XNAS:RCKB Rockville Financial, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 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.    x  Yes    ¨  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  x    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   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of August 1, 2012, there were 28,554,932 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 June 30, 2012 and December 31, 2011

     3   
 

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June  30, 2012 and 2011

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2012

     6   
 

Consolidated Statements of Cash Flows for the six months ended June 30, 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

     36   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     53   

Item 4.

 

Controls and Procedures

     54   
Part II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     54   

Item 1A.

 

Risk Factors

     54   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     55   

Item 3.

 

Defaults Upon Senior Securities

     55   

Item 4.

 

Mine Safety Disclosures

     55   

Item 5.

 

Other Information

     55   

Item 6.

 

Exhibits

     56   
SIGNATURES      58   
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)

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

CASH AND CASH EQUIVALENTS:

    

Cash and due from banks

   $ 20,151      $ 40,677   

Short-term investments

     13,739        308   
  

 

 

   

 

 

 

Total cash and cash equivalents

     33,890        40,985   

AVAILABLE FOR SALE SECURITIES - At fair value

     221,714        151,237   

HELD TO MATURITY SECURITIES - At amortized cost

     7,692        9,506   

LOANS HELD FOR SALE

     598        —     

LOANS RECEIVABLE (Net of allowance for loan losses of $17,303 at June 30, 2012 and $16,025 at December 31, 2011)

     1,545,250        1,457,398   

FEDERAL HOME LOAN BANK STOCK

     15,867        17,007   

ACCRUED INTEREST RECEIVABLE

     5,070        4,089   

DEFERRED TAX ASSET

     10,492        10,368   

BANK PREMISES AND EQUIPMENT - Net

     17,331        15,502   

GOODWILL

     1,070        1,149   

CASH SURRENDER VALUE OF BANK-OWNED LIFE INSURANCE

     56,912        31,082   

OTHER REAL ESTATE OWNED

     2,084        3,008   

PREPAID FDIC ASSESSMENTS

     2,569        3,034   

CURRENT FEDERAL TAX RECEIVABLE

     3,121        2,848   

OTHER ASSETS

     4,739        2,659   
  

 

 

   

 

 

 
   $ 1,928,399      $ 1,749,872   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES:

    

DEPOSITS:

    

Non-interest-bearing

   $ 220,924      $ 206,416   

Interest-bearing

     1,234,750        1,120,350   
  

 

 

   

 

 

 

Total deposits

     1,455,674        1,326,766   

MORTGAGORS’ AND INVESTORS’ ESCROW ACCOUNTS

     6,556        5,852   

ADVANCES FROM THE FEDERAL HOME LOAN BANK

     125,871        65,882   

ACCRUED EXPENSES AND OTHER LIABILITIES

     17,593        17,901   
  

 

 

   

 

 

 

Total liabilities

     1,605,694        1,416,401   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock (no par value; 2,000,000 authorized; no shares issued or outstanding at June 30, 2012 and December 31, 2011)

     —          —     

Common stock (no par value; 60,000,000 shares authorized; 29,509,304 and 29,514,468 shares issued and 28,602,777 and 29,514,468 outstanding at June 30, 2012 and December 31, 2011, respectively)

     243,776        243,776   

Additional paid-in capital

     11,825        15,189   

Unearned compensation - ESOP

     (8,880     (9,453

Retained earnings

     92,574        90,707   

Accumulated other comprehensive loss, net of tax

     (6,116     (6,748

Treasury stock, at cost (906,527 and 0 shares at June 30, 2012 and December 31, 2011, respectively)

     (10,474     —     
  

 

 

   

 

 

 

Total stockholders’ equity

     322,705        333,471   
  

 

 

   

 

 

 
   $ 1,928,399      $ 1,749,872   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Operations

(In Thousands, Except Share Data)

(Unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012      2011     2012      2011  

INTEREST AND DIVIDEND INCOME:

          

