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 June 30, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
760 Hopmeadow Street, P.O. Box 248, Simsbury, CT 06070
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(Address of principal executive offices) (Zip Code)
(860) 408-5493
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(Registrant's telephone number, including area code)
Not Applicable
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(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 (
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files.
Yes [ ] 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 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 July 31, 2010, the registrant had 864,976 shares of its Common Stock, no
par value per share, outstanding.
- 2 -
TABLE OF CONTENTS
SBT Bancorp, Inc.
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2010 and
2009 (unaudited) and December 31, 2009 4
Condensed Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2010 and 2009 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 2010 and 2009
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2010 and 2009 (unaudited) 7
Notes to Condensed Consolidated Financial Statements -
(unaudited) 8 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 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 21
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. [Removed and Reserved] 21
Item 5. Other Information 21
Item 6. Exhibits 22
SIGNATURES 23
EXHIBIT INDEX 24
- 3 -
PART I - FINANCIAL INFORMATION
SBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
ASSETS 6/30/10 12/31/09 6/30/09
- ------ ---------- -------- ---------
(unaudited) (unaudited)
Cash and due from banks $ 8,357 $ 8,212 $ 10,256
Interest-bearing deposits with the Federal Reserve Bank of Boston 2,448 4,945 2,755
Interest-bearing deposits with the Federal Home Loan Bank 4 163 55
Federal funds sold 78 2,416 7,870
Money market mutual funds 336 1,353 8,882
----------- --------- -----------
Cash and cash equivalents 11,223 17,089 29,818
Interest-bearing time deposits with other banks 5,581 5,488 5,398
Investments in available-for-sale securities (at fair value) 45,739 50,011 45,507
Federal Home Loan Bank stock, at cost 660 631 631
Loans outstanding 205,044 193,515 178,559
Less allowance for loan losses 2,307 2,211 2,132
----------- --------- -----------
Loans, net 202,737 191,304 176,427
----------- --------- -----------
Premises and equipment 597 684 747
Accrued interest receivable 981 977 921
Bank owned life insurance 3,929 3,846 3,759
Other assets 3,517 3,709 2,639
----------- --------- -----------
Total other assets 9,024 9,216 8,066
----------- --------- -----------
TOTAL ASSETS $ 274,964 $ 273,739 $ 265,847
=========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Demand deposits $ 48,986 $ 43,887 $ 40,513
Savings and NOW deposits 125,838 124,482 108,505
Time deposits 74,658 82,077 93,898
----------- --------- -----------
Total deposits 249,482 250,446 242,916
Securities sold under agreements to repurchase 2,609 913 757
Other liabilities 964 968 1,096
----------- --------- -----------
Total liabilities 253,055 252,327 244,769
----------- --------- -----------
Stockholders' equity:
Preferred Stock - Series A 3,828 3,805 3,781
Preferred Stock - Series B 222 225 228
Common stock, no par value; authorized 2,000,000 shares;
issued and outstanding 864,976 shares on 6/30/10, 12/31/09, and
6/30/09 9,381 9,372 9,358
Retained earnings 7,961 7,782 7,766
Accumulated other comprehensive income (loss) 517 228 (55)
----------- --------- -----------
Total stockholders' equity 21,909 21,412 21,078
----------- --------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 274,964 $ 273,739 $ 265,847
=========== ========= ===========
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 six months ended
----------------------- ------------------------
6/30/10 6/30/09 6/30/10 6/30/09
---------- ---------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 2,559 $ 2,399 $ 5,061 $ 4,807
Investment securities 470 478 940 900
Federal funds sold and overnight deposits 5 4 9 9
---------- ---------- ----------- -----------
Total interest and dividend income 3,034 2,881 6,010 5,716
---------- ---------- ----------- -----------
Interest expense:
Deposits 427 729 900 1,544
Repurchase agreements 11 1 21 4
Federal Home Loan Bank advances - - - 7
---------- ---------- ----------- -----------
Total interest expense 438 730 921 1,555
---------- ---------- ----------- -----------
Net interest and dividend income 2,596 2,151 5,089 4,161
Provision for loan losses 200 78 425 130
---------- ---------- ----------- -----------
Net interest and dividend income after
provision for loan losses 2,396 2,073 4,664 4,031
---------- ---------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 139 134 270 236
Other service charges and fees 164 148 318 268
Increase in cash surrender value of life
insurance policies 41 42 83 55
Gain on loans sold 8 40 8 43
Investment Services fees and commissions 23 17 46 47
Other income 10 27 22 46
---------- ---------- ----------- -----------
Total noninterest income 385 408 747 695
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,189 1,022 2,275 2,069
