UNITED STATES SECURITIES AND EXCHANGE COMMISSION | ||||
WASHINGTON, D.C. 20549 | ||||
FORM 10-Q | ||||
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 | ||||
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 : 333-137359 | ||||
Hampden Bancorp, Inc. | ||||
(Exact name of registrant as specified in its charter) | ||||
Delaware | 20-5714154 | |||
(State or other jurisdiction of incorporation or | (IRS Employer Identification No.) | |||
organization) | ||||
19 Harrison Ave. | ||||
Springfield, Massachusetts 01102 | ||||
(Address of principal executive offices) (Zip Code) | ||||
(413) 736-1812 | ||||
(Registrant's telephone number, including area code) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ||||
Yes [X] No [ ]. | ||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "accelerated filer, large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one): | ||||
Large accelerated filer [ ] | Accelerated Filer [ ] |
(Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). |
Yes [ ] No [X]. |
As of May 12, 2008, there were 7,949,879 shares of the registrant's common stock outstanding. |
HAMPDEN BANCORP, INC. | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSOF | |
HAMPDEN BANCORP, INC. AND SUBSIDIARIES | |
Page No. | |
Item 1 Financial Statements of Hampden Bancorp, Inc. and Subsidiaries | |
Consolidated Balance Sheets (unaudited) as of March 31, 2008, and June 30, 2007 | 3 |
4 | |
5 | |
6-7 | |
8 | |
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 3 Quantitative and Qualitative Disclosures About Market Risks | 26 |
26 | |
26 | |
26 | |
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
27 | |
27 | |
27 | |
27 | |
29 | |
2 | |
HAMPDEN BANCORP, INC. AND SUBSIDIARIES |
(Dollars in thousands, except per share data) |
Three Months Ended | Nine Months Ended | ||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||
(Unaudited) | (Unaudited) | ||||||||||
Interest and dividend income: | |||||||||||
Loans, including fees | $ | 5,455 | $ | 5,011 | $ | 16,677 | $ | 15,311 | |||
Debt securities | 1,440 | 1,390 | 4,364 | 4,110 | |||||||
Dividends | 86 | 122 | 471 | 221 | |||||||
Federal funds sold and other short-term investments |
| 175 |
| 595 |
| 408 |
| 794 | |||
Total interest and dividend income |
| 7,156 |
| 7,118 |
| 21,920 |
| 20,436 | |||
Interest expense: | |||||||||||
Deposits | 2,401 | 2,782 | 7,710 | 8,319 | |||||||
Borrowings |
| 1,142 |
| 899 |
| 3,325 |
| 3,418 | |||
Total interest expense |
| 3,543 |
| 3,681 |
| 11,035 |
| 11,737 | |||
Net interest income | 3,613 | 3,437 | 10,885 | 8,699 | |||||||
Provision for loan losses |
| 108 |
| 37 |
| 274 |
| 92 | |||
Net interest income, after provision for loan losses |
| 3,505 |
| 3,400 |
| 10,611 |
| 8,607 | |||
Non-interest income: | |||||||||||
Customer service fees | 366 | 228 | 1,172 | 704 | |||||||
Gain on sales of securities, net | 1 | 3 | 59 | 11 | |||||||
Gain on sales of loans, net | 23 | 14 | 68 | 67 | |||||||
Increase in cash surrender value of life insurance | 106 | 77 | 262 | 230 | |||||||
Other |
| 65 |
| 40 |
| 169 |
| 124 | |||
Total non-interest income |
| 561 |
| 362 |
| 1,730 |
| 1,136 | |||
Non-interest expense: | |||||||||||
Salaries and employee benefits | 2,144 | 1,936 | 5,972 | 5,220 | |||||||
Occupancy and equipment | 404 | 341 | 1,080 | 950 | |||||||
Data processing services | 193 | 183 | 563 | 525 | |||||||
Advertising | 166 | 197 | 748 | 443 | |||||||
Other general and administrative |
| 715 |
| 4,246 |
| 2,061 |
| 5,126 | |||
Total non-interest expense |
| 3,622 |
| 6,903 |
| 10,424 |
| 12,264 | |||
Income (loss) before income taxes | 444 | (3,141) | 1,917 | (2,521) | |||||||
Income tax expense (benefit) |
| 139 |
| (605) |
| 937 |
| (408) | |||
Net income (loss) | $ | 305 | $ | (2,536) | $ | 980 | $ | (2,113) | |||
Earnings per share | |||||||||||
Basic | $ | 0.04 | N/A | $ | 0.13 | N/A | |||||
Diluted | $ | 0.04 | N/A | $ | 0.13 | N/A | |||||
Weighted average shares outstanding | |||||||||||
Basic | 7,351,698 | N/A | 7,346,560 | N/A | |||||||
Diluted | 7,359,379 | N/A | 7,349,796 | N/A | |||||||
See accompanying notes to unaudited consolidated financial statements. |
4 |
HAMPDEN BANCORP, INC. AND SUBSIDIARIES |
(Dollars in thousands) |
Common Stock | Additional | Unearned | Unearned | Retained | Accumulated | Total | |||||||||
Shares | Amount | ||||||||||||||
(Unaudited) | |||||||||||||||
Balance at June 30, 2006 | - | $ - | $ - | $ -�� | $ - | $33,627 | $(2,353) | $ 31,274 | |||||||
Comprehensive loss: | |||||||||||||||
Net loss | - | - | - | - | - | (2,113) | - | (2,113) | |||||||
Change in net unrealized loss on | - | - | - | - | - | - | 1,606 | 1,606 | |||||||
Total comprehensive loss | (507) | ||||||||||||||
Issuance of common stock for initial | 7,571,313 | 75 | 73,323 | - | - | - | - | 73,398 | |||||||
Issuance of common stock to Hampden | 378,566 | 4 | 3,782 | - | - | - | - | 3,786 | |||||||
Shares purchased for ESOP | - | - | - | (6,360) | - | - | - | (6,360) | |||||||
ESOP shares committed to be allocated | - | - | 26 | 106 | - | - | - | 132 | |||||||
Balance at March 31, 2007 | 7,949,879 | $79 | $77,131 | $(6,254) | $ - | $31,514 | $(747) | $101,723 | |||||||
Balance at June 30, 2007 | 7,949,879 | $79 | $77,156 | $(6,148) | $ - | $31,933 | $(1,002) | $102,018 | |||||||
Culmulative effect of change to initially | - | - | - | - | - | 133 | - | 133 | |||||||
Comprehensive income: | |||||||||||||||
Net income | - | - | - | - | - | 980 | - | 980 | |||||||
Change in net unrealized loss on | - | - | - | - | - | - | 1,453 | 1,453 | |||||||
Total comprehensive income | 2,433 | ||||||||||||||
Cash dividends paid ($0.09 per share) | - | - | - | - | - | (641) | - | (641) | |||||||
Establishment of stock incentive plan - | - | - | 3,237 | - | (3,237) | - | - | - | |||||||
Common stock repurchased for stock | - | - | (662) | - | - | - | - | (662) | |||||||
Stock-based compensation | - | - | - | - | 167 | - | - | 167 | |||||||
ESOP shares committed to be allocated | - | - | 23 | 300 | - | - | - | 323 | |||||||
Balance at March 31, 2008 | 7,949,879 | $79 | $79,754 | $(5,848) | $(3,070) | $32,405 | $ 451 | $103,771 | |||||||
See accompanying notes to unaudited consolidated financial statements. |
5 |
HAMPDEN BANCORP, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATEDSTATEMENTS OF CASH FLOWS | ||||||
(Dollars in thousands) | ||||||
Nine Months Ended | ||||||
2008 | 2007 | |||||
(Unaudited) | ||||||
Cash flows from operating activities: | ||||||
Net income (loss) | $ | 980 | $ | (2,113) | ||
Adjustments to reconcile net income (loss) to net cash | ||||||
Provision for loan losses | 274 | 92 | ||||
Net (accretion)amortization of securities | (31) | 128 | ||||
Depreciation and amortization | 477 | 431 | ||||
Gain on sales of securities, net | (59) | (11) | ||||
Loans originated for sale | (12,019) | (10,748) | ||||
Proceeds from loan sales | 11,647 | 9,178 | ||||
Gain on sales of loans, net | (68) | (67) | ||||
Increase in cash surrender value of bank-owned | (262) | (230) | ||||
Deferred tax provision | 419 | - | ||||
Contribution of common stock to Hampden Bank Charitable Foundation | - | 3,786 | ||||
Stock-based compensation | 490 | 132 | ||||
Net change in: | ||||||
Accrued interest receivable | 263 | (207) | ||||
Other assets | (306) | (826) | ||||
Accrued expenses and other liabilities |
| (1,495) |
| 12 | ||
Net cash provided (used) by operating activities |
| 310 |
| (443) | ||
