UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from _______ to __________
Commission File Number: 000-51832
SBT Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 20-4346972
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
760 Hopmeadow Street, P.O. Box 248, Simsbury, CT 06070
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(Address of principal executive offices) (Zip Code)
(860) 408-5493
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files. Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer __ Accelerated filer __ Non-accelerated filer __
Smaller reporting company [X]
1
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of October 31, 2009, the registrant had outstanding 864,976 shares of its
Common Stock, no par value.
2
TABLE OF CONTENTS
SBT Bancorp, Inc.
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2009
and 2008 (unaudited) and December 31, 2008 4
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2009 and 2008 (unaudited) 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2009 and 2008
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2009 and 2008 (unaudited) 7
Notes to Condensed Consolidated Financial Statements -
(unaudited) 8 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4T. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
EXHIBIT INDEX 23
3
PART I - FINANCIAL INFORMATION
SBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
ASSETS 9/30/09 12/31/08 9/30/08
- ------ ------------ ---------- ------------
(Unaudited) (Unaudited)
Cash and due from banks $ 10,272 $ 11,392 $ 11,319
Interest-bearing deposits with the Federal Home Loan Bank 89 116 2,949
Federal funds sold 10,213 1,800 8,985
Money market mutual funds 3,329 3,027 27
------------ ---------- ------------
Cash and cash equivalents 23,903 16,335 23,280
Interest-bearing time deposits with other banks 5,443 7,320 -
Investments in available-for-sale securities (at fair value) 54,656 32,997 16,829
Federal Home Loan Bank stock, at cost 631 631 631
Loans outstanding 195,349 180,091 179,608
Less allowance for loan losses 2,138 2,017 1,822
------------ ---------- ------------
Loans, net 193,211 178,074 177,786
------------ ---------- ------------
Premises and equipment 705 846 910
Accrued interest receivable 1,032 836 745
Bank owned life insurance 3,803 1,204 1,192
Due from broker 1,195 - -
Other assets 2,230 2,513 1,760
------------ ---------- ------------
Total other assets 8,965 5,399 4,607
------------ ---------- ------------
TOTAL ASSETS $ 286,809 $ 240,756 $ 223,133
============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Demand deposits $ 40,011 $ 38,288 $ 37,418
Savings and NOW deposits 131,049 98,264 100,880
Time deposits 92,454 84,327 63,696
------------ ---------- ------------
Total deposits 263,514 220,879 201,994
Federal Home Loan Bank advance - 1,000 3,000
Securities sold under agreements to repurchase 741 577 900
Other liabilities 1,025 1,454 1,012
------------ ---------- ------------
Total liabilities 265,280 223,910 206,906
------------ ---------- ------------
Stockholders' equity:
Preferred Stock - Class A 3,793 - -
Preferred Stock - Class B 227 - -
Common stock, no par value; authorized 2,000,000 shares;
issued and outstanding 864,976 shares on 9/30/09, 12/31/08,
and 9/30/08 9,365 9,328 9,292
Retained earnings 7,759 7,543 7,256
Accumulated other comprehensive income (loss) 385 (25) (321)
------------ ---------- ------------
Total shareholders' equity 21,529 16,846 16,227
------------ ---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 286,809 $ 240,756 $ 223,133
============ ========== ============
See accompanying notes to the condensed consolidated financial statements
4
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for per-share amounts)
For the quarter ended For the nine months ended
---------------------- -------------------------
9/30/09 9/30/08 9/30/09 9/30/08
---------- ---------- ---------- ----------
Interest and dividend income
Interest and fees on loans $ 2,447 $ 2,522 $ 7,254 $ 7,330
Investment securities 528 228 1,428 813
Federal funds sold and overnight deposits 12 41 21 126
---------- ---------- ---------- ----------
Total interest and dividend income 2,987 2,791 8,703 8,269
---------- ---------- ---------- ----------
Interest expense
Deposits 680 658 2,224 2,202
Repurchase agreements 3 11 7 44
Federal Home Loan Bank advances - 2 7 4
---------- ---------- ---------- ----------
Total interest expense 683 671 2,238 2,250
---------- ---------- ---------- ----------
Net interest and dividend income 2,304 2,120 6,465 6,019
Provision for loan losses 192 50 322 250
---------- ---------- ---------- ----------
Net interest and dividend income after provision
for loan losses 2,112 2,070 6,143 5,769
---------- ---------- ---------- ----------
Noninterest income (charge)
Service charges on deposit accounts 159 129 395 363
Gain on sales of available-for-sale securities 40 - 40 10
Write-downs of available-for-sale securities - (1,668) - (1,668)
Other service charges and fees 145 154 413 436
Increase in cash surrender value of life insurance
policies 44 11 99 49
BOLI death benefit income - - - 328
Gain on loans sold 17 - 60 -
Investment Services fees and commissions 27 20 74 66
Other income 16 12 62 56
---------- ---------- ---------- ----------
Total noninterest income (charge) 448 (1,342) 1,143 (360)
---------- ---------- ---------- ----------
Noninterest expense
Salaries and employee benefits 964 1,103 3,033 3,144
Premises and equipment 373 516 1,109 1,293
Advertising and promotions 128 109 307 279
Forms and supplies 50 35 138 118
Professional fees 125 97 395 197
Directors fees 33 34 99 101
Correspondent charges 67 61 206 173
Postage 28 20 77 78
Other expenses 599 267 1,217 774
---------- ---------- ---------- ----------
Total noninterest expense 2,367 2,242 6,581 6,157