Loans

   $ 17,930       $ 17,481      $ 35,494       $ 35,016   

Securities-interest

     1,703         1,286        3,009         2,335   

Securities-dividends

     41         149        85         279   

Interest-bearing deposits

     26         16        37         31   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     19,700         18,932        38,625         37,661   
  

 

 

    

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE:

          

Deposits

     2,246         2,897        4,497         5,808   

Borrowed funds

     563         2,265        1,111         4,688   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     2,809         5,162        5,608         10,496   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net-interest income

     16,891         13,770        33,017         27,165   

PROVISION FOR LOAN LOSSES

     1,181         754        1,885         1,506   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     15,710         13,016        31,132         25,659   
  

 

 

    

 

 

   

 

 

    

 

 

 

NON-INTEREST INCOME:

          

Other-than-temporary impairment of securities

     —           —          —           (29

Service charges and fees

     1,538         1,682        3,364         3,278   

Net gain from sale of securities

     118         6,201        121         6,201   

Net gain from sales of loans

     44         —          569         59   

Other income (loss)

     559         (64     875         (2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     2,259         7,819        4,929         9,507   
  

 

 

    

 

 

   

 

 

    

 

 

 

NON-INTEREST EXPENSE:

          

Salaries and employee benefits

     8,468         6,613        15,591         12,284   

Service bureau fees

     1,231         1,128        2,288         2,187   

Occupancy and equipment

     1,036         1,100        2,101         2,266   

Professional fees

     828         498        1,546         1,182   

Marketing and promotions

     103         441        217         765   

FDIC assessments

     201         506        506         1,020   

Other real estate owned

     53         15        334         74   

Contribution to Rockville Bank Foundation, Inc.

     —           —          —           5,043   

Loss on extinguishment of debt

     —           8,914        —           8,914   

Other

     1,895         1,493        3,575         2,917   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expense

     13,815         20,708        26,158         36,652   
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     4,154         127        9,903         (1,486

PROVISION (BENEFIT) FOR INCOME TAXES

     1,205         84        3,099         (507
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS)

   $ 2,949       $ 43      $ 6,804       $ (979
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME (LOSS) PER SHARE

          

Basic

   $ 0.11       $ —        $ 0.24       $ (0.03

Diluted

   $ 0.11       $ —        $ 0.24       $ (0.03

WEIGHTED-AVERAGE SHARES OUTSTANDING:

          

Basic

     27,606,313         28,803,416        28,032,306         28,941,501   

Diluted

     27,773,365         28,931,099        28,200,158         28,941,501   

See accompanying notes to unaudited consolidated financial statements.

 

4


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 June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011  

NET INCOME (LOSS)

   $ 2,949      $ 43      $ 6,804      $ (979
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

        

Unrealized gains on securities:

        

Unrealized holding gains on available for sale securities

     998        1,780        494        2,913   

Reclassification adjustment for gains realized in income

     (118     (6,201     (121     (6,172
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     880        (4,421     373        (3,259

Tax effect

     (307     1,548        (129     1,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount

     573        (2,873     244        (2,118
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses on interest rate swaps designated as cash flow hedges accruing during period

     (33     —          (33     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plans:

        

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

     (6     (12     (11     (24

Gains arising during the period

     310        319        620        478   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in gains or losses and prior service costs or credits

     304        307        609        454   

Tax effect

     (105     (106     (213     (157
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - pension plans

     199        201        396        297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Postretirement plans:

        

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

     —          3        —          5   

Gains arising during the period

     19        19        39        38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in gains or losses and prior service costs or credits

     19        22        39        43   

Tax effect

     (7     (8     (14     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - postretirement plans

     12        14        25        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - pension & postretirement plans

     211        215        421        325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     751        (2,658     632        (1,793
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 3,700      $ (2,615   $ 7,436      $ (2,772
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

(In Thousands, Except Share Data)

(Unaudited)

 

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

    —          —          —          —          6,804        —          —          —          6,804   

Other comprehensive income

    —          —          —          —          —          632        —          —          632   

Share-based compensation expense

    —          —          1,327        —          —          —          —          —          1,327   

