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CBNK > SEC Filings for CBNK > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CHICOPEE BANCORP, INC.

Form 10-Q for CHICOPEE BANCORP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis discusses changes in the financial condition and results of operations of the Company at and for the three and nine months ended September 30, 2012 and 2011, and should be read in conjunction with the Company's Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.


Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. Additional factors are discussed in the Company's 2011 Annual Report on Form 10-K under "Item 1A-Risk Factors" and in "Part II. Item 1A. Risk Factors" of this 10-Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Except as required by law, the Company does not undertake - and specifically disclaims any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General
Chicopee Savings Bank is a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within its market area. We attract deposits from the general public and use such funds to originate primarily one- to four-family residential real estate loans, commercial real estate loans, commercial loans, multi-family loans, construction loans and consumer loans. At September 30, 2012, we operated out of our main office, lending and operations center, and eight branch offices located in Chicopee, Ludlow, South Hadley, Ware, and West Springfield. All of our offices are located in western Massachusetts.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, other-than-temporary impairment of securities, the valuation of mortgage servicing rights, and the valuation of other real estate owned. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions. Additional accounting policies are more fully described in Note 1 in the "Notes to Consolidated Financial Statements" presented in our 2011 Annual Report on Form 10-K. A brief description of our current accounting policies involving significant management judgment follows.

Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the probable losses inherent in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as: levels and historical trends in delinquencies, impaired loans, non-accruing loans, charge-offs and recoveries, and classified assets; trends in the volume and terms of the loans; effects of any change in underwriting policies, procedures, and practices; experience, ability, and depth of management staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; and effects of changes in credit concentrations. The use of different estimates or assumptions could produce a different provision for loan losses.


Other-Than-Temporary Impairment of Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than- temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest due.

Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Company often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 1% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value. The Company uses the amortization method for financial reporting. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speeds result in lower valuations of mortgage servicing rights. Management evaluates for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.

Valuation of Other Real Estate Owned ("OREO"). Periodically, we acquire property through foreclosure or acceptance of a deed in lieu-of-foreclosure as OREO. OREO is recorded at fair value less costs to sell. The valuation of this property is accounted for individually based on its net realizable value on the date of acquisition. At the acquisition date, if the net realizable value of the property is less than the book value of the loan, a charge or reduction in the allowance for loan losses is recorded. If the value of the property becomes subsequently impaired, as determined by an appraisal or an evaluation in accordance with our appraisal policy, we will record the decline by a charge against current earnings. Upon acquisition of a property, a current appraisal or broker's opinion must substantiate market value for the property.


Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets decreased $8.3 million, or 1.4%, from $616.3 million at December 31, 2011 to $608.0 million at September 30, 2012. The decrease in total assets was primarily due to a decrease in investments of $11.7 million, or 15.8%, and a decrease in cash and cash equivalents of $19.6 million, or 32.1%, partially offset by the increase in net loans of $25.0 million, or 5.6%, from $443.5 million, or 72.0% of total assets at December 31, 2011 to $468.5 million, or 77.1% of total assets at September 30, 2012.

The Company's net loan portfolio increased $25.0 million, or 5.6%, during the first nine months of 2012. The significant components of the increase in net loans was an increase of $7.1 million, or 19.0%, in construction loans, an increase of $10.9 million, or 6.2%, in commercial real estate loans and an increase of $6.3 million, or 7.9%, in commercial and industrial loans. These increases were partially offset by a decrease of $1.3 million, or 1.0%, in one-to-four-family residential real estate loans. The increase in construction loans was due to the $7.2 million, or 22.6%, increase in the commercial construction portfolio to existing commercial relationships for the expansion of their facilities. Upon completion, these loans will be transferred to the commercial real estate portfolio. The decrease in one-to-four-family residential real estate loans was primarily due to prepayments and refinancing activity attributed to the historically low interest rates. In accordance with the Company's asset/liability management strategy and in an effort to reduce interest rate risk, the Company continues to sell fixed rate, low coupon residential real estate loans to the secondary market. During the first nine months of 2012, the Company sold $15.9 million in low coupon residential real estate loans and currently services $84.6 million in loans sold to the secondary market. In order to service our customers, the servicing rights will continue to be retained on all loans written and sold in the secondary market.

The investment securities portfolio, including held to maturity and available for sale securities, decreased $11.7 million, or 15.8%, to $62.9 million at September 30, 2012 from $74.5 million at December 31, 2011. The decrease in investments was primarily due to a decrease of $11.3 million, or 41.8%, in U.S. Treasuries and a decrease of $3.0 million, or 22.5%, in certificates of deposit. These decreases were partially offset by an increase in tax-exempt bonds from $31.6 million at September 30, 2011 to $35.1 million at September 30, 2012.

