At December 31, 2010 and June 30, 2010, the carrying value of securities pledged to secure repurchase agreements was $11,652,000 and $8,265,000, respectively.
The industries represented by our marketable equity securities portfolio are as follows:
Information pertaining to securities with gross unrealized losses at December 31, 2010 and June 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
Management conducts, at least on a quarterly basis, a review of our investment securities to determine if the value of any security has declined below its cost or amortized cost and whether such decline represents other-than-temporary impairment (“OTTI”). There were no impairment charges recognized for the three or six months ended December 31, 2010 and December 31, 2009.
At December 31, 2010, twenty-five debt securities had unrealized losses with aggregate depreciation of 1.5% from the Company's amortized cost basis. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst's reports. Because the majority of these securities have been issued by the Federal government or its agencies and as management has not decided to sell these securities, nor is it likely that the Company will be required to sell these securities, no declines are deemed to be other than temporary. At December 31, 2010, we held twenty-two securities issued by private mortgage originators that had an amortized cost of $7.5 million and a fair value of $7.4 m illion. All of these investments are “Senior” Class tranches and have underlying credit enhancement. These securities were originated in the period 2002-2005 and are performing in accordance with contractual terms. The majority of the decrease in the fair value of these securities is attributed to changes in market interest rates. Management estimates the loss projections for each security by evaluating the industry rating, amount of delinquencies, amount of foreclosure, amount of other real estate owned, average credit scores, average amortized loan to value and credit enhancement. Based on this review, management determines whether other-than-temporary impairment existed. Management has determined that no other-than-temporary impairment existed as of December 31, 2010. We will continue to evaluate these securities for other-than-temporary impairment, which could result in a future non-cash charge to earnings.
At December 31, 2010, sixteen marketable equity securities had unrealized losses with aggregate depreciation of 14.5% from the Company's cost basis. The majority of these unrealized losses relate to the banking, retail, healthcare, and insurance industries. In analyzing the issuer's financial condition, management considers industry analysts’ reports and financial performance. Because management has the intent and ability to hold equity securities for a reasonable period for recovery, no declines are deemed to be other than temporary.
8. Loans
The following is a summary of past due and non-accrual loans at December 31, 2010:
| | December 31, 2010 | |
| | | | | | | | | | | Past Due 90 | | | | |
| | 30-89 Days | | | 90 Days | | | Total | | | Days or More | | | Loans on | |
| | Past Due | | | or Greater | | | Past Due | | | and Still Accruing | | | Non-accrual | |
| | (In Thousands) | |
Mortgage loans on real estate: | | | | | | | | | | | | | | | |
1-4 family residential | | $ | 337 | | | $ | 2,271 | | | $ | 2,608 | | | $ | - | | | $ | 2,902 | |
Commercial real estate | | | 4,751 | | | | 2,943 | | | | 7,694 | | | | - | | | | 3,194 | |
Home equity: | | | | | | | | | | | | | | | | | | | | |
First lien | | | - | | | | 50 | | | | 50 | | | | - | | | | 104 | |
Second lien | | | 29 | | | | 402 | | | | 431 | | | | - | | | | 595 | |
Construction: | | | | | | | | | | | | | | | | | | | | |
Residential construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial | | | 439 | | | | 320 | | | | 759 | | | | - | | | | 1,722 | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Manufactured homes | | | 127 | | | | - | | | | 127 | | | | - | | | | 30 | |
Other | | | 5 | | | | - | | | | 5 | | | | - | | | | 6 | |
Total | | $ | 5,688 | | | $ | 5,986 | | | $ | 11,674 | | | $ | - | | | $ | 8,553 | |
As of December 31, 2010 loans on non-accrual totaled $8.6 million which consisted of $6.0 million in loans that were 90 days or greater past due, $2.3 million in loans that are current or less than 30 days past due and $295,000 in loans that are 30-89 days past due. The loans that are less than 90 days past due were previously on non-accrual and it is the Company’s policy to keep loans on non-accrual status until the borrower can demonstrate their ability to make payments according to their loan terms. Commercial non-accrual loans less than 90 days past due were $1.4 million, 1-4 family residential non-accrual loans less than 90 days past due were $632,000, commercial real estate non-accrual loans less than 90 days past due were $251,000, home equity second lien non-accrual loans less than 90 days past due were $193,000, home eq uity first lien non-accrual loans less than 90 days past due were $54,000, manufactured home non-accrual loans less than 90 days past due were $30,000 and other consumer non-accrual loans less than 90 days past due were $6,000.
The following is a summary of impaired loans at December 31, 2010:
| | December 31, 2010 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | |
| | (In Thousands) | |
Impaired loans without a valuation allowance: | | | | | | | | | |
Mortgage loans on real estate: | | | | | | | | | |
1-4 family residential | | $ | 1,011 | | | $ | 1,011 | | | $ | - | |
Commercial real estate | | | 2,273 | | | | 2,273 | | | | - | |
Home equity: | | | | | | | | | | | | |
Second lien | | | 184 | | | | 184 | | | | - | |
Construction: | | | | | | | | | | | | |
Commercial construction | | | 1,736 | | | | 1,736 | | | | - | |
Other loans: | | | | | | | | | | | | |
Commercial | | | 3,822 | | | | 3,822 | | | | - | |
Total | | | 9,026 | | | | 9,026 | | | | - | |
| | | | | | | | | | | | |
Impaired loans with a valuation allowance: | | | | | | | | | | | | |
Mortgage loans on real estate: | | | | | | | | | | | | |
1-4 family residential | | | 934 | | | | 1,155 | | | | 221 | |
Commercial real estate | | | 4,606 | | | | 5,415 | | | | 809 | |
Home equity: | | | | | | | | | | | | |
First lien | | | 25 | | | | 50 | | | | 25 | |
Second lien | | | - | | | | 37 | | | | 37 | |
Other loans: | | | | | | | | | | | | |
Commercial | | | 1,659 | | | | 1,758 | | | | 99 | |
Total | | | 7,224 | | | | 8,415 | | | | 1,191 | |
| | | | | | | | | | | | |
Total impaired loans | | $ | 16,250 | | | $ | 17,441 | | | $ | 1,191 | |
No additional funds are committed to be advanced in connection with impaired loans. The $17.4 million of impaired loans above include $8.6 million of non-accrual loans and $4.7 million of accruing troubled debt restructured loans as of December 31, 2010. The remaining $4.2 million are loans that the Company believes 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.
The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2010 and June 30, 2010, the Company was servicing loans for participants aggregating $29,757,000 and $29,645,000, respec tively.
Information pertaining to the allowance for loan losses at December 31, 2010 follows:
| | 1-4 Family Residential | | | Commercial Real Estate | | | Home Equity First Lien | | | Home Equity Second Lien | | | Residential Construction | | | Commercial Construction | | | Commercial | | | Manufactured Homes | | | Other Consumer | |
| | (In Thousands) | |
Amount of allowance for loan losses for loans deemed to be impaired | | $ | 221 | | | $ | 809 | | | $ | 25 | | | $ | 37 | | | $ | - | | | $ | - | | | $ | 98 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of allowance for loan losses for loans not deemed to be impaired | | | 794 | | | | 2,023 | | | | 168 | | | | 334 | | | | 44 | | | | 267 | | | | 1,188 | | | | - | | | | 65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans deemed to be impaired as of December 31, 2010 | | | 2,166 | | | | 7,688 | | | | 50 | | | | 221 | | | | - | | | | 1,736 | | | | 5,580 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans not deemed to be impaired as of December 31, 2010 | | | 117,912 | | | | 126,542 | | | | 23,191 | | | | 40,148 | | | | 4,108 | | | | 13,822 | | | | 29,713 | | | | 19,874 | | | | 4,174 | |
Credit Quality Information
The Company utilizes a nine grade internal loan rating system for all loans as follows:
Loans rated 1 – 5: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, commercial construction and commercial loans. Semi-annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. All credits rated 6 or worse are reviewed on a quarterly basis by management. At origination, management assigns risk ratings to 1-4 family residential loans, home equity loans, residential construction loans, manufactured home loans, and other consumer loans. The Company updates these risk ratings as needed.
