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HBNK > SEC Filings for HBNK > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for HAMPDEN BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HAMPDEN BANCORP, INC.


13-Nov-2013

Quarterly Report


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

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 September 30, 2013 and June 30, 2013 and our consolidated results of operations for the three months ended September 30, 2013 and 2012, and should be read in conjunction with the Company's unaudited consolidated interim financial statements and notes thereto, appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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, and changes in relevant accounting principles and guidelines. 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under Item 2 -"Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this the Quarterly Report on Form 10-Q, as well as in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013, including the section titled Item 1A -"Risk Factors". You should carefully review those factors and also carefully review the risks outlined in other documents that the Company files from time to time with the SEC. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.


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, liabilities, revenue, expenses, or related disclosures, to be critical accounting policies.

Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.

Allowance for Loan Losses

Critical Estimates. 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 quarterly 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 analysis of the allowance for loan losses has two components: specific and general allocations, which are described on pages 17-18.

Judgment and Uncertainties. The qualitative factors are assessed based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are described on page 18.

Effect if Actual Results Differ from Assumptions. Although we believe we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if the current operating environment deteriorates. Management uses the best information available; however, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. In addition, the FDIC and the Massachusetts Division of Banks, as an integral part of their examination process, will periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Income Taxes

Critical Estimates. 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. Management reviews the deferred tax assets on a quarterly basis to identify any uncertainties to the collectability of the components of the deferred tax asset.

Judgment and Uncertainties. In determining the deferred tax asset valuation allowance, we use historical and forecasted operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.

Effect if Actual Results Differ from Assumptions. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets or deferred tax liabilities could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets valuation allowance would be charged to income tax expense in the period such determination was made and would have a negative impact on the Company's earnings. In addition, if actual factors and conditions differ materially from those used by management, the Company could incur penalties and interest imposed by the Internal Revenue Service.


Comparison of Financial Condition at September 30, 2013 and June 30, 2013

Overview

Total Assets. The Company's total assets increased $43.2 million, or 6.6%, from $653.0 million at June 30, 2013 to $696.2 million at September 30, 2013. Net loans, including loans held for sale, increased $30.5 million, or 6.8%, from $451.6 million at June 30, 2013 to $482.1 million at September 30, 2013. Securities available for sale increased $382,000, or 0.3%, to $139.1 million and cash and cash equivalents increased $10.1 million, or 39.3%, to $35.7 million at September 30, 2013. The increase in cash and cash equivalents was due to an increase in federal funds sold and short term investments.

Investment Activities. The composition and fair value of the Company's investment portfolio is included in Note 7 to the Company's accompanying unaudited condensed consolidated financial statements. Securities available for sale increased $382,000 to $139.1 million at September 30, 2013. Current period purchases of municipal bonds were partially offset by the unrealized losses of residential mortgage backed securities during the three months ended September 30, 2013.

Net Loans. The composition of the Company's loan portfolio is included in Note 8 to the Company's accompanying unaudited consolidated financial statements. The increases in commercial real estate, commercial, and commercial construction loans were due to the Company's increased emphasis on obtaining commercial lending relationships. There was a $2.5 million increase in automobile and other secured loans due to the purchase of automobile loans and $1.0 million increase in manufactured homes during the three months ended September 30, 2013.

During the origination of fixed rate mortgages, each loan is analyzed to determine if the loan will be sold into the secondary market or held in portfolio. The Company retains servicing for loans sold to Fannie Mae and earns a fee equal to 0.25% of the loan amount outstanding for providing these services. Loans which the Company originates to the standards of the buyer, which may differ from the Company's underwriting standards, are generally sold to a third party along with the servicing rights without recourse. For the three months ended September 30, 2013, loans sold totaled $7.1 million. Of the $7.1 million of loans sold, $3.1 million were sold on a servicing-released basis, and $4.0 million were sold on a servicing-retained basis.

Non-Performing Assets. The following table sets forth the amounts of our non-performing assets at the dates indicated. The categories of our non-performing loans are included in Note 8 to the Company's accompanying unaudited condensed consolidated financial statements.

                                                      At September 30,        At June 30,
                                                            2013                 2013
                                                             (Dollars in Thousands)

Total non-performing loans                           $            3,619     $         3,979
Other real estate owned                                           1,205               1,221
Total non-performing assets                          $            4,824     $         5,200

Performing troubled debt restructurings, not
reported above                                       $            6,506     $         7,258

Ratios:
Non-performing loans to total loans                                0.75 %              0.88 %
Non-performing assets to total assets                              0.69 %              0.80 %

Generally, loans are placed on non-accrual status either when reasonable doubt exists as to the full 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. Past due status is based on the contractual terms of the loans. From June 30, 2013 to September 30, 2013, commercial non-performing loans have decreased $3,000; residential mortgage non-performing loans have decreased $333,000; consumer, including home equity and manufactured homes, non-performing loans have decreased $19,000; and commercial real estate non-performing loans have decreased $5,000. At September 30, 2013, the Company had fifteen troubled debt restructurings (TDRs) totaling approximately $6.9 million, of which $388,000 is on non-accrual status. All loans that are modified and a concession granted by the Company in light of the borrower's financial difficulty are considered a TDR and are classified as impaired loans by the Company. The interest income recorded from these loans amounted to $201,000 for the three month period ended September 30, 2013. At June 30, 2013, the Company had sixteen TDRs consisting of commercial and mortgage loans totaling approximately $7.8 million, of which $580,000 was on non-accrual status. The interest income recorded from the restructured loans amounted to $239,000 for the year ended June 30, 2013.

