Attached files
file | filename |
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EX-32 - EX-32 - Rockville Financial Inc. | y87605exv32.htm |
EX-3.3 - EX-3.3 - Rockville Financial Inc. | y87605exv3w3.htm |
EX-31.2 - EX-31.2 - Rockville Financial Inc. | y87605exv31w2.htm |
EX-31.1 - EX-31.1 - Rockville Financial Inc. | y87605exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2010. |
Commission File Number: 000-51239
ROCKVILLE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Connecticut | 30-0288470 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
25 Park Street, Rockville, Connecticut | 06066 | |
(Address of principal executive offices) | (Zip Code) |
(860) 291-3600
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter prior that the registrant was required to submit and post such files). Yes
o No þ
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12B-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of
the Act). Yes o No þ
As of October 29, 2010, there were 19,551,938 shares of Registrants no par value common stock
outstanding.
Table of Contents
Page
2
Table of Contents
Part I FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Condition
(In Thousands, Except Share Amounts)
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
CASH AND CASH EQUIVALENTS: |
||||||||
Cash and due from banks |
$ | 23,677 | $ | 18,507 | ||||
Short-term investments |
13,749 | 800 | ||||||
Total cash and cash equivalents |
37,426 | 19,307 | ||||||
AVAILABLE FOR SALE SECURITIES-At fair value |
126,143 | 102,751 | ||||||
HELD TO MATURITY SECURITIES-At amortized cost |
15,431 | 19,074 | ||||||
LOANS HELD FOR SALE |
364 | | ||||||
LOANS RECEIVABLE (Net of allowance for loan
losses of $14,094 in 2010 and $12,539 in 2009) |
1,388,516 | 1,361,019 | ||||||
FEDERAL HOME LOAN BANK STOCK, at cost |
17,007 | 17,007 | ||||||
ACCRUED INTEREST RECEIVABLE |
4,692 | 4,287 | ||||||
DEFERRED TAX ASSET-Net |
10,642 | 10,608 | ||||||
PREMISES AND EQUIPMENT-Net |
14,986 | 15,863 | ||||||
GOODWILL |
1,149 | 1,070 | ||||||
CASH SURRENDER VALUE OF BANK-OWNED LIFE INSURANCE |
10,364 | 10,076 | ||||||
OTHER REAL ESTATE OWNED |
5,895 | 3,061 | ||||||
PREPAID FDIC ASSESSMENTS |
4,238 | 5,884 | ||||||
OTHER ASSETS |
2,915 | 1,127 | ||||||
$ | 1,639,768 | $ | 1,571,134 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
LIABILITIES: |
||||||||
DEPOSITS: |
||||||||
Non-interest-bearing |
$ | 164,577 | $ | 150,484 | ||||
Interest-bearing |
1,010,401 | 978,624 | ||||||
Total deposits |
1,174,978 | 1,129,108 | ||||||
MORTGAGORS AND INVESTORS ESCROW ACCOUNTS |
3,191 | 6,385 | ||||||
ADVANCES FROM THE FEDERAL HOME LOAN BANK |
276,428 | 263,802 | ||||||
ACCRUED EXPENSES AND OTHER LIABILITIES |
20,032 | 14,411 | ||||||
Total liabilities |
1,474,629 | 1,413,706 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 12) |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued and outstanding in 2010 and 2009) |
| | ||||||
Common stock (no par value; 29,000,000 shares authorized;
19,551,938 and 19,554,774 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively.) |
85,249 | 85,249 | ||||||
Additional paid-in capital |
4,484 | 4,082 | ||||||
Unearned compensation ESOP |
(3,654 | ) | (4,178 | ) | ||||
Treasury stock, at cost (698,826 at September 30, 2010 and
December 31, 2009) |
(9,663 | ) | (9,663 | ) | ||||
Retained earnings |
89,155 | 82,971 | ||||||
Accumulated other comprehensive loss, net of tax |
(432 | ) | (1,033 | ) | ||||
Total stockholders equity |
165,139 | 157,428 | ||||||
$ | 1,639,768 | $ | 1,571,134 | |||||
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
INTEREST AND DIVIDEND INCOME: |
||||||||||||||||
Loans |
$ | 17,833 | $ | 17,222 | $ | 52,831 | $ | 51,965 | ||||||||
Securities-interest |
1,118 | 1,359 | 3,460 | 4,837 | ||||||||||||
Securities-dividends |
117 | 102 | 335 | 319 | ||||||||||||
Interest-bearing deposits |
1 | 1 | 4 | 1 | ||||||||||||
Total interest and dividend income |
19,069 | 18,684 | 56,630 | 57,122 | ||||||||||||
INTEREST EXPENSE: |
||||||||||||||||
Deposits |
2,815 | 4,807 | 8,668 | 15,439 | ||||||||||||
Borrowed funds |
2,701 | 2,577 | 7,852 | 7,819 | ||||||||||||
Total interest expense |
5,516 | 7,384 | 16,520 | 23,258 | ||||||||||||
Net interest income |
13,553 | 11,300 | 40,110 | 33,864 | ||||||||||||
PROVISION FOR LOAN LOSSES |
1,302 | 700 | 3,114 | 1,303 | ||||||||||||
Net interest income after provision
for loan losses |
12,251 | 10,600 | 36,996 | 32,561 | ||||||||||||
NON-INTEREST INCOME: |
||||||||||||||||
Total other-than-temporary impairment
losses on equity securities |
| | | (357 | ) | |||||||||||
Service charges and fees |
1,948 | 1,376 | 5,182 | 3,874 | ||||||||||||
Net gain from sales of securities |
2 | | 190 | 936 | ||||||||||||
Net gain from sales of loans |
669 | 328 | 1,192 | 656 | ||||||||||||
Other income |
127 | 105 | 234 | 273 | ||||||||||||
Total non-interest income |
2,746 | 1,809 | 6,798 | 5,382 | ||||||||||||
NON-INTEREST EXPENSE: |
||||||||||||||||
Salaries and employee benefits |
4,958 | 4,710 | 14,579 | 14,092 | ||||||||||||
Service bureau fees |
1,020 | 952 | 3,006 | 2,924 | ||||||||||||
Occupancy and equipment |
1,056 | 1,127 | 3,238 | 3,324 | ||||||||||||
Professional fees |
378 | 202 | 1,136 | 903 | ||||||||||||
Marketing and promotions |
247 | 149 | 918 | 767 | ||||||||||||
FDIC assessments |
406 | 375 | 1,207 | 1,874 | ||||||||||||
Other real estate owned |
498 | 11 | 965 | 11 | ||||||||||||
Other |
1,313 | 1,316 | 3,854 | 3,766 | ||||||||||||
Total non-interest expense |
9,876 | 8,842 | 28,903 | 27,661 | ||||||||||||
INCOME BEFORE INCOME TAXES |
5,121 | 3,567 | 14,891 | 10,282 | ||||||||||||
PROVISION FOR INCOME TAXES |
1,862 | 1,227 | 5,314 | 3,432 | ||||||||||||
NET INCOME |
$ | 3,259 | $ | 2,340 | $ | 9,577 | $ | 6,850 | ||||||||
See accompanying notes to unaudited consolidated financial statements. (Continued)
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Income Concluded
(In Thousands, Except Share Data)
(Unaudited)
Consolidated Statements of Income Concluded
(In Thousands, Except Share Data)
(Unaudited)
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income per share
(see Note 2): |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.13 | $ | 0.52 | $ | 0.37 | ||||||||
Diluted |
0.18 | 0.13 | 0.52 | 0.37 | ||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
18,541,672 | 18,477,974 | 18,527,501 | 18,460,244 | ||||||||||||
Diluted |
18,561,277 | 18,497,155 | 18,541,739 | 18,466,638 |
See accompanying notes to unaudited consolidated financial statements.
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Rockville Financial, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
(In Thousands, Except Share Data)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Unearned | Other | Total | |||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Compensation | Retained | Treasury Stock | Comprehensive | Stockholders | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | - ESOP | Earnings | Shares | Amount | Loss | Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2009 |
19,554,774 | $ | 85,249 | $ | 4,082 | $ | (4,178 | ) | $ | 82,971 | 698,826 | $ | (9,663 | ) | $ | (1,033 | ) | $ | 157,428 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | 9,577 | | | | 9,577 | |||||||||||||||||||||||||||
Net unrealized gain on securities
available for sale, net of
reclassification adjustments and tax
effects |
| | | | | | | 308 | 308 | |||||||||||||||||||||||||||
Change in accumulated other
comprehensive loss related to employee
benefit plans, net of reclassification
adjustments and tax effects |
| | | | | | | 293 | 293 | |||||||||||||||||||||||||||
Total comprehensive income |
10,178 | |||||||||||||||||||||||||||||||||||
Share-based compensation expense |
| | 350 | | | | | | 350 | |||||||||||||||||||||||||||
ESOP shares released or committed to be
released |
| | 82 | 524 | | | | | 606 | |||||||||||||||||||||||||||
Cancellation of shares for tax withholding |
(2,836 | ) | | (30 | ) | | | | | | (30 | ) | ||||||||||||||||||||||||
Dividends paid ($0.18 per common share) |
| | | | (3,393 | ) | | | | (3,393 | ) | |||||||||||||||||||||||||
Balance at September 30, 2010 |
19,551,938 | $ | 85,249 | $ | 4,484 | $ | (3,654 | ) | $ | 89,155 | 698,826 | $ | (9,663 | ) | $ | (432 | ) | $ | 165,139 | |||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
For the Nine Months | ||||||||
Ended September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 9,577 | $ | 6,850 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Amortization and accretion of premiums and discounts on
investments, net |
(125 | ) | (127 | ) | ||||
Share-based compensation expense |
350 | 769 | ||||||
Amortization of ESOP Expense |
606 | 525 | ||||||
Provision for loan losses |
3,114 | 1,303 | ||||||
Write-down of OREO |
380 | | ||||||
Net gain from sales of securities |
(190 | ) | (936 | ) | ||||
Other-than-temporary impairment of securities |
| 357 | ||||||
Loans originated for sale |
(46,788 | ) | (38,902 | ) | ||||
Proceeds from sales of loans |
47,616 | 39,434 | ||||||
Net gains from sales of loans |
(1,192 | ) | (656 | ) | ||||
Gain on sale of OREO |
90 | | ||||||
Depreciation and amortization |
1,089 | 1,212 | ||||||
Loss on disposal of equipment |
1 | | ||||||
Deferred income tax benefit |
(450 | ) | (630 | ) | ||||
Increase in cash surrender value of bank-owned life insurance |
(288 | ) | (274 | ) | ||||
Net change in: |
||||||||
Deferred loan fees and premiums |
(83 | ) | 649 | |||||
Accrued interest receivable |
(405 | ) | (31 | ) | ||||
Other assets |
(142 | ) | (874 | ) | ||||
Accrued expenses and other liabilities |
5,968 | 1,886 | ||||||
Net cash provided by operating activities |
19,128 | 10,555 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of available for sale securities |
399 | 21,171 | ||||||
Proceeds from calls and maturities of available for sale securities |
10,723 | 500 | ||||||
Principal payments on available for sale mortgage-backed securities |
16,284 | 20,543 | ||||||
Principal payments on held to maturity mortgage-backed securities |
3,694 | 3,881 | ||||||
Purchases of available for sale securities |
(49,967 | ) | (6,055 | ) | ||||
Proceeds from sale of OREO |
682 | | ||||||
Capitalized OREO costs |
(95 | ) | | |||||
Purchase of loans |
| (2,529 | ) | |||||
Loan originations, net of principal payments |
(34,419 | ) | (65,051 | ) | ||||
Purchases of premises and equipment |
(189 | ) | (1,046 | ) | ||||
Net cash used in investing activities |
(52,888 | ) | (28,586 | ) | ||||
See accompanying notes to unaudited consolidated financial statements.
(Continued)
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Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows Concluded
(In Thousands)
(Unaudited)
Consolidated Statements of Cash Flows Concluded
(In Thousands)
(Unaudited)
For the Nine Months | ||||||||
Ended September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase in deposits |
45,870 | 83,146 | ||||||
Net decrease in mortgagors and investors escrow accounts |
(3,194 | ) | (2,908 | ) | ||||
Net decrease in short-term Federal Home Loan Bank advances |
(15,000 | ) | (51,000 | ) | ||||
Proceeds from long-term Federal Home Loan Bank advances |
37,800 | 8,112 | ||||||
Repayments of long-term Federal Home Loan Bank advances |
(10,174 | ) | (14,143 | ) | ||||
Common stock repurchased |
| (198 | ) | |||||
Cancellation of shares for tax withholding |
(30 | ) | (34 | ) | ||||
Cash dividends paid on common stock |
(3,393 | ) | (2,829 | ) | ||||
Net cash provided by financing activities |
51,879 | 20,146 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
18,119 | 2,115 | ||||||
CASH AND CASH EQUIVALENTSBeginning of period |
19,307 | 14,901 | ||||||
CASH AND CASH EQUIVALENTSEnd of period |
$ | 37,426 | $ | 17,016 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 16,478 | $ | 23,345 | ||||
Income taxes |
6,900 | 3,100 | ||||||
Transfer of loans to other real estate owned |
3,891 | 2,155 | ||||||
Goodwill recognition from subsidiary acquisition |
79 | | ||||||
Transfer to fixed assets from subsidiary acquisition |
23 | |
See accompanying notes to unaudited consolidated financial statements.