The following table presents the Company’s loans by risk rating at December 31, 2010:
| | 1-4 Family Residential | | | Commercial Real Estate | | | Commercial Construction | | | Commercial | | | Residential Construction | |
Loans rated 1-5 | | $ | 116,756 | | | $ | 105,110 | | | $ | 13,822 | | | $ | 25,085 | | | $ | 4,108 | |
Loans rated 6 | | | 794 | | | | 15,404 | | | | 1,426 | | | | 4,817 | | | | - | |
Loans rated 7 | | | 1,601 | | | | 10,631 | | | | 310 | | | | 5,023 | | | | - | |
Loans rated 8 | | | 927 | | | | 3,085 | | | | - | | | | 368 | | | | - | |
Loans rated 9 | | | - | | | | - | | | | - | | | | - | | | | - | |
| | $ | 120,078 | | | $ | 134,230 | | | $ | 15,558 | | | $ | 35,293 | | | $ | 4,108 | |
| | Manufactured Homes | | | Home Equity First Lien | | | Home Equity Second Lien | | | Consumer | |
Loans rated 1-5 | | $ | 19,509 | | | $ | 23,021 | | | $ | 39,585 | | | $ | 4,137 | |
Loans rated 6 | | | 302 | | | | 135 | | | | 246 | | | | 36 | |
Loans rated 7 | | | 63 | | | | 35 | | | | 408 | | | | - | |
Loans rated 8 | | | - | | | | 50 | | | | 130 | | | | 1 | |
Loans rated 9 | | | - | | | | - | | | | - | | | | - | |
| | $ | 19,874 | | | $ | 23,241 | | | $ | 40,369 | | | $ | 4,174 | |
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited)
This section is intended to help investors understand the financial performance of Hampden Bancorp, Inc. and its subsidiaries, through a discussion of the factors affecting our financial condition at December 31, 2010 and June 30, 2010 and our consolidated results of operations for the three months and six months ended December 31, 2010 and 2009, and should be read in conjunction with the Company’s unaudited consolidated interim financial statements and notes thereto, appearing in Part I, Item 1 of this document.
Forward-Looking Statements
Certain statements herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe", "expect", "anticipate", "estimate", and "intend" or future or conditional verbs such as "will", "would", "should", "could", or "may." Certain factors that could have a material adverse affect on the operations Hampden Bank include, but are not limited to, increased competitive pressure among financial service companies, national and regional economic conditions, changes in interest rates, changes in consumer spending, borrowing and savings habits, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, adverse changes in the securities markets, inability of key third-party providers to perform their obligations to Hampden Bank, changes in relevant accounting principles and guidelines and our ability to successfully implement our branch expansion strategy. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwi se. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under Item 2 –“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A –“Risk Factors” and elsewhere in this the Quarterly Report on Form 10-Q, as well as in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. You should carefully review those factors and also carefully review the risks outlined in other documents that the Company files from time to time with the SEC. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except a s may be required under applicable securities laws.
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, liabilities, revenue, expenses, or related disclosures, to be critical accounting policies.
Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
Other-Than-Temporary Impairment of Investment Securities.
Critical Estimates. One of the significant estimates related to available for sale securities is the evaluation of investments for other-than-temporary impairment. If a decline in the fair value of an equity security is judged to be other-than-temporary, a charge is recorded equal to the difference between the fair value and cost or amortized cost basis of the security. Following such write-down in value, the fair value of the other-than-temporarily impaired investment becomes its new cost basis.
In estimating other-than-temporary impairment losses for equity securities, 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 the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. For those debt securities for which (1) the fair value of the security is less than its amortized cost, (2) the Company does not intend to sell such security and (3) it is likely that it will not be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, GAAP requires that the credit component of the other-than-temporary impairment losses be recognized in earnings whil e the noncredit component is recognized in other comprehensive loss, net of related taxes. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation in value is recognized in earnings.
Judgment and Uncertainties. The evaluation of securities for impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation.
Effect if Actual Results Differ from Assumptions. If actual results are not consistent with management’s estimates or assumptions, we may be exposed to a other-than-temporary impairment loss that could be material and could have a negative impact on the company’s earnings.
Allowance for loan losses
Critical Estimates. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, we make significant estimates and therefore, have identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
The allowance for loan losses has been determined in accordance with U.S. GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations, which are further described below.
Specific allocation
Specific allocations are made for loans determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses.
General allocation
The general allocation is determined by segregating the remaining loans, by type of loan and payment history. We also analyze historical loss experience, delinquency trends, changes in our underwriting standards as well as in lending policies, procedures and practices, experience and depth of management and lending staff, and general economic conditions. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results. There w ere no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended December 31, 2010.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by 1-4 family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate – Loans in this segment are primarily income-producing properties throughout Massachusetts and Connecticut. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management requires annual borrower financial statements, obtains rent rolls annually and continually monitors the cash flows of these loans.
Home equity loans - Loans in this segment are secured by first or second mortgages on 1-4 family owner occupied properties, and were generally underwritten in amounts such that the combined first and second mortgage balances generally do not exceed 90% of the value of the property serving as collateral at time of origination. Under our current underwriting standards, loan originations are made in amounts such that balances do not exceed 85% of the value of the property serving as collateral at time of origination. The lines-of-credit are available to be drawn upon for 10 to 20 years, at the end of which time they become term loans amortized over 5 to 10 years. Interest rates on home equity lines normally adjust based on the month-end prime rate published in the Wall Street Journal.
Residential construction loans – Loans in this segment primarily include non-speculative real estate loans. All loans in this segment are collateralized by 1-4 family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial construction loans – Loans in this segment primarily include non-speculative real estate loans. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.
Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Manufactured home loans – Loans in this segment are generally secured by first liens on properties located primarily in the Northeast. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in this segment. The Company has a cash reserve account for manufactured home loans that can be used for any pre-payments and losses.
Other consumer loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
On a quarterly basis, management’s Loan Review Committee reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process, specific loans are analyzed to determine their potential risk of loss. This process concentrates on non-accrual and classified loans. Any loan determined to be impaired is evaluated for potential loss exposure. Any shortfall results in a recommendation of a specific allowance or possible charge-off if the likelihood of loss is evaluated as probable. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value, discounted cash flow valuation or other available information.
The results of this quarterly process are summarized by, and appropriate recommendations and loan loss allowances are approved by, the Loan Review Committee. All supporting documentation with regard to the evaluation process, loan loss experience, allowance levels and the schedules of classified loans is maintained by the Company. The Committee is chaired by the Company’s Chief Financial Officer. The allowance for loan loss calculation is presented to the Board of Directors on a quarterly basis with recommendations on its adequacy.
Judgment and Uncertainties. Management determines the adequacy of the allowance for loan losses by analyzing and estimating losses inherent in the portfolio. The allowance for loan losses contains uncertainties because the calculation requires management to use historical information as well as current economic data to make judgments on the adequacy of the allowance. This evaluation requires estimates that are susceptible to significant revision as more information becomes available.
Our primary lending emphasis has been the origination and purchase of residential mortgage loans, commercial real estate mortgages and commercial credits. We also originate home equity loans and home equity lines of credit and look to purchase manufactured home loans from a third party. As a local community bank within a small footprint, these activities result in a loan concentration in mortgages secured by real property located in Western Massachusetts and Northern Connecticut. Based on the composition of our loan portfolio, we believe the primary risks to loan losses are increases in interest rates, a decline in the general economy, and a decline in real estate market values and values of local businesses in Western Massachusetts. Any one or combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisal valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals are carefully reviewed by the Company to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Effect if Actual Results Differ from Assumptions. Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current operating environment changes. Management uses the best information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the Federal Deposit Insurance Corporation and the Massachusetts Department of Banking, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their ex amination.
Income taxes
Critical Estimates. 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. Quarterly, management reviews the deferred tax asset to identify any uncertainties to the collectability of the components of the deferred tax asset.
Judgment and Uncertainties. In determining the deferred tax asset valuation allowance, we use historical and forecasted operating results, based upon approved business plans, including a review of the eligible carry forward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.
Effect if Actual Results Differ from Assumptions. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets or deferred tax liabilities could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our net deferred tax asset in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on the Company’s earnings. In addition, if actual factors and conditions differ materially from those used by management, the Company could incur penalties and interest imposed by the Internal Revenue Service.
Other Real Estate Owned
Critical Estimates. Other Real Estate Owned (OREO) consists of all real estate, other than Company premises, actually owned or controlled by the Company and its consolidated subsidiaries, including real estate acquired through foreclosure, even if the Company has not yet received title to the property. OREO also includes certain direct and indirect investments in real estate ventures, property originally acquired for future expansion but no longer intended to be used for that purpose, and foreclosed real estate sold under contract and accounted for under the deposit method of accounting under FASB guidance.
