XNAS:RCKB Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

for the quarterly period ended March 31, 2012.
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly
period ended March 31, 2012.

Commission File Number: 001-35028

ROCKVILLE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Connecticut   27-3577029
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

25 Park Street, Rockville, Connecticut   06066
(Address of principal executive offices)   (Zip Code)

(860) 291-3600

(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. þYes ¨ No

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨    Accelerated filer    þ
Non-accelerated filer    ¨    Smaller reporting company    ¨   

(Do not check if a smaller reporting company)

     

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act). Yes ¨ No þ

As of May 1, 2012, there were 28,583,866 shares of Registrant’s no par value common stock outstanding.


Table of Contents

Table of Contents

 

           Page

Part I - FINANCIAL INFORMATION

  

        Item 1.

   Interim Financial Statements - Unaudited   
   Consolidated Statements of Condition as of March 31, 2012 and December 31, 2011    3
   Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011    4
   Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011    5
   Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2012    6
   Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011    7
   Notes to Unaudited Consolidated Financial Statements    9

        Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    35

        Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    48

        Item 4.

   Controls and Procedures    49

Part II - OTHER INFORMATION

  

        Item 1.

   Legal Proceedings    50

        Item 1A.

   Risk Factors    50

        Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    50

        Item 3.

   Defaults Upon Senior Securities    50

        Item 4.

   Mine Safety Disclosures    50

        Item 5.

   Other Information    50

        Item 6.

   Exhibits    51

SIGNATURES

   53

Exhibits

  

 

2


Table of Contents

Part 1 - FINANCIAL INFORMATION

 Item 1 - Interim Financial Statements

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Condition

(In Thousands, Except Share Data)

(Unaudited)

$1,855,154200 $1,855,154200
     March 31,
2012
     December 31,
2011
 

ASSETS

     

CASH AND CASH EQUIVALENTS:

     

Cash and due from banks

     $ 15,303           $ 40,677     

Short-term investments

     24,549           308     
  

 

 

    

 

 

 

Total cash and cash equivalents

     39,852           40,985     

AVAILABLE FOR SALE SECURITIES—At fair value

     195,501           151,237     

HELD TO MATURITY SECURITIES—At amortized cost

     8,603           9,506     

LOANS RECEIVABLE (Net of allowance for loan losses of $16,527 at March 31, 2012 and $16,025 at December 31, 2011)

     1,496,286           1,457,398     

FEDERAL HOME LOAN BANK STOCK

     15,867           17,007     

ACCRUED INTEREST RECEIVABLE

     4,624           4,089     

DEFERRED TAX ASSET

     10,590           10,368     

BANK PREMISES AND EQUIPMENT—Net

     16,082           15,502     

GOODWILL

     1,070           1,149     

CASH SURRENDER VALUE OF BANK—OWNED LIFE INSURANCE

     56,388           31,082     

OTHER REAL ESTATE OWNED

     2,746           3,008     

PREPAID FDIC ASSESSMENTS

     2,805           3,034     

CURRENT FEDERAL TAX RECEIVABLE

     612           2,848     

OTHER ASSETS

     4,128           2,659     
  

 

 

    

 

 

 
     $ 1,855,154           $ 1,749,872     
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

LIABILITIES:

     

DEPOSITS:

     

Non-interest-bearing

     $ 216,567           $ 206,416     

Interest-bearing

     1,165,702           1,120,350     
  

 

 

    

 

 

 

Total deposits

     1,382,269           1,326,766     

MORTGAGORS’ AND INVESTORS’ ESCROW ACCOUNTS

     3,217           5,852     

ADVANCES FROM THE FEDERAL HOME LOAN BANK

     125,876           65,882     

ACCRUED EXPENSES AND OTHER LIABILITIES

     16,142           17,901     
  

 

 

    

 

 

 

Total liabilities

     1,527,504           1,416,401     
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES

     

STOCKHOLDERS’ EQUITY:

     

Preferred stock (no par value; 2,000,000 authorized; no shares issued or outstanding at March 31, 2012 and December 31, 2011)

     -               -         

Common stock (no par value; 60,000,000 shares authorized; 29,511,623 and 29,514,468 shares issued and 28,863,723 and 29,514,468 outstanding at March 31, 2012 and December 31, 2011, respectively)

     243,776           243,776     

Additional paid in capital

     15,332           15,189     

Unearned compensation - ESOP

     (9,166)          (9,453)    

Retained earnings

     92,201           90,707     

Accumulated other comprehensive loss, net of tax

     (6,867)          (6,748)    

Treasury stock, at cost (647,900 and 0 shares at March 31, 2012 and December 31, 2011, respectively)

     (7,626)          -         
  

 

 

    

 

 

 

Total stockholders’ equity

     327,650           333,471     
  

 

 

    

 

 

 
     $ 1,855,154           $ 1,749,872     
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Share Data)

(Unaudited)

     For the Three Months Ended  
     March 31,  
     2012      2011  

INTEREST AND DIVIDEND INCOME:

     

Loans

     $ 17,564           $ 17,535     

Securities-interest

     1,306           1,049     

Securities-dividends

     44           130     

Interest-bearing deposits

     11           15     
  

 

 

    

 

 

 

Total interest and dividend income

     18,925           18,729     
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     2,251           2,911     

Borrowed funds

     548           2,423     
  

 

 

    

 

 

 

Total interest expense

     2,799           5,334     
  

 

 

    

 

 

 

Net-interest income

     16,126           13,395     

PROVISION FOR LOAN LOSSES

     704           752     
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     15,422           12,643     
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Other-than-temporary impairment of securities

     -               (29)    

Service charges and fees

     1,826           1,596     

Net gain from sale of securities

     3           -         

Net gain from sales of loans

     525           59     

Other income

     316           62     
  

 

 

    

 

 

 

Total non-interest income

     2,670           1,688     
  

 

 

    

 

 

 

NON-INTEREST EXPENSE:

     

Salaries and employee benefits

     7,123           5,671     

Service bureau fees

     1,057           1,059     

Occupancy and equipment

     1,065           1,166     

Professional fees

     718           684     

Marketing and promotions

     114           324     

FDIC assessments

     305           514     

Other real estate owned

     281           59     

Contribution to Rockville Bank Foundation, Inc.

     -               5,043     

Other

     1,680           1,424     
  

 

 

    

 

 

 

Total non-interest expense

     12,343           15,944     
  

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     5,749           (1,613)    

PROVISION (BENEFIT) FOR INCOME TAXES

     1,894           (591)    
  

 

 

    

 

 

 

NET INCOME (LOSS)

     $ 3,855           $ (1,022)    
  

 

 

    

 

 

 

NET INCOME (LOSS) PER SHARE

     

Basic

     $ 0.13           $ (0.04)    

Diluted

     $ 0.13           $ (0.04)    

WEIGHTED-AVERAGE SHARES OUTSTANDING:

     

Basic

     28,560,110           29,049,681     

Diluted

     28,728,761           29,049,681     

See accompanying notes to unaudited consolidated financial statements.