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Rockville Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. | Basis of Presentation and Principles of Consolidation | |
The consolidated interim financial statements and the accompanying notes presented in this report include the accounts of Rockville Financial, Inc., its wholly-owned subsidiary Rockville Bank, and the Banks wholly-owned subsidiaries, SBR Mortgage Company, SBR Investment Corp., Inc., Rockville Bank Commercial Properties, Inc., Rockville Bank Residential Properties, Inc., Rockville Financial Services, Inc. and Rockville Bank Mortgage, Inc. Rockville Financial, Inc. (the Company) is a state-chartered mid-tier stock holding company formed on December 17, 2004. Rockville Financial MHC, Inc. holds 56.7% of the Companys common stock, and the Company holds all of the common stock of Rockville Bank (the Bank). | ||
The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the interim consolidated financial statements. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These interim consolidated financial statements should be read in conjunction with the Companys 2009 consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. | ||
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from managements estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, pension and other post-retirement benefits, share-based compensation expense, valuation of deferred tax assets and the evaluation of investment securities for other-than-temporary impairment. | ||
On September 21, 2009, the Company entered into an agreement to purchase the assets of Family Choice Mortgage Company, a privately held Massachusetts mortgage origination corporation operating in Massachusetts and Connecticut. The transaction closed on January 11, 2010 and now operates under the name of Rockville Bank Mortgage, Inc., d/b/a Family Choice Mortgage, a subsidiary of Rockville Bank. This addition helps to expand the Companys mortgage origination business, particularly in the area of Federal Housing Administration (FHA) loans, Veterans Administration (VA) loans, loans to first time home buyers, and Reverse Mortgages. Policies and procedures have been implemented that govern expense and revenue sharing. The subsidiary will be included within the risk management system of the Company and is not expected to have a significant effect on the operations of the Company. | ||
The acquisition was structured as an earn-out with no payment at closing. The principal of the business is to receive a cash payout payable over a seven year period based on the income earned before taxes by Rockville Bank Mortgage, Inc. Goodwill from the transaction was recorded as a contingent liability. The liability was established based on a seven year discounted cash flow valuation applied to the projected income of Rockville Bank Mortgage, Inc. Projected income was calculated using budgeted amounts for 2010 and a 5.0% estimated annual growth thereafter. The only tangible assets acquired were the fixed assets of Family Choice Mortgage Company. The value of the fixed assets acquired was recorded using the book value, which approximated the fair value, of the fixed assets as of January, 2010. |
Discounted Contingent Liability to Family Choice Mortgage Company |
$ | 103,182 | ||
Fixed Asset Valuation as of January, 2010 |
$ | 24,232 | ||
Goodwill Asset |
$ | 78,950 |
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2. | Earnings Per Share | |
The following table sets forth the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009: |
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except share data) | ||||||||||||||||
Net income |
$ | 3,259 | $ | 2,340 | $ | 9,577 | $ | 6,850 | ||||||||
Weighted-average basic
shares
outstanding |
18,541,672 | 18,477,974 | 18,527,501 | 18,460,244 | ||||||||||||
Diluted effect of stock
options |
19,605 | 19,181 | 14,238 | 6,394 | ||||||||||||
Weighted-average diluted
shares |
18,561,277 | 18,497,155 | 18,541,739 | 18,466,638 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.13 | $ | 0.52 | $ | 0.37 | ||||||||
Diluted |
$ | 0.18 | $ | 0.13 | $ | 0.52 | $ | 0.37 | ||||||||
Treasury shares and unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations. Unvested restricted shares are included in the weighted-average number of common shares outstanding for basic earnings per share calculations. For the three and nine month periods ended September 30, 2010 and 2009, the Companys common stock equivalents relate solely to stock options granted and outstanding. Stock options that would have an anti-dilutive effect on earnings per share are excluded from the calculation. For the three and nine months ended September 30, 2010, options to purchase 426,270 and 431,637 shares, respectively, of common stock were not considered in the computation of potential common shares for the purpose of diluted EPS as the strike price of the options was above the Companys average market price during the quarter. | ||
3. | Recent Accounting Pronouncements | |
Derivatives and Hedging, Scope Exception Related to Embedded Credit Derivatives, Topic 815: In May 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-11 This is an update to FASB 815 Derivatives and Hedging and is effective for fiscal quarters beginning after June 15, 2010. This ASU clarifies that the scope exception in Paragraphs 815-15-15-8 through 15-9 only applies to the transfer of credit risk in the form of subordination of one financial instrument to another. This would apply to a securitization that is issued in several tranches and one tranche is subordinate to another tranche of the same securitization. Under these circumstances the embedded credit derivative does not have to be analyzed under the above paragraphs for possible bifurcation. This update did not have a material impact on the Companys consolidated financial statements. | ||
Receivables, Topic 310: In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this Update is for an entity to provide disclosures that facilitate financial statement users evaluation of (1) the nature of credit risk inherent in the entitys portfolio of financing receivables (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses (3) the changes and reasons for those changes in the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. This Update is expected to have a significant impact on the Companys disclosure in the consolidated financial statements for the year ended December 31, 2010. | ||
Receivables, Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset, Topic 310: In April 2010, the FASB issued ASU 2010-18 This update is effective for |
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modifications of loans accounted for with pools in the first interim or annual period ending on or after July 15, 2010. This update provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition. It allows acquired assets with common risk characteristics to be accounted for in the aggregate as a pool. This update did not have a material impact on the Companys consolidated financial statements. | ||
Fair Value Measurements and Disclosures, Topic 820: In January 2010, FASB issued ASU No 2010-06 which provides guidance that requires more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This guidance was effective for the Company on January 1, 2010, and did not have a material impact on the Companys consolidated financial statements. | ||
Transfers of Financial Assets, Topic 860: In June 2009, the FASB issued ASU No. 2009-16 which requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk in the assets. The guidance eliminates the concept of a qualifying special-purpose entity, changes the requirements for the derecognition of financial assets, and enhances the disclosure requirements for sellers of the assets. This guidance was effective for the Company on January 1, 2010 and did not have a material impact on the Companys consolidated financial statements. | ||
4. | Fair Value Measurements | |
The Company groups its assets and liabilities generally measured at fair value in three levels based upon a three-tier hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The fair value hierarchy is as follows: |
Level 1: | Quoted prices are available in active markets for identical investments as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume. | ||
Level 2: | Pricing inputs are observable for the asset or liability, either directly or indirectly but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies. | ||
Level 3: | Pricing inputs are unobservable for the assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation. | ||
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset or liability is based on the lowest level of input that is significant to the fair value of the asset or liability. |
Items Measured at Fair Value on a Recurring Basis: The following valuation methodologies are used for assets that are recorded at fair value on a recurring basis. There were no liabilities recorded at fair value on a recurring basis. | ||
Available for Sale Securities: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. Level 1 securities are those traded on active markets for identical securities including U.S. treasury debt securities, equity securities and mutual funds. Level 2 securities include U.S. government agency obligations, U.S. government-sponsored enterprises, mortgage-backed securities, corporate and other debt securities. Level 3 securities include private placement securities and thinly traded equity securities. |
Assets Recorded at Fair Value on a Recurring Basis:
Fair Value Measurements | ||||||||||||||||
At September 30, 2010 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Total Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
Available for Sale Securities: |
||||||||||||||||
U.S. Government and government-sponsored
enterprise obligations |
$ | 46,127 | $ | 2,002 | $ | 44,125 | $ | | ||||||||
Residential mortgage-backed securities |
59,818 | | 59,818 | | ||||||||||||
Corporate debt securities |
4,671 | | 4,671 | | ||||||||||||
Marketable equity securities |
15,527 | 15,454 | | 73 | ||||||||||||
Total |
$ | 126,143 | $ | 17,456 | $ | 108,614 | $ | 73 | ||||||||
11
Table of Contents
Fair Value Measurements | ||||||||||||||||
At December 31, 2009 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Total Fair | Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
(In thousands) | ||||||||||||||||
Available for Sale Securities: |
||||||||||||||||
U.S. Government and government-sponsored
enterprise obligations |
$ | 7,052 | $ | 2,018 | $ | 5,034 | $ | | ||||||||
Residential mortgage-backed securities |
75,967 | | 75,967 | | ||||||||||||
Corporate debt securities |
4,656 | | 4,656 | | ||||||||||||
Other debt securities |
731 | | 731 | | ||||||||||||
Marketable equity securities |
14,345 | 14,272 | | 73 | ||||||||||||
Total |
$ | 102,751 | $ | 16,290 | $ | 86,388 | $ | 73 | ||||||||
There were no transfers in or out of Level 1 and Level 2 for the nine months ended
September 30, 2010. During the first nine months of 2010, the Company purchased $49.0
million of U.S. government agency securities and received $16.3 million of principal
payments of residential mortgage-backed securities which are Level 2 assets.
The changes in Level 3 assets measured at fair value on a recurring basis are as
follows:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Investment Securities Available for Sale: | (In thousands) | |||||||
Balance of recurring Level 3 assets at prior year end |
$ | 73 | $ | 2,114 | ||||
Total gains or losses (realized/unrealized): |
||||||||
Included in earnings-realized |
| | ||||||
Included in earnings-unrealized |
| | ||||||
Included in other comprehensive income |
| 103 | ||||||
Purchases, sales, issuances and settlements, net |
| | ||||||
Transfers in and/or out of Level 3 |
| (241 | ) | |||||
Balance of recurring Level 3 assets at September 30 |
$ | 73 | $ | 1,976 | ||||
During the nine months ended September 30, 2009, two non-marketable equity securities
totaling $241,000 were transferred out of Level 3.
12
Table of Contents
Items Measured at Fair Value on a Non-Recurring Basis: | ||
The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. | ||
The following is a description of the valuation methodologies used for certain assets that are recorded at fair value on a non-recurring basis. | ||
Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market; however, assumptions made are based on managements judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy. | ||
Impaired Loans: Accounting standards require that a creditor recognize the impairment of a loan if the present value of expected future cash flows discounted at the loans effective interest rate (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the impaired loan. Non-recurring fair value adjustments to collateral dependent loans are recorded, when necessary, to reflect partial write-downs based upon observable market price or current appraised value of the collateral less costs and discounts based on managements judgment of current conditions. Based on the significance of managements judgment, the Company records impaired loans as non-recurring Level 3 fair value measurements. | ||
Assets Recorded at Fair Value on a Non-recurring Basis: | ||
The following table presents the Companys assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2010 and 2009: |
Fair Value Measurements At September 30, 2010 | ||||||||||||||||||||||||
using: | ||||||||||||||||||||||||
Quoted Prices | Three | |||||||||||||||||||||||
in Active | Months Ended | Nine Months Ended | ||||||||||||||||||||||
Markets for | Other | Significant | September 30, | September 30, | ||||||||||||||||||||
Identical | Observable | Unobservable | 2010 - | 2010 - | ||||||||||||||||||||
Assets | Inputs | Inputs | Total Gains | Total Gains | ||||||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | (Losses) | (Losses) | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Other real estate owned |
$ | 5,895 | $ | | $ | | $ | 5,895 | $ | (380 | ) | $ | (380 | ) | ||||||||||
Impaired loans |
3,301 | | | 3,301 | 739 | (704 | ) | |||||||||||||||||
Total |
$ | 9,196 | $ | | $ | | $ | 9,196 | $ | 359 | $ | (1,084 | ) | |||||||||||
Fair Value Measurements At September 30, 2009 | ||||||||||||||||||||||||
using: | ||||||||||||||||||||||||
Quoted Prices | Three | |||||||||||||||||||||||
in Active | Months Ended | Nine Months Ended | ||||||||||||||||||||||
Markets for | Other | Significant | September 30, | September 30, | ||||||||||||||||||||
Identical | Observable | Unobservable | 2009 - | 2009 - | ||||||||||||||||||||
Assets | Inputs | Inputs | Total Gains | Total Gains | ||||||||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | (Losses) | (Losses) | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Impaired loans |
$ | 9,821 | $ | | $ | | $ | 9,821 | $ | | $ | | ||||||||||||
Total |
$ | 9,821 | $ | | $ | | $ | 9,821 | $ | | $ | | ||||||||||||
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Table of Contents
There were no liabilities reported at fair value on a non-recurring basis on the
balance sheet at September 30, 2010 or December 31, 2009.
As of September 30, 2010 and December 31, 2009, the carrying value and estimated fair
values of the Companys financial instruments are as described below. Certain financial
instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value
amounts presented herein may not necessarily represent the underlying fair value of the
Company.
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 37,426 | $ | 37,426 | $ | 19,307 | $ | 19,307 | ||||||||
Available for sale securities |
126,143 | 126,143 | 102,751 | 102,751 | ||||||||||||
Held to maturity securities |
15,431 | 16,556 | 19,074 | 20,011 | ||||||||||||
Loans receivable-net |
1,388,516 | 1,406,795 | 1,361,019 | 1,360,789 | ||||||||||||
Loans held for sale |
364 | 364 | | | ||||||||||||
FHLBB stock |
17,007 | 17,007 | 17,007 | 17,007 | ||||||||||||
Accrued interest receivable |
4,692 | 4,692 | 4,287 | 4,287 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
1,174,978 | 1,162,929 | 1,129,108 | 1,135,815 | ||||||||||||
Mortgagors and investors |
||||||||||||||||
escrow accounts |
3,191 | 3,191 | 6,385 | 6,385 | ||||||||||||
Advances from FHLBB |
276,428 | 295,014 | 263,802 | 276,619 |
14
Table of Contents
5. Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair values
of available for sale and held to maturity securities at September 30, 2010 and
December 31, 2009 are as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
September 30, 2010 | (In thousands) | |||||||||||||||
Available
for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government and government-
sponsored enterprise obligations |
$ | 45,997 | $ | 155 | $ | 25 | $ | 46,127 | ||||||||
Government-sponsored residential
mortgage-backed
securities |
56,334 | 3,485 | 1 | 59,818 | ||||||||||||
Corporate debt securities |
5,888 | | 1,217 | 4,671 | ||||||||||||
Total debt securities |
108,219 | 3,640 | 1,243 | 110,616 | ||||||||||||
Marketable equity securities, by sector: |
||||||||||||||||
Banks |
1,256 | 2,739 | 10 | 3,985 | ||||||||||||
Consumer and household products |
1,134 | 65 | 25 | 1,174 | ||||||||||||
Food and beverage service |
1,151 | 217 | 41 | 1,327 | ||||||||||||
Government-sponsored enterprises |
283 | 15 | 92 | 206 | ||||||||||||
Healthcare/pharmaceutical |
387 | | 32 | 355 | ||||||||||||
Industrial |
695 | 240 | 17 | 918 | ||||||||||||
Integrated utilities |
742 | 93 | | 835 | ||||||||||||
Mutual funds |
2,656 | 141 | | 2,797 | ||||||||||||
Oil and gas |
754 | 500 | 4 | 1,250 | ||||||||||||
Technology/Semiconductor |
228 | 92 | | 320 | ||||||||||||
Telecommunications |
661 | 63 | 10 | 714 | ||||||||||||
Transportation |
294 | 34 | | 328 | ||||||||||||
Other industries |
1,030 | 329 | 41 | 1,318 | ||||||||||||
Total marketable equity securities |
11,271 | 4,528 | 272 | 15,527 | ||||||||||||
Total available for sale |
$ | 119,490 | $ | 8,168 | $ | 1,515 | $ | 126,143 | ||||||||
At September 30, 2010, the net unrealized gain on securities available for sale of $6.7
million, net of income taxes of $2.4 million, or $4.3 million, is included in
accumulated other comprehensive loss.
