten years 4,071,368
SBA loan pools 1,879,394
Mortgage-backed securities 16,703,335
------------
$32,980,811
During 2008, there were no sales of available-for-sale securities. In 2008, a
write-down of $1,755,600 was recorded on an available-for-sale security as
management had deemed this particular security to be other than temporarily
impaired. During 2007, proceeds from sales of available-for-sale securities
amounted to $8,236,450. Gross realized losses on those sales amounted to
$85,669. The tax benefit applicable to these gross realized losses amounted to
$33,368. In 2007, a write-down of $227,900 was recorded on an available-for-sale
security as management had deemed this particular security to be other than
temporarily impaired.
As of December 31, 2008, the Company has $3,000,120 invested in Invesco Aim
Premier-Institutional money market funds.
As of December 31, 2008 and 2007, the total carrying amounts of securities
pledged for securities sold under agreements to repurchase and public deposits
was $4,968,163 and $4,374,960, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are not other than temporarily impaired, are as follows:
Less than 12 Months 12 Months or Longer Total
------------------- ------------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
December 31, 2008:
Debt securities issued by the U.S.
Treasury and other U.S. government
corporations and agencies $ 498,726 $ 1,273 $ $ 498,726 $ 1,273
Obligations of states and municipalities 3,434,449 146,544 252,915 8,211 3,687,364 154,755
Corporate debt securities 498,595 13 498,595 13
Mortgage-backed securities 4,191,930 71,072 4,472,386 168,368 8,664,316 239,440
----------- ---------- ----------- --------- ------------- ---------
Total temporarily impaired securities $8,623,700 $218,902 $4,725,301 $176,579 $13,349,001 $395,481
========== ======== ========== ======== =========== ========
December 31, 2007:
Debt securities issued by the U.S.
Treasury and other U.S. government
corporations and agencies $ 999,357 $ 642 $ 998,864 $ 1,136 $1,998,221 $ 1,778
Obligations of states and municipalities 632,686 3,681 632,686 3,681
Corporate debt securities 474,108 892 474,108 892
Mortgage-backed securities 865,430 20 4,994,383 53,924 5,859,813 53,944
U.S. government sponsored enterprises
perpetual/callable preferred stocks 980,000 520,000 980,000 520,000
----------- ---------- ----------- --------- ------------- ---------
Total temporarily impaired securities $2,497,473 $4,343 $7,447,355 $575,952 $9,944,828 $580,295
========== ====== ========== ======== ========== ========
The investments in the Company's investment portfolio that are temporarily
impaired as of December 31, 2008 consist of debt issued by states of the United
States and political subdivisions of the states, U.S. corporations, and U.S.
government corporations and agencies. Company management considers investments
with an unrealized loss as of December 31, 2008 to be only temporarily impaired
because the impairment is attributable to changes in market interest rates and
current market inefficiencies. Company management anticipates that the fair
value of securities that are currently impaired will recover to cost basis. As
management has the ability to hold securities for the foreseeable future no
declines are deemed to be other than temporary.
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of December 31:
2008 2007
---- ----
Commercial, financial and agricultural $ 15,741,584 $ 16,585,402
Real estate - construction and land development 8,870,572 10,755,501
Real estate - residential 126,042,062 113,629,149
Real estate - commercial 22,962,191 15,134,849
Municipal 2,081,996 1,915,727
Consumer 4,125,967 7,427,567
--------------- ---------------
179,824,372 165,448,195
Allowance for loan losses (2,017,145) (1,924,552)
Deferred costs, net 266,531 241,797
---------------- ----------------
Net loans $178,073,758 $163,765,440
============ ============
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2008 2007
-------------- --------------
Balance at beginning of year $1,924,552 $1,698,329
Provision for loan losses 450,000 250,000
Charge offs (358,862) (23,777)
Recoveries of loans previously charged off 1,455
--------------- ---------------
Balance at end of year $2,017,145 $1,924,552
========== ==========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2008 2007
----------- -------
Total nonaccrual loans $560,917 $5,328
======== ======
Accruing loans which are 90 days or more overdue $ 89,823 $ 973
========= =======
Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:
2008 2007
---- ----
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----- ------ ----- ------
Loans for which there is a related allowance for credit losses $45,341 $6,946 $ 0 $0
Loans for which there is no related allowance for credit losses 0 0 0 0
------------ ---------- ------------ ---
Totals $45,341 $6,946 $ 0 $0
======= ====== =========== ==
Average recorded investment in impaired loans during the
year ended December 31 $ 9,068 $15,609
======== =======
Related amount of interest income recognized during the time, in the year ended
December 31, that the loans were impaired
Total recognized $ 0 $ 7,964
=========== ========
Amount recognized using a cash-basis method of
accounting $ 0 $ 7,964
=========== ========
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
2008 2007
-------------- --------------
Leasehold improvements $1,144,004 $1,131,840
Furniture and equipment 2,225,318 2,279,832
----------- -----------
3,369,322 3,411,672
Accumulated depreciation and amortization (2,523,486) (2,188,717)
----------- -----------
$ 845,836 $1,222,955
=========== ==========
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2008 and 2007 was $33,754,353 and $20,523,507,
respectively.
