10-Q 1 a50471806.htm HAMPDEN BANCORP, INC. 10-Q a50471806.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM                      TO                     
 
COMMISSION FILE NUMBER : 333-137359
 
Hampden Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-5714154
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
19 Harrison Ave.
Springfield, Massachusetts 01102
(Address of principal executive offices) (Zip Code)
 
(413) 736-1812
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
  Large accelerated filer o Accelerated Filer o  
  Non-accelerated filer o Smaller reporting company þ  
  (Do not check if a smaller reporting company)    
              
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No þ

As of November 5, 2012, there were 5,864,905 shares of the registrant’s common stock outstanding.


 
 

 
 
HAMPDEN BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
HAMPDEN BANCORP, INC. AND SUBSIDIARIES

     
Page No.
PART I — FINANCIAL INFORMATION  
       
  Item 1 Financial Statements of Hampden Bancorp, Inc. and Subsidiaries  
       
   
3
       
   
        4
       
   
        5
       
   
6
       
   
7-8
       
   
9
       
  Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
       
  Item 3 Quantitative and Qualitative Disclosures About Market Risks
36
       
  Item 4 Controls and Procedures
36
       
PART II — OTHER INFORMATION  
       
  Item 1 Legal Proceedings
36
       
  Item 1A Risk Factors
36
       
  Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
37
       
  Item 3 Defaults Upon Senior Securities
37
       
  Item 4 Mine Safety Disclosures
37
       
  Item 5 Other Information
37
       
  Item 6 Exhibits
38
       
SIGNATURES
40
 

 
2

 
 
PART 1 – FINANCIAL INFORMATION
Item 1: Financial Statements of Hampden Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
ASSETS
 
   
September 30,
   
June 30,
 
   
2012
   
2012
 
   
(Unaudited)
 
Cash and due from banks
  $ 11,474     $ 12,334  
Federal funds sold and other short-term investments
    34,927       15,589  
Cash and cash equivalents
    46,401       27,923  
                 
Securities available for sale, at fair value
    141,718       143,851  
Federal Home Loan Bank of Boston stock, at cost
    5,153       4,959  
Loans held for sale
    890       927  
Loans, net of allowance for loan losses of $5,172
               
at September 30, 2012 and $5,148 at June 30, 2012
    420,201       406,344  
Other real estate owned
    1,554       1,826  
Premises and equipment, net
    5,222       5,159  
Accrued interest receivable
    1,666       1,675  
Deferred tax asset, net
    3,141       3,402  
Bank-owned life insurance
    16,339       16,205  
Other assets
    3,871       3,686  
    $ 646,156     $ 615,957  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Deposits
  $ 452,907     $ 434,832  
Securities sold under agreements to repurchase
    4,822       7,315  
Short-term borrowings
    10,000       3,000  
Long-term debt
    84,746       76,661  
Mortgagors' escrow accounts
    1,048       1,010  
Accrued expenses and other liabilities
    5,601       5,979  
Total liabilities
    559,124       528,797  
                 
                 
Commitments and contingencies
               
                 
Preferred stock ($.01 par value, 5,000,000 shares authorized, none issued or outstanding)
    -       -  
Common stock ($.01 par value, 25,000,000 shares authorized; 7,951,548
               
issued; 5,860,605 outstanding at September 30, 2012 and 5,968,395 outstanding                
at June 30, 2012)
    80       80  
Additional paid-in-capital
    79,135       78,995  
Unearned compensation - ESOP (392,196 shares unallocated at September 30, 2012 and
               
402,796 shares unallocated at June 30, 2012)
    (3,922 )     (4,028 )
Unearned compensation - equity incentive plan
    (142 )     (225 )
Retained earnings
    32,995       32,473  
Accumulated other comprehensive income
    2,523       2,117  
Treasury stock, at cost (2,090,943 shares at September 30, 2012 and 1,983,153 shares at                 
June 30, 2012)
    (23,637 )     (22,252 )
Total stockholders' equity
    87,032       87,160  
    $ 646,156     $ 615,957  
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
3

 
 
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
 
   
Three Months Ended
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
Interest and dividend income:
           
Loans, including fees
  $ 5,456     $ 5,526  
Debt securities
    742       708  
Dividends
    7       4  
Federal funds sold and other short-term investments
    4       4  
Total interest and dividend income
    6,209       6,242  
                 
Interest expense:
               