As of September 30, 2013, loans on non-accrual status totaled $3.6 million which consisted of $2.9 million in loans that were 90 days or greater past due, $539,000 in loans that are current or less than 30 days past due and $180,000 in loans that are 30-89 days past due. It is the Company's policy to keep loans on non-accrual status subsequent to becoming current until the borrower can demonstrate their ability to make payments according to their loan terms for six months. As of September 30, 2013, commercial non-accrual loans less than 90 days past due were $144,000, 1-4 family residential non-accrual loans less than 90 days past due were $509,000, and home equity second lien non-accrual loans less than 90 days past due were $67,000. All non-accrual loans, TDRs, and loans with risk ratings of six or higher are assessed by the Company for impairment.


In the normal course of business, the Company may modify a loan for a credit-worthy borrower where the modified loan is not considered a TDR. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to our existing underwriting standards. These modified loans are not considered impaired loans by the Company.

Non-accrual loans, including TDRs, return to accrual status once the borrower has shown the ability and an acceptable history of repayment. The borrower must be current with their payments in accordance with the loan terms for six months. The Company may also return a loan to accrual status if the borrower evidences sufficient cash flow to service the debt and provides additional collateral to support the collectability of the loan. For non-accrual loans that make payments, the Company recognizes cash interest payments as interest income when the Company does not have a collateral shortfall for the loan and the loan has not been charged off. If there is a collateral shortfall for the loan or it has been charged off, then the Company applies the entire payment to the principal balance on the loan.

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, the collateral, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan's effective interest rate or fair value of collateral if the loan is collateral dependent and any change in present value is recorded within the provision for loan loss. Impaired loans decreased to $13.6 million at September 30, 2013 from $ 15.0 million at June 30, 2013. The Company established specific reserves aggregating $28,000 and $32,000 for impaired loans at September 30, 2013 and June 30, 2013, respectively. Such reserves relate to four impaired loan relationships with a carrying value of $2.7 million, and are based on management's analysis of the expected cash flows for troubled debt restructurings as of September 30, 2013.

We believe that the determination of our allowance for loan losses, including amounts required for impaired loans, is consistent with generally accepted accounting principles and current regulatory guidance. 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. It is also possible that, in this current economic environment, additional loans will become impaired in future periods.

The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as OREO in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. At September 30, 2013, the Company had ten properties with a carrying value of $1.2 million classified as OREO. Three of these properties were commercial properties valued at $829,000, one property was a residential property valued at $218,000, and six properties were manufactured homes valued at $158,000 in aggregate.

Allowance for Loan Losses. The following table sets forth the Company's allowance for loan losses for the periods indicated. The activity in the Company's allowance for loan losses is included in Note 8 to the Company's accompanying unaudited consolidated financial statements.

                                                              Three Months Ended
                                                                September 30,
                                                           2013                 2012
                                                            (Dollars in Thousands)

Balance at end of period                             $          5,477      $        5,172

Ratios:
Net charge-offs to average loans outstanding                     0.01 %              0.01 %
Allowance for loan losses to non-performing loans
at end of period                                               151.34 %            184.12 %
Allowance for loan losses to total loans at end of
period                                                           1.13 %              1.22 %

It is the Company's policy to classify all non-accrual loans as impaired loans. All impaired loans are measured on a loan-by-loan basis to determine if any specific allowance is required for the allowance for loan loss 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. If the impaired loan has a shortfall in the expected future cash flows then a specific allowance will be placed on the loan in that amount. However, the Company may consider collateral values where it feels there is greater risk and the expected future cash flow allowance is not sufficient. Residential, commercial real estate and construction loans are secured by real estate. Except for one, all commercial loans are secured by all business assets and many also include primary or secondary mortgage positions on business and/or personal real estate. The other commercial loan is secured by shares of stock of a subsidiary to a borrower.


When calculating the general allowance component of the allowance for loan losses, the Company analyzes the trend in delinquencies, among other things as further described in Note 8 to the accompanying unaudited consolidated financial statements. If there is an increase in the amount of delinquent loans in a particular loan category this may cause the Company to increase the general allowance requirement for that loan category. A partial charge-off on a non-performing loan will decrease the amount of non-performing and impaired loans, as well as any specific allowance requirement that loan may have had. This will also decrease our allowance for loan losses, as well as our allowance for loan losses to non-performing loans ratio and our allowance for loan losses to total loans ratio. The Company incorporates historical charge-offs, including the greater of charge-offs recognized in the current quarter, which are annualized, or projected annual charge-offs when calculating the general allowance component of the allowance for loan losses.