As of December 31, 2008, the Bank has one depositor with total deposits of
$14,215,779, or 6.4% of the Company's total deposits.
For time deposits as of December 31, 2008, the scheduled maturities for years
ended December 31 are:
2009 $74,273,485
2010 3,220,958
2011 1,261,508
2012 5,140,320
2013 430,770
--------------
Total $84,327,041
===========
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- -------------------------------------------------------
Securities sold under agreements to repurchase consist of funds borrowed from
customers on a short-term basis secured by portions of the Company's investment
portfolio. The securities which were sold have been accounted for not as sales
but as borrowings. The securities consisted of debt securities issued by the
U.S. Treasury and other U.S. government sponsored enterprises, corporations and
agencies and states and municipalities. The securities were held in safekeeping
by Morgan Stanley, under the control of the Company. The purchasers have agreed
to sell to the Company substantially identical securities at the maturity of the
agreements. The agreements mature generally within three months from date of
issue.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank (FHLB).
As of December 31, 2008, the Company has a $1,000,000 advance with an interest
rate of 3.17% which will mature in 2009.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties and other qualified assets.
START HERE
NOTE 9 - INCOME TAX (BENEFIT) EXPENSE
The components of income tax (benefit) expense are as follows for the years
ended December 31:
2008 2007
--------- ---------
Current:
Federal $ 172,166 $ 341,346
State 62,212 85,883
--------- ---------
234,378 427,229
--------- ---------
Deferred:
Federal (809,873) (204,753)
State (192,964) (48,018)
--------- ---------
(1,002,837) (252,771)
Total income tax (benefit) expense $(768,459) $ 174,458
========== =========
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended
December 31:
2008 2007
------ ------
% of % of
Income Income
------ ------
Federal income tax at statutory rate (34.0)% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (10.9) (27.6)
Other (6.2) 1.5
Stock based compensation 2.8 3.5
State tax (benefit) expense, net of federal expense (benefit) (6.1) 1.9
------ ------
Effective tax rates (54.4)% 13.3%
====== ======
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2008 2007
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 755,082 $ 625,727
Deferred compensation 198,688 211,835
Other 3,680 3,648
Impairment of operating lease 113,455
Write-down of equity securities 772,573 88,767
Net unrealized holding loss on available-for-sale securities 15,649 165,795
----------- -----------
Gross deferred tax assets 1,859,127 1,095,772
----------- -----------
Deferred tax liabilities:
Depreciation (48,444) (147,322)
Deferred loan costs/fees (103,529) (93,987)
----------- -----------
Gross deferred tax liabilities (151,973) (241,309)
----------- -----------
Net deferred tax asset $ 1,707,154 $ 854,463
=========== ===========
Deferred tax assets as of December 31, 2008 and 2007 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred taxes will be realized.
As of December 31, 2008, the Company had no operating loss carryovers for income
tax purposes.
The Company adopted FASB interpretation No. 48 "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement 109" (FIN 48) as of December
31, 2008. It is the Company's policy to provide for uncertain tax positions and
the related interest and penalties based upon management's assessment of whether
a tax benefit is more likely than not to be sustained upon examination by tax
authorities. There was no effect on the Company's balance sheet or income
statement from adoption of FIN 48.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
As of December 31, 2008 the Company was obligated under non-cancelable operating
leases for bank premises and equipment expiring between June 2010 and May 2016.