 

 

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Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands, Except Share Data)

(Unaudited)

      For the Three Months Ended
March 31,
 
     2012      2011  

NET INCOME (LOSS)

     $ 3,855          $ (1,022)   
  

 

 

    

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

     

Unrealized gains on securities:

     

Unrealized holding (losses) gains on available for sale securities

     (504)         1,133    

Reclassification adjustment for (gains) losses realized in income

     (3)         29    
  

 

 

    

 

 

 

Net unrealized (losses) gains

     (507)         1,162    

Tax effect

     178          (407)   
  

 

 

    

 

 

 

Net-of-tax amount

     (329)         755    
  

 

 

    

 

 

 

Defined benefit pension plans:

     

Reclassification adjustment for prior service costs recognized in net periodic benefit cost

     (5)         (12)   

Gains arising during the period

     310          159    
  

 

 

    

 

 

 

Change in gains or losses and prior service costs or credits

     305          147    

Tax effect

     (108)         (51)   
  

 

 

    

 

 

 

Net-of-tax amount - pension plans

     197          96    
  

 

 

    

 

 

 

Postretirement plans:

     

Reclassification adjustment for prior service costs recognized in net periodic benefit cost

     -               

Gains arising during the period

     20          19    
  

 

 

    

 

 

 

Change in gains or losses and prior service costs or credits

     20          21    

Tax effect

     (7)         (7)   
  

 

 

    

 

 

 

Net-of-tax amount - postretirement plans

     13          14    
  

 

 

    

 

 

 

Net-of-tax amount - pension & postretirement plans

     210          110    
  

 

 

    

 

 

 

Total other comprehensive (loss) income

     (119)         865    
  

 

 

    

 

 

 

Comprehensive income (loss)

     $ 3,736          $ (157)   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Rockville Financial, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(In Thousands, Except Share Data)

(Unaudited)

 

                                    Accumulated                     
                  Additional     Unearned           Other                  Total  
     Common Stock      Paid-in     Compensation     Retained     Comprehensive     Treasury Stock     Stockholders’  
  

 

 

            

 

 

   
     Shares     Amount      Capital     on ESOP     Earnings     Loss     Shares      Amount     Equity  
  

 

 

 

Balance at December 31, 2011

       29,514,468      $   243,776       $ 15,189      $ (9,453   $ 90,707      $ (6,748     -           $ -          $ 333,471    

Net income

     -            -             -            -            3,855        -            -             -            3,855    

Other comprehensive loss

     -            -             -            -            -            (119     -             -            (119)   

Share-based compensation expense

     -            -             100        -            -            -            -             -            100    

ESOP shares released or committed to be released

     -            -             75        287        -            -            -             -            362    

Cancellation of shares for tax withholding

     (2,845     -             (32     -            -            -            -             -            (32)   

Treasury stock purchased

     -            -             -            -            -            -            647,900         (7,626     (7,626)   

Dividends paid ($0.08 per common share)

     -            -             -            -            (2,361     -            -             -            (2,361)   
  

 

 

 

Balance at March 31, 2012

       29,511,623      $ 243,776       $ 15,332      $ (9,166   $ 92,201      $ (6,867     647,900       $ (7,626   $ 327,650    
  

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

      For the Three Months
Ended March 31,
 
     2012      2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income (loss)

     $ 3,855          $ (1,022)   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

     

Amortization of premiums and discounts on investments, net

     86          -       

Share-based compensation expense

     100          112    

Amortization of ESOP expense

     362          323    

Provision for loan losses

     704          752    

Net gain from sales of securities

     (3)         -       

Other-than-temporary impairment of securities

     -             29    

Loans originated for sale

     (17,533)         (4,971)   

Proceeds from sales of loans

     17,533          4,977    

(Gain) Loss on sale of OREO

     (10)         32    

Write-downs of OREO

     183          -       

Depreciation and amortization

     319          340    

Loss of disposal of equipment

     -               

Deferred income tax benefit

     (160)         (383)   

Increase in cash surrender value of bank-owned life insurance

     (306)         (92)   

Net change in:

     

Deferred loan fees and premiums

     124          (96)   

Accrued interest receivable

     (535)         (494)   

Prepaid FDIC assessment

     229          473    

Other assets

     846          68    

Accrued expenses and other liabilities

     (1,436)         (11,589)   
  

 

 

    

 

 

 

Net cash provided by (used in) operating activities

     4,358          (11,539)   
  

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Proceeds from sales of available for sale securities

     2,984          -       

Proceeds from calls and maturities of available for sale securities

     2,400          -       

Principal payments on available for sale mortgage-backed securities

     7,901          4,800    

Purchases of available for sale securities

     (58,150)         (4,850)   

Principal payments on held to maturity securities

     915          1,442    

Proceeds from redemption of FHLBB stock

     1,140          -       

Proceeds from sale of OREO

     574          426    

Purchase of bank-owned life insurance

     (25,000)         -       

Loan originations, net of principal payments

     (40,201)         (7,665)   

Purchases of premises and equipment

     (899)         (171)   
  

 

 

    

 

 

 

Net cash used in investing activities

     (108,336)         (6,018)   
  

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Net increase in non-interest-bearing deposits

     10,151          6,290    

Net increase in interest-bearing deposits

     45,352          33,181    

Net decrease in mortgagors’ and investors’ escrow accounts

     (2,635)         (2,636)   

Net increase in short-term FHLBB advances

     60,000          -       

Repayment of long-term FHLBB advances

     (4)         (10,005)   

Common stock repurchased

     (7,626)         -       

Common stock purchase by ESOP

     -             (7,071

Proceeds from stock offering, net of offering costs

     -             168,044    

Fractional shares paid

     -             (22)   

Cancellation of shares for tax w ithholding

     (32)         (43)   

Cash dividend paid on common stock

     (2,361)         (1,225)   
  

 

 

    

 

 

 

Net cash provided by financing activities

     102,845         186,513    
  

 

 

    

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (1,133)         168,956    

CASH AND CASH EQUIVALENTS - Beginning of period

     40,985          60,708    
  

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS - End of period

     $     39,852          $     229,664    
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Concluded

(In Thousands)

(Unaudited)

 

 

Consolidated Statements of Cash Flows
      For the Three Months Ended
March 31,
 
     2012      2011  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the year for:

     

Interest

     $             2,756          $             5,350    

Income Taxes

     66          200    

Transfer of loans to other real estate owned

     485          184    

Cancellation of Rockville Financial MHC, Inc. shares

     -             9,685    

Due to broker

     -             46,720    

Due on common stock repurchases

     1,076          -       

See accompanying notes to unaudited consolidated financial statements.