Cash flows from investing activities: | ||||||
Activity in available-for-sale securities: | ||||||
Sales | 20,950 | 5,772 | ||||
Maturities and calls | 38,629 | 4,000 | ||||
Principal payments | 11,960 | 12,292 | ||||
Purchases | (38,609) | (41,092) | ||||
(Purchase)Redemption of Federal Home Loan Bank stock | (626) | 666 | ||||
Loan (originations) principal payments received, net | (16,833) | 7,807 | ||||
Premiums paid on bank-owned life insurance | (287) | - | ||||
Purchase of premises and equipment |
| (526) |
| (280) | ||
Net cash provided (used) by investing activities |
| 14,658 |
| (10,835) | ||
(continued) | ||||||
See accompanying notes to unaudited consolidated financial statements. | ||||||
6 | ||||||
HAMPDEN BANCORP, INC AND SUBSIDIARIES | ||||||
(Dollars in thousands) | ||||||
Nine Months Ended | ||||||
2008 | 2007 | |||||
(Unaudited) | ||||||
Cash flows from financing activities: | ||||||
Net change in deposits | (23,183) | 2,741 | ||||
Net change in repurchase agreements | 2,767 | 2,185 | ||||
Net change in short-term borrowings | 1,000 | 2,000 | ||||
Proceeds from long-term debt | 30,687 | - | ||||
Repayment of long-term debt | (11,000) | (35,490) | ||||
Net proceeds from Initial Public Offering | - | 73,398 | ||||
Stock purchased for ESOP | - | (6,360) | ||||
Stock purchased for restricted stock awards | (662) | - | ||||
Payment of dividends on common stock | (641) | - | ||||
Net change in mortgagors' escrow accounts |
| 27 |
| 149 | ||
Net cash (used) provided by financing activities |
| (1,005) |
| 38,623 | ||
Net change in cash and cash equivalents | 13,963 | 27,345 | ||||
Cash and cash equivalents at beginning of period |
| 20,525 |
| 14,861 | ||
Cash and cash equivalents at end of period | $ | 34,488 | $ | 42,206 | ||
Supplemental cash flow information: | ||||||
Interest paid on deposits | $ | 7,710 | $ | 8,319 | ||
Interest paid on borrowings | 2,995 | 3,172 | ||||
Income taxes paid | 122 | 399 | ||||
See accompanying notes to unaudited consolidated financial statements. | ||||||
7 | ||||||
HAMPDEN BANCORP, INC AND SUBSIDIARIES |
(Unaudited) |
1. Basis of presentationand consolidation |
The consolidated financial statements include the accounts of Hampden Bancorp, Inc. (the "Company") and its wholly-owned subsidiaries, Hampden Bank ("Hampden Bank") and Hampden LS, Inc. Hampden Bank is a Massachusetts chartered stock savings bank. Hampden Bancorp, Inc. contributed funds to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan to allow it to purchase shares of the Company's common stock as part of the completion of the initial public offering.Hampden Bank has two wholly-owned subsidiaries, Hampden Investment Corporation, which engages in buying, selling, holding and otherwise dealing in securities, and Hampden Insurance Agency, which ceased selling insurance products in November of 2000 and remains inactive. All significant intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared in acco rdance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial information included herein as of March 31, 2008 and for the interim periods ended March 31, 2008 and 2007 is unaudited; however, in the opinion of management the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. The results shown for the interim period ended March 31, 2008 is not necessarily indicative of the results to be obtained for a full year. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2007 included in the Company's most recent Annual Report on Form 10-K f iled by the Company on September 14, 2007. |
2. Recent Accounting Pronouncements |
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48,"Accounting for Uncertainty in Income Taxes,"which is an interpretation of FASB Statement No. 109, "Accounting for Income Taxes."This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a Company's financial statements, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position in the tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company adopted this Interpretation on July 1, 2007, and it did not have a material impact on the Company's consolidated financial statements. The Company accounts for interest and penalties related to uncertain tax positions as part of its federal and state income taxes. The Company has no penalties or i nterest recorded for the three and nine months ended March 31, 2008. |
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement" ("SFAS 157") which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurement. This Statement was developed to provide guidance for consistency and comparability in fair value measurements and disclosures and applies under other accounting pronouncements that require or permit fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. This Statement is not expected to have a material impact on the Company's consolidated financial statements. |
In September 2006, the FASB ratified the Emerging Task Force ("EITF") consensus on Issue No. 06-4,"Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements"("EITF 06-4"). This issue addresses accounting for split-dollar life insurance arrangements whereby the employer purchases a policy to insure the life of an employee, and separately enters into an agreement to split the policy benefits between the employer and the employee. This EITF states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under EITF 06-4, the obligation is not settled upon entering into an insurance arrangement. Since the obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is in the proce ss of evaluating the potential impacts of adopting EITF 06-4 on its consolidated financial statements. |
8 |
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities"("SFAS 159"). This Statement provides companies with an option to report selected financial assets and liabilities at fair value. The Standard's objective is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its consolidated financial statements. |
In June 2007, the FASB ratified the consensus reached in EITF 06-11 "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards ("EITF 06-11")." EITF 06-11 applies to entities that have share-based payment arrangements that entitle employees to receive dividends or dividend equivalents on equity-classified unvested shares when those dividends or dividend equivalents are charged to retained earnings and result in an income tax deduction. Entities that have share-based payment arrangements that fall within scope of EITF 06-11 will be required to increase capital surplus for any realized income tax benefit associated with dividends or dividend equivalents paid to employees for equity classified unvested equity awards. EITF 06-11 is effective for fiscal years beginning after December 15, 2007. The Company does not expect EITF 06-11 to have a material impact on its consolidated financial statements. |
3. Earnings Per Share |
Basic earnings per share ("Basic EPS") excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of Basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders' equity and are included in the weighted-average number of common shares outstanding for both basic and diluted earnings per share calculations as they are committed to be released. |
The Company converted to a stock company on January 16, 2007, therefore earnings per share would not be meaningful for the three month or nine month periods ending March 31, 2007. Earnings per share for the three month and nine month periods ended March 31, 2008 have been computed as follows: |