Total deposits increased $21.7 million, or 4.8%, to $475.1 million at September 30, 2012 from $453.4 million at December 31, 2011. Core deposits increased $48.2 million, or 20.1%, from $240.3 million, or 53.0% of total deposits, at December 31, 2011 to $288.5 million, or 60.7% of total deposits, at September 30, 2012. Money market accounts increased $28.4 million, or 29.1%, to $126.0 million, regular savings accounts increased $2.2 million, or 4.7%, to $49.3 million, demand deposits increased $9.8 million, or 14.2%, to $78.6 million, and NOW accounts increased $7.8 million, or 29.2%, to $34.6 million. These increases were offset by a decrease in certificates of deposit of $26.4 million, or 12.4%, to $186.7 million. The decrease in certificates of deposits was mainly attributed to management's strategic run-off of high cost accounts by allowing higher cost, short-term time deposits to mature without renewals.

Stockholders' equity decreased $1.5 million, or 1.6%, from $90.7 million, or 14.7% of total assets, at December 31, 2011 to $89.3 million, or 14.7% of total assets, at September 30, 2012. The decrease of $1.5 million, or 1.6%, in stockholders' equity was primarily due to the repurchase of the Company's stock at a cost of $3.9 million, partially offset by an increase in stock-based compensation of $750,000 or 15.9%, and a decrease in additional paid-in-capital due to the exercise of stock options of $181,000, and net income of $1.5 million. Pursuant to the Company's Stock Repurchase Programs previously announced, in the first nine months of 2012, the Company repurchased 275,209 shares of Company stock at an average price per share of $14.17. The Company's book value per share increased $0.52, or 3.3%, from $15.83 at December 31, 2011 to $16.35 at September 30, 2012.


Allowance for Loan Losses
                                                      At or for the Nine Months
                                                         Ended September 30,
                                                      2012                2011
                                                       (Dollars In Thousands)

   Allowance for loan losses at December 31       $       4,576       $       4,431

   Charged-off loans:
   Residential real estate                                  (80 )               (87 )
   Construction                                               -                 (76 )
   Commercial real estate                                   (65 )              (163 )
   Commercial                                              (225 )              (314 )
   Home equity                                                -                  (6 )
   Consumer                                                 (61 )               (51 )
   Total charged-off loans                                 (431 )              (697 )

   Recoveries on loans previously charged-off:
   Residential real estate                                    1                   -
   Construction                                               -                   -
   Commercial real estate                                     -                   -
   Commercial                                                 2                   -
   Home equity                                                -                   -
   Consumer                                                  13                  13
   Total recoveries                                          16                  13
   Net loan charge-offs                                    (415 )              (684 )
   Provision for loan losses                                240                 575
   Allowance for loan losses, end of period       $       4,401       $       4,322

   Ratios:
   Net loan charge-offs to total average loans             0.09 %              0.15 %
   Allowance for loan losses to total loans (1)            0.93 %              0.97 %
   Allowance for loan losses to nonperforming
   loans (2)                                             124.78 %            109.42 %
   Recoveries to charge-offs                               3.71 %              1.87 %

(1) Total loans includes net loans plus the allowance for loan losses.

(2) Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. At September 30, 2012, the Company had six troubled debt restructurings totaling $740,000 included in nonperforming loans. The six restructured loans continue to be reported on nonaccrual but have been performing as modified.

Analysis and determination of the allowance for loan losses. The allowance for loan losses is a valuation allowance for probable credit losses inherent in the loan portfolio. Management evaluates the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The allowance for loan losses is maintained at an amount that management considers appropriate to cover inherent probable losses in the loan portfolio.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific allowance on identified problem loans; and
(2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.


Specific allowance required for identified problem loans. We establish an allowance on certain identified problem loans based on such factors as: (1) the strength of the customer's personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower's effort to cure the delinquency.

General valuation allowance on the remainder of the loan portfolio. We establish a general allowance for loans that are not delinquent to recognize the probable losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning percentages to each category. The percentages are adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include: levels and historical trends in delinquencies, impaired loans, nonaccrual loans, charge-offs, recoveries, and classified assets; trends in the volume and terms of loans; effects of any change in underwriting, policies, procedures, and practices; experience, ability, and depth of management and staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; and effects of changes in credit concentrations. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.

We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans and other loans for which management may have concerns about collectability. For individually reviewed loans, the borrower's inability to make payments under the terms of the loan or a shortfall in the fair value of the collateral if the loan is collateral dependent would result in our allocating a portion of the allowance to the loan that was impaired.

The allowance for loan losses is based on management's estimate of the amount required to reflect the potential inherent losses in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the collectability of the Company's loans and it is reasonably possible that actual loss experience in the near term may differ from the amounts reflected in this report.