ESOP shares released or committed to be released

    —          —          156        573        —          —          —          —          729   

Cancellation of shares for tax withholding

    (5,164     —          (32     —          —          —          —          —          (32

Reissuance of treasury shares in connection with restricted stock grants

    —          —          (4,735     —          —          —          (403,496     4,735        —     

Reissuance of treasury shares in connection with stock options exercised

    —          —          (80     —          —          —          (18,356     214        134   

Treasury stock purchased

    —          —          —          —          —          —          1,328,379        (15,423     (15,423

Dividends paid ($0.17 per common share)

    —          —          —          —          (4,937     —          —          —          (4,937
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    29,509,304      $ 243,776      $ 11,825      $ (8,880   $ 92,574      $ (6,116     906,527      $ (10,474   $ 322,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

     For the Six Months
Ended June 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 6,804      $ (979

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

    

Amortization of premiums and discounts on investments, net

     190        (39

Share-based compensation expense

     1,327        383   

Amortization of ESOP expense

     729        643   

Provision for loan losses

     1,885        1,506   

Net gain from sales of securities

     (121     (6,201

Loss on extinguishment of debt

     —          8,914   

Other-than-temporary impairment of securities

     —          29   

Loans originated for sale

     (19,059     (4,597

Proceeds from sales of loans

     18,461        4,977   

Loss on sale of OREO

     55        93   

Write-downs of OREO

     183        —     

Depreciation and amortization

     643        672   

Loss of disposal of equipment

     2        110   

Deferred income tax (benefit) expense

     (217     4,724   

Increase in cash surrender value of bank-owned life insurance

     (830     (189

Net change in:

    

Deferred loan fees and premiums

     207        (202

Accrued interest receivable

     (981     (402

Prepaid FDIC assessment

     465        945   

Current Federal income tax receivable (increase) decrease

     (537     —     

Other assets

     (1,962     (7,994

Accrued expenses and other liabilities

     308        (10,135
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     7,552        (7,742
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from sales of available for sale securities

     11,720        14,465   

Proceeds from calls and maturities of available for sale securities

     7,400        7,500   

Principal payments on available for sale mortgage-backed securities

     15,559        8,619   

Purchases of available for sale securities

     (104,876     (56,052

Principal payments on held to maturity securities

     1,838        2,380   

Proceeds from redemption of FHLBB stock

     1,140        —     

Proceeds from sale of OREO

     1,358        933   

Purchase of bank-owned life insurance

     (25,000     —     

Loan originations, net of principal payments

     (90,616     (21,599

Purchases of premises and equipment

     (2,477     (402

Proceeds from sale of other assets

     3        25   
  

 

 

   

 

 

 

Net cash used in investing activities

     (183,951     (44,131
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in non-interest-bearing deposits

     14,508        (1,873

Net increase in interest-bearing deposits

     114,400        59,483   

Net increase in mortgagors’ and investors’ escrow accounts

     704        287   

Net increase in short-term FHLBB advances

     60,000        —     

Repayment of long-term FHLBB advances

     (11     (22,331

Prepayment of long-term Federal Home Loan Bank advances and penalty

     —          (131,114

Proceeds from exercise of stock options and stock purchase plan

     95        —     

Common stock repurchased

     (15,423     —     

Common stock purchase by ESOP

     —          (7,071

Proceeds from stock offering, net of offering costs

     —          168,044   

Cancellation of Rockville Financial, MHC Inc. shares

     —          9,685   

Fractional shares paid

     —          (22

Cancellation of shares for tax withholding

     (32     (47

Cash dividend paid on common stock

     (4,937     (3,144
  

 

 

   

 

 

 

Net cash provided by financing activities

     169,304        71,897   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (7,095     20,024   

CASH AND CASH EQUIVALENTS - Beginning of period

     40,985        60,708   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ 33,890      $ 80,732   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Rockville Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Concluded

(In Thousands)

(Unaudited)

 

     For the Six Months
Ended June 30,
 
     2012      2011  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the year for:

     

Interest

   $ 5,568       $ 10,983   

Income taxes

     4,066         3,100   

Transfer of loans to other real estate owned

     672         184   

Due on common stock repurchases

     48         —     

See accompanying notes to unaudited consolidated financial statements.