---------- ---------- ---------- ----------
Income (loss) before taxes 193 (1,514) 705 (748)
Income tax provision 33 42 178 183
---------- ---------- ---------- ----------
Net income (loss) $ 160 $ (1,556) $ 527 $ (931)
Less: Preferred stock dividend and accretion $ 65 $ - $ 132 $ -
---------- ---------- ---------- ----------
Net income available to common shareholders $ 95 $ (1,556) $ 395 $ (931)
========== ========== ========== ==========
Average shares outstanding, basic 864,976 864,976 864,976 858,369
Net income (loss) per common share, basic $ 0.11 $ (1.80) $ 0.46 $ (1.09)
========== ========== ========== ==========
Average shares outstanding, assuming dilution 864,976 864,976 864,976 858,369
Net income (loss) per common share, assuming dilution $ 0.11 $ (1.80) $ 0.46 $ (1.09)
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Preferred Preferred Other
Stock Stock Common Retained Comprehensive
-Class A - Class B Stock Earnings Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2007 $ - $ - $ 8,975 $ 8,603 $ (260) $ 17,318
Comprehensive loss:
Net loss (931)
Net change in unrealized holding loss on
available-for-sale securities, net of
tax effect (61)
Comprehensive loss (992)
Recognition of stock-based compensation
expense 89 89
Tax benefit on disqualified options
exercised 33 33
Shares issued from exercise of stock options 195 195
Cash dividend paid (416) (416)
--------------------------------------------------------------------
Balance, September 30, 2008 $ - $ - $ 9,292 $ 7,256 $ (321) $ 16,227
====================================================================
Balance, December 31, 2008 $ - $ - $ 9,328 $ 7,543 $ (25) $ 16,846
Comprehensive Income:
Net income 527
Net change in unrealized holding loss on
available-for-sale securities, net of
tax effect 410
Comprehensive income 937
Dividends Paid:
Common stock (207) (207)
Class A preferred stock (77) (77)
Class B preferred stock (7) (7)
Accretion of Class A preferred stock
discount 23 (23)
Amortization of Class B preferred stock
premium (3) 3
Preferred shares issued as part of Capital
Purchase Program 3,770 230 4,000
Recognition of stock-based compensation
expense 37 37
--------------------------------------------------------------------
Balance, September 30, 2009 $ 3,793 $ 227 $ 9,365 $ 7,759 $ 385 $ 21,529
====================================================================
See accompanying notes to the condensed consolidated financial statements
6
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the nine months ended
-------------------------
9/30/09 9/30/08
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 527 $ (931)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization (accretion) of securities, net 92 (5)
Change in deferred loan costs, net 21 -
Provision for loan losses 322 250
Depreciation and amortization 205 381
Impairment of operating lease (33) -
Loss on write-down of available-for-sale securities - 1,668
Net gain on sales of available-for-sale securities (40) (10)
Increase in other assets (80) (164)
(Increase) decrease in interest receivable (196) 63
Decrease in unearned income - (29)
Decrease in taxes receivable 118 -
Stock based compensation 37 89
Decrease in other liabilities (413) (458)
Increase in cash surrender value of bank owned life insurance (99) (38)
BOLI death benefit income - (328)
Increase in interest payable 17 -
---------- ----------
Net cash provided by (used in) operating activities 478 488
---------- ----------
Cash flows from investing activities:
Proceeds from maturities of interest-bearing time deposits with
other banks 1,877 -
Purchases of available-for-sale securities (31,867) (3,456)
Proceeds from sale of available-for-sale securities - 10
Proceeds from maturities of available-for-sale securities 9,634 8,302
Loan originations and principal collections, net (4,462) (14,243)
Purchases of loans (11,021) -
Redemptions of life insurance policies - 992
Purchase of life insurance policies (2,500) -
Capital expenditures (82) (72)
Recovery of previously charged-off loans 3 1
---------- ----------
Net cash used in investing activities (38,418) (8,466)
---------- ----------
Cash flows from financing activities:
Net increase in demand, NOW, money market and savings deposits 34,508 14,658
Net increase in time deposits 8,127 530
Net change in short-term advances from the Federal Home Loan
Bank (1,000) 1,000
Net increase (decrease) in securities sold under agreements to
repurchase 164 (463)
Cash dividends paid (291) (416)
Proceeds from issuance of preferred stock 4,000 -
Proceeds from exercise of stock options - 195
---------- ----------
Net cash provided by financing activities 45,508 15,504
---------- ----------
Net increase in cash and cash equivalents 7,568 7,526
Cash and cash equivalents at beginning of period 16,335 15,754
---------- ----------
Cash and cash equivalents at end of period $ 23,903 $ 23,280
========== ==========
Supplemental disclosures:
Interest paid 2,221 2,472
Income taxes paid 60 322
See accompanying notes to the condensed consolidated financial statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
- ------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-Q, and accordingly
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all necessary adjustments, consisting of only normal
recurring accruals, to present fairly the financial position, results of
operations, cash flows and changes in stockholders' equity of SBT Bancorp, Inc.
(the "Company") for the periods presented. In preparing the interim financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. The interim results of operations are not
necessarily indicative of the results to be expected for the year ending
December 31, 2009.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's Form 10-K for the year ended
December 31, 2008.