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
September 30, 2010 | (In thousands) | |||||||||||||||
Held to maturity: |
||||||||||||||||
Government-sponsored
residential
mortgage-backed
securities |
$ | 15,431 | $ | 1,125 | $ | | $ | 16,556 | ||||||||
Total held to maturity |
$ | 15,431 | $ | 1,125 | $ | | $ | 16,556 | ||||||||
15
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
December 31, 2009 | (In thousands) | |||||||||||||||
Available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government and
government-sponsored enterprise
obligations |
$ | 7,017 | $ | 36 | $ | 1 | $ | 7,052 | ||||||||
Government-sponsored residential
mortgage-backed securities |
72,537 | 3,431 | 1 | 75,967 | ||||||||||||
Corporate debt securities |
5,879 | | 1,223 | 4,656 | ||||||||||||
Other debt securities |
722 | 9 | | 731 | ||||||||||||
Total debt securities |
86,155 | 3,476 | 1,225 | 88,406 | ||||||||||||
Marketable equity securities, by sector: |
||||||||||||||||
Banks |
1,256 | 2,470 | 173 | 3,553 | ||||||||||||
Consumer and household products |
839 | 40 | 17 | 862 | ||||||||||||
Food and beverage service |
948 | 158 | 41 | 1,065 | ||||||||||||
Government-sponsored enterprises |
284 | 217 | | 501 | ||||||||||||
Healthcare/pharmaceutical |
387 | 3 | 19 | 371 | ||||||||||||
Industrial |
639 | 134 | 13 | 760 | ||||||||||||
Integrated utilities |
742 | 69 | | 811 | ||||||||||||
Mutual funds |
2,621 | 62 | | 2,683 | ||||||||||||
Oil and gas |
754 | 353 | 12 | 1,095 | ||||||||||||
Technology/Semiconductor |
342 | 173 | | 515 | ||||||||||||
Telecommunications |
354 | | 15 | 339 | ||||||||||||
Transportation |
313 | 190 | | 503 | ||||||||||||
Other industries |
1,030 | 263 | 6 | 1,287 | ||||||||||||
Total marketable equity securities |
10,509 | 4,132 | 296 | 14,345 | ||||||||||||
Total securities available for sale |
$ | 96,664 | $ | 7,608 | $ | 1,521 | $ | 102,751 | ||||||||
At December 31, 2009, the net unrealized gain on securities available for sale of $6.1
million, net of income taxes of $2.1 million, or $4.0 million, is included in accumulated
other comprehensive loss.
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
December 31, 2009 | (In thousands) | |||||||||||||||
Held to maturity: |
||||||||||||||||
Government-sponsored
residential
mortgage-backed
securities |
$ | 19,074 | $ | 937 | $ | | $ | 20,011 | ||||||||
Total held to maturity |
$ | 19,074 | $ | 937 | $ | | $ | 20,011 | ||||||||
The amortized cost and fair value of debt securities at September 30, 2010 by
contractual maturities are presented below. Actual maturities may differ from contractual
maturities because the securities may be called or repaid without any penalties. Because
mortgage-backed securities are not due at a single maturity date, they are not included in
the maturity categories in the following maturity summary.
16
Table of Contents
Available for Sale | Held to Maturity | |||||||||||||||
Amortized | Amortized | Fair | ||||||||||||||
Cost | Fair Value | Cost | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Maturity: |
||||||||||||||||
Within 1 year |
$ | 2,102 | $ | 2,102 | $ | | $ | | ||||||||
After 1 but within 5 years |
7,963 | 7,954 | | | ||||||||||||
After 5 but within 10 years |
38,995 | 39,106 | | | ||||||||||||
After 10 years |
2,825 | 1,636 | | | ||||||||||||
51,885 | 50,798 | | | |||||||||||||
Mortgage-backed securities |
56,334 | 59,818 | 15,431 | 16,556 | ||||||||||||
$ | 108,219 | $ | 110,616 | $ | 15,431 | $ | 16,556 | |||||||||
At September 30, 2010, securities with a fair value of $2.0 million were pledged to secure
public deposits and U.S. Treasury, tax and loan payments.
For the nine months ended September 30, 2010, sales proceeds of available for sale
securities totaled $399,000 with gains totaling $190,000. There were no losses for the nine
months ended September 30, 2010.
As of September 30, 2010, the Company did not own any investment or mortgage-backed
securities of a single issuer, other than securities guaranteed by the U.S. Government or
government-sponsored enterprises, which had an aggregate book value in excess of 10% of the
Companys stockholders equity.
The following tables summarize gross unrealized losses and fair value, aggregated by
investment category and length of time the investments have been in a continuous unrealized
loss position, as of September 30, 2010 and December 31, 2009:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
September 30, 2010 | (In thousands) | |||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||
U.S. Government and
government-sponsored
enterprise obligations |
$ | 4,975 | $ | 25 | $ | | $ | | $ | 4,975 | $ | 25 | ||||||||||||
Government-sponsored
residential mortgage-backed
securities |
| | 31 | 1 | 31 | 1 | ||||||||||||||||||
Corporate debt securities |
| | 4,571 | 1,217 | 4,571 | 1,217 | ||||||||||||||||||
Total debt securities |
4,975 | 25 | 4,602 | 1,218 | 9,577 | 1,243 | ||||||||||||||||||
Marketable equity securities |
1,176 | 200 | 606 | 72 | 1,782 | 272 | ||||||||||||||||||
Total |
$ | 6,151 | $ | 225 | $ | 5,208 | $ | 1,290 | $ | 11,359 | $ | 1,515 | ||||||||||||
17
Table of Contents
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | ||||||||||||||||||||
Value | Loss | Value | Loss | Value | Unrealized Loss | |||||||||||||||||||
December 31, 2009 | (In thousands) | |||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||
U.S. Government and
government-sponsored
enterprises |
$ | 2,018 | $ | 1 | $ | | $ | | $ | 2,018 | $ | 1 | ||||||||||||
Government-sponsored
residential mortgage-backed
securities |
| | 58 | 1 | 58 | 1 | ||||||||||||||||||
Corporate debt |
| | 4,556 | 1,223 | 4,556 | 1,223 | ||||||||||||||||||
Total debt securities |
2,018 | 1 | 4,614 | 1,224 | 6,632 | 1,225 | ||||||||||||||||||
Marketable equity securities |
1,097 | 184 | 1,099 | 112 | 2,196 | 296 | ||||||||||||||||||
Total |
$ | 3,115 | $ | 185 | $ | 5,713 | $ | 1,336 | $ | 8,828 | $ | 1,521 | ||||||||||||
Of the securities summarized above as of September 30, 2010, 16 issues have
unrealized losses for less than twelve months and 8 issues had unrealized losses for twelve
months or more. As of December 31, 2009, 9 issues had unrealized losses for less than
twelve months and 13 issues had losses for twelve months or more.
U.S. Government and government-sponsored enterprises and mortgage-backed securities. The
unrealized losses on the Companys U.S. Government and government-sponsored securities were
caused by increases in the rate spread to comparable treasury securities. The Company does
not expect these securities to settle at a price less than the amortized cost basis of the
investments. Because the Company does not intend to sell the investments and it is not more
likely than not that the Company will be required to sell the investments before the
recovery of their amortized cost basis, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at September 30, 2010.
Corporate Debt Securities. The unrealized losses on corporate debt securities relate to one
AA+ rated corporate bond and one pooled trust preferred security, Preferred Term Security
XXVIII, Ltd (PRETSL XXVIII). The unrealized losses on these
securities are caused by the low
interest rate environment because they reprice quarterly to three month LIBOR and market
spreads on similar securities have increased. Yields on these securities are 0.57% and 0.69%
verses coupon rates at purchase of 5.05% and 5.27%, respectively. No loss of principal or
break in yield is projected. Based on the existing credit profile, management does not
believe that these investments will suffer from any credit related losses. Because the
Company does not intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their amortized cost
basis, which may be maturity, the Company does not consider these investments to be
other-than-temporarily impaired at September 30, 2010.
Marketable Equity Securities. The Companys investments in marketable equity securities
consist of common stock, preferred stock and mutual funds. The unrealized losses are spread
out among several industries with no concentration in any one security. Management evaluated
the near-term prospects of the issuers and the Companys ability and intent to hold the
investments for a reasonable period of time sufficient for an anticipated recovery of fair
value. The Company does not consider these investments to be other-than-temporarily impaired
at September 30, 2010.
The Company will continue to review its entire portfolio for other-than-temporarily impaired
securities with additional attention being given to high risk securities such as the one
pooled trust preferred security that the Company owns.
Management believes the policy for evaluating securities for other-than-temporary impairment
is critical because it involves significant judgments by management and could have a
material impact on our operations.
18
Table of Contents
6. Loans Receivable and Allowance for Loan Losses
A summary of the Companys loan portfolio is as follows:
September 30, 2010 | December 31, 2009 | |||||||
(In thousands) | ||||||||
Real estate loans: |
||||||||
Residential |
$ | 738,732 | $ | 754,838 | ||||
Commercial |
453,627 | 426,028 | ||||||
Construction |
69,874 | 71,078 | ||||||
Commercial business loans |
133,448 | 113,240 | ||||||
Installment, collateral and
other loans |
6,380 | 7,742 | ||||||
Total loans |
1,402,061 | 1,372,926 | ||||||
Net deferred loan costs and
premiums |
549 | 632 | ||||||
Allowance for loan losses |
(14,094 | ) | (12,539 | ) | ||||
Loans, net |
$ | 1,388,516 | $ | 1,361,019 | ||||
Non-performing Assets: The table below sets forth the amounts and categories of
our non-performing assets at the dates indicated. Once a loan is 90 days delinquent or
either the borrower or the loan collateral experiences an event that makes collectibility
suspect, the loan is placed on non-accrual status. Our policies require six months of
continuous payments in order for the loan to be removed from non-accrual status. A loan is
classified as a troubled debt restructuring if we grant a concession to the borrower due to
the borrowers financial difficulties. Concessions may include reducing an interest rate to
below market terms, extending the maturity date with an interest rate lower than the
existing contractual rate, capitalizing past due interest or granting partial forgiveness of
indebtedness.
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Non-performing assets: |
||||||||
Residential real estate(1) |
$ | 5,668 | $ | 3,106 | ||||
Commercial real estate |
2,166 | 2,242 | ||||||
Construction |
3,207 | 6,630 | ||||||
Commercial business loans |
529 | 61 | ||||||
Installment, collateral and other loans |
9 | 7 | ||||||
Total non-accrual loans(2) |
11,579 | 12,046 | ||||||
Accruing loan past due 90 days or more |
| | ||||||
Troubled debt restructurings |
| | ||||||
Total non-performing loans |
11,579 | 12,046 | ||||||
Other real estate owned |
5,895 | 3,061 | ||||||
Total non-performing assets |
$ | 17,474 | $ | 15,107 | ||||
Total non-performing loans to total loans |
0.83 | % | 0.88 | % | ||||
Total non-performing assets to total assets |
1.07 | % | 0.96 | % | ||||
Allowance for loan losses as a percent of total loans |
1.01 | % | 0.91 | % | ||||
Allowance for loan losses as a percent of
non-performing loans |
121.72 | % | 104.09 | % |
(1) | Residential mortgage loans include one-to-four family mortgage loans, home equity loans, and home equity lines of credit. | |
(2) | The amount of income that was contractually due but not recognized on non-accrual loans totaled $610,000 and $233,000 at September 30, 2010 and December 31, 2009, respectively. |
19
Table of Contents
Changes in the allowance for loan losses are as follows:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Balance, beginning of period |
$ | 13,144 | $ | 13,060 | $ | 12,539 | $ | 12,553 | ||||||||
Provision for loan losses |
1,302 | 700 | 3,114 | 1,303 | ||||||||||||
Loans charged-off |
(375 | ) | (1,156 | ) | (1,594 | ) | (1,378 | ) | ||||||||
Recoveries of loans previously charged-off |
23 | 6 | 35 | 132 | ||||||||||||
Balance, end of period |
$ | 14,094 | $ | 12,610 | $ | 14,094 | $ | 12,610 | ||||||||
Management has established the allowance for loan loss in accordance with GAAP for the
period ending September 30, 2010 based on the current risk assessment and level of loss that
is believed to exist within the portfolio. This level of reserve is deemed an appropriate
estimate of probable loan losses inherent in the loan portfolio as of September 30, 2010
based upon the analysis conducted and given the portfolio composition, delinquencies, charge
offs and risk rating changes experienced during the first three quarters of 2010 and the
five-year evaluation period utilized in the analysis. Based on the qualitative assessment of
the portfolio and in thorough consideration of non-performing loans, management believes
that the allowance for loan losses properly supports the level of associated loss and risk.
7. Other Real Estate Owned
Other real estate owned was $5.9 million as of September 30, 2010 compared to $3.1
million at December 31, 2009. Other real estate owned consisted of $5.2 million of
commercial real estate properties and $710,000 of residential real estate properties which
are held for sale at September 30, 2010. Other real estate owned expenses were $498,000 and
$965,000 for the quarter and nine months ended September 30, 2010, respectively. Included in
the third quarter 2010 expense was one commercial other real estate owned property that was
written down by $380,000 to fair value. Other real estate owned at September 30, 2009
totaled $2.2 million, of which $2.0 million was commercial properties.
8. Benefit Plans
The amounts related to the Pension Plan, Supplemental Plans and the SERPs are reflected
in the tables that follow as Pension Plans.
Components of Net Periodic Benefit Cost
Other Post-Retirement | ||||||||||||||||
Pension Plans | Benefits | |||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost |
$ | 208 | $ | 223 | $ | 4 | $ | 3 | ||||||||
Interest cost |
319 | 310 | 30 | 27 | ||||||||||||
Expected return on plan assets |
(365 | ) | (263 | ) | | | ||||||||||
Amortization of net actuarial losses |
139 | 239 | 15 | 6 | ||||||||||||
Amortization of prior service cost |
(9 | ) | 81 | 5 | 5 | |||||||||||
Net periodic benefit cost |
$ | 292 | $ | 590 | $ | 54 | $ | 41 | ||||||||
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Pension Plans | Other Post-Retirement Benefits | |||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost |
$ | 623 | $ | 682 | $ | 13 | $ | 8 | ||||||||
Interest cost |
956 | 927 | 91 | 80 | ||||||||||||
Expected return on plan assets |
(1,095 | ) | (788 | ) | | | ||||||||||
Amortization of net actuarial losses |
419 | 717 | 45 | 19 | ||||||||||||
Amortization of prior service cost |
(27 | ) | 240 | 14 | 15 | |||||||||||
Net periodic benefit cost |
$ | 876 | $ | 1,778 | $ | 163 | $ | 122 | ||||||||
For the three months ended September 30, 2010, the Company contributed $22,000 to the
post-retirement benefit plan. The Company anticipates contributing an additional $72,000 in
the remaining three months of 2010 to the post-retirement benefit plan.
The Company contributed $900,000 to the Pension Plan in the first nine months of 2010 and
expects no additional contribution in the remaining three months of 2010.
The Company contributes to the 401(k) Plan, an automatic 3% of pay safe harbor
contribution for all employees that is fully vested. The 401(k) expense for the three months
ended September 30, 2010 and 2009 was $116,000 and $99,000, respectively. For the nine
months ended September 30, 2010 and 2009, 401(k) contribution expense totaled $364,000 and
$297,000, respectively.
While management believes the assumptions used to estimate expenses related to pension and
other post-retirement benefits are reasonable and appropriate, actual experience may
significantly differ. The pension expense is calculated based upon a number of actuarial
assumptions, including an expected long-term rate of return on our Pension Plan assets of
8.25% and a discount rate of 6.00% for the year ending December 31, 2010. In developing our
expected long-term rate of return assumption, we evaluated input from our actuary and
investment consultant, including their review of asset class return expectations as well as
long-term inflation assumptions, and their review of historical returns based on the current
target asset allocations of 62% equity securities, 33% debt securities and 5% real estate.
We regularly review our asset allocation and periodically rebalance our investments when
considered appropriate. While all future forecasting contains some level of estimation
error, we continue to believe that 8.25% falls within a range of reasonable long-term rate
of return expectations for our pension plan assets. The Company recognizes the funded status
of defined benefit plans in its consolidated statement of condition and measures its plan
assets and benefit obligations as of the date of the Companys fiscal year-end statement of
condition.