 

8


Table of Contents

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 and six months ended June 30, 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 net income (loss) per share for the three and six months ended June 30, 2012 and 2011:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (In thousands, except share data)  

Net income (loss) available to common stockholders

   $ 2,949      $ 43      $ 6,804      $ (979
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted average common shares outstanding

     29,509,304        29,429,766        29,511,277        29,473,055   

Less: average number of treasury shares

     (966,388     —          (526,252     —     

Less: average number of unvested ESOP award shares

     (936,603     (626,350     (952,719     (531,554
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average basic shares outstanding

     27,606,313        28,803,416        28,032,306        28,941,501   

Dilutive effect of stock options

     167,052        127,683        167,852        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average diluted shares

     27,773,365        28,931,099        28,200,158        28,941,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

Basic

   $ 0.11      $ —        $ 0.24      $ (0.03

Diluted

   $ 0.11      $ —        $ 0.24      $ (0.03

For the three and six months ended June 30, 2012 and 2011, 1,797,698, and 1,796,899 and 770,079 and 897,762 options, respectively, 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 June 30, 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 six months ended June 30, 2012, options to purchase 1,796,899 shares 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. Adoption of ASU No. 2011-04, effective January 1, 2012, 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

 

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income or in two separate but consecutive statements. This guidance was effective for the Company beginning in the first quarter of 2012 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 in ASU No. 2011-05, to allow the FASB time to discuss adoption. The Company included Consolidated Statements of Comprehensive Income (Loss) 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. Adoption of ASU No. 2011-08, effective January 1, 2012, 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 are as follows:

 

     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)  

June 30, 2012

           

Available for Sale Securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 10,135       $ —         $ 10,135       $ —     

Government-sponsored residential mortgage-backed securities

     102,518         —           102,518         —     

Government-sponsored residential collateralized-debt obligations

     24,358         —           24,358         —     

Corporate debt securities

     13,873         —           12,346         1,527   

Obligations of states and political subdivisions

     67,548         —           67,548         —     

Marketable equity securities

     3,282         3,209         —           73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 221,714       $ 3,209       $ 216,905       $ 1,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2012      2011      2012      2011  
     (In thousands)      (In thousands)  

Balance at beginning of period

   $ 1,230       $ 73       $ 1,290       $ 73   

Total gains:

           

Included in other comprehensive income

     370         —           310         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 1,600       $ 73       $ 1,600       $ 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 (“OREO”) 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 selling 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 June 30, 2012 and the year ended December 31, 2011.

Assets recorded at fair value on a non-recurring basis are as follows:

 

     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)  

June 30, 2012

           

Impaired loans

   $ 1,678       $ —         $ —         $ 1,678   

Other real estate owned

     2,084         —           —           2,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,762       $ —         $ —         $ 3,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Impaired loans

   $ 914       $ —         $ —         $ 914   

Other real estate owned

     3,008         —           —           3,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,922       $ —         $ —         $ 3,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Losses on assets recorded at fair value on a non-recurring basis for the three and six months ended June 30, 2012 and 2011 are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (In thousands)      (In thousands)  

Impaired loans

   $ 127       $ —         $ 337       $ —     

Other real estate owned

     —           10         183         318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 127       $ 10       $ 520       $ 318   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Losses on assets recorded at fair value on a non-recurring basis are as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2012      2011      2012      2011  
     (In thousands)      (In thousands)  

Impaired loans

   $ 127       $ —         $ 337       $ —     

Other real estate owned

     —           10         183         318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 127       $ 10       $ 520       $ 318   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no liabilities reported at fair value on a non-recurring basis on the balance sheet at June 30, 2012 or December 31, 2011.

