Attached files

file filename
EX-31.1 - Hampden Bancorp, Inc.exhibit_31-1.htm
EX-21.0 - Hampden Bancorp, Inc.exhibit_21-0.htm
EX-32.0 - Hampden Bancorp, Inc.exhibit_32-0.htm
EX-31.2 - Hampden Bancorp, Inc.exhibit_31-2.htm
EX-23.0 - Hampden Bancorp, Inc.exhibit_23-0.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
FOR THE FISCAL YEAR ENDED JUNE 30, 2010
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
FOR THE TRANSITION PERIOD FROM           TO          
 
COMMISSION FILE NUMBER: 333-137359
 
HAMPDEN BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
20-5714154
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
19 HARRISON AVE.
SPRINGFIELD, MASSACHUSETTS
 
01102
(Zip Code)
(Address of principal executive offices)
   
 
(413) 736-1812
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to section 12(b) of the Act:
                   Title of each class                                                                                                                                                                                                                                  Name of each exchange on which registered
Common Stock ($0.01 par value per share)                                                                                                                                                                                                                 The NASDAQ Global Market
 
Securities registered pursuant to section 12(g) of the Act:
None
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No þ.
 
Indicate by check mark whether the registrant is not required to file reports pursuant to section 13 or Section 15(d) of the Act.  Yes      No þ.
 
    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  Yes þ     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 (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    No .
 
    Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ.
 
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o         Accelerated filer o           Non-accelerated filer o            Smaller reporting company þ
                   (Do not check if a smaller reporting company)
 
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act).  Yes      No þ.
 
    Based upon the closing price of the registrant’s common stock as of December 31, 2009, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was $62,958,100.
 
    The number of shares of Common Stock outstanding as of August 20, 2010 was 7,041,474.

 
 

 

 

Documents Incorporated By Reference:
 
The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on November 2, 2010.
 





 

 

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K 
      FOR THE FISCAL YEAR ENDED JUNE 30, 2010     
  TABLE OF CONTENTS
 
                 
       
Page No.
                 
Part I
 
         Item 1.
       
4
 
  
         Item 1A.
       
31
 
 
         Item 1B.
       
36
 
 
         Item 2.
       
37
 
 
         Item 3.
       
37
 
  
         Item 4.
       
37
 
 
Part II
 
         Item 5.
       
38
 
 
         Item 6.
       
41
 
 
         Item 7.
       
43
 
 
         Item 7A.
       
56
 
 
         Item 8.
       
56
 
 
         Item 9.
       
56
 
 
         Item 9A(T).
       
56
 
 
         Item 9B.
       
57
 
 
Part III
 
         Item 10.
       
58
 
 
         Item 11.
       
58
 
 
         Item 12.
       
58
 
 
         Item 13.
       
59
 
 
         Item 14.
       
59
 
 
Part IV
 
         Item 15.
       
59
 
 
         Signatures
   
61
 

 

 
 
Part I 

 
Item 1.  
Business
 
General

Hampden Bancorp, Inc., a Delaware corporation, was formed by Hampden Bank to become the stock holding company for Hampden Bank upon completion of Hampden Bancorp, MHC’s conversion from a mutual bank holding company to a stock bank holding company. Hampden Bancorp, Inc. and Hampden Bank completed the conversion of the holding company structure of Hampden Bank and the related stock offering on January 16, 2007 with the issuance of 7,949,879 shares (including 378,566 shares issued to the Hampden Bank Charitable Foundation) raising net proceeds of $73.4 million. The information set forth in this Annual Report on Form 10-K for Hampden Bancorp, Inc. and its subsidiaries (the “Company”), Hampden Bank (the “Bank), and Hampden LS, Inc., including the consolidated financial statements and related financial data, relates primarily to Hampden Bank. Hampden Bancorp, Inc. contributed funds to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan to allow it to purchase shares of the Company common stock as part of the completion of the initial public offering.  Hampden Bank has two wholly-owned subsidiaries, Hampden Investment Corporation, which engages in buying, selling, holding and otherwise dealing in securities, and Hampden Insurance Agency, which ceased selling insurance products in November of 2000 and remains inactive.  All significant intercompany accounts and transactions have been eliminated in consolidation. During any period prior to January 16, 2007, the Company was newly organized and owned no assets. Therefore, the financial information for any period prior to January 16, 2007 presented in this Annual Report on Form 10-K is that of Hampden Bancorp, MHC and its subsidiary.
 
    Hampden Bank, the longest standing bank headquartered in Springfield, Massachusetts, is a full-service, community-oriented financial institution offering products and services to individuals, families, and businesses through nine offices located in Hampden County in Massachusetts. Hampden Bank was originally organized as a Massachusetts state-chartered mutual savings bank dating back to 1852. Hampden Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) as well as by the Depositors Insurance Fund of Massachusetts, (“DIF”). Hampden Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”) and is regulated by the FDIC and the Massachusetts Division of Banks. Hampden Bank’s business consists primarily of making loans to its customers, including residential mortgages, commercial real estate loans, commercial loans and consumer loans, and investing in a variety of investment and mortgage-backed securities. Hampden Bank funds these lending and investment activities with deposits from the general public, funds generated from operations and select borrowings. Hampden Bank also provides access to insurance and investment products through its Financial Services Division, Hampden Financial.

Available Information
 
    The Company’s website is https://www.hampdenbank.com. The Company makes available free of charge through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The information contained on our website is not incorporated by reference into, and does not form any part of, this Annual Report on Form 10-K. We have included our website address as a factual reference and do not intend it to be an active link to our website.

Market Area

    Hampden Bank offers financial products and services designed to meet the financial needs of our customers. Our primary deposit-gathering area is concentrated in the Massachusetts cities and towns of Springfield, West Springfield, Longmeadow, Agawam and Wilbraham. We offer Remote Deposit Capture to our customers, which allows us to expand our deposit gathering outside of our normal deposit area. Our lending area is broader than our deposit-gathering area and primarily includes Hampden, Hampshire, Franklin, and Berkshire counties of Massachusetts as well as portions of northern Connecticut.
 
    Hampden Bank is headquartered in Springfield, Massachusetts. All of Hampden Bank's offices are located in Hampden County. Springfield is the third largest city in Massachusetts, located in south western Massachusetts, 90 miles west of Boston and 30 miles north of Hartford, Connecticut, and connected by major interstate highways. A diversified mix of industry groups operate within Hampden County, including manufacturing, health care, higher education, wholesale/retail trade and service. The major employers in the area include MassMutual Financial Group, Dow Jones & Co., Baystate Health System, several area universities and colleges, and Big Y Supermarkets. The county in which Hampden Bank currently operates includes a mixture of suburban, rural, and urban markets. Hampden Bank's market area is projected to remain substantially unchanged in population and household growth through 2015. Based on census data, Hampden County is expected to experience a small decrease in population from 463,651 in 2010 to 463,397 in 2015. This is a projected decrease of 0.05%. The strongest growth is projected in the 55+ age group and $100,000+ household categories. According to census data, from 2010 through 2015, the median household income is projected to increase by 14.7% from $50,841 to $58,298.

 
Competition

The Company faces intense competition in attracting deposits and loans. The Company’s most direct competition for deposits has historically come from the several financial institutions and credit unions operating in our market areas and, to a lesser extent, from other financial service companies such as brokerage firms and insurance companies. The Company also faces competition for depositors' funds from money market funds, mutual funds and other corporate and government securities. Banks owned by large super-regional bank holding companies such as Bank of America Corporation, Sovereign Bancorp, Inc., Citizens Financial Group and TD Bank also operate in the Company’s market area. These institutions are significantly larger than the Company, and, therefore, have significantly greater resources.
 
    The Company’s competition for loans comes primarily from financial institutions in our market areas, and from other financial service providers such as mortgage companies and mortgage brokers. Competition for loans also comes from a number of non-depository financial service companies in the mortgage market. These include insurance companies, securities companies and specialty finance companies.
 
    The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowing banks and other lenders to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s future growth.
 
Lending Activities
 
    General. The Company's gross loan portfolio consisted of an aggregate of $416.0 million at June 30, 2010, representing 71.2% of total assets at that date. In its lending activities, the Company originates commercial real estate loans, residential real estate loans secured by one-to-four-family residences, residential and commercial construction loans, commercial and industrial loans, home equity lines-of-credit, fixed rate home equity loans and other personal consumer loans. While the Company makes loans throughout Massachusetts, most of its lending activities are concentrated in Hampden and Hampshire counties. Loans originated or purchased totaled $118.9 million in fiscal 2010 and $130.2 million in fiscal 2009. Residential mortgage loans sold into the secondary market, on a servicing-retained basis, totaled $8.5 million during fiscal 2010 and $21.0 million in fiscal 2009, and residential mortgage loans sold into the secondary market, on a servicing-released basis, totaled $8.1 million during fiscal 2010 and $3.1 million during fiscal 2009. The Company’s largest loan is $9.2 million. The average balance of the Company’s ten largest loans is $4.9 million.
 
 
 
 
    The following table summarizes the composition of the Company's loan portfolio as of the dates indicated:

 
 
June 30,
 
 
2010
 
2009
 
2008
 
2007
 
2006
 
 
Amount
Percent
 
Amount
Percent
 
Amount
Percent
 
Amount
Percent
 
Amount
Percent
 
 
(Dollars In Thousands)
 
Mortgage loans / real estate:
                           
Residential
 $130,977
31.49
%
 $123,151
31.76
%
 $121,864
33.75
%
 $116,178
35.21
%
 $111,849
34.88
%
Commercial
   138,746
33.35
 
   127,604
32.91
 
   117,636
32.59
 
     90,538
27.45
 
     91,226
28.45
 
Home Equity
     65,006
15.63
 
     58,747
15.15
 
     57,790
16.01
 
     59,899
18.15
 
     64,132
20.00
 
Construction
     13,460
3.24
 
     17,243
4.45
 
     11,308
3.13
 
     21,251
6.44
 
     22,314
6.95
 
Total mortgage loans on real estate
   348,189
83.70
 
   326,745
84.27
 
   308,598
85.48
 
   287,866
87.25
 
   289,521
90.28
 
                               
Other loans:
                             
Commercial
     42,539
10.23
 
     38,918
10.04
 
     32,509
9.00
 
     25,472
7.71
 
     22,609
7.05
 
Consumer and other
     25,257
6.07
 
     22,079
5.69
 
     19,967
5.52
 
     16,644
5.04
 
       8,574
2.67
 
Total other loans
     67,796
16.30
 
     60,997
15.73
 
     52,476
14.52
 
     42,116
12.75
 
     31,183
9.72
 
Total loans
   415,985
100.00
%
   387,742
100.00
%
   361,074
100.00
%
   329,982
100.00
%
   320,704
100.00
%
Other items:
                             
Net deferred loan costs
       2,943
   
       2,638
   
       2,257
   
       1,902
   
          872
   
Allowance for loan losses
      (6,314)
   
      (3,742)
   
      (3,453)
   
      (2,810)
   
      (3,695)
   
Total loans, net
 $412,614
   
 $386,638
   
 $359,878
   
 $329,074
   
 $317,881
   

    Commercial Real Estate Loans.  The Company originated $14.0 million and $25.7 million of commercial real estate loans in fiscal 2010 and 2009, respectively, and had $138.7 million of commercial real estate loans, with an average yield of 6.2%, in its portfolio as of June 30, 2010, representing 33.4% of the total gross loan portfolio on such date. The Company intends to further grow this segment of its loan portfolio, both in absolute terms and as a percentage of its total loan portfolio.
 
Interest rates on commercial real estate loans adjust over periods of five or ten years based primarily on Federal Home Loan Bank rates. In general, rates on commercial real estate loans are priced at a spread over Federal Home Loan Bank advance rates.  Commercial real estate loans are generally secured by commercial properties such as industrial properties, hotels, small office buildings, retail facilities, warehouses, multi-family income properties and owner-occupied properties used for business. Generally, commercial real estate loans are approved with a maximum 80% loan to appraised value ratio.
 