The Company is permitted to acquire and hold real property used in the operation of the Company or as the Company may acquire (by foreclosure or other transfer in lieu of foreclosure) in satisfaction of all or a part of a loan or in satisfaction of a judgment or decree in its favor. If the Company acquires real property by foreclosure or other transfer in lieu of foreclosure, it carries such real property on its books as OREO. OREO acquired by the Company is subject to certain regulatory requirements that limit the time such property can be held by the Company, require that information regarding the property be reported to the Company’s federal regulator, subject the acquisition of such property to federal appraisal requirements, restrict the use of such property, and govern the treatment of any disposal of the property. It is the policy of the Company to sell any real property acquired through the collection of debts due it within a reasonable period of time. During the time that the Company holds the real property, the Company shall charge-off the real property based upon the current appraised value of the property.
GAAP provides that foreclosed real estate received in full satisfaction of a loan, provided that the real estate will be sold, is to be recorded at the time of foreclosure at its fair value less estimated costs to sell. This amount becomes the “cost” of the foreclosed real estate. According to FASB guidance, estimated costs to sell are the incremental direct costs to transact a sale, which include broker commissions, legal and title transfer fees, and closing costs that must be incurred before legal title can be transferred. When foreclosed real estate is received in full satisfaction of a loan, the amount, if any, by which the recorded amount of the loan exceeds the fair value less estimated costs to sell the property, the difference is a loss which must be charged to the Bank’s allo wance for loan losses at the time of foreclosure. The recorded amount of the loan at the time of foreclosure is the unpaid balance of the defaulted loan adjusted for any unamortized premium or discount and unamortized loan fees or costs, less any amount previously charged off, plus recorded accrued interest. The amount of any senior debt (principal and accrued interest) to which foreclosed real estate is subject at the time of foreclosure must be reported as a liability in the Financial Statements as “other borrowed money." If the fair value (less estimated costs to sell) of the property exceeds the recorded amount of the loan, the excess is to be reported as a recovery of a previous charge-off or in current earnings, as appropriate. Real estate received in partial satisfaction of a loan is to be similarly accounted for and the recorded amount of the loan is to be reduced by the fair value (less estimated costs to sell) of the asset received at the time of fo reclosure. Legal fees and other direct costs incurred by the Bank in a foreclosure are to be included in expenses when they are incurred.
FASB guidance, which applies to all transactions in which the seller provides financing to the buyer of real estate, establishes five methods to account for the disposition of OREO. If a profit is involved in the sale of real estate, each method sets forth the manner in which the profit is to be recognized based on the terms of the sale. However, regardless of which method is used, any loss on the disposition of OREO is to be recognized immediately.
Judgment and Uncertainties. The Company obtains a new or updated valuation of OREO at the time of acquisition, including periodic reappraisals (at least annually) thereafter to ensure any material change in market conditions or the physical aspects of the property are recognized. To ensure the general validity of such appraised values, it is the responsibility of loan officers to compare sale prices and appraised values of properties previously held for their respective portfolio. Each parcel of OREO is to be reviewed and valued by loan officers on its own merits. The sale of OREO is also supported by this appraisal. A careful evaluation of all the relevant factors should enable the loan officer to make an accurate and reliable judgment with regar d to classification. Any portion of the carrying value in excess of appraised value should be classified as a loss.
Effect if Actual Results Differ from Assumptions. Should any subsequent appraisals of the property indicate that a decrease in value has occurred since the initial acquisition, one of the following actions should be taken:
1. | A write-down of the recorded investment (book value) to fair value less estimated costs to sell; or |
2. | An addition to the valuation reserve in an amount equal to or greater than the excess of recorded investment over fair value less estimated costs to sell should be established. |
Comparison of Financial Condition (unaudited) at December 31, 2010 and June 30, 2010
Overview
Total Assets. The Company’s total assets decreased $18.7 million or 3.2% from $584.0 million at June 30, 2010 to $565.3 million at December 31, 2010. Net loans, including loans held for sale, decreased $18.9 million or 4.6% to $394.7 million at December 31, 2010, and security balances remained consistent as of December 31, 2010 compared to June 30, 2010. Cash and cash equivalents decreased $1.3 million or 4.2% from $30.0 million at June 30, 2010 to $28.8 million at December 31, 2010. The decrease in loans was partially related to the payoff of two loans, one that had a balance of $6.7 million and another problem credit that had a $1.5 million bal ance.
Total deposits decreased $9.0 million or 2.1% from $420.1 at June 30, 2010 to $411.1 million at December 31, 2010, long-term debt decreased $11.9 million or 20.4% from $58.2 million at June 30, 2010 to $46.3 million at December 31, 2010 and total stockholders’ equity decreased $2.1 million or 2.2% from $94.8 million at June 30, 2010 to $92.7 million at December 31, 2010. The primary reason for the decrease in deposits was due to the payout of one certificate which totaled $6.7 million.
Investment Activities. Securities available for sale decreased $46,000 to $111.3 million at December 31, 2010. Obligations issued by government-sponsored enterprises decreased at December 31, 2010. Corporate bonds and other obligations, mortgage-backed securities and common stock increased at December 31, 2010. The following table sets forth at the dates indicated information regarding the amortized cost and fair values of the Company’s investment securities.
| | At December 31, | | | At June 30, | |
| | 2010 | | | 2010 | |
| | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| | (In Thousands) | |
Securities available for sale: | | | | | | | | | | | | |
Government-sponsored enterprises | | $ | 4,500 | | | $ | 4,502 | | | $ | 9,992 | | | $ | 10,027 | |
Corporate bonds | | | 995 | | | | 989 | | | | - | | | | - | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
Agency | | | 95,123 | | | | 97,491 | | | | 88,842 | | | | 91,876 | |
Non-agency | | | 7,450 | | | | 7,417 | | | | 9,024 | | | | 9,097 | |
Total debt securities | | | 108,068 | | | | 110,399 | | | | 107,858 | | | | 111,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Marketable equity securities | | | 1,066 | | | | 935 | | | | 561 | | | | 379 | |
Total securities available for sale | | | 109,134 | | | | 111,334 | | | | 108,419 | | | | 111,379 | |
Restricted equity securites: | | | | | | | | | | | | | | | | |
Federal Home Loan Bank of Boston stock | | | 5,233 | | | | 5,233 | | | | 5,233 | | | | 5,233 | |
Total securities | | $ | 114,367 | | | $ | 116,567 | | | $ | 113,652 | | | $ | 116,612 | |
Net Loans. Total net loans, at December 31, 2010 were $393.5 million, a decrease of $19.1 million or 4.6% from $412.6 million at June 30, 2010. 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 total loan portfolio at the dates indicated.
| | At December 31, 2010 | | | At June 30, 2010 | |
| | Amount | | | Percent | | | Amount | | | Percent | |
| | (Dollars In Thousands) | |
Mortgage loans on real estate: | | | | | | | | | | | | |
1-4 family residential | | $ | 120,078 | | | | 30.25 | % | | $ | 130,977 | | | | 31.49 | % |
Commercial real estate | | | 134,230 | | | | 33.82 | | | | 138,746 | | | | 33.35 | |
Home equity: | | | | | | | | | | | | | | | | |
First lien | | | 23,241 | | | | 5.86 | | | | 22,600 | | | | 5.43 | |
Second lien | | | 40,369 | | | | 10.17 | | | | 42,406 | | | | 10.19 | |
Construction: | | | | | | | | | | | | | | | | |
Residential construction | | | 4,108 | | | | 1.03 | | | | 3,730 | | | | 0.90 | |
Commercial construction | | | 15,558 | | | | 3.92 | | | | 9,730 | | | | 2.34 | |
Total mortgage loans on real estate | | | 337,584 | | | | 85.05 | | | | 348,189 | | | | 83.70 | |
| | | | | | | | | | | | | | | | |
Other loans: | | | | | | | | | | | | | | | | |
Commercial | | | 35,293 | | | | 8.89 | | | | 42,539 | | | | 10.23 | |
Consumer: | | | | | | | | | | | | | | | | |
Manufactured homes | | | 19,874 | | | | 5.01 | | | | 20,997 | | | | 5.05 | |
Other | | | 4,174 | | | | 1.05 | | | | 4,260 | | | | 1.02 | |
Total other loans | | | 59,341 | | | | 14.95 | | | | 67,796 | | | | 16.30 | |
Total loans | | | 396,925 | | | | 100.00 | % | | | 415,985 | | | | 100.00 | % |
Other items: | | | | | | | | | | | | | | | | |
Net deferred loan costs | | | 2,685 | | | | | | | | 2,943 | | | | | |
Allowance for loan losses | | | (6,074 | ) | | | | | | | (6,314 | ) | | | | |
Total loans, net | | $ | 393,536 | | | | | | | $ | 412,614 | | | | | |
Residential real estate loans decreased $10.9 million or 8.3%, to $120.1 million, commercial loans decreased $7.2 million or 17.0%, to $35.3 million, commercial real estate loans decreased $4.5 million or 3.3%, to $134.2 million, home equity second lien loans decreased $2.0 million, or 4.8%, to $40.4 million and manufactured home loans decreased $1.1 million, or 5.3%, to $19.9 million at December 31, 2010 as compared to June 30, 2010. The decrease in commercial loans was primarily related to the payoff of two loans, one that had a balance of $6.7 million and a problem credit that had a $1.5 million balance. Commercial construction loans increased $5.8 million or 59.9%, to $15.6 million, home equity first lien loans increased $641,000, or 2.8%, to $23.2 million and residential construction loans increased $378,000 or 10.1%, to $4.1 million at December 31, 2010 as compared to June 30, 2010. The decrease in commercial real estate loans, home equity second lien loans and consumer loans is due to a decrease in loan demand. The increase in construction loans is due to new non-speculative loans which will be financed by the Company at the end of the construction period and scheduled advances on existing loans.