Premises and equipment 340 363 709 736
Advertising and promotions 97 99 192 179
Forms and supplies 29 48 63 88
Professional fees 161 162 363 270
Directors' fees 33 33 81 66
Correspondent charges 73 73 138 139
Postage 21 24 45 49
FDIC assessment 100 100 196 155
Data processing 110 36 227 72
Other expenses 278 215 462 391
---------- ---------- ----------- -----------
Total noninterest expense 2,431 2,175 4,751 4,214
---------- ---------- ----------- -----------
Income before income taxes 350 306 660 512
Income tax provision 77 85 144 145
---------- ---------- ----------- -----------
Net income $ 273 $ 221 $ 516 $ 367
========== ========== =========== ===========
Net income available to common shareholders $ 209 $ 157 $ 387 $ 300
========== ========== =========== ===========
Average shares outstanding, basic 864,976 864,976 864,976 864,976
Earnings per common share, basic $ 0.24 $ 0.18 $ 0.45 $ 0.35
========== ========== =========== ===========
Average shares outstanding, assuming dilution 865,376 864,976 865,283 864,976
Earnings per common share, assuming dilution $ 0.24 $ 0.18 $ 0.45 $ 0.35
========== ========== =========== ===========
- 5 -
SBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated Other
Preferred Stock Preferred Stock Common Retained Comprehensive
Series A Series B Stock Earnings Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2008 $ - $ - $ 9,328 $ 7,543 $ (25) $ 16,846
Comprehensive income:
Net income - - - 367 - -
Net change in unrealized holding loss on
available-for-sale securities, net of tax
effect - - - - (30) -
Comprehensive income - - - - - 337
Preferred stock issuance 3,770 230 - - - 4,000
Preferred stock dividends (31) (31)
Preferred stock amortization (accretion) 11 (2) (9)
Stock-based compensation - - 30 - 30
Dividends declared common stock ($0.12 per
share) - - (104) - (104)
------------------------------------------------------------------------------------
Balance, June 30, 2009 $ 3,781 $ 228 $ 9,358 $ 7,766 $ (55) $ 21,078
====================================================================================
Balance, December 31, 2009 $ 3,805 $ 225 $ 9,372 $ 7,782 $ 228 $ 21,412
Comprehensive Income:
Net income - - - 516 - -
Net change in unrealized holding income on
available-for-sale securities, net of tax
effect - - - - 289 -
Comprehensive income - - - - - 805
Preferred stock dividends - - - (109) - (109)
Preferred stock amortization (accretion) 23 (3) - (20) - -
Stock-based compensation - - 9 - 9
Dividends declared common stock ($0.12 per
share) - - - (208) - (208)
------------------------------------------------------------------------------------
Balance, June 30, 2010 $ 3,828 $ 222 $ 9,381 $ 7,961 $ 517 $ 21,909
====================================================================================
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 six months ended
------------------------------
6/30/10 6/30/09
-------------- --------------
Cash flows from operating activities:
Net income $ 516 $ 367
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net 93 48
Interest capitalized on interest-bearing time deposits with other banks (93) -
Change in deferred loan costs, net (16) 31
Provision for loan losses 425 130
Depreciation and amortization 115 138
Accretion on impairment of operating lease (22) (23)
Decrease (increase) in other assets 51 (177)
Increase in interest receivable (4) (85)
(Increase) decrease in taxes receivable (27) 92
Stock based compensation 9 30
Decrease in other liabilities (4) (350)
Increase in cash surrender value of bank owned life insurance (83) (55)
Increase in interest payable 6 15
-------------- --------------
Net cash provided by operating activities 966 161
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities of interest-bearing time deposits with other banks - 1,922
Purchases of available-for-sale securities (7,032) (19,046)
Proceeds from maturities of available-for-sale securities 11,685 6,438
Loan originations and principal collections, net (9,750) 1,485
Purchases of FHLB stock (29) -
Loans purchased (2,097) -
Purchase of life insurance policies - (2,500)
Capital expenditures (29) (60)
Recoveries of loans previously charged-off 4 1
-------------- --------------
Net cash used in investing activities (7,248) (11,760)
-------------- --------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts 6,455 12,466
Net (decrease) increase in time deposits (7,418) 9,571
Net change in short-term advances from the Federal Home Loan Bank - (1,000)
Net increase in securities sold under agreements to repurchase 1,696 180
Proceeds from issuance of preferred stock - 4,000
Dividends paid - preferred stock (109) (31)
Dividends paid - common stock (208) (104)
-------------- --------------
Net cash provided by financing activities 416 25,082
-------------- --------------
Net (decrease) increase in cash and cash equivalents (5,866) 13,483
Cash and cash equivalents at beginning of period 17,089 16,335
-------------- --------------
Cash and cash equivalents at end of period $ 11,223 $ 29,818
============== ==============
Supplemental disclosures:
Interest paid 915 1,540
Income taxes paid 95 53
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, 2010.