NOTE 2 - STOCK-BASED COMPENSATION
At September 30, 2009, the Company maintains a stock-based employee
compensation plan. The Company recognizes the cost resulting from all
share-based payment transactions in the consolidated financial statements and
establishes fair value as the measurement objective in accounting for
share-based payment arrangements. During the nine months ended September 30,
2009, the Company recognized $37,000 in stock-based employee compensation
expense. During the nine months ended September 30, 2008, the Company recognized
$89,000 in stock-based employee compensation expense.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board ("FASB") issued an
update to Accounting Standard Codification 105-10, "Generally Accepted
Accounting Principles." This standard establishes the FASB Accounting Standard
Codification ("Codification" or "ASC") as the source of authoritative U.S. GAAP
recognized by the FASB for nongovernmental entities. The Codification is
effective for interim and annual periods ending after September 15, 2009. The
Codification is a reorganization of existing U.S. GAAP and does not change
existing U.S. GAAP. The Company adopted this standard during the third quarter
of 2009. The adoption had no impact on the Company's financial position or
results of operations.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets," and SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)." These standards are effective for the first interim reporting period of
2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a
qualifying special-purpose entity ("QSPE") and changes some of the requirements
for derecognizing financial assets. SFAS No. 167 amends the consolidation
guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the
exemption for QSPEs from the new guidance, (b) shift the determination of which
enterprise should consolidate a variable interest entity ("VIE") to a current
control approach, such that an entity that has both the power to make decisions
and right to receive benefits or absorb losses that could potentially be
significant, will consolidate a VIE, and (c) change when it is necessary to
reassess who should consolidate a VIE. The Company is evaluating the impact that
these standards will have on its financial statements.
In August 2009, the FASB issued Accounting Standards Update ("ASU")
2009-05, "Measuring Liabilities at Fair Value," which updates ASC 820-10, "Fair
Value Measurements and Disclosures." The updated guidance clarifies that the
fair value of a liability can be measured in relation to the quoted price of the
liability when it trades as an asset in an active market, without adjusting the
price for restrictions that prevent the sale of the liability. This guidance is
effective beginning January 1, 2009. The Company does not expect that the
guidance will change its valuation techniques for measuring liabilities at fair
value.
8
In May 2009, the FASB updated ASC 855, "Subsequent Events." ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The Company adopted this guidance during the second
quarter of 2009. In accordance with the update, the Company evaluates subsequent
events through the date its financial statements are issued. The adoption of
this guidance did not have an impact on the Company's financial position or
results of operations.
In April 2009, the FASB updated ASC 320-10, "Investments - Debt and Equity
Securities." The guidance amends the other-than-temporary impairment ("OTTI")
guidance for debt securities. If the fair value of a debt security is less than
its amortized cost basis at the measurement date, the updated guidance requires
the Company to determine whether it has the intent to sell the debt security or
whether it is more likely than not it will be required to sell the debt security
before the recovery of its amortized cost basis. If either condition is met, an
entity must recognize full impairment. For all other debt securities that are
considered other-than-temporarily impaired and do not meet either condition, the
guidance requires that the credit loss portion of impairment be recognized in
earnings and the temporary impairment related to all other factors be recorded
in other comprehensive income. In addition, the guidance requires additional
disclosures regarding impairments on debt and equity securities. The Company
adopted this guidance effective April 1, 2009. The adoption of this guidance did
not have an impact on the Company's financial position or results of operations.
In April 2009, the FASB updated ASC 820-10, "Fair Value Measurements and
Disclosures," to provide guidance on determining fair value when the volume and
level of activity for the asset or liability have significantly decreased and
identifying transactions that are not orderly. This issuance provides guidance
on estimating fair value when there has been a significant decrease in the
volume and level of activity for the asset or liability and for identifying
transactions that may not be orderly. The guidance requires entities to disclose
the inputs and valuation techniques used to measure fair value and to discuss
changes in valuation techniques and related inputs, if any, in both interim and
annual periods. The Company adopted this guidance during 2009 and the adoption
did not have a material impact on the Company's financial position and results
of operations. The enhanced disclosures related to this guidance are included in
Note 4, "Fair Value Measurements," to the consolidated Financial Statements.
In April 2009, the FASB updated ASC 825-10, "Financial Instruments." This
update amends the fair value disclosure guidance in ASC 825-10-50 and requires
an entity to disclose the fair value of its financial instruments in interim
reporting periods as well as in annual financial statements. The methods and
significant assumptions used to estimate the fair value of financial instruments
and any changes in methods and assumptions used during the reporting period are
also required to be disclosed both on an interim and annual basis. The Company
adopted this guidance during 2009. The required disclosures have been included
in Note 4, "Fair Value Measurements," to the consolidated Financial Statements.
In June 2008, the FASB updated ASC 260-10, "Earnings Per Share." The
guidance concludes that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents are participating
securities that should be included in the earnings allocation in computing
earnings per share under the two-class method. The guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior period earnings per share data
presented must be adjusted retrospectively. The adoption of this update,
effective January 1, 2009, did not have a material impact on the Company's
financial position, results of operations, and earnings per share.
In March 2008, the FASB updated ASC 815, "Derivatives and Hedging." This
guidance 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 ASC 815 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This guidance encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The adoption of
this guidance did not have a material impact on its financial condition and
results of operations.
In February 2008, the FASB updated ASC 860, "Transfers and Servicing." This
guidance clarifies 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 became effective January 1, 2009. The
adoption of this guidance did not have a material effect on the Company's
results of operations or financial position.
9
In December 2007, the FASB updated ASC 810-10, "Consolidation," which
provides new accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest should be reported as a component of equity in the
consolidated financial statements. This guidance also required expanded
disclosures that identify and distinguish between the interests of the parent's
owners and the interests of the noncontrolling owners of an entity. The adoption
of this guidance did not have a material impact on the Company's results of
operations or financial position.