Three Months Ended | Nine Months Ended | ||||||
(Dollars In Thousands, except per share data) | |||||||
Net income applicable to common shareholders | $ | 305 | $ | 980 | |||
Average number of shares outstanding | 7,949,879 | 7,949,879 | |||||
Less: average unallocated ESOP shares |
| (589,942) | (600,593) | ||||
Less: unvested restricted stock awards | (8,239) | (2,726) | |||||
Average number of basic shares outstanding | 7,351,698 | 7,346,560 | |||||
Plus: dilutive unvested restricted stock awards | 7,681 | 3,236 | |||||
Average number of diluted shares outstanding | 7,359,379 | 7,349,796 | |||||
Basic earnings per share | $ | 0.04 | $ | 0.13 | |||
Diluted earnings per share | $ | 0.04 | $ | 0.13 | |||
4. Dividends |
On January 30, 2008, the Company declared a cash dividend of $0.03 per common share which was paid on February 26, 2008 to stockholders of record as of the close of business on February 12, 2008. On April 30, 2008, the Company declared a cash dividend of $0.03 per common share that will be paid on May 29, 2008 to stockholders of record as of May 14, 2008. |
9 |
5. Loan Commitments and other Contingencies |
Outstanding loan commitments and other contingencies totaled $75.1 million at March 31, 2008, compared to $95.6 million as of June 30, 2007. Loan commitments and other contingencies primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity, business and other lines of credit, and unused portions of construction loans. |
6. Loan Servicing |
In the ordinary course of business, the Company sells real estate loans to the secondary market. The Company retains servicing on loans sold and earns servicing fees of .25% per annum based on the monthly outstanding balances of the loans serviced. The Company recognizes servicing assets each time it undertakes an obligation to service loans sold. |
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets" ("SFAS 156"). The Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires companies to recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a service contract. However, the Statement permits the Company to choose either the amortization method or fair value measurement method for each class of separately recognized servicing assets. The Company adopted the fair value measurement method under SFAS No. 156 effective July 1, 2007. Previous to that date, servicing assets were amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. |
The changes in servicing assets measured using fair value is as follows: |
March 31, 2008 | ||
(In Thousands) | ||
Fair value at the beginning of period, July 1, 2007 | $ | 352 | ||
Capitalized servicing assets | 56 | |||
Changes in fair value |
| 21 | ||
Fair value at end of period, March 31, 2008 | $ | 429 | ||
The changes in servicing assets measured using the amortization method is as follows: |
March 31, 2007 | ||
(In Thousands) | ||
Carrying amount at the beginning of period, July 1, 2006 | $ | 116 | ||
Capitalized servicing assets | 45 | |||
Amortization |
| (17) | ||
Carrying amount at end of period, March 31, 2007 | $ | 144 | ||
The fair value at March 31, 2008 was determined by evaluating the excess servicing that would be paid by an external third party if the loans were sold and servicing was retained by the Company. This factor is used to determine the fair value of the Company's excess servicing rights. |
The unpaid principal balance of mortgage serviced for others were $30.9 million and $25.3 million at March 31, 2008 and June 30, 2007, respectively. There are no recourse provisions for the loans that are serviced for others. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. |
10 |
7. Equity Incentive Plan |
Stock Awards |
Under the Company's 2008 Equity Incentive Plan, approved by the Company's stockholders at a special stockholder meeting on January 29, 2008, the Company may grant stock awards to its directors, employees, and consultants for up to 317,996 shares of common stock. Granted stock awards vest at 20% per year, except that the Company's awards to its chief executive officer vest at 25% per year. The fair market value of the stock awards, based on the market price at grant date, is recorded as unearned compensation. Unearned compensation is amortized over the applicable vesting period. The Company recognized compensation cost related to restricted stock awards of $167,000 for the three months ended March 31, 2008. No stock awards were granted prior to January 29, 2008. As of March 31, 2008, there was $3.1 million of total unrecognized compensation cost related to nonvested stock awards granted under the Plan, which is expected to be recognized over a period of 4.75 years. |
A summary of the status of the Company's stock awards is presented below: |
Nonvested Shares | Shares | Weighted-Average | |||
Balance at July 1, 2007 | - | $ - | |||
Granted | 317,996 | 10.18 | |||
Vested | - | - | |||
Cancelled | - | - | |||
Forfeited | - | - | |||
Balance at March 31, 2008 | 317,996 | $10.18 | |||
Critical Accounting Policies |
We consider accounting policies that require management to exercise significant judgment or discretion, or make significant assumptions that have or could have a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies: |
Securities. Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss. |
Purchase premiums and discounts are amortized to earnings by the interest method over the terms of the securities. Declines in fair value of securities held to maturity and available for sale below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Hampden Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on disposition of securities are recorded on the trade date and determined using the specific identification method. |
Allowance for loan losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. |
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. |
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified and non-impaired loans and is based on historical loss experience adjusted for qualitative factors. |
Mortgage Banking. Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. |
Income taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in the tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Company's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable. |
Comparison of Financial Condition (unaudited) At March 31, 2008 and June 30, 2007 |
Overview |
Total Assets.Total assets increased by $423,000, or 0.1%, from $523.9 million at June 30, 2007 to $524.4 million at March 31, 2008. Net loans, including loans held for sale, increased $17.0 million, or 5.2%, to $346.5 million at March 31, 2008.Also, federal funds sold and other short-term investments increased by $15.2 million, or 112.9%, to $28.6 million at March 31, 2008. A partial offset to these increases was a decrease in securities available for sale of $30.5 million, or 20.5%, to $118.6 million at March 31, 2008. Each of these changes is discussed below. |
12 |