 

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Rockville Financial, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1.   Basis of Presentation and Principles of Consolidation

On March 3, 2011, Rockville Financial, Inc., (the “Company”), completed the “second-step” conversion of Rockville Bank (the “Bank”) from a mutual holding company structure to a stock holding company structure (the “Conversion”) pursuant to a Plan of Conversion and Reorganization (the “Plan”). As part of the Conversion, New Rockville Financial, Inc. succeeded Rockville Financial, Inc. as the stock holding company of Rockville Bank, and Rockville Financial MHC, Inc. was dissolved. Upon completion of the Conversion, the Company became the holding company for the Bank and acquired ownership of all the issued and outstanding shares of the Bank’s common stock. In connection with the Conversion, 17,109,886 shares of common stock of the Company (the “Common Stock”) were sold in a subscription offering to certain depositors of the Bank and its employee stock ownership plan for $10.00 per share, or $171,099,000 in the aggregate (the “Offering”) net of offering costs of $3,055,000. In accordance with the Plan, 1.5167 shares of Common Stock (without taking into consideration cash issued in lieu of fractional shares) were issued in exchange for each outstanding share of common stock of the Company’s predecessor, also named Rockville Financial, Inc. (“Old RFI”), the former state-chartered mid-tier holding company for the Bank, held by persons other than Rockville Financial MHC, Inc., the mutual holding company that owned the majority of Old RFI’s common stock. New Rockville Financial, Inc. changed its name to Rockville Financial, Inc. effective March 3, 2011.

In connection with the 2011 Plan, the Company contributed additional funds to Rockville Bank Foundation, Inc., a non-profit charitable organization dedicated to helping the communities that the Bank serves. The Foundation received $5.0 million, or 3.0%, of the net proceeds of the stock conversion offering.

The conversion was accounted for as a reorganization with no change to the historical basis of Rockville Financial, Inc.’s assets, liabilities, and equity.

The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the interim consolidated financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These interim consolidated financial statements should be read in conjunction with the Company’s 2011 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from management’s estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, pension and other post-retirement benefits, share-based compensation expense, valuation of deferred tax assets and the evaluation of investment securities for other-than-temporary impairment.

 

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2.   Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three months ended March 31, 2012 and 2011:

 

    For the Three Months  
    Ended March 31,  
    2012     2011  
    (In thousands, except share data)  

Net income (loss) available to common stockholders

    $ 3,855         $ (1,022)   
 

 

 

   

 

 

 

Weighted-average common shares outstanding

    29,514,468         29,388,247    

Plus: average number of restricted shares

    102,164         68,119    
 

 

 

   

 

 

 

Adjusted weighted average common shares outstanding

    29,616,632         29,456,366    

Less: average number of treasury shares

    (87,687)        -         

Less: average number of unvested ESOP award shares

    (968,835)        (406,685)   
 

 

 

   

 

 

 

Weighted-average basic shares outstanding

    28,560,110         29,049,681    

Dilutive effect of stock options

    168,651         -           
 

 

 

   

 

 

 

Weighted-average diluted shares

    28,728,761         29,049,681    
 

 

 

   

 

 

 

Earnings (loss) per share:

   

Basic

    $ 0.13         $ (0.04)   

Diluted

    $ 0.13         $ (0.04)   

For the quarters ended March 31, 2012 and 2011, respectively, 545,653 and 890,792 options were anti-dilutive and therefore excluded from the earnings per share calculation. Treasury shares and unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations. For the quarters ended March 31, 2012 and 2011, respectively, unvested restricted shares were included in the weighted-average number of common shares outstanding for basic and diluted earnings per share. The Company’s common stock equivalents relate solely to stock options issued and outstanding. For the quarter ended March 31, 2012, options to purchase 545,653 of common stock at exercise prices ranging from $9.41 to $11.72 were not considered in the computation of potential common shares for the purpose of diluted EPS.

3.   Recent Accounting Pronouncements

Fair Value Measurement (Topic 820): In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs). The amendments in the Update are intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs and to explain how to measure fair value. This guidance is effective for the Company for the first interim and annual periods beginning after December 15, 2011 and will be applied prospectively. Adoption of ASU No. 2011-04 did not have a material impact on the Company’s consolidated financial statements.

Comprehensive Income (Topic 220): In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The Update eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity to improve comparability, consistency, and transparency of financial reporting. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. An entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company for the first interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. In December 2011, the FASB issued ASU No. 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

 

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in ASU No. 2011-05, to allow the FASB time to discuss adoption. The Company included Consolidated Statements of Comprehensive Income as part of these consolidated financial statements.

Intangibles-Goodwill and Other (Topic 350): In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than the carrying amount. The amendments are effective for the Company for annual and interim impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of ASU No. 2011-08 did not have a material impact on the Company’s consolidated financial statements.

4.   Fair Value Measurements

The Company groups its assets and liabilities generally measured or disclosed at fair value in three levels based upon a three-tier hierarchy based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. The fair value hierarchy is as follows:

 

  Level 1:

Quoted prices are available in active markets for identical investments as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume.

 

  Level 2:

Pricing inputs are observable for assets and liabilities, either directly or indirectly but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

 

  Level 3:

Pricing inputs are unobservable for assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation.

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset and liability is based on the lowest level of input that is significant to the fair value of the asset and liability.

Items Measured at Fair Value on a Recurring Basis: The following valuation methodologies are used for assets that are recorded at fair value on a recurring basis. There were no liabilities recorded at fair value on a recurring basis.

Available for Sale Securities: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. Level 1 securities are those traded on active markets for identical securities including U.S. treasury debt securities, equity securities and mutual funds. Level 2 securities include U.S. government agency obligations, U.S. government-sponsored enterprises, mortgage-backed securities, obligations of states and political subdivisions, corporate and other debt securities. Level 3 securities include private placement securities and thinly traded equity securities. All fair value measurements are obtained from a third party pricing service and are not adjusted by management.

Matrix pricing is used for pricing most obligations of states and political subdivisions, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on securities relationships to other benchmark quoted securities. The grouping of securities is completed according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves.

 

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Assets Recorded at Fair Value on a Recurring Basis:

 

    

Total

Fair Value

     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    

Other

Observable
Inputs
(Level 2)

    

Significant

Unobservable
Inputs

(Level 3)

 
  

 

 

 
            (In thousands)         

March 31, 2012

           

Available for Sale Securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 15,097       $ -           $ 15,097       $ -        

Government-sponsored residential mortgage-backed securities

     102,580         -             102,580         -        

Government-sponsored residential collateralized-debt obligations

     20,232         -             20,232         -        

Corporate debt securities

     12,376         -             11,219         1,157    

Obligations of states and political subdivisions

     41,943         -             41,943         -        

Marketable equity securities

     3,273         3,200         -             73    

 

 

Total

   $ 195,501       $ 3,200       $ 191,071       $ 1,230    

 

 

December 31, 2011

           

Available for Sale Securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 17,543       $ -           $ 17,543       $ -        

Government-sponsored residential mortgage-backed securities

     110,195         -             110,195         -        

Government-sponsored residential collateralized-debt obligations

     15,950         -             15,950         -        

Corporate debt securities

     4,300         -             3,083         1,217    

Marketable equity securities

     3,249         3,176         -             73    

 

 

Total

   $ 151,237       $ 3,176       $ 146,771       $ 1,290    

 

 

The changes in Level 3 assets measured at fair value on a recurring basis are as follows:

 

$xxx.x $xxx.x
     Three Months Ended
March  31,
 
     2012      2011  
     (In thousands)  

Balance at beginning of year

     $ 1,290          $ 73    

Total gains (losses):

     

Included in other comprehensive income (loss)

     (60)         -        
  

 

 

    

 

 

 

Balance at end of period

     $             1,230          $             73    
  

 

 

    

 

 

 

 

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Items Measured at Fair Value on a Non-Recurring Basis: The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following is a description of the valuation methodologies used for certain assets that are recorded at fair value on a non-recurring basis.

Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market; however, assumptions made are based on management’s judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy.

Impaired Loans: Accounting standards require that a creditor recognize the impairment of a loan if the present value of expected future cash flows discounted at the loan’s effective interest rate (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the impaired loan. Non-recurring fair value adjustments to collateral dependent loans are recorded, when necessary, to reflect partial write-downs and the specific reserve allocations based upon observable market price or current appraised value of the collateral less costs and discounts based on management’s judgment of current conditions.

Based on the significance of management’s judgment, the Company records collateral dependent impaired loans as non-recurring Level 3 fair value measurements.

The following table presents the Company’s assets measured at fair value on a non-recurring basis at March 31, 2012 and the year ended December 31, 2011 and losses for the three months ended March 31, 2012 and 2011:

 

Assets Recorded at Fair Value on a Non-Recurring Basis:                      
     Total Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    

Other
Observable
Inputs

(Level 2)

    

Significant

Unobservable
Inputs

(Level 3)

    Total Losses for
the Three
Months Ended
March 31, 2012
     Total Losses for  
the Three  
Months Ended  
March 31, 2011  
 
  

 

 

 
              (In thousands     

March 31, 2012

                

Impaired loans

     $ 838           $ -             $ -               $ 838          $     210           $ -         

Other real estate owned

     2,746           -               -               2,746          183           -         

 

 

Total

     $         3,584           $         -             $         -               $ 3,584          $ 393           $ -         

 

 

December 31, 2011

                

Impaired loans

     $ 914           $ -             $ -               $ 914          $ -               $     308       

Other real estate owned

     3,008           -               -               3,008          -               -         

 

 

Total

     $ 3,922           $ -             $ -               $ 3,922          $ -               $ 308       

 

 

There were no liabilities reported at fair value on a non-recurring basis on the balance sheet at March 31, 2012 or December 31, 2011.

 

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As of March 31, 2012 and December 31, 2011, the carrying value and estimated fair values of the Company’s financial instruments are as described below.

 

     Carrying      Fair Value  
     

 

 

 
     Value      Level 1      Level 2      Level 3      Total  
  

 

 

    

 

 

 
     (In thousands)  

March 31, 2012

              

Financial assets:

              

Cash and cash equivalents

     $ 39,852           $     39,852           $ -               $ -               $ 39,852     

Available for sale securities

     195,501           3,200           191,071           1,230           195,501     

Held to maturity securities

     8,603           -                   9,424           -               9,424     

Loans receivable-net

     1,496,286           -               -               1,540,735           1,540,735     

FHLBB stock

     15,867           -               -               15,867           15,867     

Accrued interest receivable

     4,624           -               -               4,624           4,624     

Financial liabilities:

              

Deposits

     1,382,269           -               -               1,367,654           1,367,654     

Mortgagors’ and investors’ escrow accounts

     3,217           -               -               3,217           3,217     

Advances from FHLBB

     125,876           -               -               131,185           131,185     

December 31, 2011

              

Financial assets:

              

Cash and cash equivalents

     40,985           40,985           -               -               40,985     

Available for sale securities

     151,237           3,176           146,771           1,290           151,237     

Held to maturity securities

     9,506           -               10,380           -               10,380     

Loans receivable-net

     1,457,398           -               -               1,502,271           1,502,271     

FHLBB stock

     17,007           -               -               17,007           17,007     

Accrued interest receivable

     4,089           -               -               4,089           4,089     

Financial liabilities:

              

Deposits

     1,326,766           -               -               1,334,306           1,334,306     

Mortgagors’ and investors’ escrow accounts

     5,852           -               -               5,852           5,852     

Advances from FHLBB

     65,882           -               -               70,994           70,994     

Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value of amounts presented above may not necessarily represent the underlying fair value of the Company.

 

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Table of Contents

5.   Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available for sale and held to maturity securities at March 31, 2012 and December 31, 2011 are as follows:

 

$XXXX,XX $XXXX,XX $XXXX,XX $XXXX,XX
            Gross      Gross         
            Unrealized      Unrealized      Fair  
     Amortized Cost      Gains      Losses      Value  
  

 

 

 
     (In thousands)   

March 31, 2012

           

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

     $ 14,805           $ 292           $ -               $ 15,097     

Government-sponsored residential mortgage-backed securities

     97,825           4,756           1           102,580     

Government-sponsored residential collateralized debt obligations

     20,082           173           23           20,232     

Corporate debt securities

     13,686           376           1,686           12,376     

Obligations of states and political subdivisions

     42,6482           5           710           41,943     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     189,046           5,602           2,420           192,228     
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     68           6           -               74     

Industrial

     109           48           -               157     

Mutual funds

     2,7262           123           -               2,849     

Oil and gas

     131           62           -               193     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     3,034           239           -               3,273     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     $ 192,080           $   5,841           $ 2,420           $ 195,501     
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Government-sponsored residential mortgage-backed securities

     $ 8,603           $ 821           $ -               $ 9,424     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

     $ 17,207           $ 336           $ -               $ 17,543     

Government-sponsored residential mortgage-backed securities

     105,362           4,846           12           110,196     

Government-sponsored residential collateralized debt obligations

     15,795           155           1           15,949     

Corporate debt securities

     5,922           3           1,625           4,300     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     144,286           5,340           1,638           147,988     
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     68           6           -               74     

Industrial

     109           31           -               140     

Mutual funds

     2,715           129           -               2,844     

Oil and gas

     131           60           -               191     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     3,023           226           -               3,249     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     $ 147,309           $   5,566           $ 1,638           $ 151,237     
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Government-sponsored residential mortgage-backed securities

     $ 9,506           $ 874           $ -               $ 10,380     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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At March 31, 2012, the net unrealized gain on securities available for sale of $3.4 million, net of income taxes of $1.2 million, or $2.2 million, is included in accumulated other comprehensive loss.

The amortized cost and fair value of debt securities at March 31, 2012 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

     Available for Sale      Held to Maturity  
         Amortized    
    Cost     
     Fair
Value
     Amortized
Cost
         Fair    
    Value    
 
            (In thousands)         

Maturity:

           

Within 1 year

     $ 599           $ 603           $ -               $ -         

After 1 year through 5 years

     18,560           19,095           -               -         

After 5 years through 10 years

     9,332           9,315           -               -         

After 10 years

     42,648           40,403           -               -         
  

 

 

    

 

 

    

 

 

    

 

 

 
     71,139           69,416           -               -         

Mortgage-backed securities

     117,907           122,812           8,603           9,424     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     $ 189,046           $         192,228           $         8,603           $         9,424     
  

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, the Company had no encumbered securities.

 

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As of March 31, 2012, the Company did not own any investment or mortgage-backed securities of a single issuer, other than securities guaranteed by the U.S. Government or government-sponsored enterprises, which had an aggregate book value in excess of 10% of the Company’s stockholders’ equity.