The total minimum rental due in future periods under these existing agreements
is as follows as of December 31, 2008:
2009 $ 626,147
2010 633,824
2011 368,363
2012 313,647
2013 302,089
Thereafter 437,384
------------
Total $ 2,681,454
============
Certain leases contain provisions for escalation of minimum lease payments
contingent upon percentage increases in the consumer price index. Total rental
expense amounted to $619,429 and $618,592 for the years ended December 31, 2008
and 2007, respectively.
On November 28, 2008, the Company entered into an agreement with its data
processing servicer which ends in five years, and automatically continues to
three years, unless terminated by either party with notice. Under the agreement,
the Company must pay a termination fee as described in the agreement if the
Company terminates the agreement with notice, before the end of the agreement.
NOTE 11 - FAIR VALUE MEASUREMENTS
- ---------------------------------
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), Fair Value Measurements, which provides a
framework for measuring fair value under generally accepted accounting
principles.
The Company also adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115. SFAS No. 159 allows an entity the irrevocable option to elect fair value
for the initial and subsequent measurement for certain financial assets and
liabilities on a contract-by-contract basis. The Company did not elect fair
value treatment for any financial assets or liabilities upon adoption.
In accordance with SFAS 157, 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 New York Stock Exchange. 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. These valuation methodologies
were applied to all of the Company's financial assets and financial liabilities
carried at fair value for December 31, 2008.
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 obligations of states and municipalities,
mortgage-backed securities and other debt securities available-for-sale are
generally classified within level 2 of the fair value hierarchy. For these
securities, we obtain 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.
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.
The Company's impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral. Collateral
values are estimated using level 2 inputs based upon appraisals of similar
properties obtained from a third party.
The following summarizes assets measured at fair value for the period ending
December 31, 2008.
ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
Fair Value Measurements at Reporting Date Using:
---------------------------------------------------------------------
Quoted Prices in Significant Significant
Active Markets for Other Observable Unobservable
Identical Assets Inputs Inputs
December 31, 2008 Level 1 Level 2 Level 3
------------------ ------------------ ------------------ ------------------
Securities available-for-sale $ 32,997,312 $ 16,501 $ 32,980,811 $ 0
Impaired loans 38,395 0 38,395 0
------------------ ------------------ ------------------ ------------------
Totals $ 33,035,707 $ 16,501 $ 33,019,206 $ 0
================== ================== ================== ==================
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
2008 2007
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Value
Financial assets:
Cash and cash equivalents $ 16,335,412 $ 16,335,412 $ 15,753,813 $ 15,753,813
Interest-bearing time deposits with other banks 7,320,434 7,414,000
Available-for-sale securities 32,997,312 32,997,312 24,870,548 24,870,548
Federal Home Loan Bank stock 630,700 630,700 630,700 630,700
Loans, net 178,073,758 179,899,358 163,765,440 162,124,000
Accrued interest receivable 835,559 835,559 808,430 808,430
Financial liabilities:
Deposits 220,879,117 220,595,000 186,805,866 187,007,000
Federal Home Loan Bank advances 1,000,000 1,000,000 2,000,000 2,000,000
Securities sold under agreements to
repurchase 576,933 576,933 1,363,033 1,363,033
Due to broker 1,433,223 1,433,223
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
NOTE 12 - FINANCIAL INSTRUMENTS
- -------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, unadvanced funds
on loans and standby letters of credit. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented by
the contractual amounts of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2008 and 2007 the
maximum potential amount of the Company's obligation was $337,000 and $557,312,
respectively, for financial and standby letters of credit. The Company's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Company may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Company may take possession of the collateral, if any, securing
the line of credit.
Notional amounts of financial instrument liabilities with off-balance-sheet
credit risk are as follows as of December 31:
2008 2007
----------- -----------
Commitments to originate loans $ 1,273,063 $ 2,222,250
Standby letters of credit 337,000 557,312
Unadvanced portions of loans:
Construction 5,986,683 8,480,187
Commercial lines of credit 9,479,394 6,800,654
Consumer 714,962 729,769
Home equity 22,893,758 22,721,211
----------- -----------
$40,684,860 $41,511,383
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the above off-balance sheet liabilities.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2008.