In December 2007, the FASB updated ASC 805, "Business Combinations." The
updated guidance will significantly change the accounting for business
combinations. Under ASC 805, 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. ASC 805 applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. The adoption of
this statement to have a material impact on the Company's financial condition
and results of operations.
NOTE 4 - FAIR VALUE MEASUREMENT DISCLOSURES
In accordance with ASC 820, the Company groups its financial assets and
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 Inputs - Unadjusted quoted prices in active markets for
identical assets or liabilities that are available at the measurement
date.
Level 2 Inputs - Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability
(such as interest rates, volatilities, prepayment speeds, credit
risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of
the assets or liability and are based on the entity's own assumption
about the assumptions that market participants would use to price the
asset or liability.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general clarification 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 liabilities carried at fair
value effective January 1, 2008.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale. The fair value of the Company's
available-for-sale securities portfolio was estimated using Level 2 inputs. The
Company obtains fair value measurements from an independent pricing service. The
fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, market consensus prepayment speeds, credit
information, and bonds' terms and conditions, among other factors. At September
30, 2009, the carrying value and estimated fair value, using Level 2 inputs, of
securities available-for-sale was $54.7 million.
Impaired Loans. 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. At September 30, 2009, the
estimated fair value, using Level 2 inputs, of impaired loans was $3,700,000.
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
September 30, 2009 and December 31, 2008:
10
(Dollars in thousands)
--------------------------------------------
September 30, 2009 December 31, 2008
--------------------- ---------------------
Carrying Fair value Carrying Fair value
amount amount
---------- ---------- ---------- ----------
Financial assets
Cash and cash equivalents $ 23,903 $ 23,903 $ 16,335 $ 16,335
Interest-bearing time deposits
with other banks 5,443 5,617 7,320 7,414
Available-for-sale securities 54,656 54,656 32,997 32,997
Federal Home Loan Bank stock 631 631 631 631
Loans, net 193,211 195,676 178,074 179,899
Accrued interest receivable 1,032 1,032 836 836
Due from broker 1,195 1,195
Financial liabilities
Deposits $ 263,514 264,524 220,879 220,595
Federal Home Loan Bank advances - - 1,000 1,000
Securities sold under agreements
to repurchase 741 741 577 577
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share (EPS) 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 EPS 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.
The following information was used in the computation of EPS on both a basic and
diluted basis for the quarters and nine months ended September 30, 2009 and
September 30, 2008:
(Dollars in thousands, except per share amounts)
For the three months ended
--------------------------
9/30/09 9/30/08
---------- ----------
Basic EPS computation:
Net income (loss) $ 160 $ (1,556)
Preferred stock net accretion (10) -
Preferred stock dividend paid (55) -
Cumulative preferred stock dividend earned - -
---------- ----------
Net income available to common shareholders $ 95 $ (1,556)
Weighted average shares outstanding, basic 864,976 864,976
Basic EPS $ 0.11 $ (1.80)
========== ==========
Diluted EPS computation:
Net income (loss) $ 160 $ (1,556)
Preferred stock net accretion (10) -
Preferred stock dividend paid (55) -
Cumulative preferred stock dividend earned - -
---------- ----------
Net income available to common shareholders $ 95 $ (1,556)
Weighted average shares outstanding, assuming
dilution 864,976 864,976
Dilutive potential shares - -
---------- ----------
864,976 864,976
Diluted EPS $ 0.11 $ (1.80)
========== ==========
11
(Dollars in thousands, except per share amounts)
For the nine months ended
-------------------------
9/30/09 9/30/08
---------- ----------
Basic EPS computation:
Net income (loss) $ 527 $ (931)
Preferred stock net accretion (20) -
Preferred stock dividend paid (84) -
Cumulative preferred stock dividend earned (28) -
---------- ----------
Net income available to common shareholders $ 395 $ (931)
Weighted average shares outstanding, basic 864,976 858,369
Basic EPS $ 0.46 $ (1.09)
========== ==========
Diluted EPS computation:
Net income (loss) $ 527 $ (931)
Preferred stock net accretion (20) -
Preferred stock dividend paid (84) -
Cumulative preferred stock dividend earned (28) -
---------- ----------
Net income available to common shareholders $ 395 $ (931)
Weighted average shares outstanding, assuming
dilution 864,976 858,369
Dilutive potential shares - -
---------- ----------
864,976 858,369
Diluted EPS $ 0.46 $ (1.09)
========== ==========
NOTE 6 - OTHER THAN TEMPORARY IMPAIRMENT
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:
September 30, 2009 (Dollars in thousands)
-----------------------------------------------------------------
Less than 12 months 12 Months or longer Total
--------------------- --------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
-------- ------------ -------- ------------ -------- ------------
September 30, 2009
Debt securities
issued by the U.S.
Treasury and other
U.S. government
corporations and
agencies $ 1,000 $ 3 $ - $ - $ 1,000 $ 3
Obligations of
states and
municipalities 311 1 - - 311 1
Mortgage-backed
securities 3,785 48 1,454 249 5,239 297
-------- ------------ -------- ------------ -------- ------------
Total temporarily
impaired
securities $ 5,096 $ 52 $ 1,454 $ 249 $ 6,550 $ 301
======== ========== ======== ============ ======== ============
The investments in the Company's investment portfolio that are temporarily
impaired as of September 30, 2009 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 September 30, 2009 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.