There were no obligations of states and political subdivisions at December 31, 2011. The following table presents estimated fair value of obligations of states and political subdivision bonds relative to the geographic exposure at March 31, 2012:

 

            At March 31, 2012

 

Revenue Bond

               
State    General
Obligation
Bond
     College &
University
     Fuel Sales
Tax
     Building
Development
     Airport      Sales Tax      Water/ Sewer     

Total

Revenue
Obligations

     Total
Obligations
     Percentage
of Total
 

 

 
     (Dollars in thousands)   

Arkansas

     $ 1,179       $ -           $ -           $ -           $ -           $ -           $ -           $ -           $ 1,179         2.8  

Arizona

     266         -             -             -             -             -             -             -             266         0.6     

California

     4,412         2,241         -             -             1,643         -             -             3,884         8,296         19.8     

Connecticut

     338         2,290         -             -             -             -             -             2,290         2,628         6.3     

Florida

     2,164         -             -             401         -             -             -             401         2,565         6.1     

Illinois

     1,273         -             -             -             -             -             -             -             1,273         3.0     

Louisiana

     1,146         -             -             -             -             -             -             -             1,146         2.7     

Massachusetts

     -             575         -             -             -             -             -             575         575         1.4     

Maine

     -             -             1,908         -             -             -             -             1,908         1,908         4.5     

Minnesota

     1,207         -             -             -             -             -             -             -             1,207         2.9     

Nevada

     -             -             -             -             2,263         -             -             2,263         2,263         5.4     

New York

     -             -             -             3,046         -             -             -             3,046         3,046         7.3     

Oregon

     -             -             -             -             -             -             2,274         2,274         2,274         5.4     

Pennsylvania

     -             -             -             -             -             -             1,545         1,545         1,545         3.7     

South Carolina

     -             -             -             -             -             -             823         823         823         2.0     

Texas

     3,374         2,267         -             -             -             -             -             2,267         5,641         13.4     

Utah

     -             -             -             -             -             570         -             570         570         1.4     

Washington

     1,426         -             -             -             -             -             3,312         3,312         4,738         11.3     
  

 

 

 
     $     16,785       $ 7,373       $ 1,908       $ 3,447       $ 3,906       $ 570       $ 7,954       $ 25,158       $ 41,943         100.0  
  

 

 

 

The Company’s investment committee reviews state exposure on an ongoing basis. Of the $16.8 million general obligation bonds, $10.8 million are obligations of political subdivisions of the respective state.

 

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Table of Contents

The following table presents the types and estimated fair values of the Company’s municipal bonds based on underlying credit ratings by one or more Nationally Recognized Statistical Rating Organizations (“NRSRO”) at March 31, 2012:

 

State    Aaa ( 1)      Aa1 ( 2 )      Aa2 ( 3 )      Aa3m ( 4  )      A2 ( 5)      Total     

Percentage

of Total

 

 

 
        (Dollars in thousands)            

Arkansas

   $ -           $ -           $ -           $ 1,179       $ -           $ 1,179         2.8  

Arizona

     -             -             266         -             -             266         0.6     

California

     -             4,480         2,173         1,643         -             8,296         19.8     

Connecticut

     -             338         -             2,290         -             2,628         6.3     

Florida

     401         2,164         -             -             -             2,565         6.1     

Illinois

     -             -             -             1,273         -             1,273         3.0     

Louisiana

     -             -             1,146         -             -             1,146         2.7     

Massachusetts

     -             -             -             575         -             575         1.4     

Maine

     -             -             1,908         -             -             1,908         4.5     

Minnesota

     -             1,207         -             -             -             1,207         2.9     

Nevada

     -             -             2,263         -             -             2,263         5.4     

New York

     2,650         -             -             396         -             3,046         7.3     

Oregon

     -             -             -             2,274         -             2,274         5.4     

Pennsylvania

     -             -             -             1,545         -             1,545         3.7     

South Carolina

     -             823         -             -             -             823         2.0     

Texas

     4,539         -             -             -             1,102         5,641         13.4     

Utah

     -             -             570         -             -             570         1.4     

Washington

     -             2,549         2,189         -             -             4,738         11.3     
  

 

 

 

Total

     $ 7,590       $   11,561       $   10,515       $   11,175       $   1,102       $   41,943         100.0  
  

 

 

 

Percentage of total

     18.1%         27.6%         25.1%         26.6%         2.6%         100.0%      

Cumulative percentage of total

     18.1%         45.7%         70.8%         97.4%         100.0%         

(1) Includes S&P AAA rated securities

(2) Includes S&P AA+ rated securities

(3) Includes S&P AA rated securities

(4) Includes S&P AA- rated securities

(5) Includes S&P A rated securities

During the three months ended March 31, 2012, the Company purchased bond obligations of states and political subdivisions. The management investment subcommittee under the direction of the ALCO committee approved various conditions including the requirement that underlying ratings be Aa3 or higher. Generally, the Company does not utilize enhanced NRSROs, which represent insurance enhancements to meet conditions. At March 31, 2012, one security with an underlying rating of A2 was enhanced by the Texas Permanent School Fund, an AAA rated entity.

 

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The following table shows the Company’s premiums and discounts at March 31, 2012 and December 31, 2011:

 

    

    Par    

    Value    

    

Unamortized

Premium

     Unaccreted
Discount
         Amortized    
    Cost    
 
  

 

 

 
        (In thousands)      

March 31, 2012

           

Available for sale

           

Debt securities:

           

U.S. Government and government-sponsored ent erprise obiligations

     $ 14,800           $ 30           $ (25)           $ 14,805     

Government-sponsored residential mortgage-backed securities

     97,064           1,002           (241)           97,825     

Government-sponsored residential collaterialized debt obligations

     19,632           450           -               20,082     

Corporate debt securities

     15,054           -               (1,368)           13,686     

Obligations of states and political subdivisions

     37,270           5,378           -               42,648     
  

 

 

 

Total debt securities

     183,820           6,860           (1,634)           189,046     
  

 

 

 

Marketable equity securities

     3,034           -               -               3,034     
  

 

 

 

Total available for sale securities

     $     186,854           $ 6,860           $ (1,634)           $ 192,080     
  

 

 

 

Held to maturity

           

Government-sponsored residential mortgage-backed securities

     $ 8,714           $ -               $ (111)           $ 8,603     
  

 

 

 

December 31, 2011

           

Available for sale

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obiligations

     $ 17,200           $ 33           $ (26)           $ 17,207     

Government-sponsored residential mortgage-backed securities

     104,503           1,117           (258)           105,362     

Government-sponsored residential collaterialized debt obligations

     15,395           400           -               15,795     

Corporate debt securities

     6,017           -               (95)           5,922     
  

 

 

 

Total debt securities

     143,115           1,550           (379)           144,286     
  

 

 

 

Marketable equity securities

     3,023           -               -               3,023     
  

 

 

 

Total available for sale securities

     $     146,138           $ 1,550           $ (379)           $ 147,309     
  

 

 

 

Held to maturity

           

Government-sponsored residential mortgage-backed securities

     $ 9,629           $ -               $ (123)           $ 9,506     
  

 

 

 

During the three months ended March 31, 2012, the Company recognized premium amortization, net of accretion of $86,000, which is an adjustment to the yield of its investment securities.