During the origination of fixed rate mortgages, each loan is analyzed to determine if the loan will be sold into the secondary market or held in portfolio. The Company retains servicing for loans sold to Fannie Mae and earns a fee equal to 0.25% of the loan amount outstanding for providing these services. Loans which the Company originates to the standards of the buyer, which may differ from the Company’s underwriting standards, are generally sold to a third party along with the servicing rights without recourse. For the six months ended December 31, 2010, loans sold totaled $14.0 million. Of the $14.0 million sold, $3.2 million were sold on a servicing released basis, and $10.8 million were sold on a servicing retained basis.
Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated:
| | At December 31, | | | At June 30, | |
| | 2010 | | | 2010 | |
| | (Dollars in Thousands) | |
Non-accrual loans: | | | | | | |
Mortgage loans on real estate: | | | | | | |
1-4 family residential | | $ | 2,902 | | | $ | 2,763 | |
Commercial real estate | | | 3,194 | | | | 1,200 | |
Home equity: | | | | | | | | |
First lien | | | 104 | | | | 155 | |
Second lien | | | 595 | | | | 506 | |
Commercial | | | 1,722 | | | | 936 | |
Consumer: | | | | | | | | |
Manufactured homes | | | 30 | | | | 123 | |
Other | | | 6 | | | | 9 | |
Total non-accrual loans | | | 8,553 | | | | 5,692 | |
| | | | | | | | |
Total loans 90 days delinquent and still accruing | | | - | | | | - | |
Total non-performing loans | | | 8,553 | | | | 5,692 | |
Other real estate owned | | | 989 | | | | 911 | |
Total non-performing assets | | $ | 9,542 | | | $ | 6,603 | |
| | | | | | | | |
Troubled debt restructurings, not reported above | | $ | 4,703 | | | $ | 4,836 | |
| | | | | | | | |
Ratios: | | | | | | | | |
Non-performing loans to total loans | | | 2.15 | % | | | 1.37 | % |
Non-performing assets to total assets | | | 1.69 | % | | | 1.13 | % |
Generally, loans are placed on non-accrual status either when reasonable doubt exists as to the full 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. Non-performing assets totaled $9.5 million or 1.69% of total assets, at December 31, 2010 compared to $6.6 million, or 1.13% of total assets, at June 30, 2010. Total non-performing assets at December 31, 2010 included $8.6 million of non-performing loans and $989,000 of other real estate owned. From June 30, 2010 to December 31, 2010, commercial real estate non-performing loans have increased $2.0 million, commercial non-performing loans have increased $786,000, residential mortgage loans have increased $139,000 and a partial offset to these increases was a decrease in consumer non-performing loans of $58,000. At December 31, 2010, the Company had nine troubled debt restructurings (loans for which a portion of interest or principal has been forgiven, or the loans have been modified to lower the interest rate or extend the original term) totaling approximately $5.2 million, of which $508,000 is on non-accrual status. The interest income recorded from these loans amounted to approximately $151,000 for the six month period ended December 31, 2010. At June 30, 2010, the Company had ten troubled debt restructurings consisting of commercial and mortgage loans totaling approximately $5.5 million, of which $712,000 was on non-accrual status. The interest income recorded from the restructured loans amounted to approximately $264,000 for the year ended June 30, 2010.
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, the nature of collateral, 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. Impaired loans increased to $17.4 million at December 31, 2010 from $ 16.3 million at June 30, 2010 as a result of the continuing economic dow nturn in the greater Springfield Area as evidenced by poor payment performance and current financial information received from borrowers. The Company established specific reserves aggregating $1.2 million and $1.4 million for impaired loans at December 31, 2010 and June 30, 2010, respectively. Such reserves relate to fourteen impaired loans with a carrying value of $8.4 million, and are based on management’s analysis of estimated underlying collateral values or the expected cash flows and include $266,000 related to troubled debt restructurings at December 31, 2010.
We believe that the determination of our allowance for loan losses, including amounts required for impaired loans, is consistent with generally accepted accounting principles and current regulatory guidance. While the Company believes that it has established adequate specifically 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 217;s financial condition and earnings. It is also possible that, in this current economic environment, additional loans will become impaired in future periods.
The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned (“OREO”) in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. At December 31, 2010, the Company had eight properties with a carrying value of $989,000 classified as OREO. Two of these properties were commercial real estate properties valued at $ 475,000, and one property was a commercial construction project valued at $315,000. Five properties were manufactured homes valued at $312,000, however, there is a specific valuation reserve of $113,000 with respect to such properties. Any losses on the manufactured housing portfolio would only impact the cash reserve specifically maintained for manufactured housing loans.
Allowance for Loan Losses. The following table sets forth activity in the Company’s allowance for loan losses for the periods indicated:
| | Three Months Ended December 31, | | | Six Months Ended December 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (Dollars in Thousands) | | | (Dollars in Thousands) | |
Balance at beginning of period | | $ | 6,328 | | | $ | 4,587 | | | $ | 6,314 | | | $ | 3,742 | |
Charge-offs: | | | | | | | | | | | | | | | | |
Mortgage loans on real estate | | | | | | | (39 | ) | | | | | | | (39 | ) |
Other loans: | | | | | | | | | | | | | | | | |
Commercial business | | | (535 | ) | | | (65 | ) | | | (821 | ) | | | (65 | ) |
Consumer and other | | | (20 | ) | | | (28 | ) | | | (22 | ) | | | (28 | ) |
Total other loans | | | (555 | ) | | | (93 | ) | | | (843 | ) | | | (93 | ) |
Total charge-offs | | | (555 | ) | | | (132 | ) | | | (843 | ) | | | (132 | ) |
Recoveries: | | | | | | | | | | | | | | | | |
Mortgage loans on real estate | | | - | | | | - | | | | 2 | | | | - | |
Other loans: | | | | | | | | | | | | | | | | |
Commercial business | | | - | | | | - | | | | | | | | 3 | |
Consumer and other | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
Total other loans | | | 1 | | | | 1 | | | | 1 | | | | 4 | |
Total recoveries | | | 1 | | | | 1 | | | | 3 | | | | 4 | |
Net charge-offs | | | (554 | ) | | | (131 | ) | | | (840 | ) | | | (128 | ) |
Provision for loan losses | | | 300 | | | | 1,800 | | | | 600 | | | | 2,642 | |
| | | | | | | | | | | | | | | | |
Balance at end of period | | $ | 6,074 | | | $ | 6,256 | | | $ | 6,074 | | | $ | 6,256 | |
| | | | | | | | | | | | | | | | |
Ratios: | | | | | | | | | | | | | | | | |
Net charge-offs to average loans outstanding | | | 0.14 | % | | | 0.03 | % | | | 0.21 | % | | | 0.03 | % |
Allowance for loan losses to non-performing loans at end of period | | | 71.02 | % | | | 66.04 | % | | | 71.02 | % | | | 66.04 | % |
Allowance for loan losses to total loans at end of period | | | 1.53 | % | | | 1.52 | % | | | 1.53 | % | | | 1.52 | % |
For the six months ended December 31, 2010, total charge-offs were $843,000. These charge-offs were primarily due to four commercial loan relationships. The allowance for loan losses to non-performing loans has increased from 66.0% at December 31, 2009 to 71.0% at December 31, 2010. The allowance for loan losses to total loans has increased slightly from 1.52% at December 31, 2009 to 1.53% at December 31, 2010
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 balance of the loans serviced. The company recognizes servicing assets each time it undertakes an obligation to service loans sold. Calculation of the fair value of mortgage servicing assets is based on Service Release Premium (“SRP”) rates for conforming fixed rate mortgages obtained from an independent third party. SRP rates vary based on the outstanding balances of the mortgages and are periodically adjusted based on mortgage prepayments and market conditions.