12
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
------------------------------------------------------------------------
of Operations
- -------------
Forward-Looking Statements
When used in this quarterly report on Form 10-Q (the "Quarterly Report"),
the words "intends," "expects," "plans," "estimates," "projects," "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. The Company 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 the quarter ended
September 30, 2009. 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. The following factors, among others,
could cause actual results to differ materially from such forward-looking
statements: competitive pressures on loan and deposit product pricing; actions
of competitors; changes in economic conditions; extent and timing of actions of
the Federal Reserve Board ("the Fed"); customer deposit disintermediation;
changes in customers' acceptance of our products and services; and the extent
and timing of legislative and regulatory actions and reforms.
Forward-looking statements included in this Quarterly Report speak only as
of the date hereof 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
Management's Discussion and Analysis of Financial Conditions and Results of
Operations is designed to provide a better understanding of the significant
changes and trends related to the Company's financial condition, results of
operations, and liquidity and capital resources. The discussion should be read
in conjunction with the consolidated financial statements of the Company. All
adjustments which, in the opinion of management, are necessary in order to make
the consolidated financial statements not misleading have been made.
The Company's only business is its investment in The Simsbury Bank & Trust
Company (the "Bank"), which is a community-oriented financial institution
providing a variety of banking and investment services. The Bank offers a full
range of banking services including commercial loans, term real estate loans,
construction loans, SBA loans and a variety of consumer loans; checking,
savings, certificates of deposit and money market deposit accounts; and safe
deposit and other customary non-deposit banking services to consumers and
businesses in north central Connecticut.
The Bank offers investment products and services to customers through SBT
Investment Services, Inc., a wholly-owned subsidiary of the Bank, and its
affiliation with the securities broker/dealer LPL Financial.
Disclosure of the Company's significant accounting policies is included in
Note 2 to the consolidated financial statements of the Company's Annual Report
on Form 10-K for the year ended December 31, 2008. Some of these policies are
particularly sensitive, requiring significant judgments, estimates and
assumptions to be made by management. One of these significant policies relates
to the provision for loan losses. See the heading "Provision for Loan Losses"
below for further details about the Bank's current provision.
Results of Operation
Overview
For the quarter ended September 30, 2009, the Company earned net income of
$160,000 and net income available to common shareholders of $95,000 or $0.11 per
basic and diluted common share. For the nine months ended September 30, 2009,
net income amounted to $527,000 and net income available to common shareholders
equaled $395,000 or $0.46 per basic and diluted common share.
Key items for the quarter include:
13
- - Net income increased substantially compared to the third quarter of 2008
because of non-recurring items discussed below that impacted 2008 earnings.
- - Excluding the non-recurring items, net income for the quarter increased by
$48,000 or 43% and diluted earnings per share declined by $0.02 compared to
2008 third quarter. Year to date, excluding non-recurring items, net income
increased by $118,000 or 29% and diluted earnings per share declined by
$0.01.
- - Strong growth in both retail and municipal deposits resulted in a 30%
increase in total deposits compared to September 30, 2008.
- - Loans outstanding grew to $195 million, an increase of $16 million, or 9%,
compared to September 30, 2008.
- - The loan portfolio experienced an increase in delinquencies during the
quarter, but the overall quality of the loan portfolio remains very sound.
- - The Company's capital position remained very strong, with capital ratios
well in excess of well-capitalized regulatory standards.
The Company's previous year's net income was impacted by two major items: (1)
non-recurring income of $328,000 for Bank Owned Life Insurance death benefits
occurring in the quarter ended June 30, 2008 and (2) an
other-than-temporary-impairment ("OTTI") charge on Fannie Mae and Freddie Mac
preferred stock of $1,668,000 in the quarter ended September 30, 2008. Excluding
these items, third quarter 2008 net income and net income available to common
shareholders would have been $112,000 or $0.13 per diluted share, and September
30, 2008 year to date net income and net income available to common shareholders
would have been $409,000 or $0.47 per share. The following table compares 2009
to 2008 excluding these non-recurring items:
- --------------------------------------------------------------------------------
Excluding 2008 Non-Recurring Items
- --------------------------------------------------------------------------------
For the Quarter Ended Year to Date
- --------------------------------------------------------------------------------
9/30/09 9/30/08 9/30/09 9/30/08
- --------------------------------------------------------------------------------
Net Income (000) $ 160 $ 112 $ 527 $ 409
- --------------------------------------------------------------------------------
Income Available to Common Shareholders
(000) $ 95 $ 112 $ 395 $ 409
- --------------------------------------------------------------------------------
Diluted Income per Share $ 0.11 $ 0.13 $ 0.46 $ 0.47
- --------------------------------------------------------------------------------
On September 30, 2009, loans outstanding were $195 million, an increase of $16
million, over a year ago. Since September 30, 2008, commercial loans increased
by 11% and residential mortgages by 12%. Mortgage loan growth does not reflect
the $23 million in mortgages originated but sold as part of the Bank's
asset/liability management strategy. Sale of these mortgages resulted in a
$17,000 contribution to fee income for the quarter and $60,000 year to date. The
Company also purchased a $9.9 million pool of high quality, seasoned, short-term
residential mortgage loans during the quarter. At September 30, 2009, loans 30
days or more past due, including non-performing loans, totaled $4.4 million, or
2.28% of total loans compared to $2.6 million, or 1.46% at June 30, 2009.
Non-performing loans were $2.5 million, or 1.27% of total loans compared to $1.4
million at June 30, 2009, or 0.78% of total loans. With a loan loss provision of
$192,000 during the quarter, the Company's allowance for loan losses at
September 30, 2009 was $2.138 million or 1.10% of total loans compared to the
June 30, 2009 total of $2.036 million or 1.14% of total loans. The Company has
no foreclosed properties or Other Real Estate Owned (OREO) in its portfolio.