As of June 30, 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)  

June 30, 2012

              

Financial assets:

              

Cash and cash equivalents

   $ 33,890       $ 33,890       $ —         $ —         $ 33,890   

Available for sale securities

     221,714         3,209         216,905         1,600         221,714   

Held to maturity securities

     7,692         —           8,444         —           8,444   

Loans held for sale

     598         —           598         —           598   

Loans receivable-net

     1,545,250         —           —           1,586,553         1,586,553   

FHLBB stock

     15,867         —           —           15,867         15,867   

Accrued interest receivable

     5,070         —           —           5,070         5,070   

Financial liabilities:

              

Deposits

     1,455,674         —           —           1,441,010         1,441,010   

Mortgagors’ and investors’ escrow accounts

     6,556         —           —           6,556         6,556   

Advances from FHLBB

     125,871         —           —           131,499         131,499   

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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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 June 30, 2012 and December 31, 2011 are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (In thousands)  

June 30, 2012

           

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 9,826       $ 309       $ —         $ 10,135   

Government-sponsored residential mortgage-backed securities

     97,815         4,703         —           102,518   

Government-sponsored residential collateralized debt obligations

     24,229         130         1         24,358   

Corporate debt securities

     14,833         361         1,321         13,873   

Obligations of states and political subdivisions

     67,668         269         389         67,548   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     214,371         5,772         1,711         218,432   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     68         6         —           74   

Industrial

     109         31         —           140   

Mutual funds

     2,734         143         —           2,877   

Oil and gas

     131         60         —           191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     3,042         240         —           3,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 217,413       $ 6,012       $ 1,711       $ 221,714   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Debt securities:

           

Government-sponsored residential mortgage-backed securities

   $ 7,692       $ 752       $ —         $ 8,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

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         13         110,195   

Government-sponsored residential collateralized debt obligations

     15,795         155         —           15,950   

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:

           

Debt securities:

           

Government-sponsored residential mortgage-backed securities

   $ 9,506       $ 874       $ —         $ 10,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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At June 30, 2012, the net unrealized gain on securities available for sale of $4.3 million, net of income taxes of $1.5 million, or $2.8 million, is included in accumulated other comprehensive loss.

The amortized cost and fair value of debt securities at June 30, 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

   $ 600       $ 602       $ —         $ —     

After 1 year through 5 years

     19,697         20,243         —           —     

After 5 years through 10 years

     4,336         4,337         —           —     

After 10 years

     67,694         66,374         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     92,327         91,556         —           —     

Mortgage-backed securities

     122,044         126,876         7,692         8,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 214,371       $ 218,432       $ 7,692       $ 8,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, the Company had no encumbered securities.

For the three months ended June 30, 2012 and 2011, gross gains of $146,000 and $6.3 million, respectively, were realized on the sales of available for sale securities. Gross losses realized on the sale of available for sale securities were $28,000 and $143,000 for the three months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, gross gains of $149,000 and $6.3 million, respectively, were realized on the sales of available for sale securities. Gross losses realized on the sale of available for sale securities were $28,000 and $171,000 for the six months ended June 30, 2012 and 2011, respectively.

 

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As of June 30, 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 June 30, 2012:

At June 30, 2012

 

          Revenue Bond              

State

  General
Obligation
Bond
    College &
University
    Fuel
Sales
Tax
    Health
Services
Revenue
    Building
Development
    Airport     Sales
Tax
    Water/
Sewer
    Total
Revenue
Bonds
    Total
Obligations
    Percentage
of Total
 
(Dollars in thousands)  

Arkansas

  $ 1,173      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 1,173        1.8

Arizona

    268        —          —          —          —          —          —          —          —          268        0.4   

California

    4,517        2,318        —          —          —          1,667        —          —          3,985        8,502        12.6   

Colorado

    —          —          —          1,573        —          —          —          —          1,573        1,573        2.3   

Connecticut

    337        2,331        —          —          —          —          —          —          2,331        2,668        4.0   

Florida

    2,189        —          —          —          400        —          —          —          400        2,589        3.8   