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, 2009.
NOTE 2 - STOCK-BASED COMPENSATION
At June 30, 2010, 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 three and six months ended June 30, 2010, the Company recognized
$2,000 and $9,000, respectively in stock-based employee compensation expense.
During the three and six months ended June 30, 2009, the Company recognized
$16,000 and $30,000, respectively in stock-based employee compensation expense.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses." This ASU
is created to provide financial statement users with greater transparency about
an entity's allowance for credit losses and the credit quality of its financing
receivables. This ASU is intended to provide additional information to assist
financial statement users in assessing the entity's credit risk exposures and
evaluating the adequacy of its allowance for credit losses. The amendments in
this ASU are effective as of the end of a reporting period for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 15, 2010.
In April 2010, the FASB issued ASU 2010-18, "Effect of a Loan Modification
When the Loan is Part of a Pool that Is Accounted for as a Single Asset." As a
result of this ASU, modifications of loans that are accounted for within a pool
under Subtopic 310-30 do not result in the removal of those loans from the pool
even if the modification of those loans would otherwise be considered a troubled
debt restructuring. An entity will continue to be required to consider whether
the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. The amendments in this ASU are effective for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010. The amendments are to be applied prospectively. Early application is
permitted.
In March 2010, the FASB issued ASU 2010-11, "Scope Exception Related to
Embedded Credit Derivatives." The ASU clarifies that certain embedded
derivatives, such as those contained in certain securitizations, CDOs and
structured notes, should be considered embedded credit derivatives subject to
potential bifurcation and separate fair value accounting. The ASU allows any
beneficial interest issued by a securitization vehicle to be accounted for under
the fair value option at transition. At transition, the Company may elect to
reclassify various debt securities (on an instrument-by-instrument basis) from
held-to-maturity (HTM) or available-for-sale (AFS) to trading. The new rules
are effective July 1, 2010. The Company is currently analyzing the impact of
the changes to determine the population of instruments that may be reclassified
to trading upon adoption.
- 8 -
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about
Fair Value Measurements." The ASU requires disclosing the amounts of significant
transfers in and out of Level 1 and 2 of the fair value hierarchy and describing
the reasons for the transfers. The disclosures are effective for reporting
periods beginning after December 15, 2009. The Company adopted ASU 2010-06 as of
January 1, 2010. The required disclosures are included in Note 4. Additionally,
disclosures of the gross purchases, sales, issuances and settlements activity in
the Level 3 of the fair value measurement hierarchy will be required for fiscal
years beginning after December 15, 2010.
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. These standards did not have a
significant impact on the Company's financial statements.
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. The Company did not have any significant
transfers of assets or liabilities between Levels 1 and 2 of the fair value
hierarchy during the three and six months ended June 30, 2010.
Assets 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 June 30,
2010 and December 31, 2009, the carrying value and estimated fair value, using
Level 2 inputs, of securities available-for-sale was $45.7 million and $50.0
million, respectively.