 

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The following table summarizes gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position, as of March 31, 2012 and December 31, 2011:

 

             Less than 12 months                       12 Months or More                       Total          
    

Fair

Value

     Unrealized
Loss
    

Fair

Value

     Unrealized
Loss
    

Fair

Value

     Unrealized
Loss
 
  

 

 

 
                   (In thousands)                

March 31, 2012

                 

Available for sale:

                 

Government-sponsored residential mortgage-backed securities

     $ -               $ -               $ 41           $ 1           $ 41           $ 1     

Government-sponsored residential collateralized debt obligations

     4,747           23           -               -               4,747           23     

Corporate debt securities

     -               -               1,157           1,686           1,157           1,686     

Obligations of states and political subdivisions

     37,763           710           -               -               37,763           710     
  

 

 

    

 

 

    

 

 

 

Total

     $ 42,510           $ 733           $  1,198           $  1,687           $  43,708           $  2,420     
  

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Available for sale:

                 

Government-sponsored residential mortgage-backed securities

     $ 5,040           $ 12           $ -               $ -               $ 5,040           $ 12     

Government-sponsored residential collateralized debt obligations

     1,890           1           -               -               1,890           1     

Corporate debt securities

     -               -               1,217           1,625           1,217           1,625     
  

 

 

    

 

 

    

 

 

 

Total

     $ 6,930           $ 13           $ 1,217           $ 1,625           $ 8,147           $  1,638     
  

 

 

    

 

 

    

 

 

 

Of the securities summarized above as of March 31, 2012, 27 issues had unrealized losses for less than twelve months and 3 issues had an unrealized loss for twelve months or more. As of December 31, 2011, 4 issues had unrealized losses for less than twelve months and 1 issue had losses for twelve months or more.

U.S. Government and government-sponsored enterprises and Mortgage-backed securities. The unrealized losses on the Company’s U.S. Government and government-sponsored securities were caused by increases in the rate spread to comparable government securities. The Company does not expect these securities to settle at a price less than the par value of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.

Obligations of states and political subdivisions. The unrealized losses on the Company’s Obligations of states and political subdivisions were caused by increases in the rate spread to comparable securities as well as the method of the independent pricing service the Company utilizes to obtain market values. Matrix pricing is used for pricing most obligations of states and political subdivisions, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on securities’ relationships to other benchmark quoted securities. The grouping of securities is completed according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves. At March 31, 2012, the Company’s obligations of states and political subdivisions did not have any changes from the purchase date in the underlying credit ratings assigned by NRSROs. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.

Corporate debt securities. The unrealized losses on corporate debt securities related to one pooled trust preferred security, Preferred Term Security XXVIII, Ltd (PRETSL XXVIII). The unrealized loss on this security is caused by the low interest rate environment because it reprices quarterly to three month LIBOR and market spreads on similar securities have increased. The yield on this security is 0.87% at March 31, 2012 versus a

 

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coupon rate at purchase of 5.27%. No loss of principal or break in yield is projected. Based on the existing credit profile, management does not believe that this investment will suffer from any credit related losses. Because the Company does not intend to sell the investment and it is not probable that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2012.

The Company will continue to review its entire portfolio for other-than-temporarily impaired securities with additional attention being given to high risk securities such as the one pooled trust preferred security that the Company owns.

6.   Loans Receivable and Allowance for Loan Losses

A summary of the Company’s loan portfolio is as follows:

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Real estate loans:

     

Residential

     $ 675,498            $ 680,702    

Commercial

     610,561          593,867    

Construction

     51,935              50,654    
  

 

 

    

 

 

 

Total real estate loans

     1,337,994          1,325,223    

Commercial business loans

     170,576          143,475    

Installment loans

     1,957          2,273    

Collateral loans

     1,916              1,958    
  

 

 

    

 

 

 

Total loans

     1,512,443          1,472,929    

Net deferred loan costs and premiums

     370          494    

Allowance for loan losses

     (16,527)             (16,025)   
  

 

 

    

 

 

 

Loans - net

     $ 1,496,286            $ 1,457,398    
  

 

 

    

 

 

 

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for residential and commercial real estate, construction, commercial and installment and collateral 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 obligor 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.

At the time of loan origination, a risk rating based on this nine point grading system is assigned to each loan based on the loan officer’s assessment of risk. More complex loans, such as commercial business loans and commercial real estate loans require that our internal independent credit area further evaluate the risk rating of the

 

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individual loan, with the credit area and Chief Risk Officer having final determination of the appropriate risk rating. These more complex loans and relationships receive an in-depth analysis and periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The credit quality of the Company’s loan portfolio is reviewed by a third-party risk assessment firm on a quarterly basis and by the Company’s internal credit management function. The internal and external analysis of the loan portfolio is utilized to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Special Mention, Substandard or Doubtful are reviewed by management on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being Loss are normally fully charged off.

The following table presents the Company’s loans by risk rating at March 31, 2012 and December 31, 2011.

 

     Residential
  Real Estate  
     Commercial
  Real Estate  
       Construction        Commercial
  Business  
     Installment
and
  Collateral  
 
                   (In thousands)                

March 31, 2012

              

Loans rated 1-5

     $     662,824           $     576,638           $     44,258           $     161,012           $     3,838     

Loans rated 6

     1,947           14,925           5,071           3,097           -         

Loans rated 7

     10,727           18,998           2,606           6,467           35     

Loans rated 8

     -               -               -               -               -         

Loans rated 9

     -               -               -               -               -         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $ 675,498           $ 610,561           $ 51,935           $ 170,576           $ 3,873     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Loans rated 1-5

     $ 668,630           $ 566,160           $ 44,016           $ 135,212           $ 4,189     

Loans rated 6

     2,152           15,256           4,961           5,353           -         

Loans rated 7

     9,920           12,451           1,677           2,910           42     

Loans rated 8

     -               -               -               -               -         

Loans rated 9

     -               -               -               -               -         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $ 680,702           $ 593,867           $ 50,654           $ 143,475           $ 4,231     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Changes in the allowance for loan losses for the periods ended March 31, 2012 and 2011 are as follows:

 

Three Months ended

March 31, 2012

   Residential
    Real Estate    
     Commercial
    Real Estate    
         Construction          Commercial
    Business    
     Installment
and
    Collateral    
         Unallocated              Total      
  

 

 

 
                          (In thousands)                       

Balance, beginning of period

     $ 5,071          $ 6,694        $ 1,286        $ 2,515        $ 49          $ 410          $     16,025    

Provision for loan losses

     508          167          (57)         419          13          (346)         704    

Loans charged off

     (236)          -               -               (2)         (20)         -               (258)   

Recoveries of loans previously charged off

             -               -               46                  -               56    
  

 

 

 

Balance, end of period

     $ 5,348          $ 6,861          $ 1,229          $ 2,978          $ 47          $ 64          $ 16,527    
  

 

 

 

Three Months ended

March 31, 2011

                                                

Balance, beginning of period

     $ 4,688          $ 5,469          $ 1,653          $ 2,296          $ 81          $ 125          $ 14,312    

Provision for loan losses

     231          147                  129                   236          752    

Loans charged off

     (80)         -               -               -               (8)         -               (88)   

Recoveries of loans previously charged off

     47          -               -                               -               50    
  

 

 

 