Core deposits (demand, savings, and NOW accounts) grew by $33 million or 24%
over the past twelve months. Total deposits ended the quarter at $264 million,
an increase of $61 million, or 30%, over a year ago. The Bank's deposit mix
continued to be favorable with 27% checking (Demand and Now accounts), 37%
savings and 36% certificates of deposit contributing to a relatively low cost of
funds of 1.19%. A seasonal inflow of municipal tax deposits contributed to the
deposit increase.
The Company's taxable-equivalent net interest margin (taxable-equivalent net
interest and dividend income divided by average earning assets) decreased by 15
basis points from 3.57% in the second quarter of 2009 to 3.42% in the third
quarter of 2009. The margin declined by 70 basis points when compared to the
third quarter of 2008.
14
Total revenues, consisting of net interest and dividend income plus non-interest
income, were $2,752,000 in the third quarter of 2009. Revenues for the third
quarter of 2008 were impacted by a non-recurring OTTI charge on Fannie Mae and
Freddie Mac preferred stock of $1,668,000. Excluding this item, third quarter
2008 total revenues were $2,446,000. Compared to 2008, third quarter 2009 total
revenues, excluding non-recurring items, increased by $306,000, or 13%. The
primary contributor to revenue enhancement over this period was an increase in
net interest income resulting from deposit, loan, and investment portfolio
growth.
Total non-interest expenses for the third quarter of 2009 were $2,367,000, an
increase of $125,000 or 5% over the third quarter of 2008 primarily due to an
increase in FDIC insurance premiums. All FDIC financial institutions were
charged a special assessment during the third quarter. This amounted to $123,000
for the Bank. Salary and benefit expenses decreased by $139,000 or 13% compared
to the third quarter of 2008. Premises and equipment expenses declined $143,000
or 28% compared to the third quarter of 2008. For the nine months ended
September 30, 2009, the FDIC insurance premiums have increased by $248,000 or
248%. 50% of the increase was due to the special assessment; 39% was due to an
increase in the assessment rate; and 11% was due to deposit growth.
Capital levels for The Simsbury Bank & Trust Company remain well in excess of
those required to meet the regulatory "well-capitalized" designation.
Capital Ratios 9/30/09
- --------------------------------------------------------------------------------
The Simsbury Bank Regulatory Standard for
& Trust Company Well-Capitalized Banks
- --------------------------------------------------------------------------------
Tier 1 Leverage Capital Ratio 7.01% greater than or equal to 5.00%
- --------------------------------------------------------------------------------
Tier 1 Risk-Based Capital Ratio 12.10% greater than or equal to 6.00%
- --------------------------------------------------------------------------------
Total Risk-Based Capital Ratio 13.35% greater than or equal to 10.00%
- --------------------------------------------------------------------------------
Net Interest Income and Net Interest Margin
The Company'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, including 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
yield on interest-earning assets. The Company'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 Company's net
yield on interest-earning assets 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 Bank.
Net interest and dividend income after provision for loan losses plus
noninterest income was $2,560,000 in the third quarter of 2009 compared to
$2,396,000 excluding write-down of $1,668,000 in Fannie Mae and Freddie Mac
preferred stock. The Company's net interest margin, defined as the ratio of
taxable equivalent net interest and dividend income to interest-earning assets
or net yield on earning assets, decreased from 4.12% for the quarter ending
September 30, 2008 to 3.42% for the quarter ending September 30, 2009. The
Bank's net interest spread, defined as the difference between the yield on
earning assets and the cost of deposits and borrowings, decreased from 3.76% for
the quarter ending September 30, 2008 to 3.23% for the quarter ending September
30, 2009. The Bank's yield on interest earning assets decreased during the third
quarter of 2009 to 4.42% as compared to 5.4% for the third quarter of 2008,
while the cost of deposits and borrowings decreased from 1.64% for the third
quarter of 2008 to 1.19% for the third quarter of 2009.
15
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by 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 transfers to the allowance, as determined by the Company's
guidelines. The total allowance for loan losses at September 30, 2009 was
$2,138,000 or 1.10% of outstanding loans as compared to $1,822,000 or 1.01% of
outstanding loans as of September 30, 2008. The provision for loan losses was
$192,000 for the quarter ended September 30, 2009. The Bank charged off nine
loans for $188,417 for the third quarter of 2009 and five loans for $265,000 for
the third quarter of 2008. During the third quarter of 2009 the Bank had three
recoveries of $1,874 and two of $727 for the third quarter of 2008. The Bank
believes the allowance for loan losses is adequate.
Non-interest Income and Non-interest Expense
Total non-interest income for the first nine months of 2009 was $1,143,000,
an increase of $163,000 compared to $980,000 (excluding non-recurring revenue of
$328,000 for Bank Owned Life Insurance and write-downs of $1,668,000 for
available-for-sale securities) in the first nine months of 2008. At September
30, 2009, the Bank had approximately 20,500 deposit accounts, unchanged from the
approximately 20,500 accounts at quarter-end September 30, 2008. The major
portion of non-interest income is derived from service and overdraft charges.
Total non-interest expense for the first nine months of 2009 was
$6,581,000, an increase of $424,000 over total non-interest expense of
$6,157,000 for the first nine months of 2008. The ratio of annualized operating
expenses to average assets was 3.24% for the third quarter of 2009 compared to
4.09% for the third quarter of 2008.
Salaries and employee benefits comprised approximately 46% and 51% of total
non-interest expense in the first nine months for 2009 and 2008 respectively.