- 9 -
Assets Measured at Fair Value on a Nonrecurring Basis
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 June 30, 2010 and December
31, 2009, the estimated fair value, using Level 2 inputs, of impaired loans was
$16,000 and $194,000, respectively.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, were as follows as of June
30, 2010 and December 31, 2009:
(Dollars in thousands)
------------------------------------------------
June 30, 2010 December 31, 2009
----------------------- -----------------------
Carrying Fair value Carrying Fair value
amount amount
----------- ---------- ----------- ----------
Financial assets
Cash and cash equivalents $ 11,223 $ 11,223 $ 17,089 $ 17,089
Interest-bearing time deposits with 5,581 5,855 5,488 5,691
other banks
Available-for-sale securities 45,739 45,739 50,011 50,011
Federal Home Loan Bank stock 660 660 631 631
Loans, net 202,737 211,413 191,304 193,185
Accrued interest receivable 981 981 977 977
Financial liabilities
Deposits $ 249,482 $ 250,076 250,446 251,268
Securities sold under agreements to
repurchase 2,609 2,609 913 913
The following table below presents the changes in Level 3 assets and liabilities
that are measured at fair value for the six months ended June 30, 2010:
(Dollars in thousands)
Fair Value Measurements
Using Significant
Unobservable Inputs
Level 3
--------------------------
Impaired Loans Total
-------------- ----------
Beginning balance, December 31, 2009 $ - $ -
Transfers in and/or out of Level 3 332,142 332,142
-------------- ----------
Ending balance, June 30, 2010 $ 332,142 $ 332,142
============== ==========
NOTE 5 - EARNINGS PER COMMON SHARE
Basic earnings per common 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 three and six months ended June 30, 2010 and
June 30, 2009:
- 10 -
(Dollars in thousands, except per share amounts)
For the three months ended
------------------------------------
6/30/10 6/30/09
----------------- -----------------
Basic EPS computation:
Net income $ 273 $ 221
Preferred stock net accretion (10) (10)
Preferred stock dividend paid (54) (29)
Cumulative preferred stock dividend earned - (25)
----------------- -----------------
Net income available to common shareholders $ 209 $ 157
Weighted average shares outstanding, basic 864,976 864,976
Basic EPS $ 0.24 $ 0.18
================= =================
Diluted EPS computation:
Net income $ 273 $ 221
Preferred stock net accretion (10) (10)
Preferred stock dividend paid (54) (29)
Cumulative preferred stock dividend earned - (25)
----------------- -----------------
Net income available to common shareholders $ 209 $ 157
Weighted average shares outstanding, assuming dilution 864,976 864,976
Dilutive potential shares 400 -
----------------- -----------------
865,376 864,976
Diluted EPS $ 0.24 $ 0.18
================= =================
(Dollars in thousands, except per share amounts)
For the six months ended
------------------------------------
6/30/10 6/30/09
----------------- -----------------
Basic EPS computation:
Net income $ 516 $ 367
Preferred stock net accretion (20) (10)
Preferred stock dividend paid (109) (29)
Cumulative preferred stock dividend earned - (28)
----------------- -----------------
Net income available to common shareholders $ 387 $ 300
Weighted average shares outstanding, basic 864,976 864,976
Basic EPS $ 0.45 $ 0.35
================= =================
Diluted EPS computation:
Net income $ 516 $ 367
Preferred stock net accretion (20) (10)
Preferred stock dividend paid (109) (29)
Cumulative preferred stock dividend earned - (28)
----------------- -----------------
Net income available to common shareholders $ 387 $ 300
Weighted average shares outstanding, assuming dilution 864,976 864,976
Dilutive potential shares 307 -
----------------- -----------------
865,283 864,976
Diluted EPS $ 0.45 $ 0.35
================= =================
- 11 -
NOTE 6 - IMPAIRED INVESTMENT SECURITIES
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, were as
follows:
As of June 30, 2010 (Dollars in thousands)
----------------------------------------------------------------------------
Less than 12 months 12 Months or longer Total
------------------------ ----------------------- -------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
--------- ------------- -------- ------------- --------- --------------
Debt securities
issued by the U.S.
Treasury and other
U.S. government
corporations and
agencies $ 3,377 $ (32) $ - $ - $ 3,377 $ (32)
Mortgage-backed
securities 814 (11) 1,083 (184) 1,897 (195)
--------- ------------- -------- ------------- --------- --------------
Total temporarily
impaired
securities $ 4,191 $ (43) $ 1,083 $ (184) $ 5,274 $ (227)
========= ============= ======== ============= ========= ==============
The investments in the Company's investment portfolio that were temporarily
impaired as of June 30, 2010 consisted of debt issued by U.S. government
corporations and agencies. The Company's management considers investments with
an unrealized loss as of June 30, 2010 to be only temporarily impaired because
the impairment is attributable to changes in market interest rates and current
market inefficiencies. The Company's management anticipates that the fair
value of securities that are currently impaired will recover to cost basis. As
the Company has the ability and intent to hold securities for the foreseeable
future, no declines are deemed to be other than temporary.
NOTE 7 - LOAN INFORMATION
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of June 30, 2010 and December 31,
2009:
Dollars in thousands
---------------------------------------
June 30, 2010 December 31, 2009
------------------ ------------------
Total nonaccrual loans $ 2,916 $ 3,153
================== ==================
Accruing loans which are 90 days or more overdue $ - $ 202
================== ==================
Information about loans that meet the definition of an impaired loan under ASC
310-10-35 is as follows as of June 30, 2010 and December 31, 2009:
(Dollars in thousands)
--------------------------------------------------------
June 30, 2010 December 31, 2009
--------------------------- ----------------------------
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 $ 509 $ 160 $ 354 $ 160
Loans for which there is no related
allowance for credit losses 1,457 - 1,912 -
------------- ------------ ------------ -------------
Totals $ 1,966 $ 160 $ 2,266 $ 160
============= ============ ============ =============
- 12 -
Included in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At June 30, 2010, the Company
had $412,000 in loans that were modified in troubled debt restructuring and
impaired.
