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| HBNK > SEC Filings for HBNK > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
This section is intended to help investors understand the financial performance of Hampden Bancorp, Inc. and its subsidiaries through a discussion of the factors affecting our financial condition at December 31, 2008 and June 30, 2008 and our consolidated results of operations for the three and six months ended December 31, 2008 and December 31, 2007 and should be read in conjunction with the Company's unaudited consolidated financial statements and notes thereto, appearing in Part I, Item 1 of this document.
Forward-Looking Statements
Certain statements herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and expectations of management, as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. As a result, actual results may differ from those contemplated by these statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe", "expect", "anticipate", "estimate", and "intend" or future or conditional verbs such as "will", "would", "should", "could", or "may." Certain factors that could have a material adverse affect on the operations Hampden Bank include, but are not limited to, increased competitive pressure among financial service companies, national and regional economic conditions, changes in interest rates, changes in consumer spending, borrowing and savings habits, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, adverse changes in the securities markets, inability of key third-party providers to perform their obligations to Hampden Bank, changes in relevant accounting principles and guidelines and our ability to successfully implement our branch expansion strategy. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion, or make significant assumptions that have or could have a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:
Securities. Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss.
Purchase premiums and discounts are amortized to earnings by the interest method over the terms of the securities. Declines in fair value of securities held to maturity and available for sale below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on disposition of securities are recorded on the trade date and determined using the specific identification method.
Allowance for loan losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specifically allocated and general components. The specifically allocated component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
Income taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in the tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Company's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if it is deemed realizable.
Comparison of Financial Condition (unaudited) at December 31, 2008 and June 30, 2008
Overview
Total Assets The Company's total assets increased by $3.4 million, or 0.6%, from $543.8 million at June 30, 2008 to $547.2 million at December 31, 2008. Net loans, including loans held for sale, increased $27.7 million, or 7.7%, to $388.5 million at December 31, 2008. A partial offset to this increase was a decrease in federal funds sold and other short-term investments of $18.2 million, or 63.9%, to $10.3 million at December 31, 2008. Also, securities available for sale decreased by $8.4 million, or 6.8%, to $115.4 million at December 31, 2008. Each of these changes is discussed below.
Investment Activities. Cash and cash equivalents decreased by $16.0 million, or 47.8%, from $33.6 million at June 30, 2008 to $17.5 million at December 31, 2008. Securities available for sale decreased $8.4 million, or 6.8%, to $115.4 million at December 31, 2008. An increase in mortgage-backed securities was more than offset by declines in obligations issued by government-sponsored enterprises and common stock. The following table sets forth at the dates indicated information regarding the amortized cost and fair values of the Company's investment securities.
At December 31, At June 30,
2008 2008
Amortized Cost Fair Value Amortized Cost Fair Value
(Dollars In Thousands)
Securities available
for sale:
Government-sponsored
enterprises $22,968 $23,311 $36,962 $37,196
Mortgage-backed
securities 92,085 91,455 85,892 85,433
Total debt securities 115,053 114,766 122,854 122,629
Marketable equity
securities:
Common stock 1,178 679 1,661 1,263
Total marketable
equity securities 1,178 679 1,661 1,263
Total securities
available for sale 116,231 115,445 124,515 123,892
Restricted equity
securites:
Federal Home Loan Bank
of Boston stock 5,233 5,233 5,233 5,233
Total securities $121,464 $120,678 $129,748 $129,125
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Net Loans. Total net loans, excluding loans held for sale of $987,000, at December 31, 2008 were $387.5 million, an increase of $27.6 million, or 7.7%, from $359.9 million at June 30, 2008. The following table sets forth the composition of the Company's loan portfolio (not including loans held for sale) in dollar amounts and as a percentage of the respective portfolio at the dates indicated.
At December 31, 2008 At June 30, 2008
Amount Percent Amount Percent
(Dollars In Thousands)
Mortgage loans on real estate:
Residential $127,167 32.70 % $121,864 33.75 %
Commercial 125,081 32.16 117,636 32.58
Home equity 59,595 15.32 57,790 16.01
Construction 15,209 3.91 11,308 3.13
Total mortgage loans on real estate 327,052 84.10 308,598 85.47
Other loans:
Commercial 41,364 10.64 32,509 9.00
Consumer 20,480 5.27 19,967 5.53
Total other loans 61,844 15.90 52,476 14.53
Total loans 388,896 100.00 % 361,074 100.00 %
Other items:
Net deferred loan costs 2,496 2,257
Allowance for loan losses (3,912) (3,453)
Total loans, net $387,480 $359,878
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Commercial loans increased $8.9 million, or 27.2%, to $41.4 million, and commercial real estate loans increased $7.4 million, or 6.3%, to $125.1 million. Residential mortgage loans increased $5.3 million, or 4.4%, to $127.2 million. Construction loans increased $3.9 million, or 34.5%, to $15.2 million, and home equity loans increased $1.8 million, or 3.1%, to $59.6 million. Consumer loans also increased by $513,000, or 2.6%, to $20.5 million at December 31, 2008.
Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.
At December 31, At June 30,
2008 2008
(Dollars in Thousands)
Non-accrual loans:
Residential mortgage $2,115 $684
Commercial mortgage 1,216 703
Construction 1,224 -
Commercial 1,615 3,212
Home equity, consumer and other 419 226
Total non-accrual loans 6,589 4,825
Loans greater than 90 days delinquent and still accruing:
Residential mortgage - -
Commercial mortgage - -
Commercial - -
Home equity, consumer and other - -
Total loans 90 days delinquent and still accruing - -
Total non-performing loans 6,589 4,825
Other real estate owned - -
Total non-performing assets $6,589 $4,825
Ratios:
Non-performing loans to total loans 1.69% 1.34%
Non-performing assets to total assets 1.20% 0.89%
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Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. Non-accrual loans totaled $6.6 million, or 1.20% of total assets, at December 31, 2008 compared to $4.8 million, or 0.89% of total assets, at June 30, 2008. There was an increase in residential mortgage non-accrual loans of $1.4 million, an increase in construction non-accrual loans of $1.2 million, an increase in commercial real estate non-accrual loans of $513,000 and an increase in consumer non-accrual loans of $193,000 at December 31, 2008. These increases were partially offset by a decrease in commercial non-accrual loans of $1.6 million at December 31, 2008.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer and residential loans for impairment disclosures. At December 31, 2008, impaired loans totaled $3.8 million with an established valuation allowance of $394,000.
While the Company believes that it has established adequate specifically allocated and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the Company's regulators periodically review the allowance for loan losses. These regulatory agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting the Company's financial condition and earnings.
The following table sets forth activity in the Company's allowance for loan losses for the periods indicated:
Three Months Ended Six Months Ended
December 31, December 31,
2008 2007 2008 2007
(Dollars in Thousands) (Dollars in Thousands)
Balance at beginning of
period $3,380 $2,894 $3,453 $2,810
Charge-offs:
Mortgage loans on real
estate - (28) - (28)
Other loans:
Commercial business - - (568) -
Consumer and other (33) (5) (47) (6)
Total other loans (33) (5) (615) (6)
Total charge-offs (33) (33) (615) (34)
Recoveries:
Mortgage loans on real
estate - 26 - 26
Other loans:
Commercial business 257 - 261 2
Consumer and other - 1 1 2
Total other loans 257 1 262 4
Total recoveries 257 27 262 30
Net (charge-offs) recoveries 224 (6) (353) (4)
Provision for loan losses 308 84 812 166
Balance at end of period $3,912 $2,972 $3,912 $2,972
Ratios:
Net (charge-offs) recoveries
to average loans outstanding 0.06% 0.00% (0.09%) 0.00%
Allowance for loan losses to
non-performing loans at
end of period 59.37% 82.74% 59.37% 82.74%
Allowance for loan losses to
total loans at end of period 1.01% 0.86% 1.01% 0.86%
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Deposits and Borrowed Funds. The following table sets forth the Company's deposit accounts (excluding escrow deposits) for the periods indicated.
At December 31, At June 30,
2008 2008
Balance Percent Balance Percent
(Dollars in Thousands)
Deposit type:
Demand deposits $36,086 10.41 % $36,619 11.05 %
Savings deposits 65,941 19.00 66,492 20.06
Money market 33,054 9.54 22,138 6.68
NOW accounts 21,997 6.35 16,797 5.07
Total transaction accounts 157,078 45.32 142,046 42.86
Certificates of deposit 189,545 54.68 189,395 57.14
Total deposits $346,623 100.00 % $331,441 100.00 %
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Deposits increased $15.2 million, or 4.6%, to $346.6 million at December 31, 2008 from $331.4 million at June 30, 2008. There were increases in money market accounts of $10.9 million, increases in NOW accounts of $5.2 million, and increases in time deposits of $150,000 from June 30, 2008 to December 31, 2008. A partial offset to these increases were decreases in savings accounts of $551,000, and decreases in demand accounts of $533,000 from June 30, 2008 to December 31, 2008.
Borrowings include advances from the Federal Home Loan Bank of Boston ("FHLB") as well as securities sold under agreements to repurchase, and have decreased $7.7 million, or 7.1%, to $101.0 million at December 31, 2008 from $108.7 million at June 30, 2008. Repayment of advances from the FHLB accounted for a $7.7 million decrease and repurchase agreements accounted for a $7,000 decrease.