9. Share-Based Compensation
The Company maintains and operates the Rockville Financial, Inc. 2006 Stock Incentive
Award Plan (the Plan) as approved by the Companys Board of Directors and stockholders.
The Plan allows the Company to use stock options, stock awards, stock appreciation rights
and performance awards to attract, retain and reward performance of qualified employees and
others who contribute to the success of the Company. The Plan allows for the issuance of a
maximum of 349,830 restricted stock shares and 874,575 stock options. As of September 30,
2010, there were 31,907 restricted stock shares and 416,700 stock options that remain
available for future grants under the Plan. There were no awards granted in 2010.
Total employee and Director share-based compensation expense recognized for stock options
and restricted stock was $95,000 and $350,000 with a related tax benefit recorded of $33,000
and $122,000 for the three and nine months ended September 30, 2010 of which Director
share-based compensation expense recognized (in the consolidated statement of income as
other non-interest expense) was $55,000 and $182,000, respectively and officer share-based
compensation expense recognized (in the consolidated statement of income as salaries and
benefit expense) was $40,000 and $168,000, respectively. The total
charge of $350,000 for
the nine months
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ended September 30, 2010 includes $30,000 related to 2,836 vested restricted shares used for
income tax withholding on behalf of certain executives which occurred in the first nine
months of 2010.
Stock Options: The following table presents the activity related to stock options under the
Plan for the nine months ended September 30, 2010:
Weighted Average | Aggregate | |||||||||||||||
Weighted | Remaining | Intrinsic | ||||||||||||||
Stock | Average | Contractual Term | Value | |||||||||||||
Options | Exercise Price | (in years) | (In thousands) | |||||||||||||
Stock options outstanding at December 31, 2009 |
445,875 | $ | 13.18 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
| | ||||||||||||||
Stock options outstanding at September 30, 2010 |
445,875 | $ | 13.18 | 6.9 | $ | 284 | ||||||||||
Options exercisable at September 30, 2010 |
369,055 | $ | 13.73 | 6.7 | $ | | ||||||||||
The aggregate fair value of vested options was $119,000 and $249,000 for the nine
months ended September 30, 2010 and 2009, respectively.
As of September 30, 2010, the unrecognized cost related to the stock options awarded of
$178,000 will be recognized over a weighted-average period of 2.0 years.
The Company uses the Black-Scholes option pricing model for estimating the fair value of
stock options granted. No options were granted during 2010.
Restricted Stock: Restricted stock provides grantees with rights to shares of common stock
upon completion of a service period. During the restriction period, all shares are
considered outstanding and dividends are paid on the restricted stock. The following table
presents the activity for restricted stock for the nine months ended September 30, 2010:
Weighted Average | ||||||||
Number | Grant-Date | |||||||
of Shares | Fair Value | |||||||
Unvested as of December 31, 2009 |
41,695 | $ | 13.47 | |||||
Granted |
| | ||||||
Vested |
(9,950 | ) | 12.50 | |||||
Forfeited |
| | ||||||
Unvested as of September 30, 2010 |
31,745 | $ | 13.78 | |||||
The fair value of restricted shares that vested during the nine months ended
September 30, 2010 and 2009 was $124,000 and $136,000, respectively. There were no shares
of restricted stock granted during the nine months ended September 30, 2010. As of September
30, 2010, there was $188,000 of total unrecognized compensation cost related to unvested
restricted stock which is expected to be recognized over a weighted-average period of 1.4
years.
Of the remaining unvested restricted stock, 13,495 shares will vest in 2010, 7,950 shares in
2011, 7,950 in 2012, and 2,350 in 2013. All unvested restricted stock shares are expected to
vest.
10. Income Taxes
As of September 30, 2010 and December 31, 2009, there were no material uncertain tax
positions related to federal and state income tax matters. The Company is currently open to
audit under the statute of limitations by the Internal Revenue Service and state taxing
authorities for the years ended December 31, 2006 through 2009.
As of September 30, 2010 and December 31, 2009, the Company has not accrued any interest and
penalties related to certain tax positions.
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11. Accumulated Other Comprehensive (Loss) Income
Components of accumulated other comprehensive (loss) income, net of taxes, consist of
the following:
Net Unrealized Gain | ||||||||||||
Minimum Pension | on Available For | Accumulated Other | ||||||||||
Liability | Sale Securities | Comprehensive Loss | ||||||||||
(In thousands) | ||||||||||||
December 31, 2009 |
$ | (5,049 | ) | $ | 4,016 | $ | (1,033 | ) | ||||
Change |
293 | 308 | 601 | |||||||||
September 30, 2010 |
$ | (4,756 | ) | $ | 4,324 | $ | (432 | ) | ||||
The following table summarizes other comprehensive income and the related tax effects
for the nine months ended September 30, 2010:
September 30, 2010 | ||||
(In thousands) | ||||
Net income |
$ | 9,577 | ||
Unrealized gain on securities available for sale |
567 | |||
Income tax provision |
(259 | ) | ||
Net unrealized gain on securities available for sale |
308 | |||
Benefit plans amortization |
450 | |||
Income tax provision |
(157 | ) | ||
Net benefit plans amortization |
293 | |||
Total other comprehensive income, net of tax |
601 | |||
Total comprehensive income |
$ | 10,178 | ||
12. Commitments and Contingencies
Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial instruments with
off-balance sheet commitments to extend credit, undisbursed portions of construction loans,
unused commercial and consumer lines of credit and standby letters of credit. Commitments
generally have fixed expiration dates or other termination clauses and may require payment
of a fee by the customer. Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. Since these
commitments could expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the statements of financial condition. The contractual amounts of commitments to extend
credit represent the amounts of potential accounting loss should the contract be fully drawn
upon, the customer default, and the value of any existing collateral obligations become
worthless as it may for on-balance sheet instruments. The Company evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on managements credit
evaluation.
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Financial instruments whose contract amounts represent credit risk are as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Commitments to extend credit: |
||||||||
Commitments to grant loans |
$ | 88,453 | $ | 36,650 | ||||
Undisbursed construction loans |
66,388 | 86,492 | ||||||
Undisbursed home equity lines of credit |
137,269 | 125,511 | ||||||
Undisbursed commercial lines of credit |
57,572 | 57,713 | ||||||
Standby letters of credit |
10,306 | 10,555 | ||||||
Unused checking overdraft lines of credit |
93 | 94 | ||||||
$ | 360,081 | $ | 317,015 | |||||
Legal Matters: The Company is involved in various legal proceedings which have arisen
in the normal course of business. Management believes that resolution of these matters will
not have a material effect on the Companys financial condition or results of operations.
13. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Companys financial
statements. The regulations require the Company and the Bank meet specific capital
guidelines that involve quantitative measures of the Companys and the Banks assets,
liabilities, and certain off-balance sheet items, as calculated under regulatory accounting
practices. The Companys and the Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings, and other
factors. At September 30, 2010, the Bank exceeded all regulatory capital requirements and is
considered well capitalized under regulatory guidelines.
The following is a summary of the Companys and the Banks regulatory capital amounts and
ratios as of September 30, 2010 and December 31, 2009 compared to the Federal Deposit
Insurance Corporations requirements for classification as a well-capitalized institution
and for minimum capital adequacy:
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Minimum To Be Well | ||||||||||||||||||||||||
Minimum For Capital | Capitalized Under | |||||||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Rockville Bank: |
||||||||||||||||||||||||
September 30, 2010 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 170,220 | 13.3 | % | $ | 102,619 | 8.0 | % | $ | 128,274 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
155,439 | 12.1 | 51,300 | 4.0 | 76,950 | 6.0 | ||||||||||||||||||
Tier 1 capital to total average assets |
155,439 | 9.7 | 64,231 | 4.0 | 80,289 | 5.0 | ||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 158,870 | 13.1 | % | $ | 96,976 | 8.0 | % | $ | 121,220 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets |
145,654 | 12.0 | 48,488 | 4.0 | 72,732 | 6.0 | ||||||||||||||||||
Tier 1 capital to total average assets |
145,654 | 9.3 | 62,478 | 4.0 | 78,097 | 5.0 | ||||||||||||||||||
Rockville Financial, Inc.: |
||||||||||||||||||||||||
September 30, 2010 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 179,135 | 14.0 | % | $ | 102,656 | 8.0 | % | N/A | N/A | ||||||||||||||
Tier 1 capital to risk weighted assets |
164,354 | 12.8 | 51,321 | 4.0 | N/A | N/A | ||||||||||||||||||
Tier 1 capital to total average assets |
164,354 | 10.0 | 65,545 | 4.0 | N/A | N/A | ||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 170,559 | 14.1 | % | $ | 96,978 | 8.0 | % | N/A | N/A | ||||||||||||||
Tier 1 capital to risk weighted assets |
157,343 | 13.0 | 48,489 | 4.0 | N/A | N/A | ||||||||||||||||||
Tier 1 capital to total average assets |
157,343 | 10.1 | 62,028 | 4.0 | N/A | N/A |
Connecticut law restricts the amount of dividends that the Bank can pay based on
earnings for the current year and the preceding two years. As of September 30, 2010, $17.7
million is available for payment of dividends.
A reconciliation of the Companys capital to regulatory capital is as follows:
September 30, 2010 | December 31, 2009 | |||||||
(In thousands) | ||||||||
Total capital per financial statements |
$ | 165,139 | $ | 157,428 | ||||
Accumulated other comprehensive loss |
432 | 1,033 | ||||||
Intangible assets |
(1,149 | ) | (1,070 | ) | ||||
Servicing assets |
(68 | ) | (48 | ) | ||||
Total Tier 1 capital |
164,354 | 157,343 | ||||||
Allowance for loan and other losses includible in Tier 2 |
||||||||
capital |
14,781 | 13,216 | ||||||
Total capital per regulatory reporting |
$ | 179,135 | $ | 170,559 | ||||
14. Subsequent Event
Entry into a Material Definitive Agreement
On September 16, 2010, the Boards of Directors of Rockville Financial, Inc. (the Company),
Rockville Financial MHC, Inc. (the Mutual Holding Company), and Rockville Bank (the Bank)
adopted the Plan of Conversion and Reorganization of the Mutual Holding Company (the Plan)
pursuant to which the Mutual Holding Company will undertake a second-step conversion and
cease to exist. The Bank will reorganize from a two-tier mutual holding company structure to a
stock holding company structure. The Mutual Holding Company currently owns 56.7% of the shares
of common stock of the Company.
Pursuant to the Plan, (i) the Bank will become a wholly owned subsidiary of Rockville
Financial New, Inc. (the New Holding Company), a Connecticut corporation recently formed by
the Company, (ii) the shares of common stock of the Company held by persons other than the
Mutual Holding Company (whose shares will be canceled) will be converted into shares of common
stock of the New Holding Company pursuant to an exchange ratio
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intended to preserve the percentage ownership interests of such persons, and (iii) the
New Holding Company will offer and sell shares of its common stock representing the ownership
interest of the Mutual Holding Company, including its assets other than its shares in the
Company, to eligible depositors of the Bank and certain other persons in a subscription
offering. The Plan is subject to regulatory approval as well as the approval of the Mutual
Holding Companys corporators and the Companys stockholders (including the approval of a
majority of the shares held by persons other than the Mutual Holding Company).
Shares not subscribed for in the subscription offering are expected to be available for sale
in a community offering to members of the local community and the general public, and if
necessary in a syndicated community offering. The number of shares to be sold in the
conversion offering and the exchange ratio for current stockholders of the Company are based
on an independent appraisal.
The foregoing summary of the Plan is not complete and is qualified in its entirety by
reference to the complete text of such document, which is filed as Exhibit 2.1 to the
Companys Current Report on Form 8-K dated September 16, 2010 and which is incorporated herein
by reference in its entirety.
The Company announced the adoption of the Plan in a press release dated September 16, 2010, in
which the Company also announced the filing of a Registration Statement on Form S-1 by the New
Holding Company.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that are within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based upon the current
beliefs and expectations of our management and are subject to significant risks and
uncertainties. These risks and uncertainties could cause our results to differ materially
from those set forth in such forward-looking statements.
Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts. Words such as believes, anticipates, expects, intends,
plans, estimates, targeted and similar expressions, and future or conditional verbs,
such as will, would, should, could or may are intended to identify forward-looking
statements but are not the only means to identify these statements.
Forward-looking statements involve risks and uncertainties. Actual conditions, events or
results may differ materially from those contemplated by a forward-looking statement.
Factors that could cause this difference many of which are beyond our control include
without limitation the following:
| Local, regional and national business or economic conditions may differ from those expected. | ||
| The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Boards interest rate policies, may adversely affect our business. | ||
| The ability to increase market share and control expenses may be more difficult than anticipated. | ||
| Changes in laws and regulatory requirements (including those concerning taxes, banking, securities and insurance) may adversely affect us or our businesses. | ||
| Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, may affect expected financial reporting. | ||
| Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock. | ||
| We are subject to lending risk and could incur losses in our loan portfolio despite our underwriting practices. Changes in real estate values could also increase our lending risk. | ||
| Changes in demand for loan products, financial products and deposit flow could impact our financial performance. | ||
| Our inability to recruit and retain additional high-skilled personnel, in particular the new Chief Executive Officer, could result in disruptions to our business or operations. | ||
| Strong competition within our market area may limit our growth and profitability. |
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| We may not manage the risks involved in the foregoing as well as anticipated. | ||
| If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease. | ||
| Our stock value may be negatively affected by federal regulations restricting takeovers and our mutual holding company structure. | ||
| Persons who purchase our stock will own a minority of Rockville Financial, Inc.s common stock and will not be able to exercise voting control over most matters put to a vote of stockholders. | ||
| Further implementation of our stock benefit plans could increase our costs, which will reduce our income. | ||
| Because we intend to continue to increase our commercial real estate and commercial business loan originations, our lending risk may increase, and downturns in the real estate market or local economy could adversely affect our earnings. | ||
| The trading volume in our stock is less than in larger publicly traded companies which can cause price volatility, hinder the ability to sell our common stock and may lower the market price of the stock. | ||
| The Emergency Economic Stabilization Act (EESA) of 2008 has and may continue to have a significant impact on the banking industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 and is expected to result in dramatic regulatory changes that will affect the industry in general, and impact the Companys competitive position in ways that cant be predicted at this time. |
Any forward-looking statements made by or on behalf of us in this Form 10-Q speak only as of
the date of this Form 10-Q. We do not undertake to update forward-looking statements to
reflect the impact of circumstances or events that arise after the date the forward-looking
statement was made. The reader should; however, consult any further disclosures of a
forward-looking nature we may make in future filings.
Overview
Rockville Financial, Inc. (the Company) is a state-chartered mid-tier stock holding
company formed on December 17, 2004 and the Company holds all the common stock of Rockville
Bank (the Bank). Rockville Financial MHC, Inc. holds 56.7% percent of the Companys
outstanding common stock, and the Company holds all the outstanding common stock of
Rockville Bank (the Bank). Pursuant to the terms of the plan of conversion adopted by
Existing Rockville Financial MHC, Inc., Rockville Financial, Inc, and Rockville Bank on
September 16, 2010, Rockville Financial MHC, Inc. will convert from a partially public
mutual holding company structure to a fully public stock holding company structure. After
the conversion, Rockville Financial MHC, Inc and Existing Rockville Financial, Inc. will
cease to exist and a new subsidiary, Rockville Financial New, Inc., will be formed.