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 June
30, 2010. 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, liquidity and capital resources. The discussion should be read in
conjunction with the consolidated financial statements of the Company for the
six months ended June 30, 2010. All adjustments which, in the opinion of
management, are necessary in order to make the consolidated financial statements
for the six months ended June 30, 2010 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, 2009. 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.
Overview
For the three months ended June 30, 2010, net income was $273,000, or $0.24
per diluted share. This was an increase over the net income of $221,000, or
$0.18 per diluted share, recorded in the three months ended June 30, 2009. For
the six months ended June 30, 2010, net income amounted to $516,000, or $0.45
per diluted share. This compares to net income of $367,000, or $0.35 per
diluted share, for the six months ended June 30, 2009. Total assets were $275
million on June 30, 2010, which was a slight increase of $1 million from the
$274 million in total assets as of December 31, 2009 and an increase of $9
million, or 3%, from the $266 million in total assets as of June 30, 2009.
- 13 -
Total revenues, consisting of net interest and dividend income plus
noninterest income, were $2,981,000 in the second quarter compared to $2,559,000
a year ago, an increase of 16%. Net interest and dividend income increased by
$445,000, or 21%, for the three months ended June 30, 2010 compared to the same
period in the prior fiscal year. This increase was driven by a 3% growth in the
balance sheet and a 47 basis point increase in the Company's taxable equivalent
net interest margin. For the six months ended June 30, 2010 total revenues were
$5,836,000 compared to $4,856,000 for the six months ended June 30, 2009, an
increase of 20%.
The Company's taxable-equivalent net interest margin (taxable-equivalent
net interest and dividend income divided by average earning assets) was 4.01%
for the second quarter of 2010, compared to 3.54% for the second quarter of
2009. The primary cause of this increase was a much lower cost of funds. Core
deposits grew rapidly during this period, replacing higher-cost time deposits.
For the six months ended June 30, 2010, the Company's taxable-equivalent net
interest margin was 3.93% compared to 3.49% for the comparable period in the
prior fiscal year.
Total non-interest expenses for the second quarter were $2,431,000, an
increase of $256,000, or 12%, over the second quarter of 2009. Salaries and
employee benefit expenses and data processing expenses increased during the
second quarter of 2010 compared to the second quarter of 2009. Premises and
equipment expenses as well as forms and supplies expenses declined in the second
quarter of 2010 compared to the second quarter of 2009. For the six months
ended June 30, 2010, total non-interest expenses were $4,751,000 compared to
$4,214,000 for the six months ended June 30, 2009, an increase of $537,000 or
13%. This resulted from increases in salaries and employee benefit expenses,
data processing fees, professional fees, FDIC assessments and other expenses,
which were partially offset by decreases in premises and equipment expenses and
forms and supplies expenses.
On June 30, 2010, outstanding loans were $205 million, an increase of $11
million, or 6%, over outstanding loans at December 31, 2009 and $26 million, or
15%, over outstanding loans at June 30, 2009. With a loan loss provision of
$200,000 and $425,000, respectively, for the three and six months ended June 30,
2010, the Company's allowance for loan losses at June 30, 2010 was 1.13% of
total loans compared to 1.14% at December 31, 2009 and 1.19% at June 30, 2009.
The profile of the Company's loan portfolio remains relatively low-risk. The
Company had non-accrual loans totaling $2.9 million equal to 1.41% of total
loans, on June 30, 2010. At December 31, 2009, non-accrual loans totaled $3.1
million, or 1.61% of total loans, and at June 30, 2009, non-accrual loans
totaled $1.4 million, or 0.79% of total loans. Loans 30 days or more
delinquent, excluding non-accrual loans, totaled $278,000, or 0.14% of total
loans, at June 30, 2010. At December 31, 2009, loans 30 days or more
delinquent, excluding non-accrual loans, totaled $0.3 million, or 0.17% of total
loans, and at June 30, 2009, loans 30 days or more delinquent, excluding
non-accrual loans, totaled $1.3 million, or 0.67% of total loans.
Total deposits on June 30, 2010 were $249 million, which was off slightly
from $250 million at December 31, 2009 but an increase of $7 million, or 3%,
from $243 million at June 30, 2009. Core deposits (demand, savings and NOW
accounts) as of June 30, 2010 increased by $6 million, or 4%, when compared to
December 31, 2009 and increased by $26 million, or 17%, when compared to June
30, 2009. Time deposits decreased $7 million and $19 million, respectively,
when compared to December 31, 2009 and June 30, 2009. At quarter-end, 20% of
total deposits were in non-interest bearing demand accounts, 50% were in
low-cost savings and NOW accounts, and 30% were in time deposits. At December
31, 2009, 18% of total deposits were in non-interest bearing demand accounts,
50% were in low-cost savings and NOW accounts, and 32% were in time deposits,
and at June 30, 2009, 17% of total deposits were in non-interest bearing demand
accounts, 45% were in low-cost savings and NOW accounts, and 38% were in time
deposits.