Total loans to such persons and their companies amounted to $3,582,026 as of
December 31, 2008. During the year ended December 31, 2008 principal payments
totaled $2,393,440 and advances amounted to $1,856,974.
Deposits from related parties held by the Company as of December 31, 2008 and
2007 amounted to $3,246,946 and $2,779,043, respectively.
During 2008 and 2007, the Company paid $61,548 and $61,939, respectively, for
rent and related expenses of the Company's Granby branch office to a company of
which a bank director is a principal. The rent expense for the Granby branch
included in Note 10 amounted to $44,935 in 2008 and 2007.
NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------------------------
Most of the Company's business activity is with customers located within the
state. There are no concentrations of credit to borrowers that have similar
economic characteristics. The majority of the Company's loan portfolio is
comprised of loans collateralized by real estate located in the State of
Connecticut.
NOTE 15 - REGULATORY MATTERS
- ----------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of its assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2008 and 2007, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2008, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2008:
Total Capital (to Risk Weighted Assets):
The Simsbury Bank & Trust Company, Inc. $18,048 12.13% $11,908 >8.0% $14,884 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets):
The Simsbury Bank & Trust Company, Inc. 16,190 10.88 5,954 >4.0 8,931 >6.0
- -
Tier 1 Capital (to Average Assets):
The Simsbury Bank & Trust Company, Inc. 16,190 7.00 9,255 >4.0 11,569 >5.0
- -
As of December 31, 2007:
Total Capital (to Risk Weighted Assets):
The Simsbury Bank & Trust Company, Inc. $18,287 13.48% $10,855 >8.0% $13,568 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets):
The Simsbury Bank & Trust Company, Inc. 16,588 12.23 5,427 >4.0 8,141 >6.0
- -
Tier 1 Capital (to Average Assets):
The Simsbury Bank & Trust Company, Inc. 16,588 8.21 8,087 >4.0 10,109 >5.0
- -
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
Under Connecticut law, the Bank may pay dividends only out of net profits. The
Connecticut Banking Commissioner's approval is required for dividend payments
which exceed the current year's net profits and retained net profits from the
preceding two years. As of December 31, 2008, the Bank is restricted from
declaring dividends to the Company in an amount greater than $583,064.
NOTE 16 - EMPLOYEE BENEFITS
- ---------------------------
The Company sponsors a 401(k) savings and retirement plan. Employees who were 21
years of age and employed on the plan's effective date were immediately eligible
to participate in the plan. Other employees who have attained age 21 are
eligible for membership on the first day of the month following completion of 90
days of service.
The provisions of the 401(k) plan allow eligible employees to contribute subject
to IRS limitations. The Company's matching contribution will be determined at
the beginning of the plan year. The Company's expense under this plan was
$78,520 in 2008 and $35,123 in 2007.
The Company entered into Supplemental Executive Retirement Agreements with
current and former executive officers. The agreements require the payment of
specified benefits upon retirement over specified periods as described in each
agreement. The total liability for the agreements included in other liabilities
was $510,110 at December 31,2008 and $543,865 at December 31, 2007. Expenses
under these agreements amounted to $31,895 and $81,291, respectively, for the
years ended December 31, 2008 and 2007.
The Company entered into employment agreements (the "Agreements") with the
Executive Officers of the Company. The Agreements provide for severance benefits
upon termination following a change in control as defined in the agreements in
amounts equal to cash compensation as defined in the agreements, and fringe
benefits that the Executive(s) would have received if the Executive(s) would
have continued working for an additional two or five years.
NOTE 17 - STOCK OPTION PLAN
- ---------------------------
The Simsbury Bank & Trust Company, Inc. 1998 Stock Plan ("Plan") provides for
the granting of options to purchase shares of common stock or the granting of
shares of restricted stock up to an aggregate amount of 142,000 shares of common
stock of the Company. Options granted under the Plan may be either Incentive
Stock Options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code or non-qualified options which do not qualify as ISOs ("NQOs"). No
restricted stock awards or stock options may be granted under the Plan after
March 17, 2008.