Illinois

    2,076        —          —          —          —          —          —          —          —          2,076        3.1   

Indiana

    —          1,716        —          —          —          —          —          —          1,716        1,716        2.5   

Louisiana

    1,159        —          —          —          —          —          —          —          —          1,159        1.7   

Massachusetts

    —          580        —          —          —          —          —          —          580        580        0.9   

Maine

    —          —          1,904        —          —          —          —          —          1,904        1,904        2.8   

Minnesota

    1,221        —          —          1,511        —          —          —          —          1,511        2,732        4.0   

Mississippi

    2,289        —          —          —          —          —          —          —          —          2,289        3.4   

Nevada

    —          —          —          —          —          2,293        —          —          2,293        2,293        3.4   

New York

    1,151        —          —          —          3,104        —          —          1,498        4,602        5,753        8.5   

North Carolina

    —          —          —          2,142        —          —          —          —          2,142        2,142        3.2   

Ohio

    —          —          —          2,180        —          —          —          —          2,180        2,180        3.2   

Oklahoma

    1,818        —          —          —          —          —          —          —          —          1,818        2.7   

Oregon

    —          —          —          —          —          —          —          2,315        2,315        2,315        3.4   

Pennsylvania

    —          —          —          —          —          —          —          3,934        3,934        3,934        5.8   

South Carolina

    —          —          —          —          —          —          —          2,916        2,916        2,916        4.3   

Texas

    3,386        2,292        —          —          —          —          1,119        —          3,411        6,797        10.1   

Utah

    —          —          —          —          —          —          573        —          573        573        0.9   

Vermont

    —          1,161        —          —          —          —          —          —          1,161        1,161        1.7   

Washington

    1,429        —          —          —          —          —          —          3,391        3,391        4,820        7.1   

Wisconsin

    —          —          —          1,617        —          —          —            1,617        1,617        2.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 23,013      $ 10,398      $ 1,904      $ 9,023      $ 3,504      $ 3,960      $ 1,692      $ 14,054      $ 44,535      $ 67,548        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s investment committee reviews state exposure on an ongoing basis. Of the $23.0 million general obligation bonds, $14.7 million are obligations of political subdivisions of the respective state.

 

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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 June 30, 2012:

 

State

   Aaa (1)     Aa1 (2)     Aa2 (3)     Aa3m (4)     A2 (5)     Total  
(Dollars in thousands)  

Arkansas

   $ —        $ —        $ —        $ 1,173      $ —        $ 1,173   

Arizona

     —          —          268        —          —          268   

California

     —          4,611        2,224        1,667        —          8,502   

Colorado

     —          —          1,573        —          —          1,573   

Connecticut

     —          337        —          2,331        —          2,668   

Florida

     400        2,189        —          —          —          2,589   

Illinois

     —          —          552        1,524        —          2,076   

Indiana

     1,716        —          —          —          —          1,716   

Louisiana

     —          —          1,159        —          —          1,159   

Massachusetts

     —          —          —          580        —          580   

Maine

     —          —          1,904        —          —          1,904   

Minnesota

     —          1,221        1,511        —          —          2,732   

Mississippi

     —          —          2,289        —          —          2,289   

Nevada

     —          —          2,293        —          —          2,293   

New York

     2,706        —          2,649        398        —          5,753   

North Carolina

     —          —          2,142        —          —          2,142   

Ohio

     —          —          2,180        —          —          2,180   

Oklahoma

     1,818        —          —          —          —          1,818   

Oregon

     —          —          —          2,315        —          2,315   

Pennsylvania

     —          —          —          3,934        —          3,934   

South Carolina

     —          845        —          2,071        —          2,916   

Texas

     2,293        —          1,119        2,255        1,130        6,797   

Utah

     —          —          573        —          —          573   

Vermont

     —          —          1,161        —          —          1,161   

Washington

     —          2,583        2,237        —          —          4,820   

Wisconsin

     —          1,617        —          —          —          1,617   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,933      $ 13,403      $ 25,834      $ 18,248      $ 1,130      $ 67,548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total