Deposits
    958       1,165  
Borrowings
    450       419  
Total interest expense
    1,408       1,584  
                 
Net interest income
    4,801       4,658  
Provision for loan losses
    50       300  
Net interest income, after provision for loan losses
    4,751       4,358  
                 
Non-interest income:
               
Customer service fees
    516       504  
Gain on sales of loans, net
    195       109  
Increase in cash surrender value of bank-owned life insurance
    134       98  
Other
    121       110  
Total non-interest income
    966       821  
                 
Non-interest expense:
               
Salaries and employee benefits
    2,480       2,480  
Occupancy and equipment
    448       461  
Data processing services
    239       194  
Advertising
    149       224  
Net gain on other real estate owned
    (12 )     -  
FDIC insurance and assessment
    80       60  
Other general and administrative
    1,080       945  
Total non-interest expense
    4,464       4,364  
                 
Income before income taxes
    1,253       815  
                 
Income tax provision
    492       279  
                 
Net income
  $ 761     $ 536  
                 
Earnings per share
               
Basic
  $ 0.14     $ 0.09  
Diluted
  $ 0.14     $ 0.09  
                 
Weighted average shares outstanding
               
Basic
    5,495,803       6,197,529  
Diluted
    5,584,946       6,289,909  
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

 
The components of comprehensive income and related tax effects are as follows:

   
Three Months Ended
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
Net income
  $ 761     $ 536  
                 
Other comprehensive income:
               
Unrealized holding gains on available-for-sale securities
    669       140  
Tax effect
    263       48  
Net-of-tax amount
    406       92  
                 
Comprehensive income
  $ 1,167     $ 628  


See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 (Dollars in thousands, except per share data)

                           
Unearned
         
Accumulated
             
               
Additional
   
Unearned
   
Compensation -
         
Other
             
   
Common Stock
   
Paid-in
   
Compensation
   
Equity
   
Retained
   
Comprehensive
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
- ESOP
   
Incentive Plan
   
Earnings
   
Income
   
Stock
   
Total
 
   
(Unaudited)
 
Balance at June 30, 2011
    6,799,499     $ 80     $ 78,517     $ (4,452 )   $ (871 )   $ 30,327     $ 1,757     $ (11,842 )   $ 93,516  
Net income
    -       -       -       -       -       536       -       -       536  
Other comprehensive income
    -       -       -       -       -       -       92       -       92  
Cash dividends paid ($0.03 per share)
    -       -       -       -       -       (189 )     -       -       (189 )
Common stock repurchased
    (138,763 )     -       -       -       -       -       -       (1,792 )     (1,792 )
Stock-based compensation
    -       -       81       -       176       -       -       -       257  
Tax benefit from Equity Incentive Plan                                                                         
vesting
    -       -       4       -       -       -       -       -       4  
ESOP shares allocated or committed to                                                                         
be allocated (10,600 shares)
    -       -       32       106       -       -       -       -       138  
Balance at September 30, 2011
    6,660,736     $ 80     $ 78,634     $ (4,346 )   $ (695 )   $ 30,674     $ 1,849     $ (13,634 )   $ 92,562  
                                                                         
Balance at June 30, 2012
    5,968,395     $ 80     $ 78,995     $ (4,028 )   $ (225 )   $ 32,473     $ 2,117     $ (22,252 )   $ 87,160  
Net income
    -       -       -       -       -       761       -       -       761  
Other comprehensive income
    -       -       -       -       -       -       406       -       406  
Cash dividends paid ($0.04 per share)
    -       -       -       -       -       (239 )     -       -       (239 )
Common stock repurchased
    (107,790 )     -       -       -       -       -       -       (1,385 )     (1,385 )
Stock-based compensation
    -       -       113       -       83       -       -       -       196  
ESOP shares allocated or committed to                                                                        
be allocated (10,600 shares)
    -       -       27       106       -       -       -       -       133  
Balance at September 30, 2012
    5,860,605     $ 80     $ 79,135     $ (3,922 )   $ (142 )   $ 32,995     $ 2,523     $ (23,637 )   $ 87,032  
 
 

See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

   
Three Months Ended
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
Cash flows from operating activities:
           
Net income
  $ 761     $ 536  
Adjustments to reconcile net income to net cash
               
provided by (used in) operating activities:
               