Loan Servicing. In the ordinary course of business, the Company sells real estate loans to the secondary market. The Company retains servicing on certain loans sold and earns servicing fees of 0.25% per annum based on the monthly outstanding balance of the loans serviced. The Company recognizes servicing assets each time it undertakes an obligation to service loans sold. The Company's mortgage servicing asset valuation is performed on a quarterly basis by an independent third party, using a statistic valuation model representing the projection into the future of a single interest rate/market environment. The projected cash flows are then discounted back to present value. Discount rates, estimate of servicing costs and ancillary income, estimates of float earnings rates and delinquency information as well as an estimate of prepayments are used to calculate the value of the mortgage servicing asset. As of September 30, 2013, the change in the fair market value of mortgage servicing assets was $170,000.

The changes in servicing assets measured using fair value are on page 12. There are no recourse provisions for the loans that are serviced for others. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. For the three month periods ended September 30, 2013 and 2012, amounts recognized for loan servicing fees amounted to $107,000 and $85,000, respectively, which are included in other non-interest income in the consolidated statements of net income. The unpaid principal balance of mortgages serviced for others was $69.1 million and $67.7 million at September 30, 2013 and June 30, 2013, respectively.

Deposits and Borrowed Funds. The following table sets forth the Company's deposit accounts (excluding escrow deposits) for the periods indicated.

                                 At September 30,               At June 30,
                                       2013                         2013
                               Balance      Percent         Balance      Percent         Change       % Change
                                             (Dollars in Thousands)
Deposit type:
Demand deposits              $  76,664        15.79   %   $  74,081        15.60   %   $   2,583        3.49    %
Savings deposits               110,798        22.81         104,893        22.09           5,905        5.63
Money market                    82,486        16.98          84,277        17.75          (1,791 )     (2.13 )
NOW accounts                    50,418        10.38          46,220         9.73           4,198        9.08
Total transaction accounts     320,366        65.96         309,471        65.18          10,895        3.52
Certificates of deposit        165,303        34.04         165,327        34.82             (24 )     (0.01 )

Total deposits               $ 485,669       100.00   %   $ 474,798       100.00   %   $  10,871        2.29    %

Deposits increased $10.9 million, or 2.3%, to $485.7 million at September 30, 2013 from $474.8 million at June 30, 2013. The increase in deposits is due to the Company's increased focus on obtaining core deposits.

Borrowings include advances from the FHLB and have increased $33.3 million, or 27.7%, to $120.3 million at September 30, 2013 from $87.0 million at June 30, 2013. The Company used these FHLB borrowings to fund some of its loan demand.

Stockholders' Equity. Stockholders' equity increased $324,000, or 0.4%, to $84.0 million at September 30, 2013 from $83.7 million at June 30, 2013. During the three months ended September 30, 2013, the Company repurchased 17,622 shares of Company stock for $270,000 at an average price of $15.30 per share pursuant to the Company's previously announced stock repurchase programs. In addition, the Company repurchased 260 shares of Company stock, at an average price of $15.52 per share, in the three months ended September 30, 2013 in connection with the vesting of certain restricted stock grants issued pursuant to our 2008 Equity Incentive Plan. The Company repurchased these shares from the employee plan participant for settlement of tax withholding obligations upon vesting of the restricted stock. A partial offset to the increase in treasury stock was a $890,000 million increase in retained earnings, a $235,000 increase in additional paid in capital, a $106,000 decrease in ESOP unearned compensation and a $2,000 decrease in equity incentive plan unearned compensation. Our ratio of capital to total assets decreased to 12.1% at September 30, 2013 compared to 12.8% at June 30, 2013. The Company's book value per share as of September 30, 2013 and June 30, 2013 was $14.86.


Comparison of Operating Results for the Three Months Ended September 30, 2013 and September 30, 2012

Net Income. The Company had a $446,000 increase in net income for the three months ended September 30, 2013 to $1.2 million, or $0.22 per fully diluted share, as compared to $761,000, or $0.14 per fully diluted share, for the same period in 2012. The Company had an increase in net interest income of $87,000, or 1.8%, for the three months ended September 30, 2013 compared to the same period in 2012 due to a decrease in total interest expense of $147,000 or 10.4%, offset by a decrease in the net interest margin from 3.32% to 3.10%. The provision for loan losses increased $50,000 for the three months ended September 30, 2013 compared to the same period in 2012 primarily due to the increase in loan growth. For the three months ended September 30, 2013 there was an increase in total non-interest income of $137,000 compared to the three months ended September 30, 2012. Non-interest expense decreased $459,000, or 10.3%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Our combined federal and state effective tax rate was 36.0% for the three months ended September 30, 2013 compared to 39.3% for the same period in 2012.

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 . . .

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