In its evaluation of a commercial real estate loan application, the Company considers the net operating income of the property, the borrower’s expertise, credit history, and the profitability and value of the underlying property. For loans secured by rental properties, the Company will also consider the terms of the leases and the quality of the tenant. The Company generally requires that the properties securing these loans have minimum debt service coverage sufficient to support the loan. The Company generally requires the borrowers seeking commercial real estate loans to personally guarantee those loans.
 
Commercial real estate loans generally have larger balances and involve a greater degree of risk than residential mortgage loans. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral value of the commercial real estate securing the loan. Economic events could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential Real Estate Loans.  The Company offers fixed-rate and adjustable-rate residential mortgage loans. These loans have original maturities of up to 30 years and generally have maximum loan amounts of up to $1.0 million. In its residential mortgage loan originations, the Company lends up to a maximum loan-to-value ratio of 100% for first-time home buyers and immediately sells all of its 100% loan-to-value ratio loans.  For fiscal year 2010, the Company originated 55 loans with a loan-to-value ratio of 95% or greater, of which 89% were sold. Hampden Bank has an Asset Liability Committee, which evaluates whether the Company should retain or sell any fixed rate loans that have maturities greater than 15 years. As of June 30, 2010, the residential real estate mortgage loan portfolio totaled $131.0 million, or 31.5% of the total gross loan portfolio on that date, and had an average yield of 5.5%. Of the residential mortgage loans outstanding on that date, $89.9 million were adjustable-rate loans with an average yield of 5.4% and $41.1 million were fixed-rate mortgage loans with an average yield of 5.6%. Residential mortgage loan originations totaled $33.1 million and $41.0 million for fiscal 2010 and 2009, respectively.
 


    A licensed appraiser appraises all properties securing residential first mortgage purchase loans and all real estate transactions greater than $250,000 upon origination. If appropriate, flood insurance is required for all properties securing real estate loans made by the Company.

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 that have a higher risk profile or are outside of our normal underwriting standards are sold to a third party along with the servicing rights.

At June 30, 2010, fixed rate monthly payment loans held in the Company’s portfolio totaled $41.1 million, or 31.4% of total residential real estate mortgage loans at that date. The total of loans serviced for others as of June 30, 2010 is $49.8 million.
 
The adjustable-rate mortgage loans (“ARM Loans”) offered by the Company make up the largest portion of the residential mortgage loans held in portfolio. At June 30, 2010, ARM Loans totaled $89.9 million or 68.6% of total residential loans outstanding at that date. The Company originates ARM Loans with a maximum loan-to-value ratio of up to 95% with Private Mortgage Insurance. Generally, any ARM Loan with a loan-to-value ratio greater than 90% requires Private Mortgage Insurance. ARMs are offered for terms of up to 30 years with initial interest rates that are fixed for 1, 3, 5, 7 or 10 years. After the initial fixed-rate period, the interest rates on the loans are reset based on the relevant U.S. Treasury Constant Maturity Treasury Index, or CMT Index, plus add-on margins of varying amounts, for periods of 1, 3, and 5 years. Maximum interest rate/adjustments on such loans typically range from 2.0% to 3.0% during any adjustment period and 5.0% to 6.0% over the life of the loan. Periodic adjustments in the interest rate charged on ARM Loans help to reduce the Company’s exposure to changes in interest rates. However, ARM Loans generally possess an element of credit risk not inherent in fixed-rate mortgage loans, because borrowers are potentially exposed to increases in debt service requirements over the life of the loan in the event market interest rates rise. Higher payments may increase the risk of default or prepayments.

In light of the national mortgage crisis, rising unemployment, and a weakening economy during fiscal 2010, the Company offered a short term relief program that provides our mortgage customers with the ability to overcome temporary financial pressures through interest only payments for a short period of time. The modification program is available to current customers that have a mortgage loan held in portfolio. The modification plan is designed to provide short term relief due to job loss, reduced income, a need to restructure debt, or other events that have caused or will cause a borrower to be unable to keep current with mortgage payments. The plan is offered only after a review of the borrower’s current financial condition and a determination that such a plan is likely to provide the borrowers with the ability to maintain current monthly payments going forward. Debt to income ratios demonstrating an ability to pay must be achieved for a modification plan to be put into place. Any modifications made pursuant to this program are in accordance with the terms of the original contract.
 
    Home Equity Loans.  The Company offers home equity lines-of-credit and home equity term loans. The Company originated $19.9 million and $17.4 million of home equity lines-of-credit and loans during 2010 and 2009, respectively, and at June 30, 2010 had $65.0 million of home equity lines-of-credit and loans outstanding, representing 15.6% of the loan portfolio, with an average yield of 4.5% at that date. Approximately 38% of the Company’s home equity lines-of-credit and loans are classified as first in priority liens.
 
Home equity lines-of-credit and loans are secured by first or second mortgages on one-to-four family owner occupied properties, and were generally underwriten in amounts such that the combined first and second mortgage balances generally do not exceed 90% of the value of the property serving as collateral at time of origination. Under our current underwriting standards, loan originations are made in amounts such that balances do not exceed 85% of the value of the property serving as collateral at time of origination. The lines-of-credit are available to be drawn upon for 10 to 20 years, at the end of which time they become term loans amortized over 5 to 10 years. Interest rates on home equity lines normally adjust based on the month-end prime rate published in the Wall Street Journal. The undrawn portion of home equity lines-of-credit totaled $30.1 million at June 30, 2010.

Commercial Loans.  The Company originates secured and unsecured commercial loans to business customers in its market area for the purpose of financing equipment purchases, working capital, expansion and other general business purposes. The Company originated $23.8  million and $22.8 million in commercial loans during fiscal 2010 and fiscal 2009, respectively, and as of June 30, 2010 had $42.5 million in commercial loans in its portfolio, representing 10.2% of the loan portfolio, with an average yield of 5.2%.
 
The Company’s commercial loans are generally collateralized by equipment, accounts receivable and inventory, and are usually supported by personal guarantees. The Company offers both term and revolving commercial loans. The former have either fixed or adjustable-rates of interest and generally fully amortize over a term of between three and seven years. Revolving loans are written on demand with annual reviews, with floating interest rates that are indexed to the Company’s base rate of interest.
 


    When making commercial loans, the Company considers the financial statements of the borrower, the borrower’s payment history with respect to both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the borrower operates and the value of the collateral. The Company has established limits on the amount of commercial loans in any single industry.
 
    Because commercial loans often depend on the successful operation or management of the business, repayment of such loans may be affected by adverse changes in the economy. Further, collateral securing such loans may depreciate in value over time, may be difficult to appraise and to liquidate, and may fluctuate in value.

Construction Loans.  The Company offers residential and commercial construction loans. The majority of non-residential construction loans are written to become permanent financing. The Company originated $20.4 million and $15.9 million of construction loans during fiscal 2010 and fiscal 2009, respectively, and at June 30, 2010 had $13.5 million of construction loans outstanding, representing 3.2% of the loan portfolio.

Consumer and Other Loans.  The Company originates a variety of consumer and other loans auto loans and loans secured by passbook savings or certificate accounts. The Company also looks to purchase manufactured home loans from a third party. The Company originated $7.6 million and $7.4 million of consumer and other loans, including purchases of manufactured home loans, during 2010 and 2009, respectively, and at June 30, 2010 had $25.3 million of consumer and other loans outstanding. Of the $7.6 million of originations in 2010, $5.8 million consists of manufactured housing loans. Consumer and other loans outstanding represented 6.1% of the loan portfolio at June 30, 2010, with an average yield of 8.7%.
 
    Loan Origination.  Loan originations come from a variety of sources. The primary source of originations is our salaried and commissioned loan personnel, and to a lesser extent, local mortgage brokers, advertising and referrals from customers. The Company occasionally purchases participation interests in commercial real estate loans and commercial loans from banks located in Massachusetts and Connecticut. The Company underwrites these loans using its own underwriting criteria.
 
The Company makes commitments to loan applicants based on specific terms and conditions.  As of June 30, 2010, the Company had commitments to grant loans of $9.7 million, unadvanced funds on home equity lines of credit totaling $30.1 million, unadvanced funds on overdraft lines-of-credit totaling $2.0 million, unadvanced funds on commercial lines-of-credit totaling $23.3 million, unadvanced funds due mortgagors and on construction loans totaling $7.5 million and standby letters of credit totaling $2.2 million.
 
Generally, the Company charges origination fees, or points, and collects fees to cover the costs of appraisals and credit reports. For information regarding the Company’s recognition of loan fees and costs, please refer to Note 1 to the Consolidated Financial Statements of Hampden Bancorp, Inc. and its subsidiaries, beginning on page F-8.
 



 

The following table sets forth certain information concerning the Company’s portfolio loan originations:


 
 
For the Years Ended June 30,
 
2010
 
2009
 
2008
 
2007
 
2006
 
(In Thousands)
Loans at beginning of year
 $ 387,742
 
 $ 361,074
 
 $ 329,982
 
 $ 320,704
 
 $ 272,702
                   
Originations:
                 
Mortage loans on real estate:
                 
Residential
       33,148
 
       40,962
 
       37,975
 
       23,833
 
       36,133
Commercial
       13,973
 
       25,734
 
       19,435
 
       12,309
 
       33,350
Construction
       20,444
 
       15,932
 
       22,291
 
       24,456
 
       16,047
Home Equity
       19,927
 
       17,365
 
       15,383
 
       11,794
 
       31,913
Total mortgage loans on real estate originations
       87,492
 
       99,993
 
       95,084
 
       72,392
 
     117,443
                   
Other loans:
                 
Commercial business
       23,755
 
       22,755
 
       14,960
 
       12,351
 
         7,214
Consumer and other
         1,858
 
         1,798
 
         2,842
 
         4,477
 
         2,928
Total other loan originations
       25,613
 
       24,553
 
       17,802
 
       16,828
 
       10,142
Total loans originated
     113,105
 
     124,546
 
     112,886
 
       89,220
 
     127,585
                   
Purchase of manufactured home loans
         5,769
 
         5,644
 
         5,726
 
         6,497
 
         3,156
                   
Deduct:
                 
Principal loan repayments and prepayments
       72,256
 
       78,044
 
       71,159
 
       73,194
 
       75,011
Loan sales
       16,603
 
       24,091
 
       16,322
 
       12,219
 
         7,610
Charge-offs
         1,772
 
         1,387
 
               39
 
         1,026
 
             118
Total deductions
       90,631
 
     103,522
 
       87,520
 
       86,439
 
       82,739
Net increase in loans
       28,243
 
       26,668
 
       31,092
 
         9,278
 
       48,002
Loans at end of year
 $ 415,985
 
 $ 387,742
 
 $ 361,074
 
 $ 329,982
 
 $ 320,704
                   


    Residential mortgage loans are underwritten by the Bank. Residential mortgage loans for less than the corresponding Fannie Mae (FNMA) limit to be held in portfolio require the approval of a residential loan underwriter. Residential mortgage loans greater than the FNMA limit require the approval of a Senior Retail Loan Officer and in some instances, depending on the amount of the loan, the approval of the Board of Investment of the Board of Directors of Hampden Bank (the “Board of Investment”).
 
    Loan Underwriting. The Company believes that credit risk is best approved in a bottom up manner.  The officer most directly responsible for credit risk, the Account Manager, typically approves exposures within delegated authority or recommends approval to the next level of authority as necessary.  All exposures require at least one signature by an officer with the appropriate authority.  No exposure will be approved without the recommendation of the Account Manager.  All new commercial loan approval actions must be documented in the individual credit file with a Credit Approval Memorandum, prior to the Bank advancing any funds.

The Company’s loan policy has established specific loan approval limits.  Loan officers may approve loans up to their individual lending limit, or two loan officers can originate loans up to their combined limit.  The loan committee reviews all loan applications and approves relationships greater than the loan officer’s limit.  Certain loan relationships require loan committee and/or Board of Investment approval.  The members of the Bank’s loan committee include the Bank’s President, Executive Vice President, Chief Financial Officer, two Senior Vice Presidents, the Senior Commercial Credit Analyst and commercial loan originators.