Provision for loan losses
    50       300  
Changes in fair value of mortgage servicing rights
    (42 )     (28 )
Net amortization of securities
    177       473  
Depreciation and amortization
    177       199  
Loans originated for sale
    (5,874 )     (3,643 )
Proceeds from loan sales
    6,106       3,355  
Gain on sales of loans, net
    (195 )     (109 )
Realized gain on sale of other real estate owned
    (12 )     -  
Increase in cash surrender value of bank-owned
               
life insurance
    (134 )     (98 )
Deferred tax benefit
    (2 )     (5 )
Employee Stock Ownership Plan expense
    133       138  
Stock-based compensation
    196       257  
Tax benefit from Equity Incentive Plan vesting
    -       (4 )
Net change in:
               
Accrued interest receivable
    9       42  
Other assets
    (143 )     (633 )
Accrued expenses and other liabilities
    (378 )     (1,627 )
Net cash provided by (used in) operating activities
    829       (847 )
                 
Cash flows from investing activities:
               
Activity in available-for-sale securities:
               
Maturities and calls
    -       1,000  
Principal payments
    10,111       7,140  
Purchases
    (7,486 )     (5,656 )
Purchase of loans
    (199 )     -  
Loan (originations), net of principal payments
    (13,759 )     2,095  
Purchase of Federal Home Loan Bank stock
    (194 )     -  
Proceeds from sale of other real estate owned
    335       67  
Purchase of premises and equipment
    (240 )     (74 )
Net cash (used in) provided by investing activities
    (11,432 )     4,572  
 
 
(continued)

See accompanying notes to unaudited consolidated financial statements.
 
 
7

 
 
HAMPDEN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)

   
Three Months Ended
September 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
Cash flows from financing activities:
           
Net change in deposits
    18,075       1,140  
Net change in repurchase agreements
    (2,493 )     (318 )
Net change in short-term borrowings
    7,000       -  
Proceeds from issuance of long-term debt
    17,720       -  
Repayment of long-term debt
    (9,635 )     (5,184 )
Net change in mortgagors' escrow accounts
    38       37  
Tax benefit from Equity Incentive Plan vesting
    -       4  
Repurchase of common stock
    (1,385 )     (1,792 )
Payment of dividends on common stock
    (239 )     (189 )
Net cash provided by (used in) financing activities
    29,081       (6,302 )
                 
Net change in cash and cash equivalents
    18,478       (2,577 )
                 
Cash and cash equivalents at beginning of period
    27,923       31,147  
                 
Cash and cash equivalents at end of period
  $ 46,401     $ 28,570  
                 
Supplemental cash flow information:
               
Interest paid on deposits
  $ 958     $ 1,165  
Interest paid on borrowings
    212       479  
Income taxes paid
    650       12  
Transfers from loans to other real estate owned
    51       61  
 
 
 
See accompanying notes to unaudited consolidated financial statements.

 
8

 
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation and consolidation
 
The consolidated financial statements include the accounts of Hampden Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, Hampden Bank (the “Bank”) and Hampden LS, Inc.  Hampden Bank is a Massachusetts chartered stock savings bank. The Company contributed funds to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan (the “ESOP”) to allow it to purchase shares of the Company’s common stock as part of the completion of the initial public offering. Hampden Bank has three wholly-owned subsidiaries, Hampden Investment Corporation and Hampden Investment Corporation II, which engage in buying, selling, holding and otherwise dealing in securities, and Hampden Insurance Agency, which ceased selling insurance products in November of 2000 and remains inactive.  All significant intercompany accounts and transactions have been eliminated in consolidation.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. The results shown for the interim period ended September 30, 2012 are not necessarily indicative of the results to be obtained for a full year. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2012 included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on September 18, 2012.

In preparing the consolidated interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the statement of financial condition and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and deferred income taxes.

2. Recent Accounting Pronouncements

        In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This update amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes, as modified by ASU 2011-12, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. This guidance was adopted by the Company as of July 1, 2012, and did not have a material impact on the Company’s consolidated financial statements.
 
        In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, to effectively defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The change is effective for fiscal years, and interim periods within those years, ending after December 31, 2011.

3. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders' equity and are included in the weighted-average number of common shares outstanding for both basic and diluted EPS calculations as they are committed to be released.

