Attached files
file | filename |
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EX-32 - EX-32 - United Financial Bancorp, Inc. | y91205exv32.htm |
EX-31.2 - EX-31.2 - United Financial Bancorp, Inc. | y91205exv31w2.htm |
EX-31.1 - EX-31.1 - United Financial Bancorp, Inc. | y91205exv31w1.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 March 31, 2011. |
Commission File Number: 001-35028
ROCKVILLE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Connecticut (State or other jurisdiction of incorporation or organization) |
27-3577029 (I.R.S. Employer Identification No.) |
|
25 Park Street, Rockville, Connecticut (Address of principal executive offices) |
06066 (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 checkmark 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of
the Act). Yes o No þ
As of April 29, 2011, there were 29,506,948 shares of Registrants no par value common stock
outstanding.
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)
(In Thousands, Except Share Amounts)
(Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS: |
||||||||
CASH AND CASH EQUIVALENTS: |
||||||||
Cash and due from banks |
$ | 44,578 | $ | 16,692 | ||||
Short-term investments |
185,086 | 44,016 | ||||||
Total cash and cash equivalents |
229,664 | 60,708 | ||||||
AVAILABLE FOR SALE SECURITIES-At fair value |
173,346 | 125,447 | ||||||
HELD TO MATURITY SECURITIES-At amortized cost |
12,239 | 13,679 | ||||||
LOANS HELD FOR SALE |
374 | 380 | ||||||
LOANS RECEIVABLE (Net of allowance for loan
losses of $15,026 in 2011 and $14,312 in 2010) |
1,417,323 | 1,410,498 | ||||||
FEDERAL HOME LOAN BANK STOCK, at cost |
17,007 | 17,007 | ||||||
ACCRUED INTEREST RECEIVABLE |
4,670 | 4,176 | ||||||
DEFERRED TAX ASSET-Net |
11,245 | 11,327 | ||||||
PREMISES AND EQUIPMENT-Net |
14,741 | 14,912 | ||||||
GOODWILL |
1,149 | 1,149 | ||||||
CASH SURRENDER VALUE OF BANK-OWNED LIFE INSURANCE |
10,552 | 10,459 | ||||||
OTHER REAL ESTATE OWNED |
716 | 990 | ||||||
PREPAID FDIC ASSESSMENTS |
3,402 | 3,875 | ||||||
OTHER ASSETS |
3,398 | 3,466 | ||||||
$ | 1,899,826 | $ | 1,678,073 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
LIABILITIES: |
||||||||
DEPOSITS: |
||||||||
Non-interest-bearing |
$ | 165,341 | $ | 168,736 | ||||
Interest-bearing |
1,083,705 | 1,050,524 | ||||||
Total deposits |
1,249,046 | 1,219,260 | ||||||
MORTGAGORS AND INVESTORS ESCROW ACCOUNTS |
3,495 | 6,131 | ||||||
ADVANCES FROM THE FEDERAL HOME LOAN BANK |
251,418 | 261,423 | ||||||
AVAILABLE
FOR SALE SECURITIES PAYABLE |
46,720 | 940 | ||||||
ACCRUED EXPENSES AND OTHER LIABILITIES |
13,073 | 23,891 | ||||||
TOTAL LIABILITIES |
1,563,752 | 1,511,645 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 12) |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock (no par value; 2,000,000 and 1,000,000 shares authorized; no shares issued and
outstanding) |
| | ||||||
Common stock (no par value; 60,000,000 shares authorized;
29,501,170 and 29,653,088 shares issued and 29,501,170 and 28,610,081 outstanding at March 31, 2011 and December 31, 2010, respectively.(1) |
243,776 | 85,249 | ||||||
Additional paid-in capital |
14,634 | 4,789 | ||||||
Unearned compensation ESOP |
(10,317 | ) | (3,478 | ) | ||||
Treasury stock, at cost (1,043,007 shares at December 31, 2010)(1) |
| (9,495 | ) | |||||
Retained earnings |
88,398 | 90,645 | ||||||
Accumulated other comprehensive income loss |
(417 | ) | (1,282 | ) | ||||
TOTAL STOCKHOLDERS EQUITY |
336,074 | 166,428 | ||||||
$ | 1,899,826 | $ | 1,678,073 | |||||
(1) | Share amounts related to periods prior to the date of completion of the conversion (March 3, 2011) have been restated to give retroactive recognition to the exchange ratio applied in the conversion (1.5167). |
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share Data)
(Unaudited)
(In Thousands, Except Share Data)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
INTEREST AND DIVIDEND INCOME: |
||||||||
Loans |
$ | 17,535 | $ | 17,641 | ||||
Securities-interest |
1,049 | 1,197 | ||||||
Securities-dividends |
130 | 103 | ||||||
Interest-bearing deposits |
15 | | ||||||
Total interest and dividend income |
18,729 | 18,941 | ||||||
INTEREST EXPENSE: |
||||||||
Deposits |
2,911 | 3,000 | ||||||
Borrowed funds |
2,423 | 2,543 | ||||||
Total interest expense |
5,334 | 5,543 | ||||||
Net interest income |