Investment Activities. Cash and cash equivalents increased by $14.0 million, or 68.0%, from $20.5 million at June 30, 2007 to $34.5 million at March 31, 2008. Securities available for sale decreased $30.5 million, or 20.5%, to $118.6 million at March 31, 2008. An increase in mortgage-backed securities was more than offset by declines in obligations issued by government-sponsored enterprises, corporate bonds, common stock and money market preferred stock. The Company had $20.0 million of government-sponsored enterprise obligations mature during the nine months ended March 31, 2008 in order to offset any liquidity issues associated with the large block of maturing five year certificates of deposits during this period. At March 31, 2008, the Company's available-for-sale portfolio amounted to $118.6 million, or 22.6% of total assets. The following table sets forth at the dates indicated information regarding the amort ized cost and fair values of the Company's investment securities. |
At March 31, | At June 30, | |||||||
2008 | 2007 | |||||||
Amortized | Fair Value | Amortized | Fair Value | |||||
(Dollars In Thousands) | ||||||||
Securities available for sale: | ||||||||
Government-Sponsored Enterprises | $ 32,959 | $ 33,638 | $ 56,677 | $ 56,483 | ||||
Corporate bonds and other obligations | - | - | 1,689 | 1,684 | ||||
Mortgage-backed securities | 83,029 | 83,303 | 69,786 | 68,328 | ||||
Total debt securities | 115,988 | 116,941 | 128,152 | 126,495 | ||||
Marketable equity securities: | ||||||||
Common stock | 1,938 | 1,671 | 1,814 | 1,852 | ||||
Money market preferred stock | - | - | 20,800 | 20,800 | ||||
Total marketable equity securities | 1,938 | 1,671 | 22,614 | 22,652 | ||||
Total securities available for sale | 117,926 | 118,612 | 150,766 | 149,147 | ||||
Restricted equity securites: | ||||||||
Federal Home Loan Bank of Boston stock | 5,233 | 5,233 | 4,607 | 4,607 | ||||
Total securities | $123,159 | $123,845 | $155,373 | $153,754 | ||||
13 | ||||||||
Net Loans.Total net loans, excluding loans held for sale, at March 31, 2008 were $345.6 million, an increase of $17.0 million, or 5.0%, from $329.1 million at June 30, 2007. The following table sets forth the composition of the Company's loan portfolio (not including loans held for sale) in dollar amounts and as a percentage of the respective portfolio at the dates indicated. |
March 31, | June 30, | |||||||||
2008 | 2007 | |||||||||
Amount | Percent | Amount | Percent | |||||||
(Dollars In Thousands) | ||||||||||
Mortgage loans on real estate: | ||||||||||
Residential | $115,891 | 33.45 | % | $116,178 | 35.21 | % | ||||
Commercial | 108,972 | 31.45 | 90,538 | 27.45 | ||||||
Home equity | 57,264 | 16.53 | 59,899 | 18.15 | ||||||
Construction | 15,148 | 4.37 | 21,251 | 6.44 | ||||||
Total mortgage loans on real estate | 297,275 | 85.80 | 287,866 | 87.25 | ||||||
Other loans: | ||||||||||
Commercial | 29,579 | 8.54 | 25,472 | 7.71 | ||||||
Consumer | 18,231 | 5.26 | 15,201 | 4.61 | ||||||
Industrial revenue bonds | 1,392 | 0.40 | 1,443 | 0.43 | ||||||
Total other loans | 49,202 | 14.20 | 42,116 | 12.75 | ||||||
Total loans | 346,477 | 100.00 | % | 329,982 | 100.00 | % | ||||
Other items: | ||||||||||
Net deferred loan costs | 2,232 | 1,902 | ||||||||
Allowance for loan losses | (3,076) | (2,810) | ||||||||
Total loans, net | $345,633 | $329,074 | ||||||||
Commercial real estate loans increased $18.4 million, or 20.4%, to $109.0 million, and Commercial loans increased $4.1 million, or 16.1%, to $29.6 million. Consumer loans also increased by $3.0 million, or 19.9%, to 18.2 million. These increases were partially offset by a decrease in Residential mortgage loans of $287,000, or 0.3% from $116.2 million at June 30, 2007 to $115.9 million at March 31, 2008, and a decrease in home equity loans of $2.6 million, or 4.4%, to $57.3 million at March 31, 2008. There was a decrease in Construction loans of $6.1 million, or 28.7%, to $15.1 million, which was due to the completion of several large commercial construction projects and the end mortgages retained by Hampden Bank and reclassified as commercial real estate loans. |
14 |
Non-Performing Assets.The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. |
At March 31, | At June 30, | ||||||||
2008 | 2007 | ||||||||
(Dollars in Thousands) | |||||||||
Non-accrual loans: | |||||||||
Residential mortgage | $ 116 | $ 217 | |||||||
Commercial mortgage | 682 | 235 | |||||||
Commercial | 2,681 | 3,083 | |||||||
Home equity, consumer and other | 128 | 26 | |||||||
Total non-accrual loans | 3,607 | 3,561 | |||||||
Loans greater than 90 days delinquent and still accruing: | |||||||||
Residential mortgage | - | - | |||||||
Commercial mortgage | - | - | |||||||
Commercial | - | - | |||||||
Home equity, consumer and other | - | - | |||||||
Total loans 90 days delinquent and still accruing | - | - | |||||||
Total non-performing loans | 3,607 | 3,561 | |||||||
Other Real Estate Owned | - | - | |||||||
Total non-performing assets | $3,607 | $3,561 | |||||||
Ratios: | |||||||||
Non-performing loans to total loans | 1.04 | % | 1.08 | % | |||||
Non-performing assets to total assets | 0.69 | % | 0.68 | % | |||||
Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. |
Allowance for Loan Losses.In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management's best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subseq uent recoveries, if any, are credited to the allowance. |
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. |
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified and non-impaired loans and is based on historical loss experience adjusted for qualitative factors. |
15 |
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer and residential loans for impairment disclosures. At March 31, 2008, impaired loans totaled $3.4 million with an established valuation allowance of $1.0 million. |
While the Company believes that it has established adequate allocated and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Company's regulators periodically review the allowance for loan losses. These regulatory agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting the Company's financial condition and earnings. |
The following table sets forth activity in the Company's allowance for loan losses for the periods indicated: |
Three Months Ended | Nine Months Ended | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
(Dollars in Thousands) | (Dollars in Thousands) | |||||||||||
Balance at beginning of period | $2,972 | $2,782 | $2,810 | $3,695 | ||||||||
Charge-offs: | ||||||||||||
Mortgage loans on real estate | - | - | (28) | - | ||||||||
Other loans: | ||||||||||||
Commercial business | - | (25) | - | (988) | ||||||||
Consumer and other | (4) | (12) | (10) | (30) | ||||||||
Total other loans | (4) | (37) | (10) | (1,018) | ||||||||
Total charge-offs | (4) | (37) | (38) | (1,018) | ||||||||
Recoveries: | ||||||||||||
Mortgage loans on real estate | - | - | 26 | - | ||||||||
Other loans: | ||||||||||||
Commercial business | - | 1 | 2 | 10 | ||||||||
Consumer and other | - | 4 | 2 | 8 | ||||||||
Total other loans | - | 5 | 4 | 18 | ||||||||
Total recoveries | - | 5 | 30 | 18 | ||||||||
Net charge-offs | (4) | (32) | (8) | (1,000) | ||||||||
Provision for loan losses | 108 | 37 | 274 | 92 | ||||||||
Balance at end of period | $3,076 | $2,787 | $3,076 | $2,787 | ||||||||
Ratios: | ||||||||||||
Net charge-offs to average loans outstanding | (0.00) | % | (0.01) | % | (0.00) | % | (0.32) | % | ||||
Allowance for loan losses to non-performing loans at end of period | 85.28 | % | 75.43 | % | 85.28 | % | 75.43 | % | ||||
Allowance for loan losses to total loans at end of period | 0.89 | % | 0.90 | % | 0.89 | % | 0.90 | % | ||||
16 |