The Company strives to remain a leader in meeting the financial service needs of the local
community and to provide quality service to the individuals and businesses in the market
areas that it has served since 1858. Rockville Bank is a community-oriented provider of
traditional banking products and services to business organizations and individuals,
offering products such as residential and commercial real estate loans, consumer loans and a
variety of deposit products. Our business philosophy is to remain a community-oriented
franchise and continue to focus on providing superior customer service to meet the financial
needs of the communities in which we operate. Current strategies include expanding our
banking network by pursuing new branch locations and branch acquisition opportunities in our
market area, continuing our residential mortgage lending activities which comprise a
majority of our loan portfolio and expanding our commercial real estate and commercial
business lending activities.
Critical Accounting Policies
The accounting policies followed by the Company and its subsidiaries conform with accounting
principles generally accepted in the United States of America and with general practices
within the banking industry.
Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that our most critical accounting
policies, which involve the most complex subjective decisions or assessments, relate to
allowance for loan losses, other-than-temporary impairment of investment securities, income
taxes, pension and other post-retirement benefits and stock-based compensation.
27
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Allowance for Loan Losses: The allowance for loan losses is the amount estimated
by management as necessary to cover probable credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established in accordance with GAAP through the
provision for loan losses which is charged against income. Management believes the policy is
critical because determination of the amount of the allowance involves significant judgments
and assumptions.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses
and presents the evaluation to both the Board Lending Committee and the Board of Directors.
In addition, the credit area of the Bank is responsible for the accuracy of loan risk
ratings and prepares an Asset Quality Report on a quarterly basis and provides summary
reports to the Board Lending Committee on a monthly basis. A variety of factors are
considered in establishing this estimate including, but not limited to, historical loss and
charge off data, current economic conditions, historical and current delinquency statistics,
geographic and industry concentrations, the adequacy of the underlying collateral, the
financial strength of our borrowers, results of internal and external loan reviews and other
relevant factors. This evaluation is inherently subjective as it requires material estimates
by management that may be susceptible to significant change.
The analysis has three components: specific, general and unallocated allowances. The
specific allowance relates to loans classified as impaired where an allowance is measured by
determining an expected shortfall in collection or, for collateral-dependent loans, the
shortfall of the fair value of the collateral adjusted for market conditions and selling
expenses compared to the outstanding loan balance. These loans include those in non-accrual
status, restructured loans or loans which may be collateral dependent. Individual
evaluations of cash flow or the fair value of collateral supporting these obligations is
performed in order to determine the most probable level of loss or impairment. Based on this
analysis, specific reserves are assigned to the impaired loan and are incorporated in the
calculation of the allowance for loan losses.
The general allowance is determined by segregating the remaining loans by type of loan, risk
weighting (if applicable) and payment history. The unallocated allowance represents the
results of an analysis that measures the probable losses inherent in each portfolio.
Homogenous loan pools are determined by loan type and are comprised of: 1) residential first
mortgages, 2) commercial real estate mortgages, 3) residential second mortgages, 4)
commercial loans, 5) construction loans, 6) SBA and USDA guaranteed loans, as well as,
smaller loan pools consisting of unsecured consumer loans, collateral loans and auto loans.
Each of these loan types is evaluated on a quarterly basis to determine historical loss
rates; delinquency; growth and composition trends within the portfolio; the impact of
management and underwriting changes; shifts in risk ratings; and regional and economic
conditions influencing portfolio performance with management allocating loss factors based
on these evaluations. This analysis establishes factors that are applied to the loan groups
to determine the amount of this component of the allowance.
The unallocated allowance represents the results of an analysis that measures the probable
losses inherent in each portfolio. If the allowance for loan losses is too low, the Company
may incur higher provisions for loan loss expense in the future resulting in lower net
income. If an estimate of the allowance for loan losses is too high, the Company may
experience lower provisions for loan loss expense resulting in higher net income. The
unallocated allowance increased to $279,000 as of September 30, 2010 from $209,000 as of
December 31, 2009. The unallocated allowance supports the possible loss that exists in
emerging problem loans that cannot be fully quantified or disposition costs that may be
affected by conditions not fully understood at this time. Based on the qualitative
assessment of the portfolio and in thorough consideration of non-performing loans,
management believes that the allowance for loan losses properly supports the level of
associated loss and risk.
At the time of loan origination, a risk rating based on a nine point grading system is
assigned to each loan based on the loan officers assessment of risk. More complex loans,
such as commercial business loans and commercial real estate, require that our internal
independent credit area further evaluate the risk rating of the individual loan, with the
credit area having final determination of the appropriate risk rating. These more complex
loans and relationships receive an in-depth analysis and periodic review to assess the
appropriate risk rating on a post-closing basis with changes made to the risk rating as the
borrowers and economic conditions warrant. The credit quality of our loan portfolio is
reviewed by a third-party risk assessment firm and by our internal credit management
function. Review findings are reported periodically to senior management, the Board of
Directors Lending Committee and the Board of Directors. This process is supplemented with
several risk assessment tools including monitoring of delinquency levels, analysis of
historical loss experience by loan type, identification of portfolio concentrations by
borrower and industry, and a review of economic conditions that might impact loan quality.
Based on these findings the allowance for each loan type is evaluated. The allowance for
loan losses is calculated on a quarterly basis and reported to the Board of Directors.
Any loan that is 90 or more days delinquent is placed on non-accrual status and classified
as a non-performing
asset. A loan is classified as impaired when it is probable that we will be unable to
collect all amounts due in
accordance with the terms of the loan agreement. An allowance is maintained for impaired
loans to reflect the
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difference, if any, between the principal balance of the loan and the present value of
projected cash flows, observable fair value or the loans collateral value. In addition, our
bank regulatory agencies periodically review the adequacy of the allowance for loan losses
as part of their review and examination processes. The regulatory agencies may require that
we recognize additions to the allowance based on their judgments of information available to
them at the time of their review or examination.
Each quarter, management, in conjunction with the Board of Directors Lending Committee,
evaluates the total balance of the allowance for loan losses based on several factors some
of which are not loan specific, but are reflective of the inherent losses in the loan
portfolio. This process includes, but is not limited to, a periodic review of loan
collectability in light of historical experience, the nature and volume of loan activity,
conditions that may affect the ability of the borrower to repay, underlying value of
collateral, if applicable, and economic conditions in our immediate market area. First,
loans are grouped by type within each risk weighting classification status. All loans 90
days or more delinquent or classified as trouble debt restructuring are evaluated
individually, based primarily on the value of the collateral securing the loan and the
ability of the borrower to repay as agreed.
Specific loan loss allowances are established as required by this analysis. All loans for
which a specific loss
allowance has not been assigned are segregated by loan type, delinquency status or loan risk
rating grade and a loss allowance is established by using loss experience data and
managements judgment concerning other matters it considers significant including the
current economic environment. The allowance is allocated to each category of loan based on
the results of the above analysis.
This analysis process is both quantitative and subjective as it requires management to make
estimates that are susceptible to revisions as more information becomes available. Although
we believe that we have established the allowance at levels to absorb probable losses,
future additions may be necessary if economic or other conditions in the future differ from
the current environment.
Other-than-Temporary Impairment of Securities: On a quarterly basis, securities with
unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair
value is temporary or other-than-temporary. It is assessed whether the decline in value is
from company-specific events, industry developments, general economic conditions, credit
losses on debt or other reasons. After the reasons for the decline are identified, further
judgments are required as to whether those conditions are likely to reverse and, if so,
whether that reversal is likely to result in a recovery of the fair value of the investment
in the near term. If it is judged not to be near term, a charge is taken which results in a
new cost basis. Declines in the fair value of available for sale securities below their cost
that are deemed to be other-than-temporary are reflected in earnings for equity securities
and for debt securities that have an identified credit loss. Losses on debt securities with
no identified credit loss component are reflected in other comprehensive income. Held to
maturity securities are comprised of U.S. government-sponsored mortgage-backed securities
with no unrealized losses at September 30, 2010. Management believes the policy for
evaluating securities for other-than-temporary impairment is critical because it involves
significant judgments by management and could have a material impact on our net income.
Income Taxes: The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets are reduced by an
allowance when, in the opinion of management, it is more likely than not that all or some
portion of the deferred tax assets will not be realized.
In 1998, the Company created and has since maintained a passive investment company
(PIC), as permitted by Connecticut law. At September 30, 2010 there were no material
uncertain tax positions related to federal and state income tax matters. The Company is
currently open to audit under the statute of limitations by the Internal Revenue Service and
state taxing authorities for the years ended December 31, 2006 through 2009. If the state
were to determine that the PIC was not in compliance with statutory requirements, a material
amount of taxes could be due. As of September 30, 2010, management believes it is more
likely than not that the deferred tax assets will be realized through future reversals of
existing taxable temporary differences. As of September 30, 2010, our net deferred tax asset
was $10.6 million and there was no valuation allowance.
Pension and Other Post-retirement Benefits: We have a noncontributory defined benefit
pension plan that provides benefits for substantially all employees hired before January 1,
2005 who meet certain requirements as to age and length of service. The benefits are based
on years of service and average compensation, as defined. Our funding policy is to
contribute annually the maximum amount that could be deducted for federal income tax
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purposes, while meeting the minimum funding standards established by the Employee Retirement
Security Act of 1974 (ERISA).
In addition to providing pension benefits, we provide certain health care and life insurance
benefits for retired employees. Participants or eligible employees hired before March 1993
become eligible for the benefits if they retire after reaching age 62 with five or more
years of service. A fixed percent of annual costs are paid depending on length of service at
retirement. We accrue for the estimated costs of these other post-retirement benefits
through charges to expense during the years that employees render service. The Company makes
contributions to cover its current benefits paid under this plan.
Management believes the policy for determining pension and other post-retirement benefit
expenses is critical because judgments are required with respect to the appropriate discount
rate, rate of return on assets, salary increases and other items. Management reviews and
updates the assumptions annually. If our estimate of pension and post-retirement expense is
too low we may experience higher expenses in the future reducing our net income. If our
estimate is too high, we may experience lower expenses in the future increasing our net
income.
Share-based Compensation: The Company accounts for stock options and restricted stock based
on the grant date fair value of the award. These costs are recognized over the period during
which an employee is required to provide services in exchange for the award, the requisite
service period (usually the vesting period). The Company expenses the grant date fair value
of the Companys stock options and restricted stock with a corresponding increase in equity
or a liability, depending on whether the instruments granted satisfy the equity or liability
classification criteria. The Company uses the Black-Scholes option valuation model to value
stock options. Determining the appropriate fair-value model and calculating the estimated
fair value of stock-based awards at the grant date requires considerable judgment, including
estimating stock price volatility, expected option life, expected dividend rate, risk-free
interest rate and expected forfeiture rate. The Company develops estimates based on
historical data and market information which can change significantly over time.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2010 and
2009
The Companys results of operations depend primarily on net interest income, which is the
difference between the interest income from earning assets, such as loans and investments,
and the interest expense incurred on interest-bearing liabilities, such as deposits and
borrowings. The Company also generates non-interest income, including service charges on
deposit accounts, mortgage servicing income, bank-owned life insurance income, safe deposit
box rental fees, brokerage fees, insurance commissions and other miscellaneous fees. The
Companys non-interest expense primarily consists of employee compensation and benefits,
occupancy and equipment, service bureau fees, and other non-interest expenses. The Companys
results of operations are also affected by its provision for loan losses. The following
discussion provides a summary and comparison of the Companys operating results for the
three and nine months ended September 30, 2010 and 2009.
Income Statement Summary
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Net interest income |
$ | 13,553 | $ | 11,300 | $ | 2,253 | $ | 40,110 | $ | 33,864 | $ | 6,246 | ||||||||||||
Provision for loan losses |
1,302 | 700 | 602 | 3,114 | 1,303 | 1,811 | ||||||||||||||||||
Non-interest income |
2,746 | 1,809 | 937 | 6,798 | 5,382 | 1,416 | ||||||||||||||||||
Non-interest expense |
9,876 | 8,842 | 1,034 | 28,903 | 27,661 | 1,242 | ||||||||||||||||||
Income before income taxes |
5,121 | 3,567 | 1,554 | 14,891 | 10,282 | 4,609 | ||||||||||||||||||
Provision for income taxes |
1,862 | 1,227 | 635 | 5,314 | 3,432 | 1,882 | ||||||||||||||||||
Net income |
$ | 3,259 | $ | 2,340 | $ | 919 | $ | 9,577 | $ | 6,850 | $ | 2,727 | ||||||||||||
Net income increased by $919,000 to $3.3 million for the quarter ended September 30, 2010
compared to $2.3 million for the same period last year. The increase in net income primarily
resulted from an increase in net interest income of $2.3 million and non-interest income of
$937,000 which was partially offset by an increase of $1.0 million in non-interest expense,
an increase of $602,000 in the provision for loan loss expense and an increase in income tax
provision of $635,000. The increase in net interest income was due to a reduction of deposit
expense of $2.0 million and higher interest and dividend income of $385,000. The increase in
non-interest income was the result of the recognition of gains made on the sale of loans
held for sale totaling
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$669,000 compared to $328,000 in the third quarter of 2009 and a $572,000 increase in
service charges and fees to $1.9 million in the third quarter of 2010. The increase in
service charges and fees resulted from $628,000 of loan fee income generated by Rockville
Bank Mortgage, Inc. and an additional $82,000 in ATM fees which was offset by a net
reduction in insufficient funds fees totaling $123,000 compared to the third quarter of 2009.
Non-interest expense increased $1.0 million for the quarter-ended September 2010 as compared
to the same period in 2009. Increases in salaries and employee benefits of $248,000,
service bureau fees of $68,000, professional fees of $176,000, marketing and promotions of
$98,000, FDIC assessments of $31,000 and other real estate owned of $487,000, including
$380,000 in write offs, and reductions in occupancy and equipment of $71,000 accounted for
much of the increase for the quarter. Income before income taxes increased $1.5 million to
$5.1 million in the third quarter of 2010 from $3.6 million for the same quarter last year.
Year to date net income increased by $2.7 million to $9.6 million compared to $6.9 million
for the same period last year. The increase in net income resulted from an increase in net
interest income of $6.2 million and additional non-interest income of $1.4 million, which
was partially offset by increases in the provision for loan loss expense of $1.8 million,
non-interest expense of $1.2 million and income tax provision of $1.9 million. The increase
in net interest income was due to a reduction of interest expense on deposits of $6.8
million offset by lower interest and dividend income of $492,000. The increase of
non-interest income resulted from $1.3 million of loan fee income generated by Rockville
Bank Mortgage, Inc., an increase of $536,000 in gains on the sale of loans and the absence
of additional other-than-temporary impairment charges compared to $357,000 last year.