- 14 -
Capital levels for The Simsbury Bank & Trust Company remain well in excess
of those required to meet the regulatory "well-capitalized" designation.
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Capital Ratios
6/30/10
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The Simsbury Bank & Regulatory Standard For
Trust Company Well-Capitalized
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Tier 1 Leverage Capital Ratio 7.48% 5.00%
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Tier 1 Risk-Based Capital Ratio 12.20% 6.00%
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Total Risk-Based Capital Ratio 13.45% 10.00%
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Results of Operation
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
non-interest income was $2,781,000 for the second quarter of 2010 compared to
$2,481,000 for the second quarter of 2009. 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, increased to 4.01% for
the quarter ended June 30, 2010 from 3.54% for the quarter ended June 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, increased to 3.85% for
the quarter ended June 30, 2010 from 3.28% for the quarter ended June 30, 2009.
The Bank's yield on interest earning assets decreased during the second quarter
of 2010 to 4.67% as compared to 4.72% for the second quarter of 2009, while the
cost of deposits and borrowings decreased to 0.82% for the second quarter of
2010 from 1.44% for the second quarter of 2009.
Net interest and dividend income after provision for loan losses plus
non-interest income was $5,411,000 for the first six months of 2010 compared to
$4,726,000 for the comparable period in 2009. The Company's net interest
margin, as defined in the immediately preceding paragraph, increased to 3.93%
for the six months ended June 30, 2010 from 3.49% for the six months ended June
30, 2009. The Bank's net interest spread, as defined in the immediately
preceding paragraph, increased to 3.76% for the six months ended June 30, 2010
from 3.22% for the six months ended June 30, 2009. The Bank's yield on interest
earning assets decreased during the first six months of 2010 to 4.63% as
compared to 4.78% for the comparable period in 2009, while the cost of deposits
and borrowings decreased to 0.87% for the six months ended June 30, 2010 from
1.56% for the same period in 2009.
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.
- 15 -
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 June 30, 2010 was $2,307,000
or 1.13% of outstanding loans as compared to $2,211,000 or 1.14% of outstanding
loans as of December 31, 2009 and $2,132,000 or 1.19% of outstanding loans as of
June 30, 2009. The provision for loan losses was $200,000 and $425,000,
respectively, for the three and six months ended June 30, 2010. The Bank
charged off three loans for $100,800 in the second quarter of 2010 and two loans
for $7,225 for the second quarter of 2009. For the six months ended June 30,
2010, the Bank charged off 4 loans for $334,124 compared to 4 loans for $15,867
in the six months ended June 30, 2009. During the second quarter of 2010 the
Bank had no recoveries compared to one recovery of $920 for the second quarter
of 2009. For the six months ended June 30, 2010, the Bank had 4 recoveries of
$4,494 compared to 2 recoveries of $1,127 for the six months ended June 30,
2009. The Bank believes the allowance for loan losses is adequate.
Non-interest Income and Non-interest Expense
Total non-interest income for the three months ended June 30, 2010 was
$385,000 compared to $408,000 for the same period in the prior year. Total
non-interest income for the first six months of 2010 was $747,000, an increase
of $52,000 from $695,000 in the first six months of 2009. At June 30, 2010, the
Bank had approximately 20,900 deposit accounts compared to approximately 20,500
accounts at December 31, 2009 and at June 30, 2009. The major portion of
non-interest income is derived from service and overdraft charges.
Total non-interest expense for the three months ended June 30, 2010 was
$2,431,000 compared to $2,175,000 for the same period in the prior year. Total
non-interest expense for the first six months of 2010 was $4,751,000, an
increase of $537,000 over total non-interest expense of $4,214,000 for the first
six months of 2009. The ratio of annualized operating expenses to average
assets was 3.47% for the second quarter of 2010 compared to 3.34% for the second
quarter of 2009. For the six months ended June 30, 2010, the ratio of
annualized operating expenses to average assets was 3.41% compared to 3.32% for
the same period in the prior year.