Deposits and Borrowed Funds. The following table sets forth the Company's deposit accounts (excluding escrow deposits) for the periods indicated. |
At March 31, | At June 30, | |||||||||
2008 | 2007 | |||||||||
Balance | Percent | Balance | Percent | |||||||
(Dollars in Thousands) | ||||||||||
Deposit type: | ||||||||||
Demand deposits | $ 35,395 | 11.64 | % | $ 37,063 | 11.32 | % | ||||
Savings deposits | 69,681 | 22.91 | 66,896 | 20.44 | ||||||
Money market | 17,231 | 5.66 | 22,546 | 6.89 | ||||||
NOW accounts | 18,466 | 6.07 | 19,230 | 5.87 | ||||||
Total transaction accounts | 140,773 | 46.28 | 145,735 | 44.52 | ||||||
Certificates of deposit | 163,385 | 53.72 | 181,606 | 55.48 | ||||||
Total deposits | $304,158 | 100.00 | % | $327,341 | 100.00 | % | ||||
Deposits decreased $23.1 million, or 7.1%, to $304.2 million at March 31, 2008 from $327.3 million at June 30, 2007. This decrease was primarily due to the maturity of $50.6 million of certificates of deposit starting August 1, 2007 and ending on September 30, 2007. Of the $50.6 million of certificates of deposit that matured, the Company retained $30.0 million of them. These matured certificates of deposit were five year certificates of deposit that the Company offered as a special promotion from August 15, 2002 to September 30, 2002. In anticipation of this cash out-flow, the Company had $20.0 million of government-sponsored enterprise obligations maturing during this time. Also, the Company chose to allow municipal deposits worth approximately $14.1 million to mature in the third quarter, and replaced them with reasonably priced Federal Home Loan Bank borrowings. |
Borrowingsinclude advances from the Federal Home Loan Bank of Boston (FHLB) as well as securities sold under agreements to repurchase, and have increased $23.4 million, or 26.2%, to $112.7 million at March 31, 2008 from $89.3 million at June 30, 2007. Advances from the FHLB accounted for $20.7 million of the increase and repurchase agreements accounted for $2.7 million. |
Stockholders' Equity.Stockholders' equityincreased by $1.8 million, or 1.8%, to $103.8 million at March 31, 2008 compared to $102.0 at June 30, 2007. This increase is partially the result of the Company's net unrealized gain net of deferred taxes on securities available for sale increasing to a net unrealized gain of $451,000 at March 31, 2008. Net income increased retained earnings by $980,000. Our ratio of capital to total assets increased slightly to 19.8% as of March 31, 2008, from 19.5% as of June 30, 2007. |
Comparison of Operating Results (unaudited) for the Three Months Ended March 31, 2008 |
Net Income. Net Income for the three months ended March 31, 2008 was $305,000, an increase of $2.8 million, or 112.0%, from a net loss of $2.5 million for the same period in 2007. The net loss for the three months ended March 31, 2007 was attributable to the Company making a charitable contribution of $3.8 million to the Hampden Bank Charitable Foundation.For the three month period ended March 31, 2008, net interest income after provision for loan losses increased by $105,000, and non-interest income increased by $199,000 compared to the three month period ended March 31, 2007. These increases were offset by an increase of $505,000 in non-interest expense for the three month period ended March 31, 2008 compared to the three month period ended March 31, 2007 without the contribution to the foundation. All of these changes are discussed below. |
Analysis of Net Interest Income. |
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. |
17 |
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Company does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields. |
Three Months Ended March 31, | |||||||||||||
2008 | 2007 | ||||||||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | ||||||||
(Dollars in Thousands) | |||||||||||||
Interest-earning assets: | |||||||||||||
Loans, net (2) | $344,915 | $5,455 | 6.33 | % | $311,715 | $5,011 | 6.43 | % | |||||
Investment securities | 129,202 | 1,526 | 4.72 | % | 127,003 | 1,512 | 4.76 | % | |||||
Federal Funds Sold | 21,828 | 175 | 3.21 | % | 45,703 | 595 | 5.21 | % | |||||
Total interest earning assets | 495,945 | 7,156 | 5.77 | % | 484,421 | 7,118 | 5.88 | % | |||||
Non-interest earning assets | 30,978 | 31,443 | |||||||||||
Total assets | $526,923 | $515,864 | |||||||||||
Interest-bearing liabilities: | |||||||||||||
Savings deposits | $ 67,387 | 340 | 2.02 | % | $ 61,531 | 408 | 2.65 | % | |||||
Money market | 18,214 | 87 | 1.91 | % | 26,939 | 195 | 2.90 | % | |||||
NOW and other checking accounts | 48,213 | 36 | 0.30 | % | 53,781 | 81 | 0.60 | % | |||||
Certificates of deposit | 172,244 | 1,938 | 4.50 | % | 180,336 | 2,098 | 4.65 | % | |||||
Total deposits | 306,058 | 2,401 | 3.14 | % | 322,587 | 2,782 | 3.45 | % | |||||
Borrowed funds | 109,934 | 1,142 | 4.16 | % | 84,454 | 899 | 4.26 | % | |||||
Total interest-bearing liabilities | 415,992 | 3,543 | 3.41 | % | 407,041 | 3,681 | 3.62 | % | |||||
Non-interest bearing liabilities | 6,385 | 48,275 | |||||||||||
Total liabilities | 422,377 | 455,316 | |||||||||||
Equity | 104,546 | 60,548 | |||||||||||
Total Liabilities and equity | $526,923 | $515,864 | |||||||||||
Net interest income | $3,613 | $3,437 | |||||||||||
Net interest rate spread (3) | 2.36 | % | 2.26 | % | |||||||||
Net interest-earning assets (4) | $ 79,953 | $ 77,380 | |||||||||||
Net interest margin (5) | 2.91 | % | 2.84 | % | |||||||||
Average interest-earning assets to | |||||||||||||
interest-bearing liabilities | 119.22 | % | 119.01 | % | |||||||||
(1) | Yields and rates for the three months ended March 31, 2008 and 2007 are annualized. |
(2) | Includes loans held for sale. |
(3) | Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities for the period indicated. |
(4) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
(5) | Net interest margin represents net interest income divided by average total interest-earning assets. |
18 | |
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Company's interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. |
Three Months Ended March 31, | |||||||
Increase | Total Increase | ||||||
Volume | Rate | ||||||
(Dollars in Thousands) | |||||||
Interest income: | |||||||
Loans, net (1) | $ 526 | $ (82) | $ 444 | ||||
Investment securities | 26 | (12) | 14 | ||||
Federal funds sold | (242) | (178) | (420) | ||||
Total interest income | 310 | (272) | 38 | ||||
Interest expense: | |||||||
Savings deposits | 36 | (104) | (68) | ||||
Money market | (53) | (55) | (108) | ||||
NOW and other checking accounts | (8) | (37) | (45) | ||||
Certificates of deposits | (92) | (68) | (160) | ||||
Total deposits | (117) | (264) | (381) | ||||
Borrowed funds | 265 | (22) | 243 | ||||
Total interest expense | 148 | (286) | (138) | ||||
Change in net interest income | $ 162 | $ 14 | $ 176 | ||||
(1) | Includes loans held for sale. |
Net interest income.Net interest incomefor the three months ended March 31, 2008 was $3.6 million, an increase of $176,000, or 5.1%, over the same period of 2007, partially due to an increase in average interest earning assets of $11.5 million for the three months ended March 31, 2008 over the same period in 2007. |