Other major categories included premises and equipment at approximately 17% and
21% in the first nine months of 2009 and 2008 respectively; advertising and
promotions at approximately 5% in the first nine months of 2009 and 2008
respectively; and professional fees at approximately 6% and 3% in the first nine
months of 2009 and 2008 respectively.
Financial Condition
Investment Portfolio
In order to maintain a reserve of readily salable 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 to receipt of deposits of public funds and repurchase agreements. At
September 30, 2009, the Bank had 29 securities with a carrying value totaling
$11,217,160 pledged for such purposes. At September 30, 2008, the Bank had 15
securities with a carrying value totaling $4,881,007 pledged for such purposes.
As of September 30, 2009 and 2008, the Bank's investment portfolio
consisted of U.S. government and agency securities, municipal securities,
corporate bonds, mortgage-backed securities, money market securities, and U.S.
government-sponsored agency equity securities. The Bank's policy is to stagger
the maturities of its investments to meet overall liquidity requirements of the
Bank.
The fair market value of investments in available-for-sale securities was
$54,656,000 and $16,829,000 which are 1% above and 3% below amortized cost as of
September 30, 2009 and September 30, 2008, respectively. Management has the
ability to hold debt securities until maturity, or for the foreseeable future if
classified as available-for-sale, and equity securities until recovery to cost
basis occurs.
16
Management periodically reviews all investment securities with significant
declines in fair value for potential other-than-temporary impairment pursuant to
the guidance in ASC 320-10, "Investments - Debt and Equity Securities." ASC
320-10 addresses the determination as to when an investment is considered
impaired, whether the impairment is other-than-temporary, and the measurement of
an impairment loss. Management evaluates the Company's investment portfolio on
an ongoing basis. As of September 30, 2009, there were no investment securities
in the investment portfolio that management determined to be
other-than-temporarily impaired.
Loan Portfolio
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 year
to twenty-five years (although currently the Bank has no loans with maturities
greater than twenty 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 by the Bank
to finance the construction of commercial and single-family residential
property. These loans are typically short-term. The Bank 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 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 to no more than
50% to 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, loans guaranteed by the Small Business Administration (SBA) and
certain other real estate loans easily sold in the secondary market may be made
for longer maturities. The Bank has been designated a Certified Lender by the
SBA. As an originator of SBA loan products, the Bank can originate SBA loans
including loans with guarantees which will mitigate the Bank's risk on certain
commercial loans. 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 sold 18 loans in the nine months ended September 30, 2009 with a
combined principal balance of $3,976,000, which resulted in a gain of $55,151.
There were no sold loans in the third quarter of 2008. The Bank currently has
agreements in place to sell loans to Freddie Mac and SunTrust. During the
quarter, the Company purchased a $9,953,000 pool of high quality, seasoned,
short-term residential mortgage loans.
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. The Bank
has an agreement with BCI Financial Corp (BCI) to purchase auto loans from BCI.
As part of the agreement, BCI services the loans for the Bank. As of September
30, 2009, the Bank had approximately $2,613,000 in auto loans purchased from BCI
on its books as compared with September 30, 2008, at which time the Bank had
approximately $3,453,000 in auto loans purchased from BCI on its books.
The Bank is subject to certain lending limits. With certain exceptions, the
Bank is permitted under applicable law to make related extensions of credit to
any single borrowing entity of up to 15% of the Bank's capital and reserves.
Credit equaling an additional 10% of the Bank's capital and reserves may be
extended if the credit is fully secured by qualified collateral of limited
types. As of September 30, 2009, the Bank's lending limits were $3,446,735 and
$5,744,558, respectively. As of September 30, 2008, these lending limits were
$2,609,400 and $4,348,999, respectively. The Bank sells participations in its
loans when necessary to stay within lending limits.
The Bank does not have any concentrations in its loan portfolio by industry
or group of industries. However, as of September 30, 2009, approximately 72% of
the Bank's loans were secured by residential real property located in
Connecticut compared with 73% as of September 30, 2008.
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 non-accrual
status, unless the loan is well collateralized and in the process of collection.
Interest received on non-accrual 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 18 non-accrual loans at September 30, 2009 with a balance of
approximately $2,486,000. The Bank had no non-accrual loans at September 30,
2008.
17
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
will be known as "other real estate owned" (OREO), and will be 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 September 30, 2009 and 2008,
no OREO was held by the Bank.
Non-payment of loans is an inherent risk in 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 creditworthiness 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 Bank'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 allowance for credit 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 times a further review of loans is conducted.
There were 56 classified loans with combined outstanding balances of
$9,497,634 as of September 30, 2009. There were 37 classified loans with a
combined outstanding balance of $5,941,441 as of September 30, 2008. The Bank
has no exposure to sub-prime loans in its loan portfolio. The increase in
classified loans was due to the continued effects of a slower residential
development market in a segment of the Bank's portfolio. The Bank's overall
asset quality and loan loss reserves of 1.10% of loans compares very well to its
peer banks.
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.
Deposits
Deposits are the Bank's primary source of funds. At September 30, 2009, the
Bank had a deposit mix of 27% checking, 37% savings and 36% certificates. The
Bank's net interest income is enhanced by its percentage of non-interest-bearing
deposits. As of September 30, 2008, the deposit mix was 33% checking, 35%
savings and 32% certificates. At September 30, 2009, fifteen percent of the
total deposits of $264 million were non-interest-bearing as compared with
September 30, 2008 at which time nineteen percent of the Bank's total deposits
of $202 million were non-interest-bearing. As of September 30, 2009 and 2008,
the Bank had $41,023,000 and $15,343,000 respectively in deposits from public
sources.