     13.2     19.9     38.2     27.0     1.7     100.0

Cumulative percentage of total

     13.2     33.1     71.3     98.3     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 six months ended June 30, 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 June 30, 2012, one security, with an estimated fair value of $1.1 million and 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 unamortized premiums and unaccreted discounts at June 30, 2012 and December 31, 2011:

 

     Par
Value
     Unamortized
Premium
     Unaccreted
Discount
    Amortized
Cost
 
     (In thousands)  

June 30, 2012

          

Available for sale

          

Debt securities:

          

U.S. Government and government-sponsored enterprise obiligations

   $ 9,800       $ 27       $ (1   $ 9,826   

Government-sponsored residential mortgage-backed securities

     96,895         1,143         (223     97,815   

Government-sponsored residential collaterialized debt obligations

     23,724         505         —          24,229   

Corporate debt securities

     16,205         —           (1,372     14,833   

Obligations of states and political subdivisions

     59,856         7,812         —          67,668   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     206,480         9,487         (1,596     214,371   

Marketable equity securities

     3,042         —           —          3,042   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale securities

   $ 209,522       $ 9,487       $ (1,596   $ 217,413   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity

          

Debt securities:

          

Government-sponsored residential mortgage-backed securities

   $ 7,791       $ —         $ (99   $ 7,692   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

          

Debt securities:

          

Government-sponsored residential mortgage-backed securities

   $ 9,629       $ —         $ (123   $ 9,506   
  

 

 

    

 

 

    

 

 

   

 

 

 

During the three and six months ended June 30, 2012, the Company recognized premium amortization, net of accretion of $104,000 and $190,000, respectively, which is an adjustment to the yield of its investment securities. Purchase premiums and discounts are recognized in interest income using the interest method over the expected terms of the 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 June 30, 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)  

June 30, 2012

                 

Available for sale:

                 

Debt Securities:

                 

Government-sponsored residential collateralized debt obligations

   $ 4,477       $ 1       $ —         $ —         $ 4,477       $ 1   

Corporate debt securities

     1,087         4         1,527         1,317         2,614         1,321   

Obligations of states and political subdivisions

     34,983         389         —           —           34,983         389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,547       $ 394       $ 1,527       $ 1,317       $ 42,074       $ 1,711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Available for sale:

                 

Debt Securities:

                 

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 June 30, 2012, 27 issues had unrealized losses for less than twelve months and 1 issue had an unrealized loss for twelve months or more. At June 30, 2012, the Company had 28 issues with unrealized losses of 3.9% of the amortized cost basis. 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 at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 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 June 30, 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 at maturity and the projected cash flows is sufficient to recover their amortized cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2012.

 

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Table of Contents

Corporate debt securities. The unrealized losses on corporate debt securities are 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 0.97% at June 30, 2012 versus a 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. In addition, 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 at maturity, therefore the Company does not consider this investment to be other-than-temporarily impaired at June 30, 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. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended June 30, 2012, the Company entered into their first interest rate swap to hedge the variable cash flows associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended June 30, 2012, the Company did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company does not expect to reclass any amounts from accumulated other comprehensive income to interest expense during the next 12 months as the Company’s derivative has an effective date of July 2015.

The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 36 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

As of June 30, 2012, the Company had one outstanding interest rate derivative with a notional value of $50.0 million that was designated as a cash flow hedge of interest rate risk.

 

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Table of Contents

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of condition as of June 30, 2012. The Company had no derivatives outstanding prior to the three months ended June 30, 2012.

Fair Values of Derivative Instruments

 

     Derivative Liability  
     June 30, 2012  
     Balance Sheet Location    Fair Value  
     (In thousands)  

Derivatives designated as hedging instruments

     

Forward-starting interest rate swap

   Other Liabilities    $ 33   
     

 

 

 

Total derivatives designated as hedging instruments

      $ 33   
     

 

 

 

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the statement of operations as of June 30, 2012. The Company did not any have derivatives outstanding prior to the three months ended June 30, 2012.