Interest income.Interest incomefor the three months ended March 31, 2008 increased $38,000, or 0.5%, to $7.2 million over the same period of 2007. This increase was primarily due to an increase in average interest earning assets of $11.5 million, or 2.4%, for the three months ended March 31, 2008. For the three months ended March 31, 2008, average outstanding net loans increased $33.2 million, or 10.7%, from the average for the three month period ended March 31, 2007, primarily as a result of the growth in commercial loan portfolios. The average balance of investment securities for the three months ended March 31, 2008 increased $2.2 million, or 1.7%, from the three month period ended March 31, 2007. The average yield on interest earning assets decreased 11 basis points to 5.77% for the three months ended March 31, 2008, compared to 5.88% for the same period in 2007. |
Interest Expense.Interest expense decreased $138,000, or 3.8%, to $3.5 million for the three months ended March 31, 2008. This decrease was primarily due to a decrease in rates of deposits. The average cost of funds decreased to 3.41% for the three months ended March 31, 2008, a decrease of 21 basis points from a cost of funds of 3.62% for the same period in 2007. |
19 |
Provision for Loan Losses.The Company's provision for loan loss expense was $108,000 for the three months ended March 31, 2008 compared to $37,000 for the three months ended March 31, 2007. The Company's total allowance for loan losses increased by $289,000, to $3.1 million, or 0.89% of total loans for the three months ended March 31, 2008 compared to $2.8 million, or 0.90% of total loans for the three months ended March 31, 2007. |
Non-interest Income.Total non-interest income totaled $561,000 for the three months ended March 31, 2008, an increase of $199,000 from the same period a year ago. This increase is mainly due to increased income from customer service fees of $138,000, an increase in cash surrender value of life insurance of $29,000, and increased income from other income of $25,000. |
Non-interest Expense.Non-interest expense decreased $3.3 million, or 47.5%, to $3.6 million for the three months ended March 31, 2008 compared to the same period for 2007. Non-interest expense would have been $3.1 million for the three months ended March 31, 2007 without the contribution to the foundation. For the three months ended March 31, 2008, non-interest expense increased $505,000 compared to the three months ended March 31, 2007 without the contribution to the foundation. Other general and administrative expenses increased $255,000, or 55.4%, to $715,000 for the three months ended March 31, 2008 from the same period in 2007 without the contribution to the foundation, mainly due to increased expenses associated with operating as a public company. Salaries and employee benefits expenses increased $208,000, or 10.7%, to $2.1 million for the three months ended March 31, 2008 from the same period in 2007, mainly due to expenses associated with the 2008 Equity Incentive Plan of $167,000 for the three months ended March 31, 2008. Occupancy and equipment expenses increased by $63,000 during the three months ended March 31, 2008, and data processing expenses increased slightly by $10,000 during the three months ended March 31, 2008, compared to such expenses for the same period in 2007. |
Income Taxes.Income tax expense increased $744,000, or 123.0%, to $139,000, for the three months ended March 31, 2008. This increase was mainly due to a tax benefit of approximately $827,000 for the contribution to the Hampden Bank Charitable Foundation for the three months ended March 31, 2007. Our combined federal and state effective tax rate was 31.3% for the three months ended March 31, 2008 and 19.3% for the three months ended March 31, 2007. This increase was also mainly due to the contribution to the foundation. |
Comparison of Operating Results (unaudited) for the Nine Months Ended March 31, 2008 and |
Net Income. Net Income for the nine months ended March 31, 2008 was $980,000, an increase of $3.1 million, or 146.4%, from a net loss of $2.1 million for the same period in 2007. The reason for this increase from the same period a year ago was the funding of the Hampden Bank Charitable Foundation.There was an increase in net interest income, after provision for loan losses, for the nine months ended March 31, 2008 of $2.0 million, or 23.3%, to $10.6 million from $8.6 million for the same period in 2007, which was due to an increase in interest earning assets and a decrease in interest bearing liabilities. All of these changes are discussed below. |
Analysis of Net Interest Income. |
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. |
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Company does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields. |
20 |
Nine Months Ended March 31, | |||||||||||||
2008 | 2007 | ||||||||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | ||||||||
(Dollars in Thousands) | |||||||||||||
Interest-earning assets: | |||||||||||||
Loans, net (2) | $341,616 | $16,677 | 6.51 | % | $315,020 | $15,311 | 6.48 | % | |||||
Investment securities | 135,604 | 4,835 | 4.75 | % | 125,174 | 4,331 | 4.61 | % | |||||
Federal Funds Sold | 13,340 | 408 | 4.08 | % | 20,030 | 794 | 5.29 | % | |||||
Total interest earning assets | 490,560 | 21,920 | 5.96 | % | 460,224 | 20,436 | 5.92 | % | |||||
Non-interest earning assets | 30,542 | 33,173 | |||||||||||
Total assets | $521,102 | $493,397 | |||||||||||
Interest-bearing liabilities: | |||||||||||||
Savings deposits | $ 67,961 | 1,276 | 2.50 | % | $ 57,712 | 1,127 | 2.60 | % | |||||
Money market | 20,852 | 367 | 2.35 | % | 27,314 | 553 | 2.70 | % | |||||
NOW and other checking accounts | 48,697 | 115 | 0.31 | % | 52,650 | 205 | 0.52 | % | |||||
Certificates of deposit | 170,291 | 5,952 | 4.66 | % | 186,865 | 6,434 | 4.59 | % | |||||
Total deposits | 307,801 | 7,710 | 3.34 | % | 324,541 | 8,319 | 3.42 | % | |||||
Borrowed funds | 103,167 | 3,325 | 4.30 | % | 102,770 | 3,418 | 4.43 | % | |||||
Total interest-bearing liabilities | 410,968 | 11,035 | 3.58 | % | 427,311 | 11,737 | 3.66 | % | |||||
Non-interest bearing liabilities | 6,430 | 24,114 | |||||||||||
Total liabilities | 417,398 | 451,425 | |||||||||||
Equity | 103,704 | 41,972 | |||||||||||
Total Liabilities and equity | $521,102 | $493,397 | |||||||||||
Net interest income | $10,885 | $ 8,699 | |||||||||||
Net interest rate spread (3) | 2.38 | % | 2.26 | % | |||||||||
Net interest-earning assets (4) | $ 79,592 | $ 32,913 | |||||||||||
Net interest margin (5) | 2.96 | % | 2.52 | % | |||||||||
Average interest-earning assets to | |||||||||||||
interest-bearing liabilities | 119.37 | % | 107.70 | % | |||||||||
(1) | Yields and rates for the nine months ended March 31, 2008 and 2007 are annualized. |
(2) | Includes loans held for sale. |
(3) | Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities for the period indicated. |
(4) | Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. |
(5) | Net interest margin represents net interest income divided by average total interest-earning assets. |
21 | |
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of the Company's interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. |
Nine Months Ended March 31, | |||||||
Increase | Total Increase | ||||||
Volume | Rate | ||||||
(Dollars in Thousands) | |||||||
Interest income: | |||||||
Loans, net (1) | $1,298 | $ 68 | $1,366 | ||||
Investment securities | 369 | 135 | 504 | ||||
Federal funds sold | (229) | (157) | (386) | ||||
Total interest income | 1,438 | 46 | 1,484 | ||||
Interest expense: | |||||||