Offsetting these improvements was a reduction of $746,000 in securities gains in 2010
compared to the same period last year.
Non-interest expense increased $1.2 million for the nine-months ended September 2010 as
compared to the same period in 2009. Increases in salaries and employee benefits of
$487,000, service bureau fees of $82,000, professional fees of $233,000, marketing and
promotions of $151,000, other real estate owned of $954,000 and reductions in occupancy and
equipment of $86,000 and FDIC assessments of $667,000 accounted for much of the increase.
Income before income taxes increased $4.6 million to $14.9 million in the first nine months
of 2010 compared to $10.3 million compared to the same period last year.
Net Interest Income Analysis
Average Balance Sheets, Interest and Yields/Costs: The following table sets forth average
balance sheets, average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Loans held for sale and
non-accrual loans are included in the computation of interest-earning average balances, with
non-accrual loans carrying a zero yield. The yields set forth below include the effect of
deferred fees, discounts and premiums that are amortized or accreted to interest income or
expense.
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Three Months Ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Interest and | Yield/ | Interest and | ||||||||||||||||||||||
Average Balance | Dividends | Cost | Average Balance | Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable, net (1) |
$ | 1,388,227 | $ | 17,833 | 5.14 | % | $ | 1,334,786 | $ | 17,222 | 5.16 | % | ||||||||||||
Investment securities |
125,260 | 1,235 | 3.94 | 128,723 | 1,461 | 4.54 | ||||||||||||||||||
Federal Home Loan Bank stock |
17,007 | | | 17,007 | | | ||||||||||||||||||
Other earning assets |
5,245 | 1 | 0.08 | 1,709 | 1 | 0.23 | ||||||||||||||||||
Total interest-earning assets |
1,535,739 | 19,069 | 4.97 | 1,482,225 | 18,684 | 5.04 | ||||||||||||||||||
Non-interest-earning assets |
70,305 | 59,772 | ||||||||||||||||||||||
Total assets |
$ | 1,606,044 | $ | 1,541,997 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW and money market accounts |
$ | 352,016 | 389 | 0.44 | $ | 322,846 | 578 | 0.72 | ||||||||||||||||
Savings accounts (5) |
161,803 | 136 | 0.34 | 136,585 | 149 | 0.44 | ||||||||||||||||||
Time deposits |
484,208 | 2,290 | 1.89 | 529,702 | 4,080 | 3.08 | ||||||||||||||||||
Total interest-bearing deposits |
998,027 | 2,815 | 1.13 | 989,133 | 4,807 | 1.94 | ||||||||||||||||||
Advances from the Federal Home Loan Bank |
272,616 | 2,701 | 3.96 | 256,485 | 2,577 | 4.02 | ||||||||||||||||||
Total interest-bearing liabilities |
1,270,643 | 5,516 | 1.74 | % | 1,245,618 | 7,384 | 2.37 | % | ||||||||||||||||
Non-interest-bearing liabilities |
170,298 | 143,844 | ||||||||||||||||||||||
Total liabilities |
1,440,941 | 1,389,462 | ||||||||||||||||||||||
Stockholders equity |
165,103 | 152,535 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 1,606,044 | $ | 1,541,997 | ||||||||||||||||||||
Net interest income |
$ | 13,553 | $ | 11,300 | ||||||||||||||||||||
Net interest rate spread (2) |
3.23 | % | 2.67 | % | ||||||||||||||||||||
Net interest-earning assets (3) |
$ | 265,096 | $ | 236,607 | ||||||||||||||||||||
Net interest margin (4) |
3.53 | % | 3.05 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
120.86 | % | 119.00 | % |
(1) | Includes loans held for sale. | |
(2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. | |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. | |
(4) | Net interest margin represents the annualized net interest income divided by average total interest-earning assets. | |
(5) | Includes mortgagors and investors escrow accounts. |
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Interest and | Yield/ | Interest and | ||||||||||||||||||||||
Average Balance | Dividends | Cost | Average Balance | Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable, net (1) |
$ | 1,369,198 | $ | 52,831 | 5.14 | % | $ | 1,325,770 | $ | 51,965 | 5.23 | % | ||||||||||||
Investment securities |
122,343 | 3,795 | 4.14 | 145,453 | 5,156 | 4.73 | ||||||||||||||||||
Federal Home Loan Bank stock |
17,007 | | | 17,007 | | | ||||||||||||||||||
Other earning assets |
6,618 | 4 | 0.08 | 1,048 | 1 | 0.13 | ||||||||||||||||||
Total interest-earning assets |
1,515,166 | 56,630 | 4.98 | 1,489,278 | 57,122 | 5.11 | ||||||||||||||||||
Non-interest-earning assets |
67,904 | 58,746 | ||||||||||||||||||||||
Total assets |
$ | 1,583,070 | $ | 1,548,024 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW and money market accounts |
$ | 348,607 | 1,182 | 0.45 | $ | 305,119 | 2,017 | 0.88 | ||||||||||||||||
Savings accounts (5) |
158,607 | 410 | 0.34 | 134,551 | 475 | 0.47 | ||||||||||||||||||
Time deposits |
483,681 | 7,076 | 1.95 | 529,451 | 12,947 | 3.26 | ||||||||||||||||||
Total interest-bearing deposits |
990,895 | 8,668 | 1.17 | 969,121 | 15,439 | 2.12 | ||||||||||||||||||
Advances from the Federal Home Loan Bank |
266,162 | 7,852 | 3.93 | 292,320 | 7,819 | 3.57 | ||||||||||||||||||
Total interest-bearing liabilities |
1,257,057 | 16,520 | 1.75 | % | 1,261,441 | 23,258 | 2.46 | % | ||||||||||||||||
Non-interest-bearing liabilities |
163,565 | 137,014 | ||||||||||||||||||||||
Total liabilities |
1,420,622 | 1,398,455 | ||||||||||||||||||||||
Stockholders Equity |
162,448 | 149,569 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 1,583,070 | $ | 1,548,024 | ||||||||||||||||||||
Net interest income |
$ | 40,110 | $ | 33,864 | ||||||||||||||||||||
Net interest rate spread (2) |
3.23 | % | 2.65 | % | ||||||||||||||||||||
Net interest-earning assets (3) |
$ | 258,109 | $ | 227,837 | ||||||||||||||||||||
Net interest margin (4) |
3.53 | % | 3.03 | % | ||||||||||||||||||||
Average interest-earning assets to average
interest-bearing liabilities |
120.53 | % | 118.06 | % |
(1) | Includes loans held for sale. | |
(2) | Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. | |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. | |
(4) | Net interest margin represents the annualized net interest income divided by average total interest-earning assets. | |
(5) | Includes mortgagors and investors escrow accounts. |
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Rate-Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest
income for the periods indicated. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior rate). The net
column represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have been
allocated proportionately based on the changes due to rate and the changes due to volume.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2010 | |||||||||||||||||||||||
Compared to | Compared to | |||||||||||||||||||||||
September 30, 2009 | September 30, 2009 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
Due To | Due To | |||||||||||||||||||||||
Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest and dividend income: |
||||||||||||||||||||||||
Loans receivable |
$ | 686 | $ | (75 | ) | $ | 611 | $ | 1,688 | $ | (822 | ) | $ | 866 | ||||||||||
Securities interest, dividends & income from other assets |
1 | (227 | ) | (226 | ) | (575 | ) | (783 | ) | (1,358 | ) | |||||||||||||
Total earning assets |
687 | (302 | ) | 385 | 1,113 | (1,605 | ) | (492 | ) | |||||||||||||||
Interest expense: |
||||||||||||||||||||||||
NOW and money market accounts |
49 | (238 | ) | (189 | ) | 255 | (1,090 | ) | (835 | ) | ||||||||||||||
Savings accounts |
25 | (38 | ) | (13 | ) | 76 | (141 | ) | (65 | ) | ||||||||||||||
Time deposits |
(326 | ) | (1,464 | ) | (1,790 | ) | (1,039 | ) | (4,832 | ) | (5,871 | ) | ||||||||||||
Total interest-bearing deposits |
(252 | ) | (1,740 | ) | (1,992 | ) | (708 | ) | (6,063 | ) | (6,771 | ) | ||||||||||||
FHLB Advances |
159 | (35 | ) | 124 | (727 | ) | 760 | 33 | ||||||||||||||||
Total interest-bearing liabilities |
(93 | ) | (1,775 | ) | (1,868 | ) | (1,435 | ) | (5,303 | ) | (6,738 | ) | ||||||||||||
Change in net interest income |
$ | 780 | $ | 1,473 | $ | 2,253 | $ | 2,548 | $ | 3,698 | $ | 6,246 | ||||||||||||
Net Interest Income: Net interest income before the provision for loan loss was $13.6
million for the three months ended September 30, 2010, compared to $11.3 million for the
same period in the prior year, an increase of $2.3 million. Average earning assets
increased by $53.5 million, or 3.6%, to $1.54 billion. In the third quarter of 2010
interest income on earning assets was $19.1 million, an increase
of $385,000, yielding an
average of 4.97%, a decrease of 7 basis points, as compared to the same period of 2009.
Average interest-bearing liabilities increased $25.0 million, or 2.0% to $1.27 billion for
the three months ended September 30, 2010, costing an average of 1.74%, a decrease of 63
basis points. Average time deposits declined $45.5 million in the third quarter of 2010.
Average NOW and money market account balances increased $29.2 million and average savings
account balances increased $25.2 million compared to the same period last year. In the
third quarter of 2010, the cost of interest-bearing liabilities was $5.5 million, a decrease
of $1.9 million from the same period last year.
The increase in the average interest-earning assets reflects the net impact of continued
strong average loan growth of $53.4 million and an average reduction in available for sale
securities of $3.5 million. The increase in average interest-bearing liabilities reflects
the net impact of continued growth of average core interest-bearing deposits of $54.4
million and FHLB borrowings of $16.1 million which was offset by reductions in average time
deposits of $45.5 million. Average net interest-earning assets increased by $28.5 million
to $265.1 million. The Companys net interest margin increased 48 basis points to 3.53%
compared to 3.05% for the same period in the prior year. The Companys net interest rate
spread increased 56 basis points to 3.23% due to a decrease in the cost of funds of 63 basis
points which was partially offset by a 7 basis point reduction in the earning asset yield.
Net interest income before the provision for loan loss was $40.1 million for the nine months
ended September 30, 2010, compared to $33.9 million for the same period in the prior year.
The increase in net interest income of $6.2 million, or 18.4%, is primarily due to a $30.3
million, or 13.3%, increase in average net interest-earning assets, in combination with a 50
basis point increase in our net interest margin to 3.53%. Average earning assets increased
by $25.9 million, or 1.7%, to $1.52 billion while average interest-bearing liabilities
declined $4.4 million, or 0.4% to 1.26 billion. The increase in the average net
interest-earning assets reflects the net impact of continued
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strong loan growth funded primarily by NOW and money market accounts. Our net interest rate
spread increased 58 basis points to 3.23% from 2.65% for the same period in the prior year
due to a 71 basis point decline in our average cost of funds partially offset by a 13 basis
point decrease in our average earning asset yield resulting from the decline in interest
rates.
Interest and Dividend Income: Interest and dividend income increased $385,000, or 2.1%, to
$19.1 million for the three months ended September 30, 2010 from $18.7 million for the same
period in the prior year. A decline of $3.5 million of average available for sale securities
along with a 60 basis point decline in rates accounted for a $226,000 reduction in interest
and dividend income on investment securities. Interest income on loans receivable increased
$611,000, or 3.6%, to $17.8 million. The increase in loan interest income was due growth in
average loans for the period of $53.4 million, or 4.0% which was offset by a 2 basis point
reduction on average loan yields. The average yield on interest-earning assets is primarily
impacted by changes in market interest rates as well as changes in the volume and relative
mix of interest-earning assets. The Companys yield on interest-earning assets decreased 7
basis points to 4.97% from 5.04%. The decrease in the average yield was attributable to the
addition of new loans and investments at lower yields than the third quarter last year and
adjustable rate loans repricing downward. The effect of the lowering rates on the Companys
portfolio is delayed for adjustable-rate residential mortgage loans, with interest rates
which adjust annually based on the one-year Constant Maturity Treasury Bill Index, after
either a one, three, four, five, seven, or nine-year initial fixed rate period. The prime
rate used as an index to re-price various commercial and home equity adjustable loans
remained unchanged at 3.25% for the three months ended September 30, 2010 compared to the
same period last year. The one-year Constant Maturity Treasury Bill Index used to re-price
adjustable rate residential mortgages decreased 16 basis points during the past year to
0.25% at September 30, 2010 compared to 0.41% at September 30, 2009.
For the nine months ended September 30, 2010, interest and dividend income decreased
$492,000, or 0.9%, to $56.6 million from $57.1 million for the same period in the prior
year. The Companys interest-earning assets grew $25.9 million while the yield on
interest-earning assets decreased 13 basis points to 4.98% from 5.11%. A decline of $23.1
million of average available for sale securities coupled with a 59 basis point decline in
yield accounted for a $1.4 million reduction in interest and dividend income. Interest
income on loans receivable increased $866,000, or 1.7%, to $52.8 million compared to $52.0
million last year. The increase in loan interest income was due to growth in average loans
for the period of $43.4 million, or 3.3% offset by a 9 basis point reduction on average loan
yields.
Interest Expense: Interest expense for the three months ended September 30, 2010 decreased
$1.9 million, or 25.3%, to $5.5 million from $7.4 million compared to the same period last
year. The savings resulted from a decrease of 63 basis points paid on average
interest-bearing liabilities in combination with a $25.0 million, or a 2.0%, increase in
average interest-bearing liabilities. The decrease in the cost of funds was primarily due to
the impact of the sustained low interest rate environment had on the Banks time deposits
during the third quarter of 2010 resulting in expense savings of $1.8 million. Average
balances on interest-bearing deposits rose to $998.0 million, an increase of $8.9 million as
the growth in NOW and money market accounts of $29.2 million and savings accounts of $25.2
million offset the reduction of $45.5 million of time deposits. Generally, management would
prefer to fund growth with deposits instead of wholesale borrowings. Current market
conditions are such that the growth in deposits allowed the Company to reduce its demand for
new wholesale borrowings to $16.1 million in average borrowings. Average outstanding
advances from the Federal Home Loan Bank were $272.6 million. The interest rate on these
borrowings averaged 3.96%, a decrease of 6 basis points compared to the average rate of
4.02% last year.
Interest expense for the nine months ended September 30, 2010 decreased $6.7 million, or
29.0%, to $16.5 million from $23.3 million compared to the same period in the prior year.
The savings resulted from a decrease of 71 basis points paid on average interest-bearing
liabilities in combination with a $4.4 million, or a 0.4%, decrease in average
interest-bearing liabilities. The decrease in the cost of funds was primarily due to the
impact of the sustained low interest rate environment had on the Banks time deposits during
the first nine months of 2010 resulting in expense savings of $5.9 million. Average balances
on interest-bearing deposits rose to $990.9 million, an increase of $21.8 million as the
growth in NOW and money market accounts of $43.5 million and savings accounts of $24.1
million offset the reduction of $45.8 million in time deposits. Average outstanding advances
from the Federal Home Loan Bank were $266.2 million, a decrease of $26.2 million. The
interest rate on these borrowings averaged 3.93%, an increase of 36 basis points compared to
the average rate of 3.57% last year. The increase in the average rate for FHLB borrowings
resulted from a reduced use of lower-cost overnight borrowings in the first nine months of
2010 compared to the same period in the prior year.