 

     Amount of Loss Recognized
in  OCI on Derivative (Effective Portion)
 
     Three Months Ended     Six Months Ended  
Derivatives in Cash Flow Hedging Relationships    June 30, 2012     June 30, 2012  
     (In thousands)  

Forward-starting interest rate swap

   $ (33   $ (33
  

 

 

   

 

 

 

Total

   $ (33   $ (33
  

 

 

   

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty. As of June 30, 2012, the Company has not posted any collateral related to these agreements.

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty.

As of June 30, 2012, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $33,000. If the Company had breached any of these provisions at June 30, 2012, it could have been required to settle its obligations under the agreements at their termination value of $33,000.

 

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Table of Contents
7. Loans Receivable and Allowance for Loan Losses

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

 

     June 30,
2012
    December 31,
2011
 
     (In thousands)  

Real estate loans:

    

Residential

   $ 707,817      $ 680,702   

Commercial

     633,083        593,867   

Construction

     47,849        50,654   
  

 

 

   

 

 

 

Total real estate loans

     1,388,749        1,325,223   

Commercial business loans

     170,120        143,475   

Installment loans

     1,653        2,273   

Collateral loans

     1,744        1,958   
  

 

 

   

 

 

 

Total loans

     1,562,266        1,472,929   

Net deferred loan costs and premiums

     287        494   

Allowance for loan losses

     (17,303     (16,025
  

 

 

   

 

 

 

Loans - net

   $ 1,545,250      $ 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 reflect 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 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.

 

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Table of Contents

The following table presents the Company’s loans by risk rating at June 30, 2012 and December 31, 2011.

 

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

June 30, 2012

              

Loans rated 1-5

   $ 694,252       $ 599,154       $ 40,592       $ 158,907       $ 3,345   

Loans rated 6

     1,850         14,538         4,652         3,094         —     

Loans rated 7

     11,715         19,391         2,605         8,119         52   

Loans rated 8

     —           —           —           —           —     

Loans rated 9

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 707,817       $ 633,083       $ 47,849       $ 170,120       $ 3,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2012 and 2011 are as follows:

 

Three Months Ended June 30, 2012

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

Balance, beginning of period

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

Provision for loan losses

     765        420        (141     10        2        125        1,181   

Loans charged off

     (300     (108     —          —          (12     —          (420

Recoveries of loans previously charged off

     5        —          —          3        7        —          15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,818      $ 7,173      $ 1,088      $ 2,991      $ 44      $ 189      $ 17,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2011

                                          

Balance, beginning of period

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

Provision for loan losses

     425        193        53        49        (16     50        754   

Loans charged off

     (160     (75     —          (216     (9     —          (460

Recoveries of loans previously charged off

     1        —          —          3        4        —          8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,152      $ 5,734      $ 1,710      $ 2,262      $ 59      $ 411      $ 15,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012

                                          

Balance, beginning of period

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

Provision for loan losses

     1,284        587        (198     429        4        (221     1,885   

Loans charged off

     (547     (108     —          (2     (19     —          (676

Recoveries of loans previously charged off

     10        —          —          49        10        —          69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,818      $ 7,173      $ 1,088      $ 2,991      $ 44      $ 189      $ 17,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

                                          

Balance, beginning of period

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

Provision for loan losses

     656        340        57        178        (11     286        1,506   

Loans charged off

     (240     (75     —          (216     (17     —          (548

Recoveries of loans previously charged off

     48        —          —          4        6        —          58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,152      $ 5,734      $ 1,710      $ 2,262      $ 59      $ 411      $ 15,328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

Further information pertaining to the allowance for loan losses and impaired loans at June 30, 2012 and December 31, 2011 follows:

 

June 30, 2012

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

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

   $ 246       $ —         $ —         $ 110       $ —         $ —         $ 356   

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

     5,572         7,173         1,088         2,881         44         189         16,947   

Loans deemed to be impaired

     10,615