Savings deposits | 194 | (45) | 149 | ||||
Money market | (120) | (66) | (186) | ||||
NOW and other checking accounts | (14) | (76) | (90) | ||||
Certificates of deposits | (578) | 96 | (482) | ||||
Total deposits | (518) | (91) | (609) | ||||
Borrowed funds | 13 | (106) | (93) | ||||
Total interest expense | (505) | (197) | (702) | ||||
Change in net interest income | $1,943 | $243 | $2,186 | ||||
(1) | Includes loans held for sale. |
Net interest income.Net interest incomefor the nine months ended March 31, 2008 was $10.9 million, an increase of $2.2 million, or 25.1%, over the same period of 2007, partially due to a decrease in the average balance of interest-bearing liabilities of $16.3 million for the nine months ended March 31, 2008 over the same period in 2007, and an increase in average interest earning assets of $30.3 million for the nine months ended March 31, 2008 over the same period in 2007. |
Interest income.Interest incomefor the nine months ended March 31, 2008 increased $1.5 million, or 7.3%, to $21.9 million over the same period of 2007. This increase was primarily due to an increase in average interest earning assets of $30.3 million, or 6.6%, for the nine months ended March 31, 2008. For the nine months ended March 31, 2008, average outstanding net loans increased $26.6 million, or 8.4%, from the average for the nine month period ended March 31, 2007, primarily as a result of the growth in commercial loan portfolios. The average balance of investment securities for the nine months ended March 31, 2008 increased $10.4 million, or 8.3%, from the nine month period ended March 31, 2007. The average yield on interest earning assets increased 4 basis points to 5.96% for the nine months ended March 31, 2008, compared to 5.92% for the same period in 2007. |
Interest Expense.Interest expense decreased $702,000, or 6.0%, to $11.0 million for the nine months ended March 31, 2008. This decrease was primarily due to a decrease in average interest bearing liabilities of $16.3 million, or 3.8%, at March 31, 2008. The average cost of funds decreased to 3.58% for the nine months ended March 31, 2008, a decrease of 8 basis points from a cost of funds of 3.66% for the same period in 2007. |
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Provision for Loan Losses.The Company's provision for loan loss expense was $274,000 for the nine months ended March 31, 2008 compared to $92,000 for the nine months ended March 31, 2007. The Company's total allowance for loan losses increased by $289,000, to $3.1 million, or 0.89% of total loans for the nine months ended March 31, 2008 compared to $2.8 million, or 0.90% of total loans for the nine months ended March 31, 2007. |
Non-interest Income.Total non-interest income totaled $1.7 million for the nine months ended March 31, 2008, an increase of $594,000 from the same period a year ago. This increase is the result of increased income from customer service fees of $468,000, increased income from net gains on sales of securities and loans of $48,000, an increase in cash surrender value of life insurance of $32,000, and increased income from other income of $45,000. |
Non-interest Expense.Non-interest expense decreased $1.8 million, or 15.0%, to $10.4 million for the nine months ended March 31, 2008 compared to the same period for 2007. Non-interest expense would have been $8.5 million for the nine months ended March 31, 2007 without the contribution to the foundation. For the nine months ended March 31, 2008, non-interest expense increased $1.9 million compared to the nine months ended March 31, 2007 without the contribution to the foundation.Salaries and employee benefits expenses increased $752,000, or 14.4%, to $6.0 million for the nine months ended March 31, 2008 from the same period in 2007, partially due to an increase in ESOP expenses of $191,000, and expenses associated with the 2008 Equity Incentive Plan of $167,000 for the nine months ended March 31, 2008 compared to the same period in 2007. Other general and administrative expenses increased $721,0 00, or 53.8%, to $2.1 million for the nine months ended March 31, 2008 from the same period in 2007 without the contribution to the foundation, mainly due to increased expenses associated with operating as a public company. Advertising expenses increased by $305,000 during the nine months ended March 31, 2008, occupancy and equipment expense increased by $130,000 during the nine months ended March 31, 2008, and data processing expenses increased by $38,000 during the nine months ended March 31, 2008, compared to such expenses for the same period in 2007. |
Income Taxes.Income tax expense increased $1.3 million, or 329.7%, to $937,000, for the nine months ended March 31, 2008. This increase was mainly due to a tax benefit of approximately $827,000 for the contribution to the Hampden Bank Charitable Foundation for the nine months ended March 31, 2007. There was a $350,000 adjustment made in the nine months ended March 31, 2008 to the Company's valuation reserve against the deferred tax asset set up for the utilization of the charitable contribution deduction carry-forward generated by the establishment of the Hampden Bank Charitable Foundation. This adjustment was made to reflect the current assessment of margins and spreads, which are different than when the reserve was originally established. Our combined federal and state effective tax rate was 48.9% for the nine months ended March 31, 2008 and 16.2% for the nine months ended March 31, 2007. This increase was due to the $827,000 tax benefit re ceived for the contribution to the foundation for the nine months ended March 31, 2007 and the $350,000 adjustment to the Company's valuation reserve for the nine months ended March 31, 2008. |
Minimum Regulatory Capital Requirements.As of March 31, 2008, the most recent notification from the Federal Deposit Insurance Corporation categorized Hampden Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed Hampden Bank's category. The Company's capital amounts and ratios as of March 31, 2008 (unaudited) and June 30, 2007 are presented in the table below. |
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Actual | Minimum | Minimum | ||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||
(Dollars in Thousands) | ||||||||||||
As of March 31, 2008: | ||||||||||||
Total capital (to risk weighted assets): | ||||||||||||
Consolidated | $105,810 | 30.4 | $27,878 | 8.0% | N/A | N/A | ||||||
Bank | 70,874 | 20.7 | 27,406 | 8.0 | $34,258 | 10.0% | ||||||
Tier 1 capital (to risk weighted assets): | ||||||||||||
Consolidated | 102,734 | 29.5 | 13,939 | 4.0 | N/A | N/A | ||||||
Bank | 67,797 | 19.8 | 13,703 | 4.0 | 20,555 | 6.0 | ||||||
Tier 1 capital (to average assets): | ||||||||||||
Consolidated | 102,734 | 19.5 | 21,085 | 4.0 | N/A | N/A | ||||||
Bank | 67,797 | 13.7 | 19,849 | 4.0 | 24,811 | 5.0 | ||||||
As of June 30, 2007: | ||||||||||||
Total capital (to risk weighted assets): | ||||||||||||
Consolidated | $105,832 | 30.5 | $28,038 | 8.0% | N/A | N/A | ||||||
Bank | 66,673 | 20.1 | 27,582 | 8.0 | $34,478 | 10.0% | ||||||
Tier 1 capital (to risk weighted assets): | ||||||||||||
Consolidated | 103,005 | 29.7 | 14,019 | 4.0 | N/A | N/A | ||||||
Bank | 63,846 | 19.3 | 13,791 | 4.0 | 20,687 | 6.0 | ||||||
Tier 1 capital (to average assets): | ||||||||||||
Consolidated | 103,005 | 20.2 | 20,636 | 4.0 | N/A | N/A | ||||||