Consumer loans are underwritten by consumer loan underwriters, including loan officers and branch managers who have approval authorities based on experience for these loans. Unsecured personal loans are generally written for not more than $5,000.
 


    The Company generally will not make loans aggregating more than $10.0 million to one borrower (or related entity). Exceptions to this limit require the approval of the Board of Investment prior to loan origination. The Company’s internal lending limit is lower than the Massachusetts legal lending limit, which is 20.0% of a bank’s retained earnings and equity, or $14.4 million for the Company as of June 30, 2010.
 
The Company has established a risk rating system for its commercial real estate and commercial loans. This system evaluates a number of factors useful in indicating the risk of default and risk of loss associated with a loan. These ratings are reviewed by commercial credit analysts who do not have responsibility for loan originations. The Company also uses a third party loan review firm to test and review these ratings, and then report their results to the Audit Committee of the Board of Directors of Hampden Bancorp, Inc (the “Audit Committee”).
 
The Company occasionally participates in loans originated by third parties to supplement our origination efforts. The Company underwrites these loans using its own underwriting criteria.
 
    Loan Maturity.  The following table summarizes the final maturities of the Company’s loan portfolio at June 30, 2010. This table does not reflect scheduled principal payments, unscheduled prepayments, or the ability of certain loans to reprice prior to maturity dates. Demand loans, and loans having no stated repayment schedule, are reported as being due in one year or less:

 
                                 
 
Residential Mortgage
 
Commercial Mortgage
 
Commercial
 
Construction
 
 
Amount
 
 Weighted Average
 Rate
 
Amount
 
 Weighted Average
 Rate
 
Amount
 
 Weighted Average
Rate
 
Amount *
 
 Weighted Average
Rate
 
 
(Dollars In Thousands)
                       
Due less than one year
 $          77
 
5.43
%
 $     4,578
 
6.37
%
 $     5,045
 
3.42
%
 $     2,281
 
6.01
%
Due after one year to five years
        1,334
 
5.83
 
      52,169
 
6.14
 
      12,366
 
6.54
 
           614
 
4.77
 
Due after five years
    129,566
 
5.47
 
      81,999
 
6.26
 
      25,128
 
4.93
 
      10,565
 
6.27
 
Total
 $ 130,977
 
5.50
%
 $ 138,746
 
6.22
%
 $   42,539
 
5.22
%
 $   13,460
 
6.16
%
                                 
                                 
                                 
 
Home Equity
 
Consumer and Other
 
Total
         
 
Amount
 
 Weighted Average
Rate
 
Amount
 
 Weighted Average
Rate
 
Amount
 
 Weighted Average
Rate
 
 
   
 
(Dollars In Thousands)
                       
Due less than one year
 $          30
 
5.63
%
 $        323
 
6.04
%
 $   12,334
 
5.08
%
       
Due after one year to five years
        2,344
 
4.39
 
        2,990
 
6.08
 
      71,817
 
6.13
         
Due after five years
      62,632
 
4.40
 
      21,944
 
9.15
 
    331,834
 
5.69
         
Total
 $   65,006
 
4.45
%
 $   25,257
 
8.71
%
 $ 415,985
 
5.76
%
       
                                 
* The amount of Construction loans that are due after five years are written to be permanent loans after the construction period is over.
 
 



The following table sets forth, at June 30, 2010, the dollar amount of total loans, net of unadvanced funds on loans, contractually due after June 30, 2011 and whether such loans have fixed interest rates or adjustable interest rates.

 
             
   
Due After June 30, 2011
   
Fixed
 
Adjustable
 
Total
   
(In Thousands)
Residential Mortgage
 $     41,124
 
 $        89,776
 
 $ 130,900
Construction
        10,836
 
                 343
 
      11,179
Commercial mortgage
        70,850
 
           63,318
 
    134,168
Commercial business
        22,082
 
           15,412
 
      37,494
Home equity
        31,605
 
           33,371
 
      64,976
Consumer and other
        24,289
 
                 645
 
      24,934
Total loans
 
 $  200,786
 
 $      202,865
 
 $ 403,651
             

Loan Quality
 
    General.  One of the Company’s most important operating objectives is to maintain a high level of asset quality. Management uses a number of strategies in furtherance of this goal including maintaining sound credit standards in loan originations, monitoring the loan portfolio through internal and independent third-party loan reviews, and employing active collection and workout processes for delinquent or problem loans.
 
    Delinquent Loans.  Management performs a monthly review of all delinquent loans. The actions taken with respect to delinquencies vary depending upon the nature of the delinquent loans and the period of delinquency. A late charge is normally assessed on loans where the scheduled payment remains unpaid after a 15 day grace period for residential mortgages and a 10 day grace period for commercial loans. After mailing delinquency notices, the Company’s loan collection personnel call the borrower to ascertain the reasons for delinquency and the prospects for repayment. On loans secured by one- to four-family owner-occupied property, the Company initially attempts to work out a payment schedule with the borrower in order to avoid foreclosure. Any such loan restructurings must be approved by the level of officer authority required for a new loan of that amount. If these actions do not result in a satisfactory resolution, the Company refers the loan to legal counsel and counsel initiates foreclosure proceedings. For commercial real estate, construction and commercial loans, collection procedures may vary depending on individual circumstances.
 
    Other Real Estate Owned.  The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned (“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 less estimated cost to sell 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 June 30, 2010, the Company had $911,000 of property classified as OREO. 

Classification of Assets and Loan Review.  Risk ratings are assigned to all credit relationships to differentiate and manage levels of risk in individual exposures and throughout the portfolio.  Ratings are called Customer Risk Ratings (CRR).  Customer Risk Ratings are designed to reflect the risk to the Company in any Total Customer Relationship Exposure.  Risk ratings are used to profile the risk inherent in portfolio outstandings and exposures to identify developing trends and relative levels of risk and to provide guidance for the promulgation of policies, which control the amount of risk in an individual credit and in the entire portfolio, identify deteriorating credits and predict the probability of default.  Timeliness of this process allows early intervention in the recovery process so as to maximize the likelihood of full recovery, and establish a basis for maintaining prudent reserves against loan losses.
 
The Account Manager has the primary responsibility for the timely and accurate maintenance of Customer Risk Ratings.  The risk rating responsibility for the aggregate portfolio rests with the Commercial and Residential Division Executives.  If a disagreement surfaces regarding a risk rating, the loan review committee makes the final determination. All others in a supervisory or review function regarding a certain credit have a responsibility for reviewing the appropriateness of the rating and bringing to senior management’s attention any dispute so it may be resolved.  Generally, changes to risk ratings are made immediately upon receipt of material information, which suggests that the current rating is not appropriate.
 
The Company engages an independent third party to conduct a semi-annual review of its commercial mortgage and commercial loan portfolios. These loan reviews provide a credit evaluation of individual loans to determine whether the risk ratings assigned are appropriate. Independent loan review findings are presented directly to the Audit Committee.

 
Watchlist loans, including non-accrual loans, are classified as either special mention, substandard, doubtful, or loss. At June 30, 2010, loans classified as special mention totaled $27.3 million, consisting of $20.3 million commercial real estate, $3.3 million commercial loans, $1.7 million construction, $1.0 million residential mortgage loans, $626,000 home equity and $381,000 consumer loans.

Substandard loans totaled $14.5 million, consisting of $8.3 million commercial real estate, $5.3 million commercial, $320,000 residential mortgage, $244,000 home equity, $228,000 construction and $80,000 consumer loans.

Loans classified as doubtful totaled $3.4 million, consisting of $1.7 million residential mortgage, $883,000 commercial, $427,000 commercial real estate, $245,000 home equity and $127,000 consumer loans.

Loans classified as a loss totaled $3,000 consisting of consumer loans.

Non-Performing Assets.  The table below sets forth the amounts and categories of our non-performing assets at the dates indicated:
 

 
 
At June 30,
 
2010
 
2009
 
2008
 
2007
 
2006
 
(Dollars In Thousands)
Non-accrual loans:
                 
Residential mortgage
 $      2,763
 
 $      2,473
 
 $         684
 
 $         217
 
 $            78
Commercial mortgage
         1,200
 
             856
 
             703
 
             235
 
             588
Commercial
             936
 
             168
 
         3,212
 
         3,083
 
         3,168
Home equity, consumer and other
             793
 
             417
 
             226
 
               26
 
             118
Total non-accrual loans
         5,692
 
         3,914
 
         4,825
 
         3,561
 
         3,952
                   
Loans greater than 90 days delinquent and still accruing:
               
Residential mortgage
                -
 
                -
 
                -
 
                -
 
             190
Commercial mortgage
                -
 
                -
 
                -
 
                -
 
             267
Commercial
                -
 
                -
 
                -
 
                -
 
             778
Home equity, consumer and other
                -
 
                -
 
                -
 
                -
 
                -
Total loans 90 days delinquent and still accruing
                -
 
                -
 
                -
 
                -
 
         1,235
Total non-performing loans
         5,692
 
         3,914
 
         4,825
 
         3,561
 
         5,187
Other real estate owned
             911
 
         1,362
 
                -
 
                -
 
                -
Total non-performing assets
 $      6,603
 
 $      5,276
 
 $      4,825
 
 $      3,561
 
 $      5,187
Troubled debt restructurings, not reported above
 $      4,836
 
 $             -
 
 $             -
 
 $             -
 
 $             -
                   
Ratios:
                 
Non-performing loans to total loans
1.37%
 
1.01%
 
1.34%
 
1.08%
 
1.62%
Non-performing assets to total assets
1.13%
 
0.93%
 
0.89%
 
0.68%
 
1.11%
                   


    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. Loans are reclassified to accrual status once the borrower has shown the ability and an acceptable history of repayment of three to six months. The increase in residential mortgage non-accrual loans from fiscal year 2009 to fiscal year 2010 was due to the continued deterioration of the housing and real estate markets, as well as overall weakness in the economy. The increase in commercial mortgage, commercial, and home equity, consumer and other non-accrual loans from fiscal year 2009 to fiscal year 2010 was due to the overall weakness in the economy. We continue to closely monitor the local and regional real estate markets and other factors related to risks inherent in our loan portfolio. The decrease in commercial non-accrual loans from fiscal year 2008 to fiscal year 2009 was due to $1.4 million that was transferred to OREO, as well as $739,000 of charge-offs in fiscal year ended 2009. At June 30, 2010, the Bank had ten troubled debt restructurings (loans for which a portion of interest or principal has been forgiven, or the loans have been modified to lower the interest rate or extend the original term) consisting of commercial and mortgage loans totaling approximately $5.5 million, of which $712,000 is on non-accrual status. The interest income recorded from the restructured loans amounted to approximately $264,000 for the year ended June 30, 2010. There were no troubled debt restructurings for any fiscal year prior to June 30, 2010.
 
    At June 30, 2010, the interest income that would have been recorded had nonaccruing loans been current according to their original terms, amounted to $158,000. There was no interest income recognized on nonaccruing loans in 2010.


Allowance for Loan Losses.  In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. The Company maintains an allowance for loan losses that is intended to absorb losses inherent in the loan portfolio, and as such, this allowance represents management’s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements. 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 such 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 all non-impaired loans and is based on historical loss experience adjusted for qualitative factors.
 
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 does not separately identify individual consumer and residential mortgages for impairment. Impaired loans increased to $16.2 million at June 30, 2010 from $ 2.0 million at June 30, 2009 as a result of the continuing economic downturn in the greater Springfield Area, current financial information received from borrowers, and an internal review of criteria for classifying impaired loans based on current regulatory guidelines.  Total impaired loans include $11.9 million, or 73%, of loans which are current with all payment terms. The Company has established specific reserves aggregating $1.4 million for impaired loans.  Such reserves relate to fourteen impaired loans with a carrying value of $10.1 million, and are based on management’s analysis of estimated underlying collateral values or the expected cash flows.
 