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.
The Bank is not dependent upon funds from sources outside the United States
and has not made loans to any foreign entities.
18
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 is a member of Promontory Interfinancial Network LLC's
Certificate of Deposit Account Registry Service (CDARS). This allows the Bank to
offer its customers FDIC insurance, which reflects the deposit insurance limits
in effect on the report date, by placing the deposits in the CDARS network.
Accounts placed in this manner are considered brokered deposits. As of September
30, 2009, the Bank had $7,117,000 deposits in the CDARS network and $617,000 as
of September 30, 2008. The Bank had no other brokered deposits as of September
30, 2009 and September 30, 2008.
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 September 30, 2009, the Bank's liquidity ratio was 29.81%, defined as the
sum of $10.2 million in Federal funds sold, $54.7 million in available-for-sale
securities, and $10.4 million in cash and due from banks, $89,313 in
interest-bearing deposits with the Federal Home Loan Bank and $3.3 million in
money market mutual funds as a percentage of deposits. This ratio was 19.6% at
September 30, 2008 defined as the sum of $9 million in Federal funds sold, $16.8
million in available-for-sale securities, $11.3 million in cash and due from
banks, $2.9 million in interest-bearing deposits with the Federal Home Loan
Bank, and $27,000 in money market mutual funds 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 offered in
connection with its certificates of deposit and by offering variable rate loans.
The Bank has generally been able to control its exposure to changing interest
rates by maintaining floating interest rate loans, shorter term investments, and
a majority of its time certificates in relatively short maturities.
The Executive Committee of the Company's Board of Directors meets at least
quarterly to monitor the Bank's investments and liquidity needs and oversee its
asset-liability management. In between meetings of the Committee, the Bank's
Management oversees the Bank's liquidity.
Capital Requirements
The banking industry is subject to capital adequacy requirements based on
risk-adjusted assets. The risk-based guidelines are used to evaluate capital
adequacy and are based on the institution's asset risk profile, including
investments and loans, and off-balance sheet exposures, such as unused loan
commitments and standby letters of credit. The guidelines require that a portion
of total capital be core, or Tier 1. Tier 1 capital is the aggregate of common
shareholders' equity and perpetual preferred stock, less goodwill and certain
other deductions. Total capital consists of Tier 1 capital plus the allowance
for loan losses subject to certain limitations. Leverage ratio is defined as
Tier 1 capital divided by average assets.
At September 30, 2009 and 2008, 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.
Inflation
The impact of inflation on financial institutions may differ significantly
from the impact 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 as to value. This is especially true for companies with a
high percentage of interest-rate-sensitive assets and liabilities, such as a
bank. Banks seek to reduce the impact of inflation by managing the
interest-rate-sensitivity gap. The Bank attempts to manage its
interest-rate-sensitivity gap and to structure its mix of financial instruments
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.
19
Financial institutions are also affected by inflation's impact on
non-interest expenses, such as salaries and occupancy expenses. From 1992
through September 30, 2009, inflation has remained relatively stable, due
primarily to continuous management of the money supplied by the Fed. Based on
the Bank's interest-rate-sensitivity position, the Bank benefits in the short
term from rising interest rates and is adversely affected by falling interest
rates. As such, indirectly the management of the money supply by the Fed to
control the rate of inflation has an impact on the earnings of the Bank. Also,
changes in interest rates may have a corresponding impact on the ability of
borrowers to repay loans with the Bank.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 4T. Controls and Procedures
The Company has initiatives in place to ensure compliance with the
Sarbanes-Oxley Act of 2002. The Company has an Internal Compliance Committee
that is responsible for the monitoring of and compliance with all federal
regulations. This committee makes reports on compliance matters to the Audit and
Compliance Committee of the Company's Board of Directors.
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures as of September 30, 2009.
Based upon this evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of that date, the Company's disclosure
controls and procedures were effective at ensuring that required information
will be disclosed on a timely basis.
As used herein, "disclosure controls and procedures" mean controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There was no change in the Company's internal controls over financial
reporting during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
20
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. Description
----------- -----------
3(i) Certificate of Incorporation (incorporated by reference
to Exhibit 3(i) of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2008)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2 of the
Company's Form 8-K12G3 filed with the Securities and
Exchange Commission on March 7, 2006)
31.1 Section Rule 13a-14(a)/15d-14(a) Certification by Chief
Executive Officer
31.2 Section Rule 13a-14(a)/15d-14(a) Certification by Chief
Financial Officer
32.1 Section 1350 Certification by Chief Executive Officer
32.2 Section 1350 Certification by Chief Financial Officer
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SBT BANCORP, INC.
Date: November 16, 2009 By: /s/ Martin J. Geitz
------------------------------
Martin J. Geitz
Chief Executive Officer
Date: November 16, 2009 By: /s/ Anthony F. Bisceglio
------------------------------
Anthony F. Bisceglio
Chief Financial Officer
22
EXHIBIT INDEX
3(i) Certificate of Incorporation (incorporated by reference
to Exhibit 3(i) of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2008)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2 of the
Company's Form 8-K12G3 filed with the Securities and
Exchange Commission on March 7, 2006)
31.1 Section Rule 13a-14(a)/15d-14(a) Certification by Chief
Executive Officer
31.2 Section Rule 13a-14(a)/15d-14(a) Certification by Chief
Financial Officer
32.1 Section 1350 Certification by Chief Executive Officer
32.2 Section 1350 Certification by Chief Financial Officer
23