Bank | 63,846 | 13.7 | 19,431 | 4.0 | 24,289 | 5.0 | ||||||
Liquidity Risk Management. Liquidity risk, or the risk to earnings and capital arising from an organization's inability to meet its obligations without incurring unacceptable losses, is managed by the Company's Chief Financial Officer, who monitors on a daily basis the adequacy of the Company's liquidity position. Oversight is provided by the Asset/Liability Committee, which reviews the Company's liquidity on a monthly basis, and by the Board of Directors of the Company, which reviews the adequacy of our liquidity resources on a quarterly basis. |
The Company's primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided by operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing loans and investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We maintain excess funds in cash and short-term interest-bearing assets that provide additional liquidity. At March 31, 2008, cash and due from banks, and short-term investments totaled $34.5 million or 6.6% of total assets. |
The Company also relies on outside borrowings from the FHLB as an additional funding source. Over the past several years, the Company has expanded its use of FHLB borrowings to fund growth in the balance sheet and to assist in the management of its interest rate risk by match funding longer term fixed rate loans. |
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The Company uses it's liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and borrowings, to fund other deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. The Company anticipates that it will continue to have sufficient funds and alternative funding sources to meet its commitments. |
Contractual Obligations. The following tables present information indicating various contractual obligations and commitments of the Company as of March 31, 2008 and the respective maturity dates: |
Total | One Year | More than | More than | Over Five | ||||||
(In Thousands) | ||||||||||
As of March 31, 2008 | ||||||||||
Federal Home Loan Bank of Boston advances | $ 97,021 | $24,818 | $31,619 | $31,561 | $9,023 | |||||
Securities sold under agreements to repurchase | 15,704 | 15,704 | - | - | - | |||||
Total contractual obligations | $112,725 | $40,522 | $31,619 | $31,561 | $9,023 | |||||
Off-Balance Sheet Arrangements:In the normal course of business, there are outstanding commitments which are not reflected in the accompanying consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses. The following table presents certain information about the Company's loan commitments and other contingencies outstanding as of March 31, 2008 and June 30, 2007: |
March 31, 2008 | June 30, 2007 | |||||
(Dollars In Thousands) | ||||||
Commitments to grant loans (1) | $20,568 | $28,891 | ||||
Commercial loan lines-of-credit | 17,391 | 19,312 | ||||
Unused portions of home equity lines of credit (2) | 27,294 | 28,363 | ||||
Unused portion of construction loans (3) | 6,678 | 15,777 | ||||
Unused portion of mortgage loans | 334 | 641 | ||||
Unused portion of personal lines-of-credit (4) | 2,047 | 2,050 | ||||
Standby letters of credit (5) | 765 | 580 | ||||
Total loan commitments | $75,077 | $95,614 | ||||
(1) | Commitments for loans are generally extended to customers for up to 30 days after which they expire. |
(2) | Unused portions of home equity lines of credit are available to the borrower for up to 10 years. |
(3) | Unused portions of construction loans are available to the borrower for up to twelve to eighteen months for development loans and up to one year for other construction loans. The decrease of $9.1 million is due to several large commercial construction projects being completed. |
(4) | Unused portions of personal lines-of-credit are available to customers in "good standing" indefinitely. |
(5) | Standby letters of credit are generally available for one year or less. |
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Period | (a) | (b) | (c) | (d) | ||||
January 1, 2008 - January 31, 2008 | - | $ - | - | 317,996 | ||||
February 1, 2008 - February 29, 2008 | 2,974 | $10.44 | 2,974 | 315,022 | ||||
March 1, 2008 - March 31, 2008 | 59,640 | $10.59 | 59,640 | 255,382 | ||||
62,614 | $10.58 | 62,614 | ||||||
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None. |
None. |
Not applicable. |
3.1 | Certificate of Incorporation of Hampden Bancorp, Inc.(1) | |
3.2 | Bylaws of Hampden Bancorp, Inc.(2) | |
4.1 | Stock Certificate of Hampden Bancorp, Inc.(1) | |
10.1 | Hampden Bank Employee Stock Ownership Plan and Trust Agreement(3) | |
10.2.1 | Hampden Bank Employee Stock Ownership Plan Loan Agreement(4) | |
10.2.2 | Pledge Agreement(4) | |
10.2.3 | Promissory Note(4) | |
10.3 | Hampden Bank 401(k) Profit Sharing Plan and Trust(1) | |
10.4 | Hampden Bank SBERA Pension Plan(1) | |
10.5.1 | Employment Agreement between Hampden Bank and Thomas R. Burton(4) | |
10.5.2 | Employment Agreement between Hampden Bank and Glenn S. Welch(4) | |
10.6 | Form of Hampden Bank Change in Control Agreement(4) | |
10.7 | Executive Salary Continuation Agreement between Hampden Bank and Thomas R. Burton(1) | |
10.8 | Form of Executive Salary Continuation Agreement between Hampden Bank and certain specific officers(1) | |
10.9 | Form of Director Supplemental Retirement Agreements between Hampden Bank and certain directors(1) | |
10.10.1 | Executive Split Dollar Life Insurance Agreement between Hampden Bank and Thomas R. Burton(1) | |
10.10.2 | Executive Split Dollar Life Insurance Agreement between Hampden Bank and Robert S. Michel(1) | |
10.11 | Amendment to Supplemental Retirement Agreement between Hampden Bank and Thomas R. Burton (5) | |
10.12 | 2008 Equity Incentive Plan (6) | |
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10.13 | Form of Restricted Stock Agreement | |
10.14 | Form of Stock Option Grant Notice and Stock Option Agreement | |
14.0 | Hampden Bancorp, Inc. Code of Conduct (5) | |
21.0 | List of Subsidiaries (5) | |
31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a) of Thomas R. Burton | |
31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a) of Robert A. Massey | |
32.0 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |
(1) | Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-137359), as amended, initially filed with the SEC on September 15, 2006. |
(2) | Incorporated by reference to the Company's Current Report on Form 8-K (File No. 000-33144) as filed with the SEC on August 3, 2007. |
(3) | Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 001-33144) for the quarter ended September 30, 2006. |
(4) | Incorporated by reference to the Company's Current Report on Form 8-K (File No. 000-33144) as filed with the SEC on January 19, 2007. |
(5) | Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 333-137359), as filed with the SEC on September 14, 2007. |
(6) | Incorporated by reference to the Company's Proxy Statement on Form DEF 14A, as filed with the SEC on December 27, 2007. |
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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. |
HAMPDEN BANCORP, INC. | ||
Date: May 15, 2008 | /s/ Thomas R. Burton | |
Thomas R. Burton | ||
President and Chief Executive Officer | ||
Date: May 15, 2008 | /s/ Robert A. Massey | |
Robert A. Massey | ||
Chief Financial Officer, Senior Vice President and Treasurer | ||
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