The exercise price for shares covered by an ISO may not be less than 100% of the
fair market value of common stock on the date of grant. The exercise price for
shares covered by a NQO may not be less than 50% of the fair market value of
common stock at the date of grant. All options must expire no later than ten
years from the date of grant. The Plan also provides the Board with authority to
make grants that will provide that options will become exercisable and
restricted awards will become fully vested upon a change in control of the
Company.
In accordance with the Plan each non-employee director is granted a NQO to
purchase 1,000 shares of common stock at the fair market value of the common
stock on the grant date. These options will become exercisable in two equal
installments beginning on the first anniversary of the date of grant.
The Company did not grant any options in 2008. The fair value of each option
granted in 2007 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
2007
----
Expected volatility 12.9%
Expected dividends 1.5%
Expected term (in years) 10
Risk free rate 4.71%
A summary of the status of the Company's stock option plan as of December 31 and
changes during the years ending on that date is presented below:
2008 2007
--------------------------------------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------- ------ ---------------------- ------ ------------------
Outstanding at beginning of year 69,208 $27.21 68,927 $25.22
Granted 10,500 30.00
Exercised (14,080) 13.87 (8,905) 13.77
Forfeited (3,939) 34.35 (1,314) 36.55
------ ------
Outstanding at end of year 51,189 30.33 69,208 27.21
====== ======
Options exercisable at year-end 40,689 30.50 44,708 25.60
Weighted-average fair value of
options granted during the year N/A $8.11
The following table summarizes information about fixed stock options outstanding
as of December 31, 2008:
Options Outstanding and Exercisable
Weighted-Average
Number Remaining Number
Exercise Price Outstanding Contractual Life Exercisable Exercise Price
- -------------- ----------- -------------------- ----------- --------------
$15.65 1,311 3.2 years 1,311 $15.65
16.25 1,314 2.9 years 1,314 16.25
34.90 1,314 5.3 years 1,314 34.90
35.00 5,250 5.8 years 5,250 35.00
31.50 21,000 7.0 years 21,000 31.50
29.00 10,500 7.5 years 7,000 29.00
30.00 10,500 8.6 years 3,500 30.00
------ ------
30.33 51,189 7.1 years 40,689 30.50
====== ======
As of December 31, 2008, there was $53,222 of total unrecognized compensation
cost related to nonvested share-based arrangements granted under the Plan. That
cost is expected to be recognized over a weighted average period of .75 years.
The total value of shares that vested during the years ended December 31, 2008
and 2007 was $114,274 and $133,167, respectively.
NOTE 18 - EARNINGS (LOSS) PER SHARE
- -----------------------------------
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net (loss) income are as follows:
(Loss)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------------
Year ended December 31, 2008
Basic loss per share
Net loss $ (644,824) 860,030 $(.75)
Effect of dilutive securities, options
----------- -----------
Diluted loss per share
Net loss $ (644,824) 860,030 $(.75)
=========== ===========
Year ended December 31, 2007
Basic earnings per share
Net income $ 1,139,711 849,468 $1.34
Effect of dilutive securities, options 9,405
----------- -----------
Diluted earnings per share
Net income $ 1,139,711 858,873 $1.33
=========== ===========
NOTE 19 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
NOTE 20 - SUBSEQUENT EVENT
- --------------------------
On November 14, 2008, the Company applied for participation in the Department of
the Treasury (Treasury) Troubled Asset Relief Program Capital Purchase Program
under the Emergency Economic Stabilization Act of 2008 and the rules and
regulations promulgated thereunder (collectively, the "Act"). On November 21,
2008, the Treasury preliminarily approved the Company's application in the
amount of $4,000,000. Closing of the transaction is subject to satisfaction as
determined by the Treasury in its sole discretion, of all the conditions of the
Act, and additional conditions that must be completed by the Company. The
Company is planning to satisfy all required conditions needed in order to
receive the additional capital of $4,000,000.
Company shareholders met on February 27, 2009 and voted to approve a
modification to the Company's charter to permit the issuance of preferred stock.
Such preferred stock can be issued to the Treasury as described below.