The changes in servicing assets measured using fair value are as follows:
| | Three Months Ended December 31, | | | Six Months Ended December 31, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | (In thousands) | |
Fair value at beginning of period | | $ | 481 | | | $ | 662 | | | $ | 501 | | | $ | 656 | |
Capitalized servicing assets | | | 36 | | | | 5 | | | | 71 | | | | 38 | |
Changes in fair value | | | (80 | ) | | | (71 | ) | | | (135 | ) | | | (98 | ) |
Fair value at end of period | | $ | 437 | | | $ | 596 | | | $ | 437 | | | $ | 596 | |
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. For the three month periods ended December 31, 2010, and 2009, amounts recognized for loans servicing fees amounted to $81,000, and $72,000, respectively, which are included in other non-interest income in the statement of operations. For the six month periods ended December 31, 2010, and 2009, amounts recognized for loans servicing fees amounted to $144,000, and $99,000, respectively. The unpaid principal balance of mortgages serviced for others was $54.3 million and $49.8 million at December 31, 2010 and June 30, 2010, respectively.
Deposits and Borrowed Funds. The following table sets forth the Company’s deposit accounts (excluding escrow deposits) for the periods indicated.
| | At December 31, | | | At June 30, | |
| | 2010 | | | 2010 | |
| | Balance | | | Percent | | | Balance | | | Percent | |
| | (Dollars in Thousands) | |
Deposit type: | | | | | | | | | | | | |
Demand deposits | | $ | 52,462 | | | | 12.76 | % | | $ | 52,090 | | | | 12.40 | % |
Savings deposits | | | 79,015 | | | | 19.22 | | | | 82,040 | | | | 19.53 | |
Money market | | | 49,483 | | | | 12.04 | | | | 43,414 | | | | 10.34 | |
NOW accounts | | | 29,552 | | | | 7.19 | | | | 29,578 | | | | 7.04 | |
Total transaction accounts | | | 210,512 | | | | 51.21 | | | | 207,122 | | | | 49.31 | |
Certificates of deposit | | | 200,568 | | | | 48.79 | | | | 212,938 | | | | 50.69 | |
| | | | | | | | | | | | | | | | |
Total deposits | | $ | 411,080 | | | | 100.00 | % | | $ | 420,060 | | | | 100.00 | % |
Deposits decreased $9.0 million, or 2.1%, to $411.1 million at December 31, 2010 from $420.1 million at June 30, 2010. Certificates of deposit decreased $12.4 million savings accounts decreased $3.0 million and NOW accounts decreased $26,000. A partial offset to these decreases was an increase in money market accounts of $6.1 million, and an increase in demand deposits of $372,000. The primary reason for the decrease in certificates of deposit was due to the payout of one certificate which totaled $6.7 million. This certificate was collateral for a commercial loan which has been paid off.
Borrowings include advances from the Federal Home Loan Bank of Boston (“FHLB”), as well as securities sold under agreements to repurchase, and have decreased $9.0 million, or 13.8%, to $56.0 million at December 31, 2010 from $65.0 million at June 30, 2010. Repayments of advances from the FHLB were $11.9 million and repurchase agreements increased $2.9 million.
Stockholders’ Equity. In June 2010, the Company announced that its Board of Directors authorized a third stock repurchase program for the purchase of up to 357,573 shares of the Company’s common stock, or approximately 5% of its outstanding common stock (the “Repurchase Program”). Stockholders’ equity decreased $2.1 million, or 2.2%, to $92.7 million at December 31, 2010 from $94.8 million at June 30, 2010. Between June 30, 2010 and December 31, 2010 the Company repurchased 284,830 shares of Company’s common stock for $3.0 million, at an average pric e of $10.08 per share pursuant to the Company’s third Stock Repurchase Program. In addition the Company purchased 10,500 shares of Company stock, at $9.95 per share, from Hampden Bank Charitable Foundation in the first quarter of fiscal 2011. The decrease due to stock repurchased was partially offset by the net income for the six months of $1.0 million. Our ratio of capital to total assets increased slightly to 16.4% as of December 31, 2010 from 16.2% at June 30, 2010.
Comparison of Operating Results (unaudited) for the Three Months Ended December 31, 2010 and December 31, 2009
Net Income. The Company had net income for the three months ended December 31, 2010 of $491,000, or $0.08 per basic and fully diluted share, as compared to a net loss of $670,000, or $(0.10) per basic and fully diluted share, for the same period in 2009. The reason for the increase in net income was due to a decrease in the provision for loan losses of $1.5 million, or 83.3%, for the three months ended December 31, 2010 compared to the three months ended December 31, 2009. Also, for the three month period ended December 31, 2010, interest expense decreased by $558,000 compared to the three month period ended December 31, 2009. This decrease in interest expense was due to a decrease in deposit interest expense of $400,000 and a decrease in borrowing interest ex pense of $158,000 for the three months ended December 31, 2010 compared to the three months ended December 31, 2009. A partial offset to this was a decrease in interest and dividend income, including fees, of $516,000, or 7.4%, for the three months ended December 31, 2010 compared to the three months ended December 31, 2009. This decrease in interest income was mainly due to a decrease in debt securities income of $276,000 and a decrease in loan income of $247,000 for the three months ended December 31, 2010 compared to the three months ended December 31, 2009.
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.