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.

 

    The following table sets forth activity in the Company’s allowance for loan losses for the periods indicated:

 
 
At or For the Years Ended June 30,
 
2010
 
2009
 
2008
 
2007
 
2006
 
(Dollars In Thousands)
Balance at beginning of year
 $      3,742
 
 $      3,453
 
 $      2,810
 
 $      3,695
 
 $      3,644
Charge-offs:
                 
Mortgage loans on real estate
             (39)
 
           (585)
 
             (28)
 
                -
 
                -
Other loans:
                 
Commercial business
        (1,695)
 
           (739)
 
                -
 
           (991)
 
             (92)
Consumer and other
             (38)
 
             (58)
 
             (11)
 
             (35)
 
             (26)
Total other loans
        (1,733)
 
           (797)
 
             (11)
 
        (1,026)
 
           (118)
Total charge-offs
        (1,772)
 
        (1,382)
 
             (39)
 
        (1,026)
 
           (118)
                   
Recoveries:
                 
Mortgage loans on real estate
                 2
 
                -
 
               26
 
                -
 
                -
Other loans:
                 
Commercial business
                 3
 
             256
 
                -
 
                 7
 
                -
Consumer and other
                 2
 
                 3
 
                 5
 
               12
 
               19
Total other loans
                 5
 
             259
 
                 5
 
               19
 
               19
Total recoveries
                 7
 
             259
 
               31
 
               19
 
               19
Net charge-offs
        (1,765)
 
        (1,123)
 
                (8)
 
        (1,007)
 
             (99)
Provision for loan losses
         4,337
 
         1,412
 
             651
 
             122
 
             150
Balance at end of year
 $      6,314
 
 $      3,742
 
 $      3,453
 
 $      2,810
 
 $      3,695
                   
Ratios:
                 
Net charge-offs to average loans outstanding
(0.43%)
 
(0.29%)
 
(0.00%)
 
(0.32%)
 
(0.03%)
Allowance for loan losses to non-performing loans at end of year
110.93%
 
95.61%
 
71.56%
 
78.91%
 
71.24%
Allowance for loan losses to total loans at end of year
1.52%
 
0.97%
 
0.96%
 
0.85%
 
1.15%


As shown in the table above, the provision for loan losses has increased substantially over the past year. This is due to increases in loan delinquencies, and non-accrual loans, general economic conditions, and growth in the loan portfolio. The Company completes its allowance for loan losses review using a calculation that includes specific reserves on impaired credits and general reserves on all non-impaired credits. There was an increase in specific reserves on impaired loans from $10,000 at June 30, 2009 to $1.4 million at June 30, 2010. This increase in specific reserves contributed to the significant increase in the ratio of allowance for loan losses to total loans at the end of the year from 0.97% at June 30, 2009 to 1.52% at June 30, 2010. During this review process, the Company has implemented a qualitative review of the non-classified loans, using historical charge-offs as the starting point and then adding additional basis points for specific qualitative factors such as the levels and trends in delinquency and impairments, trends in volume and terms, risk rating migration, effects of changes in risk selection and underwriting standards, experience of lending management and staff, and national and local economic trends and conditions. Adjustments to the provision are made when quarterly reviews indicate that revisions are necessary.




The following table sets forth the Company’s allowance by loan category and the percent of the loans to total loans in each of the categories listed at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories:

 
   
At June 30,
   
2010
 
2009
 
2008
     
Allowance
for Loan
 Losses
 
 
Loan
Balance by
 Category
 
 
Percent
 of Loans
in Each Category to Total
 Loans
   
Allowance
for Loan
Losses
 
 
Loan
Balance by Category
 
 
Percent
of Loans
in Each Category
to Total
Loans
 
 
Allowance
 for Loan
Losses
 
 
Loan
Balance by Category
 
 
Percent
of Loans
in Each Category
to Total Loans
 
   
(Dollars In Thousands)
 
Mortage loans on real estate:
                                   
Residential
 
 $            1,391
 
 $      130,977
 
31.49
%
 $             887
 
 $        123,151
 
31.76
%
 $             464
 
 $       121,864
 
33.75
%
Construction
 
                  224
 
             13,460
 
3.24
 
                 235
 
             17,243
 
4.45
 
                     91
 
              11,308
 
3.13
 
Commercial
 
               1,766
 
          138,746
 
33.35
 
               1,308
 
          127,604
 
32.91
 
                 850
 
           117,636
 
32.59
 
Home equity
 
                  526
 
            65,006
 
15.63
 
                 458
 
            58,747
 
15.15
 
                 304
 
            57,790
 
16.01
 
Total mortgage loans on real estate
              3,907
 
          348,189
 
83.70
 
              2,888
 
         326,745
 
84.27
 
               1,709
 
         308,598
 
85.48
 
                                       
Other loans:
                                     
Commercial
 
              2,348
 
            42,539
 
10.23
 
                  781
 
             38,918
 
10.04
 
                1,681
 
            32,509
 
8.99
 
Consumer and other
                    59
 
            25,257
 
6.07
 
                    73
 
            22,079
 
5.69
 
                    63
 
             19,967
 
5.53
 
Total other loans
              2,407
 
            67,796
 
16.30
 
                 854
 
            60,997
 
15.73
 
               1,744
 
            52,476
 
14.52
 
Total loans
 
 $           6,314
 
 $      415,985
 
100.00
%
 $          3,742
 
 $     387,742
 
100.00
%
 $          3,453
 
 $      361,074
 
100.00
%
                                       
                                       
   
At June 30,
             
   
2007
 
2006
             
     
Allowance
 for Loan
 Losses
 
 
Loan
Balance by
Category
 
 
Percent
of Loans
 in Each Category
 to Total
Loans
 
 
Allowance
for Loan
 Losses
 
 
Loan
Balance by Category
 
 
Percent
of Loans
 in Each Category
 to Total
Loans
     
   
(Dollars In Thousands)
             
Mortage loans on real estate:
                                   
Residential
 
 $              287
 
 $        116,178
 
35.21
%
 $             287
 
 $        111,849
 
34.88
%
           
Construction
 
                    141
 
              21,251
 
6.44
 
                   141
 
             22,314
 
6.95
             
Commercial
 
                  539
 
            90,538
 
27.45
 
                 744
 
             91,226
 
28.45
             
Home equity
 
                   217
 
            59,899
 
18.15
 
                  217
 
             64,132
 
20.00
             
Total mortgage loans on real estate
                1,184
 
         287,866
 
87.25
 
               1,389
 
          289,521
 
90.28
             
                                       
Other loans:
                                     
Commercial
 
               1,469
 
            25,472
 
7.71
 
               2,123
 
            22,609
 
7.05
             
Consumer and other
                   157
 
             16,644
 
5.04
 
                  183
 
              8,574
 
2.67
             
Total other loans
               1,626
 
              42,116
 
12.75
 
              2,306
 
              31,183
 
9.72
             
Total loans
 
 $           2,810
 
 $     329,982
 
100.00
%
 $          3,695
 
 $     320,704
 
100.00
%
           



Investment Activities
 
    General.  The Company’s investment policy is approved and adopted by the Board of Directors. The Chief Executive Officer and the Chief Financial Officer, as authorized by the Board of Directors, implement this policy based on the established guidelines within the written policy.

The basic objectives of the investment function are (1) to enhance the profitability of the Company by keeping its investable funds fully employed at the maximum after-tax return, (2) to provide adequate regulatory and operational liquidity, (3) to minimize and/or adjust the interest rate risk position of the Company, (4) to assist in reducing the Company’s corporate tax liability, (5) to minimize the Company’s exposure to credit risk, (6) to provide collateral for pledging requirements, (7) to serve as a countercyclical balance to earnings by absorbing funds when the Company’s loan demand is low and infusing funds when loan demand is high and (8) to provide a diversity of earning assets to mortgage/loan investments.

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 purchased and held principally for the purpose of trading in the near term are classified as “trading securities”. 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. Gains and losses on disposition of securities are recorded on the trade date and determined using the specific identification method. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
 
    Declines in fair value of securities 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, impairment is required to be recognized  (1) if we intend to sell the security, (2) if it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired available-for-sale debt securities that we intend to sell, or likely will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired available-for-sale debt securities, credit-related impairment is recognized through earnings, while non-credit related impairment is recognized in other comprehensive income/loss, net of applicable taxes.
 
    Government-Sponsored Enterprises.  At June 30, 2010, the Company’s government-sponsored enterprises portfolio totaled $10.0 million, or 9.0% of the total portfolio on that date.
 
Residential Mortgage-Backed Securities.  At June 30, 2010, the Company’s portfolio of residential mortgage-backed securities totaled $101.0 million, or 90.7% of the portfolio on that date, and included pass-through securities totaling $72.6 million and collateralized mortgage obligations totaling $19.3 million directly insured or guaranteed by Freddie Mac, Fannie Mae or the Government National Mortgage Association (“Ginnie Mae”). The Company also invests in securities issued by non-agency or private mortgage originators, provided those securities are rated AAA by nationally recognized rating agencies at the time of purchase. At June 30, 2010, we held 23 securities issued by private mortgage originators that had an amortized cost of $9.0 million and a fair value of $9.1 million. All of these investments are “Senior” Class tranches and have underlying credit enhancement.  These securities were originated in the period 2002-2005 and are performing in accordance with contractual terms. Management estimates the loss projections for each security by evaluating the industry rating, amount of delinquencies, amount of foreclosure, amount of other real estate owned, average credit scores, average amortized loan to value and credit enhancement.  Based on this review, management determines whether other-than-temporary impairment existed. Management has determined that no other-than-temporary impairment existed as of June 30, 2010. We will continue to evaluate these securities for other-than-temporary impairment, which could result in a future non-cash charge to earnings.
 
    Marketable Equity Securities.  At June 30, 2010, the Company’s portfolio of marketable equity securities totaled $379,000, or 0.3% of the portfolio at that date, and consisted of common stock of various corporations. The Company’s investment policy requires no more than 5% of Tier I capital be invested in the equity of any one issuer and no more than 20% of Tier I capital in any one industry.  The total of all investments in common and preferred stocks may not exceed 100% of Tier I capital.  Issuers must be listed on the NYSE, or AMEX or traded on NASDAQ.  During the year ended June 30, 2010 the Company did not incur a write-down for other-than-temporary impairment of investment securities.

            Restricted Equity Securities.  At June 30, 2010, the Company held $5.2 million of FHLB stock. This stock is restricted and must be held as a condition of membership in the FHLB and as a condition for Hampden Bank to borrow from the FHLB.  On February 26, 2009 the FHLB’s board of directors (i) announced that they were suspending dividends and (ii) issued a moratorium on the redemption of FHLB stock.