The Company is planning to issue to the Treasury $4,000,000 Series A Fixed Rate
Cumulative Perpetual Preferred Stock (Series A Preferred Stock) together with
related warrants to purchase shares of the Company's Series B Fixed Rate
Cumulative Perpetual (Series B Preferred Stock) equal to 5% of the aggregate
liquidation amount of the original Series A preferred stock issued to the
Treasury. The exercise price of the warrants will be $0.01 per share. Both
series of preferred stock have a liquidation amount of $1,000 per share.
Series A Preferred Stock will pay cumulative dividends at a rate of 5% for the
first five years and thereafter at a rate of 9% per year.
The Company may not redeem the Series A Preferred Stock during the first three
years except with proceeds from a "qualifying equity offering." After three
years, the Company may, at its option, redeem the Series A Preferred Stock at
the liquidation amount plus accrued and unpaid dividends. The Series A Preferred
Stock will be generally non-voting. The Series B Preferred Stock will pay
cumulative dividends at the rate of 9% per year and will generally have the same
rights and privileges as the Series A Preferred Stock.
There will also be restrictions on dividends. As is typical with cumulative
preferred stock, dividend payments for this preferred stock must be current
before dividends can be paid on Company common stock and the Treasury must
consent to any increase in common dividends per share until the third
anniversary of the preferred stock issuance as long as the Treasury continues to
hold any of the preferred stock.
Shareholder Data
- --------------------------------------------------------------------------------
The stock of the Bank's parent company, SBT Bancorp, Inc., which was formed on
March 3, 2006, is currently listed on the OTC Bulletin Board (Symbol: "SBTB").
At December 31, 2008, there were 864,976 shares of the Bank's common stock
outstanding and approximately 1,100 shareholders of record. There is a limited
market for Company's shares. The following table sets forth the high and low bid
information for the period indicated.
Year Ended Year Ended
December 31, 2008 December 31, 2007
----------------- -----------------
High Low High Low
First Quarter $32.00 $25.50 $33.00 $28.50
Second Quarter $26.75 $23.25 $35.00 $28.75
Third Quarter $25.55 $21.50 $31.25 $27.50
Fourth Quarter $21.50 $16.00 $28.90 $27.50
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not reflect actual transactions.
Dividends
The Company's shareholders are entitled to dividends when and if declared by
the Board of Directors out of funds legally available therefore. Connecticut law
prohibits the Company from paying cash dividends except from its net profits,
which are defined by state statutes. The Company declared and paid cash
dividends of $415,188 on June 16, 2008. The Company declared and paid cash
dividends of $373,858 on June 15, 2007.
The Bank did not repurchase any of its securities during 2008.
SBT Bancorp, Inc.
- --------------------------------------------------------------------------------------------------------------------
Board of Directors Officers
*Chairman of Committee
Lincoln S. Young Gary R. Kevorkian Martin J. Geitz
Chairman of the Board Attorney at Law President and Chief Executive Officer
Retired Chief Executive Officer Investment Services Committee
Turbine Engine Services Corp. Loan Committee Anthony F. Bisceglio, Ph.D.
Corporate Governance Committee* Personnel Committee Treasurer and Chief Financial Officer
Executive Committee
Investment Services Committee* George B. Odlum, Jr., DMD Gary R. Kevorkian
Loan Committee Retired General Dentistry Secretary
Personnel Committee Audit & Compliance Committee*
Executive Committee Susan D. Presutti
Robert J. Bogino Assistant Secretary
Vice Chairman Rodney R. Reynolds
Retired President and Co-Owner Retired Founding Director
Bogino & DeMaria, Inc. Trust Company of Connecticut
Audit & Compliance Committee Investment Services Committee
Corporate Governance Committee Personnel Committee
Executive Committee*
Investment Services Committee David W. Sessions
Loan Committee* President and Treasurer
Casle Corporation
James T. Fleming Executive Committee
President Loan Committee
Connecticut Automotive Retailers Personnel Committee*
Association
Audit & Compliance Committee Penny R. Woodford
Corporate Governance Committee Real Estate Agent
Coldwell Banker Residential Brokerage
Martin J. Geitz Audit & Compliance Committee
President and Chief Executive Officer Corporate Governance Committee
The Simsbury Company and Trust Company
Executive Committee
Investment Services Committee
Loan Committee
Edward J. Guarco
Vice President
State Line Oil
Audit & Compliance Committee
Personnel Committee
The Simsbury Bank & Trust Company, Inc.