 
9

 
 
Earnings per share for the three month periods ended September 30, 2012 and 2011 have been computed as follows:

   
Three Months Ended September 30,
 
   
2012
   
2011
 
             
Net income applicable to common stock (in thousands)
  $ 761     $ 536  
                 
Average number of shares issued
    7,951,548       7,950,379  
Less: average unallocated ESOP shares
    (399,192 )     (441,588 )
Less: average treasury stock
    (2,007,664 )     (1,194,116 )
Less: average unvested restricted stock awards
    (48,889 )     (117,146 )
Average number of basic shares outstanding
    5,495,803       6,197,529  
                 
Plus: dilutive unvested restricted stock awards
    29,316       45,672  
Plus: dilutive stock option shares
    59,827       46,708  
Average number of diluted shares outstanding
    5,584,946       6,289,909  
                 
Basic earnings per share
  $ 0.14     $ 0.09  
Diluted earnings per share
  $ 0.14     $ 0.09  

4. Dividends
 
On August 7, 2012, the Company declared a cash dividend of $0.04 per common share which was paid on August 31, 2012 to stockholders of record as of the close of business on August 16, 2012.

On November 6, 2012, the Company declared a cash dividend of $0.04 per common share which is payable on November 30, 2012 to stockholders of record as of the close of business on November 16, 2012.

5. Loan Commitments
 
Outstanding loan commitments totaled $104.2 million at September 30, 2012 and $96.3 million as of June 30, 2012. Loan commitments primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity, business and other lines of credit, and unused portions of construction loans.

6. Fair Value of Assets and Liabilities
 
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
 
 
Level 1:
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
     
 
Level 2:
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; and quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology are derived principally from or can be corroborated by observable market data by correlation or other means.
     
 
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
Transfers between levels are recognized at the end of the reporting period, if applicable.

 
10

 
 
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
 
Cash and cash equivalents: The carrying amounts of cash and federal funds sold and other short-term investments approximate fair values.
 
Securities available for sale: The fair values used by the Company are obtained from an independent pricing service, which represents either quoted market prices for identical securities, quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events.  These values are not adjusted by the Company.
 
Federal Home Loan Bank of Boston stock: The carrying amount of Federal Home Loan Bank (“FHLB”) stock approximates fair value based upon the redemption provisions of the FHLB of Boston.
 
Loans held for sale: Fair value of loans held for sale is estimated based on commitments on hand from investors or prevailing market prices.
 
Loans: Fair values for loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This analysis assumes no prepayment. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
 
Mortgage servicing rights: Mortgage servicing rights (“MSR”) are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage holder. The fair value of servicing rights is estimated using a discounted cash flow model. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
 
Deposits and mortgagors’ escrow accounts: The fair values for non-certificate accounts and mortgagors’ escrow accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.
 
Securities sold under agreements to repurchase: The carrying amount of repurchase agreements approximates fair value based on the short duration of the agreements.
 
Short-term borrowings: For short-term borrowings maturing within ninety days, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
 
Long-term debt: The fair values of the Company's advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
 
Accrued interest: The carrying amounts of accrued interest approximate fair value.
 
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of off-balance sheet financial instruments at September 30, 2012 and June 30, 2012 was not material.
 
The Company does not measure any liabilities at fair value on either a recurring or non-recurring basis.
 
 
11

 
 
The following tables present the balance of assets measured at fair value on a recurring basis as of September 30, 2012 and June 30, 2012:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2012
 
(In Thousands)
 
Debt securities:
                       
Corporate bonds
  $ -     $ 6,291     $ -     $ 6,291  
Residential mortgage-backed securities:
                               
Agency
    -       131,408       -       131,408  
Non-agency
    -       3,963       -       3,963  
Total debt securities
    -       141,662       -       141,662  
Marketable equity securities
    56       -       -       56  
Mortgage servicing rights
    -       -       440       440  
Total assets measured at fair value on a recurring basis
  $ 56     $ 141,662     $ 440     $ 142,158  
 
 
June 30, 2012
                       
Debt securities:
                       
Corporate bonds
  $ -     $ 6,136     $ -     $ 6,136  
Residential mortgage-backed securities:
                               
Agency
    -       133,543       -       133,543  
Non-agency
    -       4,118       -       4,118  
Total debt securities
    -       143,797       -       143,797  
Marketable equity securities
    54       -       -       54  
Mortgage servicing rights
    -       -       445       445  
Total assets measured at fair value on a recurring basis
  $ 54     $ 143,797     $ 445     $ 144,296  
 
 
The table below presents, for the three months ended September 30, 2012 and 2011, the changes in Level 3 assets that are measured at fair value on a recurring basis:
 