    The following table sets forth certain information regarding the amortized cost and market values of the Company’s investment securities at the dates indicated:

 
 
At June 30,
 
2010
 
2009
 
2008
   
Amortized Cost
   
Fair Value
   
Amortized Cost
 
 
Fair Value
 
 
Amortized Cost
 
Fair Value
 
(In Thousands)
Securities available for sale:
                     
Government-sponsored enterprises
 $      9,992
 
 $    10,027
 
 $     9,982
 
 $    10,105
 
 $    36,962
 
 $    37,196
Corporate bonds and other obligations
                -
 
                -
 
                -
 
                 -
 
                -
 
                -
Residential mortgage-backed securities:
                   
     Agency
       88,842
 
       91,876
 
      92,340
 
       94,108
 
       70,388
 
       70,530
     Non-agency
         9,024
 
         9,097
 
      11,973
 
       11,180
 
       15,504
 
       14,903
Total debt securities
    107,858
 
     111,000
 
    114,295
 
     115,393
 
     122,854
 
     122,629
                       
Marketable equity securities:
                     
Common stock
            561
 
             379
 
         1,018
 
             707
 
         1,661
 
         1,263
Total marketable equity securities
            561
 
             379
 
         1,018
 
             707
 
         1,661
 
         1,263
Total securities available for sale
    108,419
 
     111,379
 
    115,313
 
     116,100
 
     124,515
 
     123,892
Restricted equity securites:
                     
Federal Home Loan Bank of Boston stock
         5,233
 
         5,233
 
         5,233
 
          5,233
 
         5,233
 
         5,233
Total securities
 $ 113,652
 
 $ 116,612
 
 $ 120,546
 
 $  121,333
 
 $ 129,748
 
 $ 129,125
                       

The table below sets forth certain information regarding the amortized cost, and weighted average yields by contractual maturity of the Company’s debt securities portfolio at June 30, 2010. In the case of mortgage-backed securities, this table does not reflect scheduled principal payments, unscheduled prepayments, or the ability of certain of these securities to reprice prior to their contractual maturity:

 
 
One Year or Less
   
More Than One Year Through Five Years
   
More Than Five Years Through Ten Years
 
 
More Than Ten Years
 
Total Securities
 
   
Amortized Cost
 
 
Weighted Average Yield
 
 
Amortized Cost
 
 
Weighted Average Yield
 
 
Amortized
Cost
 
 
Weighted Average Yield
 
 
Amortized
 Cost
 
 
Weighted Average
Yield
 
 
Amortized
 Cost
 
 
Weighted Average
Yield
 
 
(Dollars In Thousands)
Securities available for sale:
                                       
Government-sponsored enterprises
 $         -
 
0.00
%
 $   9,992
 
1.76
%
 $         -
 
            -
%
 $         -
 
           -
%
 $    9,992
 
1.76
%
Mortgage-backed securities:
                                       
   Agency
         307
 
7.77
 
      8,161
 
2.67
 
    22,144
 
3.63
 
     58,230
 
3.60
 
     88,842
 
3.54
 
   Non-agency
            -
 
0.00
 
            -
 
0.00
 
      5,217
 
4.71
 
       3,807
 
3.08
 
       9,024
 
4.02
 
Total debt securities
 $      307
 
7.77
%
 $ 18,153
 
2.17
%
 $ 27,361
 
3.84
%
 $  62,037
 
3.57
%
 $107,858
 
3.41
%



Sources of Funds
 
General.  Deposits are the primary source of the Company’s funds for lending and other investment purposes. In addition to deposits, the Company obtains funds from the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, advances from the FHLB, and cash flows generated by operations. 
 
Deposits.  Consumer and commercial deposits are gathered primarily from the Company’s primary market area through the offering of a broad selection of deposit products including checking, regular savings, money market deposits and time deposits, including certificate of deposit accounts and individual retirement accounts. The FDIC insures deposits up to certain limits and the Depositors Insurnace Fund ("DIF") fully insures amounts in excess of such limits.
 
Competition and general market conditions affect the Company’s ability to attract and retain deposits.  We offer Remote Deposit Capture to our business customers, which allows us to expand our deposit gathering outside of our normal deposit area. The Company offers rates on various deposit products based on local competitive pricing and the Company’s need for new funds.  Occasionally, the Company does offer “special” rate pricing in an effort to attract new customers.  The Company does not have any brokered deposits.

The following table sets forth certain information relative to the composition of the Company’s average deposit accounts and the weighted average interest rate on each category of deposits:



 
Years Ended June 30,
 
 
2010
 
2009
 
2008
 
   
Average Balance
 
 
Percent
   
Weighted Average Rate
 
 
Average
Balance
 
 
Percent
   
Weighted Average Rate
   
Average Balance
 
 
Percent
 
 
Weighted Average Rate
 
 
(Dollars In Thousands)
                         
Deposit type:
                                   
Demand
 $   47,182
 
11.78
%
             -
%
 $   36,728
 
10.38
%
             -
%
 $   34,335
 
11.09
%
             -
%
Savings
      76,700
 
19.16
 
0.61
 
      68,385
 
19.33
 
1.14
 
      68,065
 
21.97
 
1.79
 
Money market
      44,309
 
11.07
 
0.67
 
      33,124
 
9.36
 
1.17
 
      19,958
 
6.44
 
1.70
 
NOW accounts
      23,707
 
5.92
 
0.60
 
      19,132
 
5.41
 
0.90
 
      16,571
 
5.35
 
0.94
 
Total transaction accounts
    191,898
 
47.93
 
0.49
 
    157,369
 
44.48
 
0.87
 
    138,929
 
44.85
 
1.23
 
Certificates of deposit
    208,468
 
52.07
 
2.59
 
    196,457
 
55.52
 
3.22
 
    170,849
 
55.15
 
3.99
 
Total deposits
 $400,366
 
100.00
%
1.52
%
 $ 353,826
 
100.00
%
2.12
%
 $309,778
 
100.00
%
2.75
%



 


The following table sets forth the time deposits of the Company classified by interest rate as of the dates indicated:

 
 
At June 30,
Interest Rate
2010
 
2009
 
2008
 
(In Thousands)
Less than 2%
 $          81,604
 
 $    27,961
 
 $      6,326
2.00% - 2.99%
             48,204
 
       58,339
 
       26,722
3.00% - 3.99%
             55,632
 
       80,658
 
       57,520
4.00% - 4.99%
               9,364
 
       12,003
 
       58,970
5% or Greater
             18,134
 
       23,555
 
       39,857
Total
 $       212,938
 
 $ 202,516
 
 $ 189,395
           
 
 
The following table sets forth the amount and maturities of time deposits at June 30, 2010:


 
Year Ending June 30,
Interest Rate
2011
 
2012
 
2013
 
2014
   
After
 June 30, 2014
 
Total
 
(In Thousands)
Less than 2%
 $       74,641
 
 $     6,943
 
 $          20
 
 $            -
 
 $                -
 
 $      81,604
2.00% - 2.99%
          21,575
 
      15,184
 
        8,570
 
        1,808
 
             1,067
 
         48,204
3.00% - 3.99%
          21,492
 
      10,357
 
        4,070
 
        8,898
 
          10,815
 
         55,632
4.00% - 4.99%
             2,202
 
           429
 
        2,180
 
        4,494
 
                  59
 
           9,364
5% or Greater
             7,548
 
        9,670
 
           916
 
               -
 
                    -
 
         18,134
Total
 $     127,458
 
 $  42,583
 
 $  15,756
 
 $  15,200
 
 $       11,941
 
 $   212,938


    As of June 30, 2010, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $123.3 million. The following table sets forth the maturity of those certificates as of June 30, 2010:

 
 
At June 30, 2010
 
(In Thousands)
Three months or less
 $                 26,651
Over three months through six months
                    28,808
Over six months through one year
                    18,991
Over one year through three years
                    37,328
Over three years
                    11,549
Total
 $               123,327





Borrowings.  The Company utilizes advances from the FHLB primarily in connection with funding growth in the balance sheet and to assist in the management of its interest rate risk by match funding longer term fixed rate loans. FHLB advances are secured primarily by certain of the Company’s mortgage loans, investment securities and by its holding of FHLB stock. As of June 30, 2010, the Company had outstanding $58.2 million in FHLB advances, and had the ability to borrow an additional $75.7 million based on available collateral.
 
The following table sets forth certain information concerning balances and interest rates on the Company’s FHLB advances at the dates and for the years indicated:

 
 
At or For the Years Ended June 30,
 
2010
 
2009
 
2008
 
(Dollars In Thousands)
Balance at end of year
 $    58,196
 
 $    72,415
 
 $    95,477
Average balance during year
        63,116
 
       84,809
 
       92,770
Maximum outstanding at any month end
        72,415
 
       94,126
 
       98,394
Weighted average interest rate at end of year
3.96%
 
4.05%
 
4.16%
Weighted average interest rate during year
4.03%
 
4.16%
 
4.36%
 
Of the $58.2 million in advances outstanding at June 30, 2010, $35.0 million bearing a weighted average interest rate of 4.13% are callable by the FHLB at its option and in its sole discretion only if the level of a specific index were to exceed a pre-determined maximum rate. In the event the FHLB calls these advances, the Company will evaluate its liquidity and interest rate sensitivity position at that time and determine whether to replace the called advances with new borrowings.

The Company recognizes the need to assist the communities it serves with economic development initiatives. These initiatives focus on creating or retaining jobs for lower income workers, benefits for lower income families, supporting small business and funding affordable housing programs. To assist in funding these initiatives, the Company has participated in FHLB’s Community Development Advance program. The Company continues to originate loans that qualify under this program.

In addition to FHLB borrowings as of June 30, 2010 and 2009, the Company had $6.8 million of overnight repurchase agreements with business customers with a weighted average rate of 0.25% and $10.9 million with a weighted average rate of 0.75%, respectively.  These repurchase agreements are collateralized by government-sponsored enterprise investments.

Personnel
 
As of June 30, 2010, the Company had 97 full-time and 16 part-time employees, none of whom is represented by a collective bargaining unit. The Company considers its relationship with its employees to be good.
 
Subsidiary Activities and Portfolio Management Services
           
     Hampden Bancorp, Inc. conducts its principal business activities through its wholly-owned subsidiary, Hampden Bank. Hampden Bank has two operating subsidiaries, Hampden Investment Corporation and Hampden Insurance Agency.
 
Hampden Investment Corporation. Hampden Investment Corporation (“HIC”) is a Massachusetts securities corporation and a wholly owned subsidiary of Hampden Bank. HIC is an investment company that engages in buying, selling and holding securities on its own behalf. At June 30, 2010, HIC had total assets of $65.9 million consisting primarily of government-sponsored enterprise bonds and mortgage backed securities. HIC’s net income for the years ending June 30, 2010 and June 30, 2009 was $1.5 million and $1.9 million respectively. As a Massachusetts securities corporation, HIC has a lower state income tax rate compared to other corporations.

Hampden Insurance Agency. Hampden Insurance Agency (“HIA”) is an inactive insurance agency.  As of June 30, 2010 HIA had no assets.
 
    Hampden Bancorp, Inc.’s subsidiary, in addition to Hampden Bank, is described below.
 
    Hampden LS, Inc. Hampden Bancorp, Inc. contributed funds to a subsidiary, Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan to allow it to purchase shares of the Company common stock as part of the completion of the initial public offering. On January 16, 2007, at the completion of the initial public offering the ESOP purchased 635,990 shares, or 8% of the 7,949,879 shares outstanding from the initial public offering.

 

REGULATION AND SUPERVISION

General
 
Hampden Bancorp, Inc. is a Delaware corporation and registered bank holding company. Hampden Bancorp, Inc. is regulated as a bank holding company by the Federal Reserve Board. Hampden Bank is a Massachusetts-charted stock savings bank. Hampden Bank is the wholly-owned subsidiary of Hampden Bancorp, Inc.  Hampden Bank’s deposits are insured up to applicable limits by the FDIC and by DIF of Massachusetts for amounts in excess of the FDIC insurance limits. Hampden Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency, and by the FDIC, as its deposit insurer. Hampden Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and, for purposes of the FDIC, the protection of the insurance fund. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the FDIC or Congress, could have a material adverse impact on Hampden Bancorp, Hampden Bank and their operations. Hampden Bank is a member of the FHLB. Hampden Bancorp is regulated as a bank holding company by the Federal Reserve Board.
 
Certain regulatory requirements applicable to Hampden Bank and to Hampden Bancorp, Inc. are referred to below. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth below does not purport to be a complete description of such statutes and regulations and their effects on Hampden Bank and Hampden Bancorp, Inc. and is qualified in its entirety by reference to the actual laws and regulations.
 
Massachusetts Bank Regulation
 
    General.    As a Massachusetts-chartered stock savings bank, Hampden Bank is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of retained earnings and reserve accounts, distribution of earnings and payment of dividends. In addition, Hampden Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Massachusetts Commissioner of Banks or the Board of Bank Incorporation is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, organize a holding company, issue stock and undertake certain other activities.
 
            In response to Massachusetts laws enacted in the last few years, the Massachusetts Commissioner of Banks adopted rules that generally allow Massachusetts banks to engage in activities permissible for federally chartered banks or banks chartered by another state. The Commissioner also has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks.      
 