13,395 | 13,398 | ||||||
PROVISION FOR LOAN LOSSES |
752 | 903 | ||||||
Net interest income after provision
for loan losses |
12,643 | 12,495 | ||||||
NON-INTEREST INCOME: |
||||||||
Total other-than-temporary impairment losses on
equity securities |
(29 | ) | | |||||
Service charges and fees |
1,596 | 1,242 | ||||||
Net gain from sales of securities |
| 188 | ||||||
Net gain from sales of loans |
59 | 159 | ||||||
Other income |
62 | 98 | ||||||
Total non-interest income |
1,688 | 1,687 | ||||||
NON-INTEREST EXPENSE: |
||||||||
Salaries and employee benefits |
5,671 | 4,790 | ||||||
Service bureau fees |
1,059 | 999 | ||||||
Occupancy and equipment |
1,166 | 1,127 | ||||||
Professional fees |
684 | 390 | ||||||
Marketing and promotions |
324 | 274 | ||||||
FDIC assessments |
514 | 400 | ||||||
Other real estate owned |
59 | 368 | ||||||
Contribution to Rockville Bank Foundation, Inc. |
5,043 | | ||||||
Other |
1,424 | 1,287 | ||||||
Total non-interest expense |
15,944 | 9,635 | ||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(1,613 | ) | 4,547 | |||||
INCOME TAX (BENEFIT) EXPENSE |
(591 | ) | 1,693 | |||||
NET (LOSS) INCOME |
$ | (1,022 | ) | $ | 2,854 | |||
See accompanying notes to unaudited consolidated financial statements.
(Continued)
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Operations Concluded
(In Thousands, Except Share Data)
(Unaudited)
Consolidated Statements of Operations Concluded
(In Thousands, Except Share Data)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010(1) | |||||||
Net (loss) income per share
(see Note 2): |
||||||||
Basic |
$ | (0.04 | ) | $ | 0.10 | |||
Diluted |
$ | (0.04 | ) | $ | 0.10 | |||
Weighted average shares outstanding: |
||||||||
Basic |
29,049,681 | 28,084,679 | ||||||
Diluted |
29,049,681 | 28,089,760 |
(1) | Share and per share amounts related to periods prior to the date of completion of the conversion (March 3, 2011) have been restated to give retroactive recognition to the exchange ratio applied in the conversion (1.5167). |
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
(In Thousands, Except Share Data)
(Unaudited)
(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, 2010 |
19,551,057 | $ | 85,249 | $ | 4,789 | $ | (3,478 | ) | $ | 90,645 | 687,682 | $ | (9,495 | ) | $ | (1,282 | ) | $ | 166,428 | |||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||
Net loss |
| | | | (1,022 | ) | | | | (1,022 | ) | |||||||||||||||||||||||||
Net unrealized gain on securities
available for sale, net of
reclassification adjustments and tax
effects |
| | | | | | | 755 | 755 | |||||||||||||||||||||||||||
Change in accumulated other
comprehensive loss related to employee
benefit plans, net of reclassification
adjustments and tax effects |
| | | | | | | 110 | 110 | |||||||||||||||||||||||||||
Total comprehensive loss |
(157 | ) | ||||||||||||||||||||||||||||||||||
Cancel Rockville Financial MHC, Inc. shares |
(10,689,250 | ) | | 9,685 | | | | | | 9,685 | ||||||||||||||||||||||||||
Treasury shares retired |
(687,682 | ) | (9,495 | ) | | | | (687,682 | ) | 9,495 | | | ||||||||||||||||||||||||
Exchange of common stock @ 1.5167 shares
per common share |
4,222,539 | | | | | | | | | |||||||||||||||||||||||||||
Fractional share distribution |
(2,226 | ) | (22 | ) | | | | | | | (22 | ) | ||||||||||||||||||||||||
Proceeds from stock offering, net of
offering costs |
17,109,886 | 168,044 | | | | | | | 168,044 | |||||||||||||||||||||||||||
Purchase of common stock by ESOP |
| | | (7,071 | ) | | | | | (7,071 | ) | |||||||||||||||||||||||||
Share-based compensation expense |
| | 112 | | | | | | 112 | |||||||||||||||||||||||||||
ESOP shares released or committed to be
released |
| | 91 | 232 | | | | | 323 | |||||||||||||||||||||||||||
Cancellation of shares for tax withholding |
(3,154 | ) | | (43 | ) | | | | | | (43 | ) | ||||||||||||||||||||||||
Dividends paid ($0.065 per common share) |
| | | | (1,225 | ) | | | | (1,225 | ) | |||||||||||||||||||||||||
Balance at March 31, 2011 |
29,501,170 | $ | 243,776 | $ | 14,634 | $ | (10,317 | ) | $ | 88,398 | | $ | | $ | (417 | ) | $ | 336,074 | ||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(In Thousands)
(Unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net (loss) income |
$ | (1,022 | ) | $ | 2,854 | |||
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities: |
||||||||