Salaries and employee benefits comprised approximately 49% and 47%,
respectively, of total non-interest expense for the three months ended June 30,
2010 and 2009. Other major categories included premises and equipment at
approximately 14% and 17%, respectively, of non-interest expense for the three
months ended June 30, 2010 and 2009; advertising and promotions at approximately
4% and 5%, respectively, of total non-interest expense for the three months
ended June 30, 2010 and 2009; and professional fees at approximately 7%, of
total non-interest expense in each of the three months ended June 30, 2010 and
2009.
Salaries and employee benefits comprised approximately 48% and 49%,
respectively, of total non-interest expense in the first six months of 2010 and
2009. Other major categories included premises and equipment at approximately
15% and 17%, respectively, of non-interest expense in the first six months of
2010 and 2009; advertising and promotions at approximately 4% of total
non-interest expense in each of the first six months of 2010 and 2009; and
professional fees at approximately 8% and 6%, respectively, of total
non-interest expense in the first six months of 2010 and 2009.
Financial Condition
Investment Portfolio
In order to maintain a reserve of readily sellable 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
June 30, 2010, the Bank had 46 securities with a carrying value totaling
$18,302,000 pledged for such purposes. At December 31, 2009, the Bank had 29
securities with a carrying value totaling $11,038,000 pledged for such purposes,
and at June 30, 2009, the Bank had 16 securities with a carrying value totaling
$5,382,000 pledged for such purposes.
As of June 30, 2010, December 31, 2009 and June 30, 2009, 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.
- 16 -
The fair market value of investments in available-for-sale securities as of
June 30, 2010 was $45,739,000, which is 2% above amortized cost, compared to
$50,011,000, which was 1% below amortized cost as of December 31, 2009 and
$45,507,000, which was .01% below amortized cost as of June 30, 2009. The Bank
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.
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 June 30, 2010, 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 financing 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. 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 generally
pre-qualifies construction loan borrowers for permanent "take-out" financing as
a condition to making the construction loan. 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 that are
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. The Bank offers both fixed and floating rate loans.
Maturities on such loans typically range from five to thirty 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. 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 one loan in the three and six months ended June 30, 2010 with
a principal balance of $185,000 which resulted in a gain of $7,700. The Bank
sold thirteen loans in the three months ended June 30, 2009 with a combined
principal balance of $2,808,800 which resulted in a gain of $40,000. For the six
months ended June 30, 2009 the Bank sold fifteen loans with a combined principal
balance of $3,173,800 for a gain of $43,478. The Bank is an approved originator
of loans that can be sold to the Federal Home Loan Mortgage Corporation.
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 June 30,
2010, the Bank had approximately $4,395,000 in auto loans purchased from BCI on
its books compared to approximately $3,226,000 in auto loans purchased from BCI
on its books as of December 31, 2009 and approximately $1,944,000 in auto loans
purchased from BCI on its books as of June 30, 2009.
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 June 30, 2010, the Bank's lending limits were $3,570,000 and
$5,950,000, respectively. As of December 31, 2009, these lending limits were
$3,440,000 and $5,733,000, respectively, and as of June 30, 2009, these lending
limits were $3,378,000 and $5,631,000, respectively. The Bank sells
participations in its loans when necessary to stay within lending limits.
- 17 -
The Bank does not have any concentrations in its loan portfolio by industry
or group of industries. However, as of June 30, 2010, approximately 83% of the
Bank's loans were secured by residential real property located in Connecticut
compared with 78% as of December 31, 2009 and 71% as of June 30, 2009.
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. 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 24 non-accrual loans at June 30, 2010 with a balance of
approximately $2,916,000, 21 non-accrual loans with a balance of approximately
$3,200,000 at December 31, 2009 and 19 non-accrual loans with a balance of
approximately $1,403,000 at June 30, 2009.
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 June 30, 2010, December 31,
2009 and June 30, 2009, no OREO was held by the Bank.
A loan whose terms have been modified due to financial difficulties of a
borrower is reported as a troubled debt restructure ("TDR"). All TDRs are
placed on non-accrual status until the loan qualifies for return to accrual
status. Loans qualify for return to accrual status once they have demonstrated
performance with the restructured terms of the loan agreement for a minimum of
six months. The Bank had three TDR loans at June 30, 2010 with a balance of
approximately $412,000. The Bank had no TDR loans at December 31, 2009 and June
30, 2009.
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 $500,000, as well as other loans in
certain circumstances, must be approved by the Loan Committee of the Bank's
Board of Directors.
The Bank has an internal review process to verify credit quality and risk
classifications. In addition, 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 62 classified loans with combined outstanding balances of
$10,554,000 as of June 30, 2010 compared to 63 classified loans with combined
outstanding balances of $9,382,000 as of December 31, 2009. There were 52
classified loans with a combined outstanding balance of $8,805,000 as of June
30, 2009. 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 loan portfolio. The
Bank's overall asset quality and loan loss reserves of 1.13% of loans compare
favorably 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.