    Investment Activities.    In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in Massachusetts which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the Commonwealth of Massachusetts. However, these powers are constrained by federal law. See “—Federal Bank Regulation—Investment Activities” for federal restrictions on equity investments.
 
    Loans-to-One-Borrower Limitations.    Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations of one borrower to a bank may not exceed 20.0% of the total of the bank’s capital.
 
            Loans to a Bank’s Insiders.    The Massachusetts banking laws prohibit any executive officer, director or trustee from borrowing, otherwise becoming indebted, or becoming liable for a loan or other extension of credit by such bank to any other person, except for any of the following loans or extensions of credit: (i) loans or extension of credit, secured or unsecured, to an officer of the bank in an amount not exceeding $100,000; (ii) loans or extensions of credit intended or secured for educational purposes to an officer of the bank in an amount not exceeding $200,000; (iii) loans or extensions of credit secured by a mortgage on residential real estate to be occupied in whole or in part by the officer to whom the loan or extension of credit is made, in an amount not exceeding $750,000; and (iv) loans or extensions of credit to a director or trustee of the bank who is not also an officer of the bank in an amount permissible under the bank’s loan to one borrower limit.
 


           The loans listed above require approval of the majority of the members of the Company’s Board of Directors, excluding any member involved in the loan or extension of credit. No such loan or extension of credit may be granted with an interest rate or other terms that are preferential in comparison to loans granted to persons not affiliated with the savings bank.
 
           Dividends.    A Massachusetts stock bank may declare from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes.
 
            Regulatory Enforcement Authority.    Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including seizure of the property and business of the bank and suspension or revocation of its charter. The Massachusetts Commissioner of Banks may under certain circumstances suspend or remove officers or directors who have violated the law, conducted the bank’s business in a manner which is unsafe, unsound or contrary to the depositors interests or been negligent in the performance of their duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to Hampden Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
 
           Depositors Insurance Fund of Massachusetts.    All Massachusetts-chartered savings banks are required to be members of the DIF, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The DIF is authorized to charge savings banks an annual assessment of up to 1/50th of 1.0% of a savings bank’s deposit balances in excess of amounts insured by the FDIC.
 
    Protection of Personnel Information:  Massachusetts has adopted regulatory requirements intended to protect personal information.  The requirements, which became effective March 1, 2010, are similar to existing federal laws such as the Gramm-Leach Bliley Act, discussed below under “— Federal Regulations — Privacy Requirements”, that require organizations to establish written information security programs to prevent identity theft.  However, unlike federal regulations, the Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.
 
Federal Bank Regulation
 
           Capital Requirements.    Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Hampden Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization rated composite 1 under Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholder’s equity, noncumulative perpetual preferred stock (including any related retained earnings) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.
 
           The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to four risk-weighted categories ranging from 0.0% to 100.0%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the Federal Deposit Insurance Corporation’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0.0% risk weight, loans secured by one- to four-family residential properties generally have a 50.0% risk weight, and commercial loans have a risk weighting of 100.0%.
 
    State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.
 

 
           The FDIC Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.
 
    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Financial Reform Act”) was enacted.  The Financial Reform Act requires federal bank regulators including the FDIC to establish minimum leverage and risk based capital requirements to apply to insured depository institutions such as Hampden Bank.  Such regulations must be implemented by January 21, 2012.
 
U.S. Treasury’s TARP Capital Purchase Program.  The Emergency Economic Stabilization Act of 2008 provides the United States Secretary of the Treasury with the broad authority to implement certain actions to help restore stability and liquidity to U.S. markets.  One of the provisions resulting from the Act is the Treasury Capital Purchase Program (“CPP”), which provides direct equity investment in perpetual preferred stock by the Treasury in qualified financial institutions.  The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Hampden Bank has elected not to participate in the CPP.
 
           Standards for Safety and Soundness.    As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Most recently, the agencies have established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
 
            Investment Activities.    Since the enactment of the FDIC Improvement Act, all state-chartered Federal Deposit Insurance Corporation-insured banks, including savings banks, have generally been limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. FDIC Improvement Act and the FDIC regulations permit exceptions to these limitations. For example, state chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ Global Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100.0% of Tier 1 Capital, as specified by the Federal Deposit Insurance Corporation’s regulations, or the maximum amount permitted by Massachusetts law, whichever is less. Hampden Bank received approval from the FDIC to retain and acquire such equity instruments equal to the lesser of 100% of Hampden Banks’ Tier 1 capital or the maximum permissible amount specified by Massachusetts law. Any such grandfathered authority may be terminated upon the Federal Deposit Insurance Corporation’s determination that such investments pose a safety and soundness risk or upon the occurrence of certain events such as the savings bank’s conversion to a different charter. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to Hampden Bank Insurance Fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specifies that a non-member bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
 
           Interstate Banking and Branching.    The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Interstate Banking Act, permits adequately capitalized bank holding companies to acquire banks in any state subject to specified concentration limits and other conditions. The Interstate Banking Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Banking Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state.
 
 
 


 
    Prompt Corrective Regulatory Action.    Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of June 30, 2010, the most recent notification from the FDIC categorized Hampden Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed Hampden Bank’s category.
 
    The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
 
          “Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is ”significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
 
        Transaction with Affiliates and Regulation W of the Federal Reserve Regulations.    Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act and Regulation W (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and retained earnings, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such institution’s capital stock and retained earnings and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.
 
           The Gramm-Leach-Bliley Act amended several provisions of Sections 23A and 23B of the Federal Reserve Act. The amendments provide that so-called “financial subsidiaries” of banks are treated as affiliates for purposes of Sections 23A and 23B of the Federal Reserve Act, but the amendment provides that (i) the 10.0% capital limit on transactions between the bank and such financial subsidiary as an affiliate is not applicable, and (ii) the investment by the bank in the financial subsidiary does not include retained earnings in the financial subsidiary. Certain anti-evasion provisions have been included that relate to the relationship between any financial subsidiary of a bank and sister companies of the bank: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; or (2) if the Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank.
 
           The Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its executive officers and directors. However, the law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Hampden Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“Insiders”) of Hampden Bancorp, Inc. and Hampden Bank, as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans Hampden Bank may make to Insiders based, in part, on Hampden Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to Insiders over other employees. Loans to executive officers are further limited by specific categories.
 


    The Financial Reform Act requires that the scope of “covered transactions” will be expanded to include derivative transactions to the extent they result in credit exposure to an affiliate and securities borrowing and lending transactions to the extent they result in credit exposure to any affiliate.  Such changes are to be effective July 21, 2012.
 
           Enforcement.    The FDIC has extensive enforcement authority over insured state savings banks, including Hampden Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
 
           Deposit Insurance.  Hampden Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation (“FDIC”).  Deposit accounts in Hampden Bank are insured by the FDIC. In October 2008, the FDIC increased deposit insurance to a maximum of $250,000 per depositor. The Financial Reform Act has made this maximum of $250,000 in deposit insurance, which was to end on January 1, 2014, permanent. In addition, as a Massachusetts-chartered savings bank, Hampden Bank is required to be member of the Massachusetts Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage.
 
    Federal law requires that the designated reserve ratio for the deposit insurance fund to be established by the FDIC at 1.15% to 1.50% of estimated insured deposits. The Financial Reform Act increased the minimum reserve ratio to 1.35% from 1.15%, and the FDIC has been instructed to offset the effect of this increase on institutions with less than $10 billion in assets. If this reserve ratio drops below 1.35%, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.35% of estimated insured deposits within five years. As of June 30, 2008, the designated reserve ratio was 1.01% of estimated insured deposits at March 31, 2008.  As part of a plan to restore the reserve ratio to 1.15%, the Federal Deposit Insurance Corporation imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009. In addition, the Federal Deposit Insurance Corporation has increased its quarterly assessment rates and amended the method by which rates are calculated. Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points. The Financial Reform Act has directed the FDIC to amend its regulations regarding assessments by basing the changes on assets and equity, instead of U.S. account deposits.
 
    On November 12, 2009, the Federal Deposit Insurance Corporation approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base is assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, the Bank prepaid $2.0 million in estimated assessment fees for years 2010 through 2012. Because the prepaid assessments represent the prepayment of future expense, they do not affect our regulatory capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.
 
    Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed bys the FDIC.  We do not know of any practice, condition or violation that might lead to termination of Hampden Bank’s deposit insurance.
 
    In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation.  The bonds issued by the FICO are due to mature in 2017 through 2019.  For the quarter ended June 30, 2010, the annualized FICO assessment was equal to 1.04 basis points for each $100 in domestic deposits maintained at an institution.


 
    FDIC Temporary Liquidity Guarantee Program.  On October 14, 2008, the FDIC announced a new program - the Temporary Liquidity Guarantee Program (“TLGP”).  This program has two components.  One guarantees senior unsecured debt of the participating organizations, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009.  On February 10, 2009, the FDIC stated that the June 30, 2009 deadline for issuing guaranteed debt would be extended to October 31, 2009, for an additional premium.  The FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment or principal or interest in accordance with the terms of the instrument.  The guarantee will remain in effect until June 30, 2012.  In return for the FDIC’s guarantee, participating institutions will pay the FDIC a fee based on the amount and maturity of the debt.  Hampden Bank has opted not to participate in this component of the TLPG. The Financial Reform Act has authorized the FDIC to create a widely available program to guarantee obligations of solvent financial institutions, provided certain requirements are met.
 
    The other component of the program provides full FDIC insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2009, which has been extended to December 31, 2010 with the possibility of an additional 12 month extension.  For periods prior to January 1, 2010 an annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 were assessed on a quarterly basis to insured depository institutions that have not opted out of this component of the TLGP.  Thereafter the rate of assessment was set between 15 and 25 basis points according to the risk category assigned to each institution. Because Hampden Bank’s deposits in excess of FDIC limits are already insured under the Massachusetts Depositors Insurance Fund, Hampden Bank has opted not to participate in this component of the TLPG. The Financial Reform Act has provided that a similar program effective until January 1, 2013 will replace this program.
 
           Privacy Regulations.    Pursuant to the Gramm-Leach-Bliley Act, the FDIC has published final regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. The regulations generally require that Hampden Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Hampden Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Hampden Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
 
           Customer Information Security.    The FDIC and other bank regulatory agencies have adopted guidelines for establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the Gramm-Leach Bliley Act (“Information Security Guidelines”). Among other things, the Information Security Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In April 2005, the FDIC and other bank regulatory agencies issued further guidance for the establishment of these Information Security Guidelines, requiring financial institutions to develop and implement response programs designed to address incidents of unauthorized access to sensitive customer information maintained by the financial institution or its service provider, including customer notification procedures. Hampden Bank currently has Information Security Guidelines in place and believes that such guidelines are in compliance with the regulations.
 
    Community Reinvestment Act.    Under the Community Reinvestment Act (the “CRA”) as amended and as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Hampden Bank’s latest FDIC CRA rating was “Outstanding.”
 
           Massachusetts has its own statutory counterpart to the CRA which is also applicable to Hampden Bank. The Massachusetts version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit- taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Hampden Bank’s most recent rating under Massachusetts law was “Outstanding.”
 


    Consumer Protection and Fair Lending Regulations.    Massachusetts savings banks are subject to a variety of federal and Massachusetts statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.
 
Anti-Money Laundering
 
            The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”) significantly expands the responsibilities of financial institutions, including banks, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, Title III of the USA PATRIOT Act requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.
 
Other Regulations
 
            Interest and other charges collected or contracted for by Hampden Bank are subject to state usury laws and federal laws concerning interest rates. Hampden Bank’s loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
 
 Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

• Massachusetts Debt Collection Regulations, establishing standards, by defining unfair or deceptive acts or practices, for the collection of debts from persons within the Commonwealth of Massachusetts;

• General Laws of Massachusetts, Chapter 167E, which governs Hampden Bank’s lending powers; and

 Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.
 