Provision for Loan Losses: The allowance for loan losses is maintained at a level
management determined to be appropriate to absorb estimated credit losses that are probable at the dates of the financial statements. Management
evaluates the adequacy of the allowance for loan losses on a quarterly basis
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and charges any provision for loans losses needed to current operations. The assessment
considers historical loss experience, the types of loans and the amount of loans in the loan
portfolio, adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. Based on our
evaluation of these factors, management recorded provisions of $1.3 million for the three
months ended September 30, 2010, as compared to $700,000 for the same period in the prior
year primarily due to continued assessment of estimated exposure on impaired loans. The
repayment of these impaired loans is largely dependent upon the sale and value of collateral
that may be impacted by current real estate conditions. At September 30, 2010, the allowance
for loan losses totaled $14.1 million, which represented 1.01% of total loans and 121.72% of
non-performing loans compared to an allowance for loan losses of $12.5 million, which
represented 0.91% of total loans and 104.09% of non-performing loans as of December 31, 2009.
Potential problem loans: The Bank performs an internal analysis of the loan portfolio in
order to identify and quantify loans with higher than normal risk. Loans having a higher
risk profile are assigned a risk rating corresponding to the level of weakness identified in
the loan. All loans risk rated Special Mention, Substandard or Doubtful are listed on the
Companys watchlist and are reviewed by management on a quarterly basis to assess the
level of risk and to ensure that appropriate actions are being taken to minimize potential
loss exposure. Loans identified as being Loss are normally fully charged off. In addition,
the Company maintains a listing of criticized loans consisting of Substandard and Doubtful
loans which are transferred to the Special Assets area which totaled $26.5 million at
September 30, 2010.
The Company closely monitors the watchlist for signs of deterioration to mitigate the growth
in non-accrual loans. At September 30, 2010, $14.4 million of commercial loans and $500,000
of residential and consumer loans were included on the criticized list that are not
considered impaired. At December 31, 2009, $15.8 million of commercial loans and $1.5
million of residential and consumer loans were included on the criticized list that are not
considered impaired.
Non-interest Income: The Company has the following sources of non-interest income: banking
service charges on deposit accounts, bank-owned life insurance, mortgage servicing income,
loan fee income, derivative financial instruments and brokerage and insurance fees from
Infinex, Inc., the Banks on-premise provider of non-deposit investment services.
Non-interest income increased by $937,000 to $2.7 million for the quarter ended September
30, 2010, compared to $1.8 million for the same period last year. Service charges and fees
increased $572,000 to $1.9 million in the third quarter of 2010 compared to the same period
last year. The increase was attributable to $628,000 of loan fees collected by Rockville
Bank Mortgage, Inc., which began operations in January of this year, and an increase in ATM
fees of $82,000. Partially offsetting these was a reduction in the collection of
insufficient funds fees of $123,000 resulting from a policy change implemented this year.
During the third quarter of 2010, the Company realized gains of $669,000 on the sale of
fixed rate residential mortgages compared to $328,000 for the same period last year due to
the decision of the Companys asset-liability committee to sell longer-term, fixed rate
residential mortgages in the current interest rate environment. Additionally, the Company
collected $30,000 in rental income on other real estate owned in the third quarter of 2010
compared to none in the third quarter of 2009. There were no significant gains from the sale
of securities during the third quarter of 2010 or 2009. There was no other-than-temporary
impairment of securities in the third quarter of either year.
Non-interest income increased by $1.4 million to $6.8 million for the nine months ended
September 30, 2010, compared to $5.4 million for the same period last year. During 2010,
Rockville Bank Mortgage, Inc. collected $1.3 million in loan fees in its first nine months
of operations. There were gains from the sale of securities of $190,000 in 2010 compared to
$936,000 of gains in 2009, a reduction of $746,000. ATM fees increased $303,000, the gains
on the sale of fixed rate residential mortgage loans increased $536,000, the collection of
insufficient funds fees decreased $187,000, and Infinex fees decreased $60,000 for the nine
months ended September 30, 2010 compared to the same period of 2009. There was no
other-than-temporary impairment of securities in 2010 compared to $357,000 in 2009.
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Non-interest Expense: The following table summarizes non-interest expense for the three and
nine months ended September 30, 2010 and 2009:
Three Months | Nine Months | |||||||||||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Salaries and employee benefits |
$ | 4,958 | $ | 4,710 | $ | 248 | $ | 14,579 | $ | 14,092 | $ | 487 | ||||||||||||
Service bureau fees |
1,020 | 952 | 68 | 3,006 | 2,924 | 82 | ||||||||||||||||||
Occupancy and equipment |
1,056 | 1,127 | (71 | ) | 3,238 | 3,324 | (86 | ) | ||||||||||||||||
Professional fees |
378 | 202 | 176 | 1,136 | 903 | 233 | ||||||||||||||||||
Marketing and promotions |
247 | 149 | 98 | 918 | 767 | 151 | ||||||||||||||||||
FDIC assessments |
406 | 375 | 31 | 1,207 | 1,874 | (667 | ) | |||||||||||||||||
Other real estate owned |
498 | 11 | 487 | 965 | 11 | 954 | ||||||||||||||||||
Other |
1,313 | 1,316 | (3 | ) | 3,854 | 3,766 | 88 | |||||||||||||||||
Total non-interest expense |
$ | 9,876 | $ | 8,842 | $ | 1,034 | $ | 28,903 | $ | 27,661 | $ | 1,242 | ||||||||||||
Non-interest expense increased $1.0 million, or 11.7%, to $9.9 million for the three
months ended September 30, 2010 compared to $8.8 million for the same period in the prior
year. Salary
and employee benefits expense increased $248,000 which was mainly attributable to increases
in salary and related payroll tax expense of $636,000 and health insurance expense of
$25,000 which were offset by reductions in pension and retirement expense of $333,000 and
temporary help expense of $80,000. Additionally, with the addition of Rockville Bank
Mortgage, Inc., the number of full-time equivalent employees increased to 235 as of
September 30, 2010 compared to 208 as of September 30, 2009 Service bureau fees increased
$68,000 as the result of higher ATM servicing fees of $40,000, other service bureau fees of
$23,000 and wide-area network servicing fees of $5,000. Occupancy and equipment expense
decreased $71,000 mainly due to decreases in depreciation expense of $49,000 and janitorial
service and supplies expense of $38,000 which was offset by increases in rent and other
occupancy expense of $16,000. Professional fees increased $176,000, of which, $109,000 was
for consulting fees and $67,000 for audit and legal fees. The increase was mainly
attributable for expenses related to loan review and executive search. Marketing and
promotions expense increased $98,000 mainly due to the redesign of the Companys website and
logo and increased advertising to take advantage of competitive opportunities. Other real estate owned expense increased
$487, 000 for the quarter ended September 30, 2010 which consisted of $50,000 of residential
properties and $437,000 of commercial properties. Other expense declined $3,000 mainly due
to reductions in collections expense of $122,000 which was offset by increased mortgage
appraisal and credit report expense of $32,000, mortgage loan servicing expense of $21,000
and all other expense of $66,000.
Non-interest expense increased $1.2 million, or 4.5%, to $28.9 million for the nine months
ended September 30, 2010 compared to $27.7 million for the same period in the prior year. Salary and
employee benefits expense increased $487,000 which was mainly attributable to increases in
salary expense of $1.5 million, health insurance of $103,000, 401k contribution expense of
$67,000 and employee bonus expense of $63,000 which were offset by reductions in pension and
retirement expense of $934,000, stock award incentives of $251,000 and temporary help of
$51,000. The increase in the discount rate for the qualified pension plan expense is one of
the key reasons for the overall decrease in the 2010 pension and retirement expense. Stock
incentive award expense decreased due to the absence of new 2010 incentive awards. Service
bureau fees increased $82,000 as the result of higher ATM servicing fees of $50,000 and
service bureau fees of $74,000 offset by $42,000 of reductions in wide-area network
servicing fees. Occupancy and equipment expense decreased $86,000 due to reductions in
depreciation expense of $120,000, utilities expense of $31,000, received additional rental
income of $19,000 which was offset by increases in maintenance expense of $40,000 and rent
expense of $44,000. Professional fees increased $233,000 due to increases in consulting
fees of $230,000 and legal fees of $20,000 resulting from additional loan review
documentation, possible branch expansion and human resource related issues which were offset
by reductions in audit fees of $27,000. Marketing and promotions expense increased $151,000
to take advantage of competitive opportunities. FDIC assessments decreased $667,000 as a result of a one-time
special assessment of $700,000 incurred in 2009 which was partially offset by additional
insurance expense on deposit growth. Other real estate owned expense increased $954,000
consisting of $184,000 of residential properties and $770,000 of commercial properties.
There was other real
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estate owned expense of $11,000 in the first nine months of 2009. Other expense increased
$88,000 as shown in the table below.
The following table summarizes significant components of other non-interest expense for the
three and nine months ended September 30, 2010 and 2009:
Three Months | Nine Months | |||||||||||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Telephone |
$ | 51 | $ | 48 | $ | 3 | $ | 162 | $ | 132 | $ | 30 | ||||||||||||
Postage |
104 | 106 | (2 | ) | 315 | 296 | 19 | |||||||||||||||||
Collections |
44 | 167 | (123 | ) | 301 | 357 | (56 | ) | ||||||||||||||||
Directors fees and stock expense |
166 | 177 | (11 | ) | 499 | 574 | (75 | ) | ||||||||||||||||
Courier services |
84 | 85 | (1 | ) | 239 | 249 | (10 | ) | ||||||||||||||||
Mortgage loan servicing |
73 | 52 | 21 | 209 | 205 | 4 | ||||||||||||||||||
Mortgage appraisal / credit reports |
117 | 85 | 32 | 270 | 260 | 10 | ||||||||||||||||||
Off balance sheet provision expense |
14 | (19 | ) | 33 | 10 | (57 | ) | 67 | ||||||||||||||||
Dues and subscriptions |
52 | 40 | 12 | 157 | 160 | (3 | ) | |||||||||||||||||
Printing and forms |
86 | 82 | 4 | 240 | 254 | (14 | ) | |||||||||||||||||
Other |
522 | 493 | 29 | 1,452 | 1,336 | 116 | ||||||||||||||||||
Total other non-interest expense |
$ | 1,313 | $ | 1,316 | $ | (3 | ) | $ | 3,854 | $ | 3,766 | $ | 88 | |||||||||||
Income Tax Provision: Income tax provision increased $635,000 to $1.9 million for the
three months ended September 30, 2010 as compared to $1.2 million for the same period in the
prior year. Year to date income tax provision is $5.3 million, an increase of $1.9 million
from the same period last year. Income taxes are provided on an interim basis using the
estimated annual effective tax rate. The effective tax rate was 35.7% and 33.4% of pretax
income for the nine months ended September 30, 2010 and 2009, respectively.
The increase in the effective tax rate was attributable in part to additional state income
taxes which make up 0.7% of the effective tax rate of 35.7%. Due to recent changes in
statutes of various nearby states, in 2010 the Company reviewed its filing requirements and
revenues received from customers from other states. It is anticipated the Company will file
a corporation income tax return for 2010 with the State of Massachusetts. The remaining
increase in the effective tax rate was due to an increase in fully taxable income while
maintaining static levels of tax-advantaged income.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
Summary: The Companys total assets increased $68.6 million, or 4.4%, to $1.64 billion
at September 30, 2010, from $1.57 billion at December 31, 2009, primarily due to a $27.5
million, or 2.0%, increase in loans receivable, an increase of available for sale securities
of $23.4 million, or 22.8%, an $18.1 million, or 93.9%, increase in cash and cash
equivalents and a $2.8 million, or 92.6%, increase in other real estate owned which were
partially offset by a reduction of $3.6 million, or 19.1%, in held to maturity securities.
In the first quarter of 2009, the Company began selling residential mortgages in the
secondary market to Freddie Mac. During the first nine months of 2010, the Company sold
$47.6 million of loans originated for sale in the secondary market. At September 30, 2010,
there were $364,000 of loans held for sale.
Deposits increased $45.9 million, or 4.1%, from December 31, 2009, to $1.17 billion at
September 30, 2010. Interest-bearing deposits grew $31.8 million in the first nine months of
2010 to $1.01 billion from $978.6 million at December 31, 2009. Non-interest-bearing deposits
totaled $164.6 million at September 30, 2010, an increase of $14.1 million from year end
2009. Federal Home Loan Bank advances increased $12.6 million, or 4.8%, to $276.4 million at
September 30, 2010 from $263.8 million at December 31, 2009.
Total stockholders equity increased $7.7 million, or 4.9%, to $165.1 million at September
30, 2010 compared to $157.4 million at December 31, 2009. This was due to increased retained
earnings of $6.2 million, consisting of $9.6 million of net income offset by dividend
payments totaling $3.4 million. Also contributing to the increase in equity was an increase
in additional paid-in capital of $402,000, a decrease of $601,000 in the accumulated other
comprehensive loss, net of tax, and a reduction in unallocated stock held by the ESOP
totaling $524,000.
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Investment Securities: At September 30, 2010, the Companys investment portfolio of $141.6
million, or 8.6% of total assets, consisted of available for sale securities of $126.1
million and held to maturity securities of $15.4 million. The increase in available for sale
securities of $23.4 million from year end was mainly due to the purchase of $49.0 million of
U.S. Government-sponsored enterprise investments offset by $16.3 million of principal
payments of government-sponsored enterprise mortgage-backed securities. At September 30,
2010, the available for sale securities portfolio was comprised of $46.1 million in U.S.
Government and U.S. Government-sponsored enterprise securities, $4.7 million in corporate
bonds, $59.8 million in U.S. Government-sponsored mortgage-backed securities and $15.5
million in marketable equity securities. The net unrealized gains on available for sale
securities increased $567,000 to $6.7 million at September 30, 2010 from $6.1 million at
December 31, 2009. The increase in the net unrealized gains on investment securities
available for sale reflects the positive impact that decreasing long-term investment market
rates had on the debt securities portfolio during the first nine months of 2010. The held to
maturity securities portfolio had an amortized cost of $15.4 million comprised of U.S.
Government-sponsored mortgage-backed securities that had a fair market value of $16.6
million at September 30, 2010. Principal payments totaling $3.7 million were made in held to
maturity securities during the nine months ended September 30, 2010; there were no
purchases.
Lending Activities: Net loans receivable increased $27.5 million to $1.39 billion at
September 30, 2010. The increase was primarily due to increases in commercial real estate of
$27.6 million and commercial business loans of $20.2 million. Residential real estate loans
decreased $16.1 million to $738.7 million due to the Companys decision to sell fixed rate
residential loans in the secondary market as a result of the historically low market rates.