- 18 -
Deposits
Deposits are the Bank's primary source of funds. At June 30, 2010, the
Bank had a deposit mix of 35% checking, 35% savings, and 30% certificates of
deposit. The Bank's net interest income is enhanced by its percentage of
non-interest-bearing deposits. As of December 31, 2009, the deposit mix was 32%
checking, 35% savings, and 33% certificates of deposit, and as of June 30, 2009,
the deposit mix was 31% checking, 30% savings, and 39% certificates of deposit.
At June 30, 2010, twenty percent of the total deposits of $249.5 million were
non-interest-bearing compared to seventeen percent of the Bank's total deposits
of $250.4 million that were non-interest-bearing at December 31, 2009 and
seventeen percent of the Bank's total deposits of $242.9 million that were
non-interest-bearing at June 30, 2009. As of June 30, 2010, December 31, 2009
and June 30, 2009, the Bank had $21,604,000, $28,700,000 and $18,098,000,
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 any loans to a foreign entity.
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 June 30, 2010, the Bank had $6,395,000 of deposits in the CDARS network
compared to $5,345,000 of deposits in the CDARS network as of December 31, 2009
and $6,415,000 of deposits in the CDARS network as of June 30, 2009. The Bank
had no other brokered deposits as of June 30, 2010, December 31, 2009 and June
30, 2009.
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 June 30, 2010, the Bank's liquidity ratio was 16%, defined as the sum of
$0.1 million in federal funds sold, $27.4 million in available-for-sale
securities, and $11.2 million in cash and due from banks, interest-bearing
deposits at the Federal Home Loan Bank and Federal Reserve Bank and money market
mutual funds, as a percentage of total deposits. This ratio was 22% at December
31, 2009, defined as the sum of $2.4 million in federal funds sold, $39 million
in available-for-sale securities, and $14.7 million in cash and due from banks,
interest-bearing deposits with the Federal Home Loan Bank and Federal Reserve
Bank and money market mutual funds, as a percentage of total deposits. At June
30, 2009, this ratio was 29%, defined as the sum of $7.9 million in federal
funds sold, $40.1 million in available-for-sale securities, $21.9 million in
cash and due from banks, interest-bearing deposits with the Federal Home Loan
Bank and Federal Reserve Bank and money market mutual funds, as a percentage of
total deposits.
The careful planning of asset and liability maturities and the matching of
interest rates to correspond with this matching of maturities 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 provides
for the extension of variable rate loans to borrowers. 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 of deposit with 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.
- 19 -
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 June 30, 2010, December 31, 2009 and June 30, 2009, 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 numerous 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.
Financial institutions are also affected by inflation's impact on
non-interest expenses, such as salaries and occupancy expenses. From 1992
through June 30, 2010, 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, in the short term the Bank may be adversely
affected by changes in interest rates. As such, the management of the money
supply by the Fed to control the rate of inflation has an indirect 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 June 30, 2010. 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.
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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 June 30, 2010 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.
Item 3. Defaults upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. Description
----------- -----------
3(i) Conformed Copy of the Certificate of Incorporation
of SBT Bancorp, Inc. (incorporated by reference to
Exhibit 3(i) of the Company's Form 10-K filed on
March 31, 2009)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2
of the Company's Form 8-K12G3 filed on March 7,
2006)
10.1 Supplemental Executive Retirement Agreement, dated
May 7, 2010, by and between The Simsbury Bank &
Trust Company and Anthony Bisceglio (incorporated
by reference to Exhibit 10.1 of the Company's Form
8-K filed on May 13, 2010)
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
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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: August 12, 2010 By: /s/ Martin J. Geitz
-------------------------------------
Martin J. Geitz
Chief Executive Officer
Date: August 12, 2010 By: /s/ Anthony F. Bisceglio
-------------------------------------
Anthony F. Bisceglio
Chief Financial Officer
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EXHIBIT INDEX
3(i) Conformed Copy of the Certificate of Incorporation
of SBT Bancorp, Inc. (incorporated by reference to
Exhibit 3(i) of the Company's Form 10-K filed on
March 31, 2009)
3(ii) Bylaws (incorporated by reference to Exhibit 3.2
of the Company's Form 8-K12G3 filed on March 7,
2006)
10.1 Supplemental Executive Retirement Agreement, dated
May 7, 2010, by and between The Simsbury Bank &
Trust Company and Anthony Bisceglio (incorporated
by reference to Exhibit 10.1 of the Company's Form
8-K filed on May 13, 2010)
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
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