Stockholders' Equity. The Company repurchased 397,493 shares of Company stock, at an average price of $10.03 per share, in the first and second quarters of fiscal 2009 pursuant to the completion of the Company's stock repurchase program announced in May 2008, contributing to an overall decrease in stockholders' equity of $3.9 million, to $96.5 million at December 31, 2008, compared to $100.4 million at June 30, 2008. Our ratio of capital to total assets decreased to 17.6% as of December 31, 2008, from 18.5% as of June 30, 2008. On December 1, 2008, the Company announced that due to its strong capital position it did not apply for participation in the U.S. Treasury's Capital Purchase Program, which is part of the federal government's Troubled Asset Relief Program ("TARP").
Comparison of Operating Results (unaudited) for the Three Months Ended December 31, 2008 and December 31, 2007
Net Income. Net income for the three months ended December 31, 2008 was $190,000, or $0.03 per fully diluted share, as compared to $153,000, or $0.02 per fully diluted share, for the same period in 2007. For the three month period ended December 31, 2008, net interest income increased by $274,000 compared to the three month period ended December 31, 2007. A partial offset to this increase was an increase in the provision for loan loss of $224,000 for the three months ended December 31, 2008 compared to the same period in 2007. The increase in the provision for loan losses is due to increases in loan delinquencies, increases in non-accrual loans, growth in the loan portfolio, and general economic conditions. There was also an increase in non-interest expense for the three months ended December 31, 2008 of $501,000, which was primarily due to an increase in salary and employee benefit expenses, including expenses for the equity incentive plan, of $371,000. Non-interest income, including net gains and losses on sales and write-downs of securities decreased by $42,000 compared to the three month period ended December 31, 2007. For the three month period ended December 31, 2008, there was a net loss on the sales and write-downs of investment securities of $63,000, including a charge for other than temporary impairment of $68,000.
Analysis of Net Interest Income.
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, and discounts and premiums that are amortized or accreted to interest income or expense. The Company does not accrue interest on loans on non-accrual status, however, the balance of these loans is included in the total average balance, which has the effect of lowering average loan yields.
Three Months Ended December 31,
2008 2007
Average Average
Outstanding Yield Outstanding Yield
Balance Interest /Rate (1) Balance Interest /Rate (1)
(Dollars in Thousands)
Interest-earning
assets:
Loans, net (2) $383,775 $5,734 5.98 % $342,957 $5,649 6.59 %
Investment
securities 124,961 1,442 4.62 % 131,910 1,608 4.88 %
Federal funds sold
and other 5,065 19 1.50 % 12,768 159 4.98 %
Total interest
earning assets 513,801 7,195 5.60 % 487,635 7,416 6.08 %
Non-interest earning
assets 29,685 30,668
Total assets $543,486 $518,303
Interest-bearing
liabilities:
Savings deposits $68,149 288 1.69 % $68,091 447 2.63 %
Money market 29,968 129 1.72 % 21,915 137 2.50 %
NOW and other
checking accounts 51,900 40 0.31 % 48,695 37 0.30 %
Certificates of
deposit 187,594 1,746 3.72 % 162,061 1,873 4.62 %
Total deposits 337,611 2,203 2.61 % 300,762 2,494 3.32 %
Borrowed funds 102,453 954 3.72 % 106,946 1,158 4.33 %
Total
interest-bearing
liabilities 440,064 3,157 2.87 % 407,708 3,652 3.58 %
Non-interest bearing
liabilities 6,200 6,601
Total liabilities 446,264 414,309
Equity 97,222 103,994
Total Liabilities
and equity $543,486 $518,303
Net interest income $4,038 $3,764
Net interest rate
spread (3) 2.73 % 2.50 %
Net interest-earning
assets (4) $73,737 $79,927
Net interest margin
(5) 3.14 % 3.09 %
Average
interest-earning
assets to
interest-bearing
liabilities 116.76 % 119.60 %
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(1) Yields and rates for the three months ended December 31, 2008 and 2007 are
annualized.
(2) Includes loans
held for sale.
(3) Net interest rate spread represents the difference between the yield on interest-earning
assets and the cost of
interest-bearing liabilities for the
period indicated.
(4) Net interest-earning assets represents total interest-earning assets less total
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of the Company's
interest-earning assets and interest-bearing liabilities. Information is
provided for each category of interest-earning assets and interest-bearing
liabilities with respect to (i) changes attributable to changes in volume (i.e.,
changes in average balances multiplied by the prior-period average rate) and
(ii) changes attributable to rate (i.e., changes in average rate multiplied by
prior-period average balances). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
Three Months Ended December 31,
2008 vs. 2007
Increase
(Decrease) Due to
Volume Rate Total Increase (Decrease)
(Dollars in Thousands)
Interest income:
Loans, net (1) $637 $(552) $85
Investment securities (82) (84) (166)
Federal funds sold and other (65) (75) (140)
Total interest income 490 (711) (221)
Interest expense:
. . .
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