Balance, end of period

     $ 4,886          $ 5,616          $ 1,657          $ 2,426          $ 80          $ 361          $ 15,026    
  

 

 

 

 

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Table of Contents

Further information pertaining to the allowance for loan losses and impaired loans at March 31, 2012 and December 31, 2011 follows:

 

                                 Installment                
     Residential      Commercial             Commercial      and                
March 31, 2012    Real Estate      Real Estate      Construction      Business      Collateral      Unallocated      Total  
  

 

 

 
                          (In thousands)                       

Amount of allowance for loan losses for loans deemed to be impaired

   $ 170       $ -           $ -           $ -           $ -           $ -           $ 170   

Amount of allowance for loan losses for loans not deemed to be impaired

     5,178         6,861         1,229         2,978         47         64         16,357   

Loans deemed to be impaired

     9,339         1,561         1,006         1,715         34         -             13,655   

Loans not deemed to be impaired

     666,159         609,000         50,929         168,861         3,839         -             1,498,788   

December 31, 2011

                    

Amount of allowance for loan losses for loans deemed to be impaired

   $ 148       $ -           $ -           $ -           $ -           $ -           $ 148   

Amount of allowance for loan losses for loans not deemed to be impaired

     4,923         6,694         1,286         2,515         49         410         15,877   

Loans deemed to be impaired

     9,002         1,044         1,099         1,436         29         -             12,610   

Loans not deemed to be impaired

     671,700         592,823         49,555         142,039         4,202         -             1,460,319   

 

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Table of Contents

The following is a summary of past due and non-accrual loans at March 31, 2012 and December 31, 2011:

 

    

  30-59 Days

  Past Due

    

60-89 Days

Past Due

    

Past Due 90

Days of
More

    

Total Past

Due

    

Past Due
90 Days or

More and

Still
Accruing

    

Loans on  

Non-

accrual  

 
  

 

 

 
                   (In thousands)                

March 31, 2012

                 

Real estate loans:

                 

Residential

     $ 6,529         $     2,590         $ 4,873         $     13,992       $ -             $     9,339     

Commercial

     507         509         562         1,578         -             1,561     

Construction

     408         -             -             408         -             1,006     

Commercial business loans

     500         -             447         947         -             1,715     

Installment and collateral

     13         4         30         47         -             34     
  

 

 

 

Total

     $     7,957         $     3,103         $     5,912         $     16,972       $ -             $     13,655     
  

 

 

 

December 31, 2011

                 

Real estate loans:

                 

Residential

     $     6,655         $     2,679         $     4,759         $     14,093         $     -             $     9,003     

Commercial

     109         257         196         562         -             806     

Construction

     -             191         93         284         -             1,099     

Commercial business loans

     133         200         433         766         -             1,673     

Installment and collateral

     5         42         -             47         -             29     
  

 

 

 

Total

     $     6,902         $     3,369         $     5,481         $     15,752         $     -             $     12,610     
  

 

 

 

 

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Table of Contents

The following is a summary of impaired loans with and without a valuation allowance as of March 31, 2012 and December 31, 2011.

 

             March 31, 2012              December 31, 2011  
     Recorded
  Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance  
 
  

 

 

 
                   (In thousands)                

Impaired loans without a valuation allowance:

                 

Real estate loans:

                 

Residential

     $     8,195         $ 8,195           $     -               $     7,792           $     7,792           $     -         

Commercial

     1,561           1,561           -               1,044           1,044           -         

Construction

     1,006           1,006           -               1,099           1,099           -         

Commercial business loans

     1,715           1,715           -               1,436           1,436           -         

Installment and collateral loans

     34           34           -               29           29           -         
  

 

 

    

 

 

 

Total

     12,511           12,511           -               11,400           11,400           -         
  

 

 

    

 

 

 

Impaired loans with a valuation allowance:

                 

Real estate loans:

                 

Residential

     1,144           1,144           170           1,210         1,210           148     

Commercial

     -               -               -               -               -               -         

Construction

     -               -               -               -               -               -         

Commercial business loans

     -               -               -               -               -               -         

Installment and collateral loans

     -               -               -               -               -               -         
  

 

 

    

 

 

 

Total

     1,144           1,144           170           1,210           1,210           148     
  

 

 

    

 

 

 

Total

     $     13,655           $     13,655           $     170           $     12,610         $     12,610           $     148     
  

 

 

    

 

 

 

 

26


Table of Contents

The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the three months ended March 31, 2012 and 2011.

 

    For the Three Months     For the Three Months  
    Ended March 31, 2012     Ended March 31, 2011  
    Average
Recorded
  Investment  
   

Interest

Income

  Recognized  

   

Interest

Income
  Recognized  
on a Cash
    Basis    

    Average
Recorded
  Investment  
    Interest
Income
Recognized
   

Interest

Income
  Recognized  
on a Cash

    Basis    

 
 

 

 

   

 

 

 
                (In thousands)              

Impaired loans without a valuation allowance:

           

Real estate loans:

           

Residential

    $     8,095          $     76            $     76        $ 4,836          $     51        $ 51     

Commercial

    1,184          29          29          1,782          36          36     

Construction

    1,053          9          9          2,409          -              -         

Commercial business loans

    1,694          18          18          330          8          8     

Installment and collateral loans

    32          1          1          5          -              -         
 

 

 

   

 

 

 

Total

    12,058          133          133          9,362          95          95     
 

 

 

   

 

 

 

Impaired loans without a valuation allowance:

           

Real estate loans:

           

Residential

    1,076          19          19          1,557          18          18     

Commercial

    -              -              -              1,196          -              -         

Construction

    -              -              -              -              -              -         

Commercial business loans

    -              -              -              551          4          4     

Installment and collateral loans

    -              -              -              29          1          1     
 

 

 

   

 

 

 

Total

    1,076          19          19          3,333          23          23     
 

 

 

   

 

 

 

Total

    $     13,134          $     152          $     152          $     12,695          $     118          $     118     
 

 

 

   

 

 

 

Management has established the allowance for loan loss in accordance with GAAP for the period ending March 31, 2012 based on the current risk assessment and level of loss that is believed to exist within the portfolio. This level of reserve is deemed an appropriate estimate of probable loan losses inherent in the loan portfolio as of March 31, 2012 based upon the analysis conducted and given the portfolio composition, delinquencies, charge offs and risk rating changes experienced during the first quarter of 2012 and the three-year evaluation period utilized in the analysis. Based on the qualitative assessment of the portfolio and in thorough consideration of non-performing loans, management believes that the allowance for loan losses properly supports the level of associated loss and risk.

Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the restructuring constitutes a concession by the creditor and (ii) the debtor is experiencing financial difficulties. A troubled debt restructuring may include (i) a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt, (ii) issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting debt into an equity interest, and (iii) modifications of terms of a debt.