- -----------------------------------------------------------------------------------------------------
Board of Directors Officers Employees
All SBT Bancorp, Inc. Directors
Martin J. Geitz Dianna S. Anderson
President and Chief Executive Officer Theresa D. Bendell
Directors Emeriti Yvonne L. Bourgoin
Anthony F. Bisceglio, Ph.D. Alexandra S. Bullard
Richard C. Anthony Executive Vice President, Treasurer and Katherine P. Cain
Consultant Chief Financial Officer Carol D. Clifford
Megan L. Clifford
Paul R. Little Catherine A. Cook
Robert B. August Senior Vice President and Jacek Danillowicz
Retired Attorney at Law Chief Lending Officer Cheryl B. Dilisio
S. Thomas Edge
Jackson F. Eno Howard R. Zern Marilyn E. Ehrhardt
Vice President Senior Vice President and Lori L. Ethier
Morgan Stanley Chief Retail, Bank Operations & Deborah A. Fochesato
Technology Officer Shirley T. Gentry
Jane F. von Holzhausen Lynn G. Godin
Vice President of Operations Gary R. Kevorkian Jo-Ann Horton
Southwest Region Secretary Lucyna Jennison
Prudential Connecticut Realty Leslie S. Kane
Senior Vice President Regina M. Keith
Evan W. Woollacott --------------------- Sarah Krahl
Retired Vice Chairman and Commissioner Terry L. Boulton Sherrie S. Krawczyk
Connecticut Department of Public Elizabeth C. Lenhart
Utility Control Vice Presidents Cindy Matthews
--------------- Catherine L. Miller
Richard A. Bahre Irene P. Najman
Dante S. Fazzina Julia E. Pattison
Robert A. Francolini Alan G. Pollack
H. Holbrook Hyde, Jr. Patricia A. Pschirer
Lauren S. McCoy Michelle Raymond
Bruce Noe Petrina C. Reid
Barbara J. Wallace Elizabeth D. Rimkie
Margaret E. Rose
Assistant Vice Presidents Gerald Smith, Jr.
------------------------- Irene M. Smith
Brenda J. Abbott Karen E. Storms
Brian D. Belyea Maria Theodoratos
Robin J. DiNicola Annette M. Troutman
Jocelyn A. Mitchell Michelle G. Wiggins
Craig S. Porter
Susan D. Presutti, Assistant Secretary
Peter Sepelak, Jr.
Kenneth S. Sklodosky
Sophie S. Stevens
Assistant Treasurers
--------------------
Margot M. Byrne
Barbara J. Hanifin
Karen G. Jepeal
Lisa A. Morgan
Corporate Information
- --------------------------------------------------------------------------------
SBT Bancorp, Inc.
760 Hopmeadow Street
P.O. Box 248
Simsbury, Connecticut 06070-0248
(860) 658-2265
Fax: (860) 408-4679
simsburybank.com
Notice of Shareholders' Meeting
-------------------------------
The Annual Meeting of Shareholders of SBT Bancorp, Inc., the holding
company for The Simsbury Bank & Trust Company, Inc., will be held at 5:00
p.m. on Tuesday, May 12, 2009 at 981 Hopmeadow Street, Simsbury,
Connecticut.
Independent Auditors Legal Counsel
-------------------- -------------
Shatswell, MacLeod & Company, P.C. Day Pitney LLP
83 Pine Street Counselors at Law
West Peabody, MA 01960-3635 CityPlace I
Hartford, CT 06103-3499
Transfer Agent Shareholder Contact
-------------- -------------------
American Stock Transfer & Trust Company Susan D. Presutti, Assistant Secretary
59 Maiden Lane SBT Bancorp, Inc.
Plaza Level 760 Hopmeadow Street, P.O. Box 248
New York, NY 10005 Simsbury, CT 06070-0248
Shareholder Relations: (800) 937-5449 (860) 408-5493
Trading Symbol: SBTB
--------------
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K WILL BE FORWARDED WITHOUT
CHARGE UPON WRITTEN REQUEST TO:
Gary R. Kevorkian, Secretary
SBT Bancorp, Inc.
760 Hopmeadow Street
P.O. Box 248
Simsbury, CT 06070-0248