| | Three Months Ended December 31, | |
| | 2010 | | | 2009 | |
| | Average Outstanding Balance | | | Interest | | | Yield /Rate (1) | | | Average Outstanding Balance | | | Interest | | | Yield /Rate (1) | |
| | (Dollars in Thousands) | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans (2) | | $ | 398,164 | | | $ | 5,648 | | | | 5.67 | % | | $ | 410,136 | | | $ | 5,895 | | | | 5.75 | % |
Investment securities | | | 104,030 | | | | 784 | | | | 3.01 | % | | | 113,038 | | | | 1,062 | | | | 3.76 | % |
Federal funds sold and other short-term investments | | | 13,669 | | | | 15 | | | | 0.44 | % | | | 13,495 | | | | 6 | | | | 0.18 | % |
Total interest earning assets | | | 515,863 | | | | 6,447 | | | | 5.00 | % | | | 536,669 | | | | 6,963 | | | | 5.19 | % |
Non-interest earning assets | | | 53,417 | | | | | | | | | | | | 37,508 | | | | | | | | | |
Total assets | | $ | 569,280 | | | | | | | | | | | $ | 574,177 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Savings deposits | | $ | 80,589 | | | | 92 | | | | 0.46 | % | | $ | 75,107 | | | | 170 | | | | 0.91 | % |
Money market | | | 46,463 | | | | 66 | | | | 0.57 | % | | | 45,667 | | | | 112 | | | | 0.98 | % |
NOW and other checking accounts | | | 81,941 | | | | 45 | | | | 0.22 | % | | | 68,599 | | | | 65 | | | | 0.38 | % |
Certificates of deposit | | | 202,522 | | | | 1,226 | | | | 2.42 | % | | | 207,467 | | | | 1,482 | | | | 2.86 | % |
Total deposits | | | 411,515 | | | | 1,429 | | | | 1.39 | % | | | 396,840 | | | | 1,829 | | | | 1.84 | % |
Borrowed funds | | | 50,862 | | | | 521 | | | | 4.10 | % | | | 74,538 | | | | 679 | | | | 3.64 | % |
Total interest-bearing liabilities | | | 462,377 | | | | 1,950 | | | | 1.69 | % | | | 471,378 | | | | 2,508 | | | | 2.13 | % |
Non-interest bearing liabilities | | | 13,619 | | | | | | | | | | | | 6,537 | | | | | | | | | |
Total liabilities | | | 475,996 | | | | | | | | | | | | 477,915 | | | | | | | | | |
Equity | | | 93,284 | | | | | | | | | | | | 96,262 | | | | | | | | | |
Total Liabilities and equity | | $ | 569,280 | | | | | | | | | | | $ | 574,177 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | $ | 4,497 | | | | | | | | | | | $ | 4,455 | | | | | |
Net interest rate spread (3) | | | | | | | | | | | 3.31 | % | | | | | | | | | | | 3.06 | % |
Net interest-earning assets (4) | | $ | 53,486 | | | | | | | | | | | $ | 65,291 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (5) | | | | | | | | | | | 3.49 | % | | | | | | | | | | | 3.32 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | | | | | | | 111.57 | % | | | | | | | | | | | 113.85 | % |
(1) | Yields and rates for the three months ended December 31, 2010 and 2009 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. |
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 December 31, 2010 vs. 2009 | |
| | Increase (Decrease) Due to | | | Total Increase | |
| | Volume | | | Rate | | | (Decrease) | |
| | (Dollars in Thousands) | |
Interest income: | | | | | | | | | |
Loans (1) | | $ | (171 | ) | | $ | (76 | ) | | $ | (247 | ) |
Investment securities | | | (80 | ) | | | (198 | ) | | | (278 | ) |
Federal funds sold and other short-term investments | | | 0 | | | | 9 | | | | 9 | |
Total interest income | | | (250 | ) | | | (266 | ) | | | (516 | ) |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Savings deposits | | | 12 | | | | (90 | ) | | | (78 | ) |
Money market | | | 2 | | | | (48 | ) | | | (46 | ) |
NOW and other checking accounts | | | 11 | | | | (31 | ) | | | (20 | ) |
Certificates of deposits | | | (35 | ) | | | (221 | ) | | | (256 | ) |
Total deposits | | | (9 | ) | | | (391 | ) | | | (400 | ) |
Borrowed funds | | | (235 | ) | | | 77 | | | | (158 | ) |
Total interest expense | | | (245 | ) | | | (313 | ) | | | (558 | ) |
Change in net interest income | | $ | (6 | ) | | $ | 48 | | | $ | 42 | |
| | | | | | | | | | | | |
(1) Includes loans held for sale. | | | | | | | | | |
Net interest income. Net interest income for the three months ended December 31, 2010 was $4.5 million, an increase of $42,000 or 0.9%, over the same period of 2009. This was primarily due to a decrease in the average cost of deposits of 45 basis points to 1.39% for the three months ended December 31, 2010 over the same period in 2009, as well as a decrease in interest income of $516,000 for the three months ended December 31, 2010 and a decrease of $23.7 million in the average balance of borrowings or the three months ended December 31, 2010 over the same period in 2009.
Interest income. Interest income for the three months ended December 31, 2010 decreased $516,000, or 7.4%, to $6.4 million over the same period of 2009. For the three months ended December 31, 2010, average outstanding loans decreased $12.0 million, or 2.9%, from the average for the three month period ended December 31, 2009. Due to interest rate risk, the Company has decided to sell some of its current originations of fixed rate mortgages, which is contributing to the decrease in average outstanding loans as well as the decrease in interest income. For the three months ended December 31, 2010, average outstanding investment securities decreased $9.0 million or 8.0% from the average for the three month period ended December 31, 2009. The average yield on interest earning assets decreased 19 basis points to 5.00% for the three months ended December 31, 2010, compared to 5.19% for the same period in 2009.
Interest Expense. Interest expense decreased $558,000, or 22.3%, to $2.0 million for the three months ended December 31, 2010. This decrease was primarily due to a decrease in rates of deposits and a decrease in the average balance of borrowed funds due to the Company paying off some higher rate borrowings. The average cost of funds decreased to 1.69% for the three months ended December 31, 2010, a decrease of 44 basis points from a cost of funds of 2.13% for the same period in 2009. The decrease in the cost of funds is due to the result of the current low interest rate environment as well as an increase in transaction and money market deposit accounts.
Provision for Loan Losses. The Company’s provision for loan loss expense was $300,000 for the three months ended December 31, 2010 compared to $1.8 million for the three months ended December 31, 2009. The reason for the large provision in loan loss expense for the three months ended December 31, 2009 was primarily due to our concern over one large lending relationship, as well as increases in loan delinquencies, increases in non-accrual loans, increases in impaired loans, growth in the loan portfolio, and general economic conditions. As of December 31, 2010, the Company’s total allowance for loan losses of $6.1 million decreased slightly from $6.3 million at June 30, 2010. The change in the allowance is because the Company charged-off l oan balances totaling $555,000 during the three month period ended December 31, 2010 and $843,000 during the six month period ended December 31, 2010. The allowance for loan losses remained relatively unchanged at 1.53% of total loans as of December 31, 2010 compared to 1.52% of total loans as of December 31, 2009 as a result of decreased allowance for loan loss and a decrease in gross loans outstanding.
Non-interest Income. Total non-interest income totaled $807,000 for the three months ended December 31, 2010, an increase of $130,000 from the same period a year ago. This increase is due to an increase in gain on sales of loans of $191,000 for the three months ended December 31, 2010 compared to the same period a year ago. Due to interest rate risk, the Company has decided to sell some of its current originations of fixed rate mortgages.
Non-interest Expense. Non-interest expense decreased $83,000, or 1.9%, to $4.2 million for the three months ended December 31, 2010 compared to the same period for 2009. This decrease was largely due to a decrease in advertising expense of $106,000, a decrease in data processing services of $58,000 and a decrease in write-down on the sale of other real estate owned of $28,000,. These decreases were offset by increases in salary and employee benefit expense of $74,000, other general and administrative expense of $17,000, FDIC insurance and assessment expenses of $15,000 and occupancy and equipment expense of $3,000.
Income Taxes. Income tax expense increased $594,000 for the three months ended December 31, 2010 compared to the same period for 2009. Our combined federal and state effective tax rate was 35.1% for the three months ended December 31, 2010 compared to 32.9% for the three months ended December 31, 2009. The primary reason for the increase in income tax expense and effective tax rate was due to the change in the estimated effective state tax rate in fiscal 2010 decreasing the December 31, 2009 effective rate.
Comparison of Operating Results (unaudited) for the Six Months Ended December 31, 2010 and December 31, 2009
Net Income. The Company had net income for the six months ended December 31, 2010 of $1.0 million, or $0.16 per basic and fully diluted share, as compared to a net loss of $832,000, or $(0.13) per basic and fully diluted share, for the same period in 2009. The reason for the increase in net income was due to a decrease in the provision for loan losses of $2.0 million, or 77.3%, for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. Also, for the six month period ended December 31, 2010, interest expense decreased by $1.1 million compared to the six month period ended December 31, 2009. This decrease in interest expense was due to a decrease in deposit interest expense of $740,000 and a decrease in borrowing interest expe nse of $318,000 for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. A partial offset to this was a decrease in interest and dividend income, including fees, of $772,000, or 5.6%, for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. This decrease in interest income was mainly due to a decrease in debt securities income of $554,000 and a decrease in loan income of $228,000 for the six months ended December 31, 2010 compared to the six months ended December 31, 2009.