At September 30, 2012, the allowance for loan losses represented 0.93% of total loans and 124.8% of nonperforming loans. The allowance for loan losses decreased $175,000, or 3.8%, from $4.6 million at December 31, 2011 to $4.4 million at September 30, 2012, due to a provision for loan losses of $71,000 offset by net charge-offs of $165,000. The provision for loan losses was $240,000 for the nine months ended September 30, 2012 compared to $575,000 for the nine months ended September 30, 2011, a decrease of $335,000, or 58.3%. Non-performing loans decreased $423,000, or 10.7%, from $4.0 million, or 0.89% of total loans, at September 30, 2011, to $3.5 million, or 0.75% of total loans, at September 30, 2012. Total non-performing assets decreased $1.0 million, or 19.2%, from $5.0 million, or 0.85% of total assets, at September 30, 2011 to $4.0 million, or 0.67% of total assets, at September 30, 2012. The allowance for loan losses as a percentage of total loans decreased from 0.97% at September 30, 2011 to 0.93% at September 30, 2012 and the allowance for loan losses as a percentage of non-performing loans increased from 109.4% at September 30, 2011 to 124.8% at September 30, 2012.


Nonperforming Assets

The following table sets forth information regarding nonaccrual loans and real
estate owned at the dates indicated:

                                                      September 30,      December 31,
                                                          2012               2011
                                                          (Dollars In Thousands)

                   Nonaccrual loans:
                   Residential real estate           $         1,435     $       2,222
                   Construction                                  331                 -
                   Commercial real estate                        921               798
                   Commercial                                    567             1,306
                   Home equity                                   223               306
                   Consumer                                       50                79
                   Total nonaccrual loans                      3,527             4,711
                   Other real estate owned                       538               913
                   Total nonperforming assets        $         4,065     $       5,624
                   Ratios:
                   Total nonperforming loans as a
                   percentage of total loans (1)                0.75 %            1.05 %
                   Total nonperforming assets as a
                   percentage of total assets (2)               0.67 %            0.91 %

(1) Total loans equals net loans plus the allowance for loan losses.

(2) Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. At September 30, 2012, the Company had six troubled debt restructurings totaling $740,000 included in nonperforming loans. The six restructured loans continue to be reported on nonaccrual but have been performing as modified.

Loans are placed on nonaccrual status either when reasonable doubt exists as to the timely collection of principal and interest 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. At September 30, 2012, there were no loans that were over 90 days delinquent and still accruing interest.

As of September 30, 2012, nonperforming loans decreased $1.2 million, or 25.1%, to $3.5 million compared to $4.7 million as of December 31, 2011. The decrease in nonperforming loans is primarily due to the decrease in nonperforming residential real estate loans of $787,000, or 35.4%, a decrease of $739,000, or 56.6%, in nonperforming commercial and industrial loans, a decrease of $83,000, or 27.1%, in nonperforming home equity loans, and a decrease of $29,000, or 36.7%, in nonperforming consumer loans. These decreases were partially offset by an increase of $123,000, or 15.4%, in nonperforming commercial real estate loans, and an increase of $331,000, in nonperforming construction loans. Loans that are less than 90 days past due and were previously on nonaccrual continue to be on nonaccrual status until the borrower can demonstrate their ability to make payments according to their loan terms. The following loan segments were not accruing interest as of September 30, 2012: 12 residential real estate loans with an outstanding balance of $1.4 million, one construction loan with an outstanding balance of $331,000, four commercial real estate loans with an outstanding balance of $921,000, seven commercial loans with an outstanding balance of $567,000, two consumer loans with an outstanding balance of $50,000 and four home equity loans with an outstanding balance of $223,000.


Deposits

The following table sets forth the Company's deposit accounts at the dates
indicated:

                                     September 30, 2012              December 31, 2011
                                                  Percent                        Percent
                                                  of Total                       of Total
                                  Balance         Deposits        Balance        Deposits
                                                  (Dollars In Thousands)

Demand deposits                 $    78,563             16.5 %   $   68,799           15.2 %
NOW accounts                         34,563              7.3 %       26,747            5.9 %
Savings accounts                     49,345             10.4 %       47,122           10.4 %
Money market deposit accounts       125,983             26.5 %       97,606           21.5 %
   Total transaction accounts       288,454             60.7 %      240,274           53.0 %
Certificates of deposit             186,655             39.3 %      213,103           47.0 %
   Total deposits               $   475,109            100.0 %   $  453,377          100.0 %

Total deposits increased $21.7 million, or 4.8%, to $475.1 million at September 30, 2012 from $453.4 million at December 31, 2011. Core deposits increased $48.2 million, or 20.1%, from $240.3 million, or 53.0% of total deposits, at December 31, 2011 to $288.5 million, or 60.7% of total deposits, at September 30, 2012. Money market accounts increased $28.4 million, or 29.1%, to $126.0 million, regular savings accounts increased $2.2 million, or 4.7%, to $49.3 million, demand deposits increased $9.8 million, or 14.2%, to $78.6 million, and NOW accounts increased $7.8 million, or 29.2%, to $34.6 million. These increases were offset by a decrease in certificates of deposit of $26.4 million, or 12.4%, . . .

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