Mortgage Servicing Rights
 
             
   
Three Months Ended September 30,
 
   
2012
   
2011
 
   
(In Thousands)
 
Beginning balance
  $ 445     $ 445  
Total realized and unrealized gains
               
(losses) included in net income
    (42 )     (28 )
Total unrealized gains (losses) included                
in other comprehensive income
    -       -  
Capitalized servicing assets
    37       22  
Transfers in and/or out of Level 3
    -       -  
Ending balance
  $ 440     $ 439  
 
 
12

 
 
Also, the Company may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs, charge-offs, and specific loss allocations of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets measured at fair value on a non-recurring basis as of September 30, 2012 and June 30, 2012.
 
   
Level 1
   
Level 2
   
Level 3
 
September 30, 2012
 
(In Thousands)
 
Impaired loans
  $ -     $ -     $ -  
Other real estate owned
    -       -       1,554  
Total assets
  $ -     $ -     $ 1,554  
 
 
June 30, 2012
                 
Impaired loans
  $ -     $ -     $ 1,055  
Other real estate owned
    -       -       1,826  
Total assets
  $ -     $ -     $ 2,881  

 
During the three months ended September 30, 2012 there were no transfers from levels 1, 2, or 3.

The amount of impaired loans represents the carrying value of loans that include adjustments which are based on the estimated fair value of the underlying collateral. The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, as well as relevant legal, physical and economic factors. The Company had no gain or loss on impaired loans for the three months ended September 30, 2012. The Company had a gain of $180,000 for the three months ended September 30, 2011. These gains/losses were recognized through the provision for loan losses. The Company charges off any collateral shortfall on collaterally dependent impaired loans. Independent appraisals or tax assessments are obtained and updated as required for commercial real estate and residential real estate loans that are considered impaired and collateral dependent.  Losses applicable to certain impaired loans are estimated using the appraised or assessed value adjusted for market related discounts associated with foreclosure auctions, short sales, inventory of like properties, general liquidity in the market place as well as selling and disposal costs.  These considerations are applied on a case by case basis. 

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. The Company had a $12,000 gain on the sale of OREO for the three months ended September 30, 2012. The Company did not have any gains or losses on OREO for the three months ended September 30, 2011. At September 30, 2012 and 2011, the amount of other real estate owned represents the carrying value and related charge-offs for which adjustments are based on current appraised value of the collateral or, where current appraised value is not obtained, management’s discounted estimate of the collateral. 

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

 
13

 
 
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:
 
   
September 30,
 
   
2012
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In Thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 46,401     $ 46,401     $ -     $ -     $ 46,401  
Securities available for sale
    141,718       56       141,662       -       141,718  
Federal Home Loan Bank stock
    5,153       -       -       5,153       5,153  
Loans held for sale
    890       -       -       890       890  
Loans, net
    420,201       -       -       439,781       439,781  
Accrued interest receivable
    1,666       -       -       1,666       1,666  
Mortgage servicing rights (1)
    440       -       -       440       440  
                                         
Financial liabilities:
                                       
Deposits
    452,907       -       -       455,495       455,495  
Securities sold under agreements to repurchase
    4,822       -       -       4,822       4,822  
Short-term borrowings
    10,000       -       10,000       -       10,000  
Long-term debt
    84,746       -       86,412       -       86,412  
Mortgagors' escrow accounts
    1,048       -       -       1,048       1,048  
 
(1) Included in other assets.
 
   
June 30,
 
   
2012
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In Thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 27,923     $ 27,923     $ -     $ -     $ 27,923  
Securities available for sale
    143,851       54       143,797       -       143,851  
Federal Home Loan Bank stock
    4,959       -       -       4,959       4,959  
Loans held for sale
    927       -       -       927       927  
Loans, net
    406,344       -       -       425,782       425,782  
Accrued interest receivable
    1,675       -       -       1,675       1,675  
Mortgage servicing rights (1)
    445       -       -       445       445  
                                         
Financial liabilities:
                                       
Deposits
    434,832       -       -       437,725       437,725  
Securities sold under agreements to repurchase
    7,315       -       -       7,315       7,315  
Short-term borrowings
    3,000       -       3,000       -       3,000  
Long-term debt
    76,661       -       78,220       -       78,220  
Mortgagors' escrow accounts
    1,010       -       -       1,010       1,010  
 
(1) Included in other assets.
 