Real estate construction loans decreased $1.2 million to $69.9 million from year end. As of
September 30, 2010 and December 31, 2009, commercial business loans consisted of $20.0
million and $22.7 million, respectively, of loans fully guaranteed by the United States
Department of Agriculture.
Deposits: Deposits increased $45.9 million to $1.17 billion at September 30, 2010 compared
to $1.13 billion at December 31, 2009. At September 30, 2010, non-interest-bearing deposits
were $164.6 million, an increase of $14.1 million and interest-bearing deposits were $1.01
billion, an increase of $31.8 million, compared to December 31, 2009. Money market and
investment savings account balances were $232.0 million, a decrease of $2.7 million, regular
savings and club account balances were $159.0 million, an increase of $15.2 million, and NOW
account balances were $113.4 million, an increase of $5.3 million as compared to December
31, 2009. Certificates of deposit balances were $506.0 million, an increase of $14.0
million in the first nine months of 2010 compared to year end resulting from the
introduction of a new, flexible 14-month certificate of deposit yielding 1.52%. At
September 30, 2010, core deposits were $669.0 million, an increase of $31.8 million compared
to December 31, 2009. The Company has been promoting competitive rate shorter-term time
deposits and money market accounts in response to the competition within our marketplace to
maintain existing market share and to fund loan growth and reduce borrowings.
Liquidity and Capital Resources: The Company maintains liquid assets at levels the Company
considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to
fund loan commitments, repay its borrowings, fund deposit outflows, pay escrow obligations
on all items in the loan portfolio and to fund operations. The Company also adjusts
liquidity as appropriate to meet asset and liability management objectives.
The Companys primary sources of liquidity are deposits, amortization and prepayment of
loans, the sale in the secondary market of loans held for sale, maturities and sales of
investment securities and other short-term investments, periodic pay downs of
mortgage-backed securities, and earnings and funds provided from operations. While scheduled
principal repayments on loans are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by market interest rates, economic conditions,
and rates offered by our competition. The Company sets the interest rates on our deposits to
maintain a desired level of total deposits. In addition, the Company invests excess funds in
short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of the Companys liquidity consists of cash and cash equivalents, which are a
product of our operating, investing and financing activities. At September 30, 2010, $37.4
million of the Companys assets were invested in cash and cash equivalents compared to $19.3
million at December 31, 2009. The Companys primary sources of cash are principal repayments
on loans, proceeds from the calls and maturities of investment securities, increases in
deposit accounts, proceeds from residential loan sales and advances from the Federal Home
Loan Bank of Boston.
For the nine months ended September 30, 2010, net loans receivable increased $27.5 million
due to increased levels of commercial real estate and commercial business loans. Total net
loan originations declined $30.6 million from the same period last year. The Company
purchased $50.0 million of available for sale investment securities during the nine months
ended September 30, 2010. Sales of available for sale securities in the first nine
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months of 2010 were $399,000. The Company received $16.3 million in net principal reductions
on available for sale mortgage-backed securities and $3.7 million in principal payments on
held to maturity securities during the nine months ended September 30, 2010. Calls and
maturities of investment securities during the nine months ended September 30, 2010 totaled
$10.7 million.
Liquidity management is both a daily and longer-term function of business management. If the
Company requires funds beyond its ability to generate them internally, borrowing agreements
exist with the Federal Home Loan Bank of Boston, which provide an additional source of
funds. At September 30, 2010, the Company had $276.4 million in advances from the Federal
Home Loan Bank of Boston and an additional available borrowing limit
of $125.2 million based on collateral requirements of the Federal Home Loan Bank of Boston. Internal policies limit
borrowings to 30% of total assets, or $491.9 million at September 30, 2010.
At September 30, 2010, the Company had outstanding commitments to originate loans of $88.5
million and unfunded commitments under construction loans, lines of credit and stand-by
letters of credit of $271.6 million. At September 30, 2010, time deposits scheduled to
mature in less than one year totaled $296.8 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with the Company, although
there can be no assurance that this will be the case. In the event a significant portion of
its deposits are not retained by the Company, it will have to utilize other funding sources,
such as Federal Home Loan Bank of Boston advances in order to maintain its level of assets.
Alternatively, we would reduce our level of liquid assets, such as our cash and cash
equivalents in order to meet funding needs. In addition, the cost of such deposits may be
significantly higher if market interest rates are higher or there is an increased amount of
competition for deposits in our market area at the time of renewal.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
General: The majority of the Companys assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk. The Companys
assets, consisting primarily of mortgage loans, in general have longer contractual
maturities than our liabilities, consisting primarily of deposits. As a result, a principal
part of our business strategy is to manage interest rate risk and reduce the exposure of our
net interest income to changes in market interest rates. Accordingly, the Board of Directors
has established an Asset/Liability Committee which is responsible for evaluating the
interest rate risk inherent in our assets and liabilities, for determining the level of risk
that is appropriate given the Companys business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. Management monitors the level of interest
rate risk on a regular basis and the Asset/Liability Committee meets at least quarterly to
review our asset/liability policies and interest rate risk position.
The Company has sought to manage our interest rate risk in order to minimize the exposure of
our earnings and capital to changes in interest rates. During the low interest rate
environment that has existed in recent years, we have implemented the following strategies
to manage our interest rate risk: (i) emphasizing adjustable rate loans including,
adjustable rate one-to-four family, commercial and consumer loans, (ii) reducing and
shortening the expected average life of the investment portfolio, and (iii) periodically
lengthening the term structure of our borrowings from the Federal Home Loan Bank of Boston.
Additionally, in the first quarter of 2009, the Company began selling fixed rate residential
mortgages to the secondary market. These measures should serve to reduce the volatility of
our future net interest income in different interest rate environments.
Quantitative Analysis
Income Simulation: Simulation analysis is an estimate of the Companys interest rate risk
exposure at a particular point in time. It is a dynamic method in that it incorporates our
forecasted balance sheet growth assumptions under the different interest rate scenarios
tested. The Company utilizes the income simulation method to analyze our interest rate
sensitivity position to manage the risk associated with interest rate movements. At least
quarterly, our Asset/Liability Committee reviews the potential effect changes in interest
rates could have on the repayment or repricing of rate sensitive assets and funding
requirements of rate sensitive liabilities. The Companys most recent simulation uses
projected repricing of assets and liabilities at September 30, 2010 on the basis of
contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment
rate assumptions can have a significant impact on interest income simulation results.
Because of the large percentage of loans and mortgage-backed securities it holds, rising or
falling interest rates may have a significant impact on the actual prepayment speeds of the
Companys mortgage related assets that may in turn affect its interest rate sensitivity
position. When interest rates rise, prepayment speeds slow and the average expected life of
the Companys assets would tend to lengthen more than the expected average life of its
liabilities and therefore would most likely result in a decrease to the Companys asset
sensitive position.
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Percentage Increase (Decrease) in Estimated | ||||
Net Interest Income | ||||
Over 12 Months | ||||
400 basis point increase in rates |
11.45 | % | ||
50 basis point decrease in rates |
(0.52 | ) |
Rockville Banks Asset/Liability policy currently limits projected changes in net
interest income to a maximum variance of (5%) for every 100 basis point interest rate change
measured over a twelve-month and a twenty-four month period when compared to the flat rate
scenario. In addition, the Companys policy limits change in return on assets (ROA) by a
maximum of (15) basis points for every 100 basis point interest rate change when compared to
the flat rate scenario, or the change will be limited to 20% of the flat rate scenario ROA
(for every 100 basis point interest rate change), whichever is less. These policy limits are
re-evaluated on a periodic basis (not less than annually) and may be modified, as
appropriate. Because of the slight asset-sensitivity of the Companys balance sheet, income
is projected to decrease more if interest rates fall. Also included in the decreasing rate
scenario is the assumption that further declines are reflective of a deeper recession as
well as narrower credit spreads from Federal Market intervention. At September 30, 2010,
income at risk (i.e., the change in net interest income) increased 11.45% and decreased
0.52% based on a 400 basis point average increase or a 50 basis point average decrease,
respectively. At September 30, 2010, return on assets is modeled to increase by 15 basis
points and decrease 1 basis point based on a 400 basis point increase or a 50 basis point
decrease, respectively. While we believe the assumptions used are reasonable, there can be
no assurance that assumed prepayment rates will approximate actual future mortgage-backed
security and loan repayment activity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our disclosure controls and
procedures are designed to ensure that information the Company must disclose in its reports
filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported on a timely basis. Our management
has evaluated, with the participation and under the supervision of our chief executive
officer (CEO) and chief financial officer (CFO), the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as
of the end of the period covered by this report. Based on this evaluation, our CEO and CFO
have concluded that, as of such date, the Companys disclosure controls and procedures are
effective in ensuring that information relating to the Company, including its consolidated
subsidiaries, required to be disclosed in reports that it files under the Exchange Act is
(1) recorded, processed, summarized and reported within time periods specified in the SECs
rules and forms, and (2) accumulated and communicated to our management, including our CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls: During the quarter under report, there was no change in the
Companys internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act ) that has materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting.
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Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various litigation matters arising in the ordinary course of
business. Although the ultimate resolution of these matters cannot be determined at this
time, management of the Company does not believe that such matters, individually or in the
aggregate, will have a material adverse effect on the future results of operations or
financial condition of the Company.
Item 1A. Risk Factors
In addition to the Risk Factors previously disclosed in Item 1A of the Companys Annual
Report on Form 10-K for the period ended December 31, 2009, the following risk factors
represent material updates.
On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank 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 Dodd-Frank Act
requires various federal agencies to adopt a broad range of new rules and regulations, and
to prepare numerous studies and reports for Congress. The federal agencies are given
significant discretion in drafting the rules and regulations, and consequently, many of the
details and much of the impacts of the Dodd-Frank Act may not be known for many months or
years.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau (CFPB) with broad
powers to supervise and enforce consumer protection laws. The CFPB 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 CFPB 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 Dodd-Frank 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 Dodd-Frank 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.
A provision of the Dodd-Frank Act, which will become effective one year after enactment,
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 Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation 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
Dodd-Frank 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.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding
vote on executive compensation and so-called golden parachute payments, and by authorizing
the Securities and Exchange Commission to promulgate rules that would allow stockholders to
nominate their own candidates using a companys proxy materials. The legislation also
directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation
paid to bank holding company executives, regardless of whether the company is publicly
traded or not.
It is difficult to predict at this time what specific impact the Dodd-Frank 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.
The FDIC increased deposit insurance premium expense effective June 30, 2009 in the form of
a special assessment. The FDIC has exercised its authority to raise assessment rates
beginning in 2009, and may impose another special assessment in the future. If such action
is taken by the FDIC it could have an adverse effect on the earnings of the Company. At
present, the FDIC has not required an additional assessment in 2010, but rather required
prepayment in 2009 of deposit insurance premiums for 2010 through 2012.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about repurchases of common stock by the
Company during the quarter ended September 30, 2010:
Issuer Purchases of Equity Securities | ||||||||||||||||
Total Number of | Maximum Number of | |||||||||||||||
Shares Purchased as | Shares that May Yet | |||||||||||||||
Part of Publicly | Be Purchased Under | |||||||||||||||
Total Number of | Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Shares Purchased | Paid per Share | Programs | Programs (1) | ||||||||||||
7/1/10 7/31/10 |
| $ | | | 674,718 | |||||||||||
8/1/10 8/31/10 |
| | | 674,718 | ||||||||||||
9/1/10 9/30/10 |
| | | 674,718 | ||||||||||||
Total |
| $ | | | 674,718 | |||||||||||
(1) | Effective January 2008, the Company adopted a plan to repurchase of up to 978,400 of our outstanding shares of common stock on the open market. At September 30, 2010 there were 674,718 shares available to be purchased under this program. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Removed and Reserved
Item 5. Other Information
None
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Item 6. Exhibits
2.1 | Plan of Conversion and Reorganization of Rockville Financial MHC, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on September 16, 2010 (File No. 000-51239)) | ||
3.1 | Certificate of Incorporation of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on the Form S-1 filed for Rockville Financial New, Inc., as amended, initially filed on September 16, 2010 (File No. 333-169439)) | ||
3.2 | Bylaws of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q filed for Rockville Financial New, Inc. on September 16, 2010 (File No. 333-169439)) | ||
3.2.1 | Amendment dated December 12, 2007 to the Bylaws of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current Report on the Companys Form 8-K filed on December 12, 2007 (File No. 000-51239)) | ||
3.2.2 | Amendment and restatement dated February 13, 2008 to the Bylaws of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current Report on the Companys Form 8-K filed on February 14, 2008 (File No. 000-51239)) | ||
3.3 | Form of Common Stock Certificate of Rockville Financial, Inc. filed herewith | ||
10.1 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and William J. McGurk, effective January 1, 2009 (incorporated herein by reference to Exhibit 10.1 to the Annual Report on the Companys Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239)) | ||
10.2 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Joseph F. Jeamel, Jr., effective January 1, 2009 (incorporated herein by reference to Exhibit 10.2 to the Annual Report on the Companys Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239)) | ||
10.3 | Change-in-Control and Restricted Covenant Agreement by and among Rockville Financial, Inc., Rockville Bank and John T. Lund, effective January 2, 2009 (incorporated herein by reference to Exhibit 10.3 to the Annual Report on the Companys Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239)) | ||
10.4 | First Amendment to the Employment Agreement by and among Rockville Financial, Inc. and Rockville Bank and Christopher E. Buchholz as amended and restated effective as of April 13, 2009 (incorporated herein by reference to Exhibit 10.4 to the Current Report on the Companys Form 10-Q filed on May 11, 2009 (File No. 000-51239)) | ||
10.5 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2009 (incorporated herein by reference to Exhibit 10.5 to the Annual Report on the Companys Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239)) | ||
10.6 | Supplemental Savings and Retirement Plan of Rockville Bank as amended and restated effective December 31, 2007 (incorporated herein by reference to Exhibit 10.5 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007 (File No. 000-51239)) | ||
10.7 | Rockville Bank Officer Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.2.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 31, 2006 (File No. 000-51239)) | ||
10.8 | Rockville Bank Supplemental Executive Retirement Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.8 to the Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on September 16, 2010 (File No. 333-169439)) |
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10.8.1 | First Amendment to the Supplemental Executive Retirement Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.7.1 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007 (File No. 000-51239)) | ||
10.9 | Executive Split Dollar Life Insurance Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.10 to the Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on September 16, 2010 (File No. 333-169439)) | ||
10.10 | Rockville Bank Supplemental Executive Retirement Plan as amended and restated effective December 31, 2007 (incorporated herein by reference to Exhibit 10.9 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007(File No. 000-51239)) | ||
10.11 | Rockville Financial, Inc. 2006 Stock Incentive Award Plan (incorporated herein by reference to Appendix B in the Definitive Proxy Statement on Form 14A for Rockville Financial, Inc. filed on July 3, 2006 (File No. 000-51239)) | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer filed herewith | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer filed herewith | ||
32.0 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer attached hereto |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Rockville Financial, Inc. | ||||
By: |
/s/ John T. Lund
|
|||
SVP, Chief Financial Officer and Treasurer | ||||
Date: November 9, 2010 |
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