            The deposit operations of Hampden Bank also are subject to, among others, the:
 
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 Electronic Funds Transfer Act and Regulation E promulgated thereunder, as well as Chapter 167B of the General Laws of Massachusetts, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and

General Laws of Massachusetts, Chapter 167D, which governs the Hampden Bank’s deposit powers.
 
            In many cases, Massachusetts has similar statutes to those under federal law that are applicable to Hampden Bank.
 


Federal Reserve System
 
                                    The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $55.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0%; and for amounts greater than $55.2 million, the reserve requirement is 10.0% (which may be adjusted by the Federal Reserve Board between 8.0% and 14.0%), of the amount in excess of $55.2 million. The first $10.7 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Hampden Bank is in compliance with these requirements.

Federal Home Loan Bank System
 
                                Hampden Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank. Hampden Bank was in compliance with this requirement with an investment in stock of the FHLB at June 30, 2010 of $5.2 million.
       
    The Federal Home Loan Banks are required to provide funds for certain purposes including the resolution of insolvent thrifts in the late 1980s and to contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, a member bank affected by such reduction or increase would likely experience a reduction in its net interest income. Recent legislation has changed the structure of the Federal Home Loan Banks’ funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. On February 26, 2009 the Federal Home Loan Bank’s board of directors (i) announced that they were suspending future dividends and (ii) issued a moratorium on the redemption of FHLB stock. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the FHLB stock held by Hampden Bank.

Holding Company Regulation
 
Hampden Bancorp, Inc. is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. Hampden Bancorp, Inc. is required to obtain prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or holding company. Prior Federal Reserve Board approval would be required for Hampden Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or holding company if, after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company. In addition to the approval of the Federal Reserve Board, before any bank acquisition can be completed, prior approval must also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired.
 
            A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association.
 
    The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.
 
    Hampden Bancorp, Inc. is subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for Hampden Bank. The Financial Reform Act requires federal bank regulators to establish minimum leverage and risk based capital requirements for insured depository institutions by January 21, 2012.  It also provides that minimum capital levels applicable to insured institutions will be applied to bank holding companies.  As a result, trust preferred stock will no longer be deemed Tier 1 capital for bank holding companies with over $500 million in assets.
 


    A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
 
           The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Hampden Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.
 
            Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would have potential applicability if Hampden Bancorp, Inc. ever held as a separate subsidiary a depository institution in addition to Hampden Bank.
 
            Hampden Bancorp, Inc. and Hampden Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of Hampden Bancorp, Inc. or Hampden Bank.
 
           The status of Hampden Bancorp, Inc. as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. 
 
            Massachusetts Holding Company Regulation.    Under the Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. The term “company” is defined by the Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the Division; and (iii) is subject to examination by the Division. Hampden Bancorp, Inc. would become a Massachusetts bank holding company if it acquires a second banking institution and holds and operates it separately from Hampden Bank.
 
            Federal Securities Laws.    Our common stock is registered with the SEC under Section 12(b) of the Exchange Act. We are subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act.
 
           The Sarbanes-Oxley Act.    The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act of 2002, Hampden Bancorp, Inc.’s principal executive officer and principal financial officer each are required to certify that Hampden Bancorp, Inc.’s quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act of 2002 have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the Audit Committee about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls.
 
 

FEDERAL AND STATE TAXATION
 
Federal Income Taxation
 
       General.    The Company reports its income using the accrual method of accounting. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions, including the reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company. Hampden Bank currently files a consolidated federal income tax return with Hampden Bancorp, Inc. Hampden Bank's federal income tax returns have been either audited or closed under the statute of limitations through October 31, 2006. For its 2009 tax year, Hampden Bank's maximum federal income tax rate was 34%.
 
           Bad Debt Reserves.    For taxable years beginning before January 1, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. However, those bad debt reserves accumulated prior to 1988 ("Base Year Reserves") were not required to be recaptured unless the savings institution failed certain tests. Approximately $1.5 million of Hampden Bank's accumulated bad debt reserves would not be recaptured into taxable income unless Hampden Bank makes a "non-dividend distribution" to Hampden Bancorp, Inc. as described below.
 
            Distributions.    If Hampden Bank makes "non-dividend distributions" to Hampden Bancorp, Inc., the distributions will be considered to have been made from Hampden Bank's unrecaptured tax bad debt reserves, including the balance of its Base Year Reserves as of October 31, 1987, to the extent of the "non-dividend distributions," and then from Hampden Bank's supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Hampden Bank's taxable income. Non-dividend distributions include distributions in excess of Hampden Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. Dividends paid out of Hampden Bank's current or accumulated earnings and profits will not be so included in Hampden Bancorp, Inc.'s taxable income.
 
           The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Hampden Bank makes a non-dividend distribution to Hampden Bancorp, Inc. approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Hampden Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.
 
State Taxation
 
           Prior to tax years beginning on or after January 1, 2009, financial institutions in Massachusetts were not allowed to file consolidated income tax returns. Instead, each entity in the consolidated group filed a separate annual income tax return. The Massachusetts excise tax rate for savings banks is currently 10.5% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net operating losses and capital losses are not allowed.
 
    On July 3, 2008, the Commonwealth of Massachusetts enacted a law that included reducing the tax rate on net income applicable to financial institutions. As a result, the rate will drop from the current rate of 10.5% to 10.0% for tax years beginning on or after January 1, 2010, 9.5% for tax years beginning on or after January 1, 2011, and to 9.0% for tax years beginning on or after January 1, 2012 and thereafter. Also, for the years beginning on or after January 1, 2009, the new law requires all unitary members of a consolidated group, except those with Massachusetts Security Corporation status, to file a combined corporation excise tax return. The Company continues to analyze the impact of this law change, however, it is not expected to have a material effect on the financial statements.
 
    Hampden Bank's state tax returns, as well as those of its subsidiaries, are not currently under audit.
 


    A financial institution or business corporation is generally entitled to special tax treatment as a "security corporation" under Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a "security corporation" by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Internal Revenue Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Internal Revenue Code must pay a tax equal to 1.32% of its gross income. Hampden Bancorp, Inc. requested to be classified as a security corporation and was approved for the taxable year ended October 31, 2007. The classification is in effect until revoked by the Commissioner of the Massachusetts Department of Revenue in writing or revoked by conducting any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue. In order to qualify as a security corporation, the Company established a subsidiary for the purpose of making the loan to the employee stock ownership plan, because making such a loan directly would disqualify it from classification as a security corporation.
 
    Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.
 
 
   
Item 1A.  
Risk Factors
 
    The following risk factors are relevant to our future results and financial success, and should be read with care.
 
 Our continued emphasis on commercial lending may expose us to increased lending risks.
 
           At June 30, 2010, our loan portfolio consisted of $138.7 million, or 33.4%, of commercial real estate loans, $42.5 million, or 10.2%, of commercial business loans and $13.5 million, or 3.2%, of construction loans. We have grown these loan portfolios in recent years and intend to continue to grow commercial real estate and commercial loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property. Commercial business loans expose us to additional risks because they typically are made on the basis of the borrower's ability to make repayments from the cash flow of the borrower's business and are secured by non-real estate collateral that may depreciate over time. In addition, because commercial business loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
 
The Company’s investment portfolio may suffer reduced returns, material losses or other-than-temporary impairment losses.
 
    During an economic downturn, the Company’s investment portfolio could be subject to higher risk. The value of the Company’s investment portfolio is subject to the risk that certain investments may default or become impaired due to a deterioration in the financial condition of one or more issuers of the securities held in the Company’s portfolio, or due to a deterioration in the financial condition of an issuer that guarantees an issuer’s payments of such investments. Such defaults and impairments could reduce the Company’s net investment income and result in realized investment losses.
 
    The Company’s investment portfolio is also subject to increased risk as the valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e. the carrying amount) of the portion of the investment portfolio that is carried at fair value as reflected in the Company’s financial statements is not reflective of prices at which actual transactions would occur.
 
    Because of the risks set forth above, the value of the Company’s investment portfolio could decrease, the Company could experience reduced net investment income, and the Company could incur realized investment losses, which could materially and adversely affect the Company’s results of operations, financial position and liquidity.
 
    Additionally, the Company reviews its securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of the Company’s securities has declined below its carrying value, the Company is required to assess whether the decline is other-than-temporary. The Company is required to write-down the value of that security through a charge to earnings if it concludes that the decline is other-than-temporary. As of June 30, 2010, the amortized cost and the fair value of the Company’s securities portfolio totaled $108.4 million and $111.4 million, respectively. Changes in the expected cash flows of these securities and/or prolonged price declines may result in the Company concluding in future periods that the impairment of these securities is other-than-temporary, which would require a charge to earnings to write-down equity securities to their fair value or debt securities to the extent of estimated credit loss. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.


The building of market share through our branching strategy could cause our expenses to increase faster than revenues.
 
           We intend to continue to build market share in Hampden County, Massachusetts and surrounding areas through our branching strategy. Our business plan currently contemplates that we will establish additional branches, if market conditions are favorable. There are considerable expenses involved in opening branches and new branches generally require a period of time to generate the necessary revenues to offset their expenses, especially in areas in which we do not have an established presence. Accordingly, any new branch can be expected to negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance our new branches will be successful even after they have been established.
 
Our expenses have increased as a result of increases in Federal Deposit Insurance Corporation insurance premiums. Any future special assessments, increases in premiums or required prepayments will adversely affect our earnings.
 

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of September 30, 2009. The special assessment was paid on September 30, 2009. We recorded an expense of $235,000 during the quarter ended June 30, 2009, to reflect the special assessment. The FDIC has also increased its maximum quarterly assessment rates and amended the method by which rates are calculated. Quarterly assessments paid by us for fiscal 2010 equaled $596,000 compared to $381,000 for fiscal 2009. The final rule permitted the FDIC’s Board of Directors to levy up to two additional special assessments of up to five basis points each during 2009 if the FDIC estimated that the Deposit Insurance Fund reserve ratio will fall to a level that the FDIC’s Board of Directors believes would adversely affect public confidence or to a level that will be close to or below zero. Although there were no further special assessments in 2009, any such action by the FDIC in the future will be recorded as an expense during the appropriate period.
 

The Federal Deposit Insurance Corporation also adopted a rule pursuant to which all insured depository institutions prepaid on December 30, 2009 their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. The assessment rate for the fourth quarter of 2009 and for 2010 was based on each institution’s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 was equal to the modified third quarter assessment rate plus an additional three basis points. In addition, each institution’s base assessment rate for each period was calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. We recorded the pre-payment as a prepaid expense, which will be amortized to expense over three years. Based on our deposits and assessment rate as of September 30, 2009, our prepayment amount was $2.0 million. The Financial Reform Act increases the required minimum reserve ratio for the DIF from 1.15% to 1.35% of insured deposits and directs the FDIC to offset the increased assessments on depository institutions with less than $10 billion in assets and to amend its regulations regarding deposit insurance assessments by basing the charges on assets and equity instead of deposit accounts.

Certain interest rate movements may hurt our earnings and asset value.
 
            Our profitability, like that of most financial institutions, depends on primarily upon our net interest income, which is the difference between our gross interest income and interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations and financial condition depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements, including our adjustable-rate mortgage loans, which represent a large portion of our residential loan portfolio. Changes in interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.  For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management."
 
           We are also subject to reinvestment risk relating to interest rate movements. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest funds from such prepayments at rates that are comparable to the rates on the prepaid loans or securities. On the other hand, increases in interest rates on adjustable-rate mortgage loans result in larger mortgage payments due from borrowers, which could potentially increase our level of loan delinquencies and defaults.
 



The Federal Home Loan Bank of Boston Has Suspended Dividends. This Continues to Negatively Affect our Earnings.

    The Federal Home Loan Bank of Boston has not paid dividends on its stock since suspending them during the fourth quarter of 2008 and it is uncertain when these payments will recommence. We received $279,000 in dividends from the Federal Home Loan Bank of Boston during the year ended June 30, 2008, and the failure of the Federal Home Loan Bank of Boston to pay dividends for any quarter will reduce our earnings during that quarter.
 