 
14

 

7. Securities Available For Sale
 
The amortized cost and estimated fair value of securities available for sale, with gross unrealized gains and losses, are as follows:
 
   
September 30, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In Thousands)
 
Debt securities:
                       
Corporate bonds
  $ 6,126     $ 165     $ -     $ 6,291  
Residential mortgage-backed securities:
                               
Agency
    127,645       3,778       (15 )     131,408  
Non-agency
    3,914       66       (17 )     3,963  
Total debt securities
    137,685       4,009       (32 )     141,662  
Marketable equity securities
    51       5       -       56  
Total securities available for sale
  $ 137,736     $ 4,014     $ (32 )   $ 141,718  
 
   
June 30, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In Thousands)
 
Debt securities:
                       
Corporate bonds
  $ 6,134     $ 10     $ (8 )   $ 6,136  
Residential mortgage-backed securities:
                               
Agency
    130,157       3,419       (33 )     133,543  
Non-agency
    4,196       53       (131 )     4,118  
Total debt securities
    140,487       3,482       (172 )     143,797  
Marketable equity securities
    51       3       -       54  
Total securities available for sale
  $ 140,538     $ 3,485     $ (172 )   $ 143,851  
 
 
The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2012 is set forth below. Expected maturities will differ from contractual maturities because the issuer may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
September 30, 2012
 
   
Amortized
Cost
   
Fair Value
 
   
(In Thousands)
 
Within 1 year
  $ -     $ -  
Over 1 year through 5 years
    6,126       6,291  
Total bonds and obligations
    6,126       6,291  
Residential mortgage-backed securities:
               
Agency
    127,645       131,408  
Non-agency
    3,914       3,963  
Total debt securities
  $ 137,685     $ 141,662  

At September 30, 2012 and June 30, 2012, the carrying value of securities pledged to secure repurchase agreements was $13.1 million and $13.3 million, respectively.
 
 
15

 
 
Information pertaining to securities with gross unrealized losses at  September 30, 2012 and June 30, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
 
   
Less Than Twelve Months
   
Over Twelve Months
   
Total
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In Thousands)
 
September 30, 2012:
                                   
Residential mortgage-backed securities:
                                   
Agency
  $ 8     $ 3,827     $ 7     $ 322     $ 15     $ 4,149  
Non-agency
    -       -       17       1,226       17       1,226  
    $ 8     $ 3,827     $ 24     $ 1,548     $ 32     $ 5,375  
June 30, 2012:
                                               
Corporate bonds
  $ 8     $ 2,024     $ -     $ -     $ 8     $ 2,024  
Residential mortgage-backed securities:
                                               
Agency
    25       8,435       8       409       33       8,844  
Non-agency
    -       -       131       2,066       131       2,066  
    $ 33     $ 10,459     $ 139     $ 2,475     $ 172     $ 12,934  
 
 
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”).
 
At September 30, 2012 and June 30, 2012, no marketable equity securities had unrealized losses.
 
At September 30, 2012, eleven debt securities had unrealized losses with aggregate depreciation of 0.6% 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 U.S. 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 September 30, 2012, we held six securities issued by private mortgage originators that had unrealized losses which had an amortized cost of $1.2 million and a fair value of $1.2 million. All of these investments are “Senior” Class tranches and have underlying credit enhancement. 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 credit losses have occurred. Management has determined that no credit losses have occurred as of September 30, 2012.
 
 
16

 
 
8. Loans
 
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 September 30, 2012
   
At June 30, 2012
             
   
Amount
   
Percent
   
Amount
   
Percent
   
Change
   
% Change
 
   
(Dollars In Thousands)
             
Mortgage loans on real estate:
                                   
1-4 family residential
  $ 110,913       26.24 %   $ 112,294       27.48 %   $ (1,381 )     (1.23 ) %
Commercial
    156,850       37.11       152,965       37.43       3,885       2.54 %
Home equity:
                                               
First lien
    33,715       7.98       31,609       7.73       2,106       6.66 %
Second lien
    42,116       9.97       41,374       10.12       742       1.79 %
Construction:
                                               
Residential
    4,749       1.12       4,149       1.02       600       14.46 %
Commercial
    6,611       1.56       2,404       0.59       4,207       175.00 %
Total mortgage loans on real estate
    354,954       83.99       344,795       84.37       10,159       2.95 %
                                                 
Other loans:
                                               