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.
| | Six Months Ended December 31, | |
| | 2010 | | | 2009 | |
| | Average Outstanding Balance | | | Interest | | | Yield /Rate (1) | | | Average Outstanding Balance | | | Interest | | | Yield /Rate (1) | |
| | (Dollars in Thousands) | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Loans (2) | | $ | 406,172 | | | $ | 11,463 | | | | 5.64 | % | | $ | 404,470 | | | $ | 11,691 | | | | 5.78 | % |
Investment securities | | | 105,664 | | | | 1,630 | | | | 3.09 | % | | | 114,119 | | | | 2,188 | | | | 3.83 | % |
Federal funds sold and other short-term investments | | | 12,332 | | | | 26 | | | | 0.42 | % | | | 14,547 | | | | 12 | | | | 0.16 | % |
Total interest earning assets | | | 524,168 | | | | 13,119 | | | | 5.01 | % | | | 533,136 | | | | 13,891 | | | | 5.21 | % |
Non-interest earning assets | | | 50,461 | | | | | | | | | | | | 36,107 | | | | | | | | | |
Total assets | | $ | 574,629 | | | | | | | | | | | $ | 569,243 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Savings deposits | | $ | 81,019 | | | | 208 | | | | 0.51 | % | | $ | 74,156 | | | | 358 | | | | 0.97 | % |
Money market | | | 44,535 | | | | 134 | | | | 0.60 | % | | | 44,281 | | | | 229 | | | | 1.03 | % |
NOW and other checking accounts | | | 80,969 | | | | 94 | | | | 0.23 | % | | | 66,236 | | | | 127 | | | | 0.38 | % |
Certificates of deposit | | | 207,352 | | | | 2,584 | | | | 2.49 | % | | | 204,595 | | | | 3,046 | | | | 2.98 | % |
Total deposits | | | 413,875 | | | | 3,020 | | | | 1.46 | % | | | 389,268 | | | | 3,760 | | | | 1.93 | % |
Borrowed funds | | | 53,786 | | | | 1,099 | | | | 4.09 | % | | | 76,850 | | | | 1,417 | | | | 3.69 | % |
Total interest-bearing liabilities | | | 467,661 | | | | 4,119 | | | | 1.76 | % | | | 466,118 | | | | 5,177 | | | | 2.22 | % |
Non-interest bearing liabilities | | | 12,904 | | | | | | | | | | | | 6,590 | | | | | | | | | |
Total liabilities | | | 480,565 | | | | | | | | | | | | 472,708 | | | | | | | | | |
Equity | | | 94,064 | | | | | | | | | | | | 96,535 | | | | | | | | | |
Total Liabilities and equity | | $ | 574,629 | | | | | | | | | | | $ | 569,243 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | $ | 9,000 | | | | | | | | | | | $ | 8,714 | | | | | |
Net interest rate spread (3) | | | | | | | | | | | 3.24 | % | | | | | | | | | | | 2.99 | % |
Net interest-earning assets (4) | | $ | 56,507 | | | | | | | | | | | $ | 67,018 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (5) | | | | | | | | | | | 3.43 | % | | | | | | | | | | | 3.27 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | | | | | | | 112.08 | % | | | | | | | | | | | 114.38 | % |
(1) | Yields and rates for the six months ended December 31, 2010 and 2009 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. |
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.
| | Six Months Ended December 31, 2010 vs. 2009 | |
| | Increase (Decrease) Due to | | | Total Increase | |
| | Volume | | | Rate | | | (Decrease) | |
| | (Dollars in Thousands) | |
Interest income: | | | | | | | | | |
Loans (1) | | $ | 49 | | | $ | (277 | ) | | $ | (228 | ) |
Investment securities | | | (153 | ) | | | (405 | ) | | | (558 | ) |
Federal funds sold and other | | | (2 | ) | | | 16 | | | | 14 | |
Total interest income | | | (106 | ) | | | (666 | ) | | | (772 | ) |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Savings deposits | | | 31 | | | | (181 | ) | | | (150 | ) |
Money market | | | 1 | | | | (96 | ) | | | (95 | ) |
NOW and other checking accounts | | | 24 | | | | (57 | ) | | | (33 | ) |
Certificates of deposits | | | 41 | | | | (503 | ) | | | (462 | ) |
Total deposits | | | 98 | | | | (838 | ) | | | (740 | ) |
Borrowed funds | | | (459 | ) | | | 141 | | | | (318 | ) |
Total interest expense | | | (362 | ) | | | (696 | ) | | | (1,058 | ) |
Change in net interest income | | $ | 255 | | | $ | 31 | | | $ | 286 | |
| | | | | | | | | | | | |
(1) Includes loans held for sale. | | | | | | | | | |
Net interest income. Net interest income for the six months ended December 31, 2010 was $9.0 million, an increase of $286,000 or 3.3%, over the same period of 2009. This was primarily due to a decrease in the average cost of deposits of 47 basis points to 1.46% for the six months ended December 31, 2010 over the same period in 2009, as well as a decrease in interest income of $772,000 for the six months ended December 31, 2010 over the same period in 2009.
Interest income. Interest income for the six months ended December 31, 2010 decreased $772,000, or 5.6%, to $13.1 million over the same period of 2009. For the six months ended December 31, 2010, average outstanding loans increased $1.7 million, or 0.4%, from the average for the six month period ended December 31, 2009. For the six months ended December 31, 2010, average outstanding investment securities decreased $8.5 million or 7.4% from the average for the six month period ended December 31, 2009. The average yield on interest earning assets decreased 20 basis points to 5.01% for the six months ended December 31, 2010, compared to 5.21% for the same period in 2009.
Interest Expense. Interest expense decreased $1.1 million, or 20.4%, to $4.1 million for the six months ended December 31, 2010. This decrease was primarily due to a decrease in rates of deposits and a decrease in the average balance of borrowed funds due to the Company paying off some higher rate borrowings. The average cost of funds decreased to 1.76% for the six months ended December 31, 2010, a decrease of 46 basis points from a cost of funds of 2.22% for the same period in 2009.
Provision for Loan Losses. The Company’s provision for loan loss expense was $600,000 for the six months ended December 31, 2010 compared to $2.6 million for the six months ended December 31, 2009. The reason for the large provision in loan loss expense for the six months ended December 31, 2009 was primarily due to our concern over one large lending relationship, as well as increases in loan delinquencies, increases in non-accrual loans, increases in impaired loans, growth in the loan portfolio, and general economic conditions. As of December 31, 2010, the Company’s total allowance for loan losses of $6.1 million decreased slightly from $6.3 million at June 30, 2010. This is because the Company charged off loan balances totaling $ 843,000 during the six month period ended December 31, 2010. The allowance for loan losses remained relatively unchanged at 1.53% of total loans as of December 31, 2010 compared to 1.52% of total loans as of December 31, 2009 as a result of decreased allowance for loan loss and a decrease in gross loans outstanding.
Non-interest Income. Total non-interest income totaled $1.6 million for the six months ended December 31, 2010, an increase of $300,000 from the same period a year ago. This increase is due to an increase in gain on sales of loans of $345,000 for the six months ended December 31, 2010 compared to the same period a year ago. Due to interest rate risk, the Company has decided to sell some of its current originations of fixed rate mortgages.
Non-interest Expense. Non-interest expense decreased $203,000, or 2.4%, to $8.4 million for the six months ended December 31, 2010 compared to the same period for 2009. This decrease was largely due to a decrease in write-down on the sale of other real estate owned of $268,000, a decrease in advertising expense of $136,000 and a decrease in data processing services of $118,000. These decreases were offset by increases in other general and administrative expense of $121,000, salary and employee benefit expense of $113,000, occupancy and equipment expense of $47,000 and FDIC insurance and assessment expenses of $38,000.
Income Taxes. Income tax expense increased $965,000 for the six months ended December 31, 2010 compared to the same period for 2009. Our combined federal and state effective tax rate was 35.4% for the six months ended December 31, 2010 compared to 32.4% for the six months ended December 31, 2009. The primary reason for the increase in income tax expense and effective tax rate was due to the change in the estimated effective state tax rate in fiscal 2010 decreasing the December 31, 2009 effective rate.
Minimum Regulatory Capital Requirements. As of December 31, 2010, 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 has changed Hampden Bank’s category. The Company’s and Bank’s capital amounts and ratios as of December 31, 2010 (unaudited) and June 30, 2010 are presented in the table below.
| | | | | | | | | | | | | | Minimum | |
| | | | | | | | | | | | | | To Be Well | |
| | | | | | | | Minimum | | | Capitalized Under | |
| | | | | | | | For Capital | | | Prompt Corrective | |
| | Actual | | | Adequacy Purposes | | | Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | (Dollars in Thousands) | |
As of December 31, 2010: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total capital (to risk weighted assets): | | | | | | | | | | | | | | | | |
Consolidated | | $ | 96,065 | | | | 24.3 | % | | $ | 31,555 | | | | 8.0 | % | | | N/A | | | | N/A | |
Bank | | | 76,636 | | | | 19.6 | | | | 31,243 | | | | 8.0 | | | $ | 39,054 | | | | 10.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to risk weighted assets): | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 91,120 | | | | 23.1 | | | $ | 15,777 | | | | 4.0 | | | | N/A | | | | N/A | |
Bank | | | 71,740 | | | | 18.4 | | | | 15,622 | | | | 4.0 | | | | 23,432 | | | | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to average assets): | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 91,120 | | | | 16.0 | | | $ | 22,771 | | | | 4.0 | | | | N/A | | | | N/A | |
Bank | | | 71,740 | | | | 12.9 | | | | 22,181 | | | | 4.0 | | | | 27,726 | | | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of June 30, 2010: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk weighted assets): | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 96,860 | | | | 23.4 | % | | $ | 33,145 | | | | 8.0 | % | | | N/A | | | | N/A | |
Bank | | | 73,989 | | | | 18.1 | | | | 32,643 | | | | 8.0 | | | $ | 40,803 | | | | 10.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to risk weighted assets): | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 91,667 | | | | 22.1 | | | | 16,573 | | | | 4.0 | | | | N/A | | | | N/A | |
Bank | | | 68,874 | | | | 16.9 | | | | 16,321 | | | | 4.0 | | | | 24,482 | | | | 6.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Tier 1 capital (to average assets): | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | | 91,667 | | | | 15.8 | | | | 23,152 | | | | 4.0 | | | | N/A | | | | N/A | |
Bank | | | 68,874 | | | | 12.4 | | | | 22,305 | | | | 4.0 | | | | 27,882 | | | | 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, prepayments and the maturity of 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 December 31, 2010, cash and cash equivalents totaled $28.8 million, or 5.1% of total assets.