The United States economy remains weak and unemployment levels are high.  The prolonged economic downturn will adversely affect our business and financial results.  
 
    The United States experienced a severe economic recession in 2008 and 2009.  While economic growth has resumed recently, the rate of growth has been slow and unemployment remains at very high levels and is not expected to improve in the near future.  Loan portfolio quality has deteriorated at many financial institutions reflecting, in part, the weak U.S. economy and high unemployment.  In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline.  The continuing real estate downturn also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans.  Bank and bank holding company stock prices have declined substantially, and it is significantly more difficult for banks and bank holding companies to raise capital or borrow in the debt markets.
 
    Continued negative developments in the financial services industry and the domestic and international credit markets may significantly affect the markets in which we do business, the market for and value of our loans and investments, and our ongoing operations, costs and profitability.  Moreover, continued declines in the stock market in general, or stock values of financial institutions and their holding companies specifically, could adversely affect our stock performance.

Lack of consumer confidence in financial institutions may decrease our level of deposits.
 
    Our level of deposits may be affected by lack of consumer confidence in financial institutions, which may cause depositors to withdraw deposits and invest the funds in investments perceived as being more secure.  These consumer preferences may force us to pay higher interest rates to retain deposits and may constrain liquidity as we seek to meet funding needs caused by reduced deposit levels.

Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.
 
    There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.  Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursing our remedies as a creditor.

If our investment in the Federal Home Loan Bank of Boston is impaired, our earnings and stockholders’ equity could decrease.

We own common stock of the FHLB.  We hold the FHLB common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLB’s advance program.  The aggregate cost and fair value of our FHLB common stock as of June 30, 2010 was $5.2 million based on its par value.  There is no market for our FHLB common stock.

Recent published reports indicate that certain member banks of the Federal Home Loan Bank System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels.  In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the after-tax amount of the impairment charge.
 
Strong competition within our market area could hurt our profits and slow growth.
 
    We face intense competition both in making loans and attracting and retaining deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. There are 15 credit unions in Hampden County, which, as tax-exempt organizations, are able to offer higher rates on retail deposits than banks. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Due to the interventions of the federal government, some of the institutions that we compete with are receiving substantial federal financial support which may not be available to us.  Many institutions have been allowed to convert to banking charters and to offer insured deposits for the first time.  
 


 
The federal government has guaranteed money market funds which traditionally compete with bank deposits.  The federal government has offered significant guarantees of new debt issuance to some of our competitors to help them fund their operations.  The federal government now controls Fannie Mae and Freddie Mac and may operate directly as a competitor in some lending markets in the future.  Emergency measures designed to support some of our competitors may provide no advantage to us or place us at a disadvantage.  Emergency changes in deposit insurance, financial market regulation, bank regulation, and policy of the Federal Home Loan Bank system may all affect the competitive environment for us and other market participants.  Our profitability depends upon our continued ability to compete successfully in our market area.For more information about our market area and the competition we face, see "Business—Market Area" and " Business—Competition."
 
A continued downturn in the local economy or a decline in real estate values could hurt our profits.
 
           Nearly all of our real estate loans are secured by real estate in Hampden and Hampshire Counties. As a result of this concentration, a downturn in the local economy could cause significant increases in non-performing loans, which would hurt our profits. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. A decline in real estate values could cause some of our mortgage loans to become inadequately collateralized, which would expose us to a greater risk of loss. In addition, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy may also have a negative effect on the ability of many of our borrowers to make timely repayments on their loans, which would have an adverse impact on our earnings. For a discussion of our market area, see "Business—Market Area."
 
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
 
            In the event that our loan customers do not repay their loans according to the terms of the loans, and the collateral securing the repayment of these loans is insufficient to cover any remaining loan balance, we could experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets, if any, serving as collateral for the repayment of our loans. As of June 30, 2010, our allowance for loan losses was $6.3 million, representing 1.52% of total loans and 110.93% of nonperforming loans as of that date. In determining the amount of our allowance for loan losses, we rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover potential losses inherent in our loan portfolio, which may require additions to our allowance. Our allowance may need to be increased further in the future due to our emphasis on loan growth and on increasing our portfolio of commercial business and commercial real estate loans. Any material additions to our allowance for loan losses would materially decrease our net income. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge offs. Any such action might have a material adverse effect on our financial condition and results of operations.
 
We operate in a highly regulated environment and may be adversely affected by changes in law and regulations.
 
           We are subject to extensive regulation, supervision and examination. See "Business — Regulation and Supervision". Any change in the laws or regulations applicable to us, or in banking regulators' supervisory policies or examination procedures, whether by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress or the Massachusetts legislature could have a material adverse effect on our business, financial condition, results of operations and cash flows. The FDIC may impose additional assessment fees which could negatively impact our earnings.
 
    We are subject to regulations promulgated by the Massachusetts Division of Banks, as our chartering authority, and by the FDIC as the insurer of our deposits up to certain limits. We also belong to the Federal Home Loan Bank System and, as a member of such system, we are subject to certain limited regulations promulgated by the FHLB. In addition, currently the Federal Reserve Board regulates and oversees Hampden Bancorp, Inc., as a bank holding company.
 
           This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the FDIC's insurance fund. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution's allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and Massachusetts's deceptive acts and practices law. These laws also permit private individual and class action law suits and provide for the recovery of attorneys fees in certain instances. No assurance can be given that the foregoing regulations and supervision will not change so as to affect us adversely. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations.
 


    The potential exists for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders.  Actions taken to date, as well as potential actions, may not have the beneficial effects that are intended, particularly with respect to the extreme levels of volatility and limited credit availability currently being experienced.  In addition, new law, regulations, and other regulatory changes will increase our Federal Deposit Insurance Corporation insurance premiums and may also increase our costs of regulatory compliance and of doing business, and otherwise affect our operations.  New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.  Further, continue declines in the stock market in general, or for stock of financial institutions and their holding companies, could affect our stock performance.
 
Financial reform legislation recently enacted will, among other things, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase our costs of operations.

    Financial reform legislation recently enacted will, among other things, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase our costs of operations.
 
On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Financial Reform Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Financial Reform Act may not be known for many months or years.
 
The Financial Reform Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Financial Reform Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
 
The Financial Reform Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.
 
The new law provides that the Office of Thrift Supervision will cease to exist one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision.
 
Effective one year after the date of enactment is a provision of the Financial Reform Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
 
The Financial Reform Act also broadens the base for FDIC deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Financial Reform Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.


 
It is difficult to predict at this time what specific impact the Financial Reform Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
 
Our low return on equity may negatively affect our stock price
 
    Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. Our return on equity is reduced due to the large amount of capital that we raised in our 2007 stock offering and to expenses we will incur in pursuing our growth strategies, the costs associated with being a public company and added expenses in connection with the administration of our employee stock ownership plan and our 2008 Equity Incentive Plan (the “2008 Plan”). Until we can increase our net interest income and non-interest income, we expect our return on equity to be below that of our peers, which may negatively affect the value of our common stock. For the twelve months ended June 30, 2010, our return on equity was (0.37)%.
 
Expenses from operating as a public company and from our stock-based benefit plans will continue to adversely affect our profitability.
 
    Our non-interest expenses are impacted as a result of the financial, accounting, legal and other additional expenses usually associated with operating as a public company. We will also recognize additional annual employee compensation and benefit expenses stemming from the shares that are purchased or granted to employees and executives under our new benefit plans. These additional expenses adversely affect our profitability. We recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients pursuant to our 2008 Plan.
 
Our contribution to Hampden Bank Charitable Foundation may not be fully tax deductible, which could hurt our profits.
 
    We made a contribution to the Hampden Bank Charitable Foundation, valued at $3.8 million, pre-tax, at the time of our initial public offering. The Internal Revenue Service has granted tax-exempt status to the foundation. The amount of the tax deduction related to the foundation is limited to 10% of taxable income each year but can only be carried forward until 2011. We may not have sufficient profits to be able to use the deduction fully. As a result of our evaluation of whether it is “more likely than not” that we will be unable to use the entire deduction, we have established a valuation allowance of $810,000 related to the deferred tax asset that has been recorded for this contribution.
 
 
   
Item 1B.  
Unresolved Staff Comments
 
    Not applicable.



 
   
Item 2.  
Properties

 
    The Company conducts its business through its main office located in Springfield, Massachusetts and eight other offices located in Hampden County, Massachusetts. The following table sets forth ownership and lease information for the Company’s offices as of June 30, 2010:
 
   
Location
Year Opened
Lease Expires
         
Owned
       
 
Main Office:
     
   
19 Harrison Avenue
1950
 
   
Springfield, MA 01103
   
 
Branch Offices:
     
   
220 Westfield Street
1991
 
   
West Springfield, MA 01085
   
         
   
475 Longmeadow Street
1976
 
   
Longmeadow, MA 01106
   
         
   
1363 Allen Street
1979
 
   
Springfield, MA 01118
   
         
Leased
       
   
820 Suffield Street
2001
 2010 (1)
   
Agawam, MA 01001
   
         
   
2005 Boston Road
2003
  2022 (2)
   
Wilbraham, MA 01095
   
         
   
1500 Main Street
2005
   2010 (3)
   
Tower Square
   
   
Springfield, MA 01115
   
         
   
187 Main Street
2007
    2013 (4)
   
Indian Orchard
   
   
Springfield, MA 01151
   
         
   
916 Shaker Road
2009
     2014 (5)
   
Longmeadow, MA 01106
   
         
         
(1) Hampden Bank has an option to renew for ten years.
   
(2) Hampden Bank has an option to renew for two additional ten year terms.
 
(3) Hampden Bank has an option to renew for five years.
   
(4) Hampden Bank has an option to renew for two additional five year terms.
 
(5) Hampden Bank has an option to renew for three additional five year terms.
 

   
Item 3.  
Legal Proceedings
 
    The Company is not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Company’s management believes that those routine legal proceedings involve, individually and in the aggregate, amounts that are immaterial to our financial condition and results of operations.
 
 
   
Item 4.  
(Removed and Reserved)


Part II
 
   
Item 5.  
Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
 

Market Information

The Company’s common stock is listed on The NASDAQ Global Market under the trading symbol “HBNK”. The Company’s initial public offering closed on January 16, 2007 and the common stock began trading on January 17, 2007. The initial offering price was $10.00 per share. The following table sets forth, for the quarters in the Company’s two most recent fiscal years, the daily high and low sales price for the common stock and the dividends declared. The closing price of the Company’s common stock on September 3, 2010 was $10.10. The Company is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding two fiscal years. The Company currently anticipates that comparable cash dividends will continue to be paid in the future.

 
           
Common Stock (per share)
         
 
Market Price
   
 
High
 
Low
 
Dividends Declared
Fiscal Year 2010:
         
First Quarter
 $        11.00
 
 $         9.90
 
 $         0.03
Second Quarter
           11.00
 
          10.62
 
            0.03
Third Quarter
           10.99
 
            9.80
 
            0.03
Fourth Quarter
           10.05
 
            9.21
 
            0.03
           
           
           
Common Stock (per share)
         
 
Market Price
   
 
High
 
Low
 
Dividends Declared
Fiscal Year 2009:
         
First Quarter
 $        10.45
 
 $         9.65
 
 $         0.03
Second Quarter
           10.22
 
            8.85
 
            0.03
Third Quarter
             9.48
 
            7.87
 
            0.03
Fourth Quarter
           11.20
 
            8.90
 
            0.03


 

Shareholders and Issuer Purchases of Equity Securities

As of August 20, 2010, there were 7,041,474 shares of common stock outstanding, and the Company had approximately 2,000 holders of record.

Pursuant to the Company’s third Stock Repurchase Program, which was announced on June 2, 2010, the Company’s Board of Directors authorized the repurchase of up to 357,573, or 5%, of the then common stock outstanding, in open market purchases.  Purchases will be made from time to time at the discretion of the Company. During the fourth quarter, the Company repurchased 34,200 shares of Company stock, at an average price of $9.75 per share.


           
(c)
   
           
Total Number of