Commercial
    39,297       9.30       35,567       8.70       3,730       10.49 %
Consumer:
                                               
Manufactured homes
    21,368       5.06       21,169       5.18       199       0.94 %
Automobile and other secured loans
    5,956       1.41       6,385       1.56       (429 )     (6.72 ) %
Other
    1,060       0.25       769       0.19       291       37.84 %
Total other loans
    67,681       16.01       63,890       15.63       3,791       5.93 %
Total loans
    422,635       100.00 %     408,685       100.00 %   $ 13,950       3.41 %
Other items:
                                               
Net deferred loan costs
    2,738               2,807                          
Allowance for loan losses
    (5,172 )             (5,148 )                        
                                                 
Total loans, net
  $ 420,201             $ 406,344                          

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 fair value of collateral for collateral dependent loans. The Company charges off any collateral shortfall on collaterally dependent impaired loans.

A loan is considered impaired when, based on current information and events, it is probable that the bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans are generally placed on non-accrual status either when there is reasonable doubt as to the full collection of payments or when the loans become 90 days past due unless an evaluation clearly indicates that the loan is well secured and in the process of collection. 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, adjusted for market conditions and selling expenses, if the loan is collateral dependent.
 
The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired and may be evaluated for removal from impaired status after one year of current payments for a modified loan with a market rate.
 
 
17

 

General allocation
 
The general allocation is determined by segregating the remaining loans by type of loan and payment history. Consideration is given to historical loss experience and qualitative factors such as delinquency trends, changes in underwriting standards or lending policies, procedures and practices, experience and depth of management and lending staff, and general economic conditions. This analysis establishes loss 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 that have been established which could have a material negative effect on financial results. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended September 30, 2012.
 
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 with risk ratings of six or higher 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 charge-off if the likelihood of loss is evaluated as probable. The Company’s policy for charging off uncollectible loans is based on an analysis of the financial condition of the borrower and/or the collateral value. 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 qualitative factors are assessed 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 unless there is private mortgage insurance. 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 can be 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 are generally underwritten in amounts such that the combined first and second mortgage balances generally 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 construction to permanent 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 construction to permanent non-speculative real estate loans. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy, 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 may have an effect on the credit quality in this segment.

Automobile and other secured loans – Loans in this segment include consumer non-real estate secured loans that the Company originates as well as automobile loans that the Company purchases from a third party. The Company has the ability to select the automobile loans it purchases based on its own underwriting standards.
 
Manufactured home loans – Loans in this segment are 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 broker funded cash reserve accounts for manufactured home loans that can be used for pre-payments and losses. These reserve accounts totaled $499,000 at September 30, 2012 and $601,000 at June 30, 2012 and are included in deposit accounts.
 
Other consumer loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
 
 
18

 
 
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. These loans are generally charged off at each quarter end.

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. 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 and semi-annually a statistically significant percentage is reviewed by a third party. 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 based primarily on delinquency, bankruptcy, or tax delinquency.

 
19

 
 
The following table presents the Company’s loans by risk rating at September 30, 2012 and June 30, 2012:
 
September 30, 2012
                                   
   
1-4 Family
Residential
   
Commercial
 Real Estate
   
Home Equity
 First Lien
   
Home Equity
 Second Lien
   
Residential Construction
   
Commercial Construction
 
   
(In Thousands)
 
Loans rated 1-5
  $ 108,974     $ 134,399     $ 33,567     $ 41,797     $ 4,749     $ 6,611  
Loans rated 6
    1,000       6,507       37       294       -       -  
Loans rated 7
    553       15,944       111       25       -       -  
Loans rated 8
    386       -       -       -       -       -  
Loans rated 9
    -       -       -       -       -       -  
    $ 110,913     $ 156,850     $ 33,715     $ 42,116     $ 4,749     $ 6,611  
 
 
   
Commercial
   
Manufactured
Homes
   
Automobile and
Other Secured Loans
   
Other Consumer
   
Total
 
   
(In Thousands)
 
Loans rated 1-5
  $ 33,431     $ 20,888     $ 5,949     $ 1,053     $ 391,418  
Loans rated 6
    891       249       7       3       8,988  
Loans rated 7
    4,975       69       -       2       21,679  
Loans rated 8
    -       162       -       2       550  
Loans rated 9
    -       -       -       -       -  
    $ 39,297     $ 21,368     $ 5,956     $ 1,060     $ 422,635  
 
 
June 30, 2012