The Company also relies on outside borrowings from the FHLB as an additional funding source. The Company uses 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.
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.
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 December 31, 2010 and June 30, 2010.
| | December 31, 2010 | | | June 30, 2010 | |
| | (Dollars in Thousands) | |
Commitments to grant loans (1) | | $ | 15,177 | | | $ | 9,719 | |
Commercial loan lines-of-credit (2) | | | 24,647 | | | | 23,262 | |
Unused portions of home equity lines-of-credit (3) | | | 30,893 | | | | 30,074 | |
Unused portion of construction loans (4) | | | 3,276 | | | | 7,333 | |
Unused portion of mortgage loans | | | 191 | | | | 210 | |
Unused portion of personal lines-of-credit (5) | | | 1,933 | | | | 1,983 | |
Standby letters of credit (6) | | | 2,135 | | | | 2,200 | |
Total loan commitments | | $ | 78,252 | | | $ | 74,781 | |
(1) | Commitments for loans are generally extended to customers for up to 60 days after which they expire. |
(2) | The majority of C&I loans are written on a demand basis. |
(3) | Unused portions of home equity lines of credit are available to the borrower for up to 20 years. |
(4) | Unused portions of construction loans are available to the borrower for up to eighteen months |
| for development loans and up to one year for other construction loans. |
(5) | Unused portions of personal lines-of-credit are available to customers in "good standing" indefinitely. |
(6) | Standby letters of credit are generally available for one year or less. |
Item 3: Quantitative and Qualitative Disclosures About Market Risks
There have been no material changes in the Company’s market risk during the six months ended December 31, 2010. See the discussion and analysis of quantitative and qualitative disclosures about market risk provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010 for a general discussion of the qualitative aspects of market risk and discussion of the simulation model used by the Company to measure its interest rate risk.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed by us is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including ou r principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply this judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.
There have been no material changes in the Company’s risk factors during the six months ended December 31, 2010. See the discussion and analysis of risk factors, in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Unregistered Sales of Equity Securities – Not applicable |
(b) | Use of Proceeds – Not applicable |
(c) | Repurchase of Our Equity Securities –In June 2010, the Company announced that its Board of Directors authorized a third stock repurchase program (“Repurchase Program”) for the purchase of up to 357,573 shares of the Company’s common stock or approximately 5% of its outstanding common stock. The Company purchased 123,230 of its shares in the open market in the quarter ended December 31, 2010 at an average price of $10.12 per share. |
| On December 22, 2010, the Company announced that its Board of Directors authorized a fourth stock repurchase program (the “Stock Repurchase Program”) for the purchase of up to 339,170 shares of the Company’s common stock or approximately 5% of its outstanding common stock. The Company will commence its fourth stock repurchase program immediately upon the completion of its third repurchase program. Any repurchases under the Stock Repurchase Program will be made through open market purchase transactions from time to time. The amount and exact timing of any repurchases will depend on market conditions and other factors, at the discretion of management of the Company, and it is intended that the Stock Repurchase Program will complete all repurchases within twelve months after its commencement. There is no assurance that the Company will repurchase shares during any period. |
Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly announced Plans or Programs | | | (d) Maximum Number or Appropriate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
October 1, 2010 - October 31, 2010 | | | 109,430 | | | $ | 10.11 | | | | 109,430 | | | | 52,343 | |
November 1, 2010 - November 30, 2010 | | | 9,200 | | | $ | 10.20 | | | | 9,200 | | | | 43,143 | |
December 1, 2010 - December 31, 2010 | | | 4,600 | | | $ | 10.22 | | | | 4,600 | | | | 38,543 | |
| | | 123,230 | | | $ | 10.12 | | | | 123,230 | | | | | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
Not applicable.
3.1 | | Certificate of Incorporation of Hampden Bancorp, Inc. (1) |
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3.2 | | Amended and Restated Bylaws of Hampden Bancorp, Inc. (2) |
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3.3 | | Text of Amendment to Amended and Restated Bylaws of Hampden Bancorp, Inc. (3) |
4.1 | | Stock Certificate of Hampden Bancorp, Inc. (1) |
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10.1 | | Hampden Bank Employee Stock Ownership Plan and Trust Agreement (4) |
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10.2.1 | | Hampden Bank Employee Stock Ownership Plan Loan Agreement (5) |
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10.2.2 | | Pledge Agreement (5) |
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10.2.3 | | Promissory Note (5) |
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10.3 | | Hampden Bank 401(k) Profit Sharing Plan and Trust (1) |
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10.4 | | Hampden Bank SBERA Pension Plan (1) |
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10.5.1 | | Employment Agreement between Hampden Bank and Thomas R. Burton (5) |
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10.5.2 | | Employment Agreement between Hampden Bank and Glenn S. Welch (5) |
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10.6.2 | | Form of 2010 Hampden Bank Change in Control Agreement (11) |
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10.7 | | Executive Salary Continuation Agreement between Hampden Bank and Thomas R. Burton (1) |
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10.8 | | Form of Executive Salary Continuation Agreement between Hampden Bank and certain specific officers (1) |
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10.9 | | Form of Director Supplemental Retirement Agreements between Hampden Bank and certain directors (1) |
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10.10.1 | | Executive Split Dollar Life Insurance Agreement between Hampden Bank and Thomas R. Burton (1) |
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10.10.2 | | Executive Split Dollar Life Insurance Agreement between Hampden Bank and Robert S. Michel (1) |
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10.11 | | Amended and Restated Executive Salary Continuation Agreement between Hampden Bank and Thomas R. Burton (7) |
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10.12 | | 2008 Equity Incentive Plan (8) |
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10.13 | | Form of Restricted Stock Agreement (9) |
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10.14 | | Form of Stock Option Grant Notice and Stock Option Agreement (9) |
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21.0 | | List of Subsidiaries (10) |
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31.1 | | Certification pursuant to Rule 13a-14(a)/15d-14(a) of Thomas R. Burton |
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31.2 | | Certification pursuant to Rule 13a-14(a)/15d-14(a) of Robert A. Massey |
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32.0 | | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
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(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. 001-33144) as filed with the SEC on August 3, 2007. |
(3) | Incorporated by reference to the Company’s Current Report on form 8-K (File No. 001-33144), as filed with the SEC on September 14, 2009. |
(4) | Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 001-33144) for the quarter ended September 30, 2006. |
(5) | Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on January 19, 2007. |
(6) | Incorporated by reference to the Company’s Current Report on Form 8-K (File No. 001-33144), as filed with the SEC on November 9, 2009. |
(7) | Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-33144) for the year ended June 20, 2007. |
(8) | Incorporated by reference to the Company’s Proxy Statement on Form DEF 14A (File No. 001-33144), as filed with the SEC on December 27, 2007. |
(9) | Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 001-33144) for the quarter ended September 30, 2008. |
(10) | Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-33144) for the year ended June 30, 2010. |
(11) | Incorporated by reference to the Company's Current Report on Form 8-K (File No. 001-33144) as filed with the SEC on November 4, 2010. |
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.
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| HAMPDEN BANCORP, INC. | |
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Date: February 11, 2011 | /s/ Thomas R. Burton | |
| Thomas R. Burton |
| President and Chief Executive Officer |
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Date: February 11, 2011 | /s/ Robert A. Massey | |
| Robert A. Massey |
| Chief Financial Officer, Senior Vice President and Treasurer |