 

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Troubled debt restructurings during the three months ended March 31, 2012 are set forth in the following table:

 

     Number
of
Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
  

 

 

 
     (Dollars in thousands)  

Residential real estate

         1       $ 27       $ 27     

Construction

         4         900         900     
  

 

 

 

Total troubled debt restructuring

         5       $ 927       $ 927     
  

 

 

 

Troubled debt restructurings that defaulted within twelve months of restructuring during the three months ended March 31, 2012 follows:

 

XX.XX XX.XX
     Number    
of    
Contracts    
       Recorded Investment    
  

 

 

 

Residential real estate

     1             $                              64       
  

 

 

 

Total troubled debt restructuring

     1             $ 64       
  

 

 

 

Troubled debt restructurings are set forth in the following table as of December 31, 2011:

 

    

Number

of
Contracts

     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
  

 

 

 
     (Dollars in thousands)  

Residential real estate

         9        $ 1,423       $ 1,361     

Commercial business

         2         620         403     
  

 

 

 

Total troubled debt restructuring

         11        $ 2,043       $ 1,764     
  

 

 

 

 

XX.XX XX.XX
     Number             
Troubled Debt Restructurings    of             
That Subsequently Defaulted:    Contracts          Recorded Investment    
  

 

 

 

Residential real estate

                   2               $                          306        

Commercial business

           1                 79       
  

 

 

 

Total troubled debt restructuring

           3               $ 385       
  

 

 

 

The majority of restructured loans were on non-accrual status as of March 31, 2012 and December 31, 2011. The financial impact of the trouble debt restructured loans has been minimal to date. Typically, residential loans are restructured with a modification and extension of the loan amortization and maturity at substantially the same interest rate as contained in the original credit extension. As part of the troubled debt restructuring process, the current value of the property is compared to the general ledger loan balance and if not fully supported, a write down is processed through the allowance for loan losses. Commercial real estate loans and commercial business loans also contain payment modification agreements and a like assessment of the underlying collateral value if the borrower’s cash flow may be inadequate to service the entire obligation.

 

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Loan Servicing

The Company services certain loans for third parties. The aggregate of loans serviced for others was $169.3 million and $160.3 million as of March 31, 2012 and December 31, 2011, respectively. The balances of these loans are not included in the accompanying consolidated statements of condition.

The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of servicing rights at March 31, 2012 and 2011 was determined using pretax internal rates of return ranging from 8.0% to 10.0% and the Public Securities Association (“PSA”) Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 377 and 257, respectively.

Mortgage servicing rights are included in other assets in the consolidated statement of condition. The following table summarizes mortgage servicing rights capitalized and amortized for the three months ended March 31, 2012 and 2011:

 

    

For the Three
Months Ended
March 31, 2012

  

For the Three
Months Ended
March 31, 2011

    (In thousands)

Mortgage servicing rights valuation

    

Balance at beginning of period

   $                944      $               858 

Additions

    79       48 

Amortization

    (82)      (53)
 

 

  

 

Balance at end of period

    941       853 
 

 

  

 

Valuation allowances:

    

Balance at beginning of period

    (166)      -      

Recoveries

    108       -      

Provisions

    -            (21)
 

 

  

 

Balance at end of period

    (58)      (21)
 

 

  

 

Mortgage servicing assets, net

   $                883      $               832 
 

 

  

 

    

 

Fair value of mortgage servicing
assets at end of period

 

 

  

 

   $            1,093      $            1,052 
 

 

  

 

 

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7.   Federal Home Loan Bank Borrowings and Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). At March 31, 2012 and December 31, 2011, the Bank had access to a pre-approved secured line of credit with the FHLBB of $10.0 million. In accordance with an agreement with the FHLBB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At March 31, 2012 and December 31, 2011, there were no advances outstanding under the line of credit.

Contractual maturities and weighted average rates of outstanding advances from the FHLBB as of March 31, 2012 and December 31, 2011 are summarized below:

 

         March 31, 2012         December 31, 2011  
  

 

 

   

 

 

 
     Amount      Weighted-
Average
Rate
    Amount      Weighted-
Average
Rate
 
  

 

 

    

 

 

   

 

 

    

 

 

 
     (Dollars in thousands)  

2012

     $     67,000           0.63       $     7,000           4.09  

2013

     -               -              -               -         

2014

     8,112           3.70          8,112           3.70     

2015

     29,000           2.58          29,000           2.58     

2016

     3,000           2.70          3,000           2.70     

Thereafter

     18,764           3.76          18,770           3.76     
  

 

 

      

 

 

    
     $     125,876           1.79       $     65,882           3.22  
  

 

 

      

 

 

    

At March 31, 2012, five advances totaling $30.0 million with interest rates ranging from 3.19% to 4.39% which are scheduled to mature between 2014 and 2017 are callable. Advances are collateralized by first mortgage loans with an estimated eligible collateral value of $318.2 million and $337.8 million at March 31, 2012 and December 31, 2011, respectively. The Bank is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, and up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the most recent redemption provisions of the stock. During the quarter ended March 31, 2012, the FHLBB repurchased $1.1 million of excess capital stock as part of an announced program to repurchase $250 million of members’ excess stock, the first repurchase since it established a moratorium in 2008.

8.   Share-Based Compensation Plans

The Company maintains and operates the Rockville Financial, Inc. 2006 Stock Incentive Award Plan (the “Plan”) as approved by the Company’s Board of Directors and stockholders. The Plan allows the Company to use stock options, stock awards, stock appreciation rights and performance awards to attract, retain and reward performance of qualified employees and others who contribute to the success of the Company. Prior to the Company’s second-step stock offering effective March 3, 2011, the Plan allowed for the issuance of a maximum of 349,830 restricted stock shares and 874,575 stock options. After adjusting for the 1.5167 exchange ratio established as a result of the stock offering, as of March 31, 2012, there were 14,603 restricted stock shares and 443,968 stock options that remain available for future grants under the Plan. There have been no stock awards granted in 2012.

Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $100,000 with a related tax benefit recorded of $33,000 for the three months ended March 31, 2012 of which Director share-based compensation expense recognized (in the consolidated statements of operations as other non-interest expense) was $14,000 and officer share-based compensation expense recognized (in the consolidated statements of operations as salaries and benefit expense) was $86,000. The total charge of $100,000 for the three months ended March 31, 2012 includes $32,000 related to 2,845 vested restricted shares used for income tax withholding on behalf of certain executives which occurred in the first three months of 2012.

 

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Stock Options: The following table presents the activity related to stock options under the Plan for the three months ended March 31, 2012:

 

     Stock
    Options    
    Weighted
Average
Exercise Price
    Remaining
Contractual Term
(in years)
 

Intrinsic

Value
  (in thousands)  

 
  

 

 

 

Stock options outstanding at December 31, 2011

     875,446       $ 8.67       

Granted

     -            -           

Exercised

     -            -           

Forfeited or expired

     (11,184     8.27       

 

 

Stock options outstanding at March 31, 2012

     864,262       $ 8.68      5.9       $ 2,580     

 

 

Stock options vested and exercisable at March 31, 2012

     705,643       $ 8.65      5.2       $ -         

 

 

The aggregate fair value of vested options was $99,000 and $122,000 for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the unrecognized cost related to the stock options awarded of $437,000 will be recognized over a weighted-average period of 2.8 years.

Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. During the restriction period, all shares are considered outstanding and dividends are paid on the restricted stock. The following table presents the activity for restricted stock for the three months ended March 31, 2012:

     Number
of Shares
   

Weighted Average

Grant-Date

Fair Value

 

 

 

  Unvested as of December 31, 2011

   &n