Amortization and accretion of premiums and discounts on
investments, net |
| (34 | ) | |||||
Share-based compensation expense |
112 | 136 | ||||||
Amortization of ESOP Expense |
323 | 186 | ||||||
Provision for loan losses |
752 | 903 | ||||||
Net gain from sales of securities |
| (188 | ) | |||||
Other-than-temporary impairment of securities |
29 | | ||||||
Loans originated for sale |
(4,971 | ) | (8,633 | ) | ||||
Proceeds from sales of loans |
4,977 | 8,633 | ||||||
Loss (gain) on sale of OREO |
32 | (1 | ) | |||||
Depreciation and amortization |
340 | 379 | ||||||
Loss on disposal of equipment |
2 | 1 | ||||||
Deferred income tax benefit |
(383 | ) | (187 | ) | ||||
Increase in cash surrender value of bank-owned life insurance |
(92 | ) | (94 | ) | ||||
Net change in: |
||||||||
Deferred loan fees and premiums |
(96 | ) | (45 | ) | ||||
Accrued interest receivable |
(494 | ) | (347 | ) | ||||
Prepaid FDIC assessment |
473 | 919 | ||||||
Other assets |
68 | (665 | ) | |||||
Accrued expenses and other liabilities |
(11,589 | ) | (94 | ) | ||||
Net cash (used in) provided by operating activities |
(11,539 | ) | 3,723 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of available for sale securities |
| 399 | ||||||
Principal payments on available for sale mortgage-backed securities |
4,700 | | ||||||
Principal payments on held to maturity mortgage-backed securities |
1,442 | 1,063 | ||||||
Principal payments on available for sale securities |
100 | 4,891 | ||||||
Purchases of available for sale securities |
(4,850 | ) | (952 | ) | ||||
Proceeds from sale of OREO |
426 | 39 | ||||||
Purchase of loans |
| (82 | ) | |||||
Loan originations (principal payments), net |
(7,665 | ) | 5,604 | |||||
Purchases of premises and equipment |
(171 | ) | (31 | ) | ||||
Net cash (used in) provided by investing activities |
(6,018 | ) | 10,931 | |||||
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 Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net increase (decrease) in deposits |
39,471 | (662 | ) | |||||
Net decrease in mortgagors and investors escrow accounts |
(2,636 | ) | (2,820 | ) | ||||
Net decrease in short-term Federal Home Loan Bank advances |
| (15,000 | ) | |||||
Proceeds from long-term Federal Home Loan Bank advances |
| 5,000 | ||||||
Repayments of long-term Federal Home Loan Bank advances |
(10,005 | ) | (50 | ) | ||||
Common stock purchase by ESOP |
(7,071 | ) | | |||||
Proceeds from stock offering, net of offering costs |
168,044 | | ||||||
Fractional shares paid |
(22 | ) | | |||||
Cancellation of shares for tax withholding |
(43 | ) | (20 | ) | ||||
Cash dividends paid on common stock |
(1,225 | ) | (1,131 | ) | ||||
Net cash provided by (used in) financing activities |
186,513 | (14,683 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
168,956 | (29 | ) | |||||
CASH AND CASH EQUIVALENTSBeginning of period |
60,708 | 19,307 | ||||||
CASH AND CASH EQUIVALENTSEnd of period |
$ | 229,664 | $ | 19,278 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 5,350 | $ | 5,530 | ||||
Income taxes |
200 | 1,550 | ||||||
Transfer of loans to other real estate owned |
184 | 108 | ||||||
Goodwill recognition from subsidiary acquisition |
| 79 | ||||||
Transfer to fixed assets from subsidiary acquisition |
| 24 | ||||||
Cancellation of Rockville Financial MHC, Inc. shares |
9,685 | | ||||||
Due to broker |
46,720 | |
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 |
On March 3, 2011, Rockville Financial, Inc., (the Company), completed the second-step conversion of Rockville Bank (the Bank) from a mutual holding company structure to a stock holding company structure (the Conversion) pursuant to a Plan of Conversion and Reorganization (the Plan). As part of the conversion, New Rockville Financial, Inc. succeeded Rockville Financial, Inc as the stock holding company of Rockville Bank, and Rockville Financial MHC, Inc. was dissolved. Upon completion of the Conversion, the Company became the holding company for the Bank and acquired ownership of all the issued and outstanding shares of the Banks common stock. In connection with the Conversion, 17,109,886 shares of common stock of the Company (the Common Stock) were sold in a subscription offering to certain depositors of the Bank and its employee stock ownership plan for $10.00 per share, or $171,099,000 in the aggregate (the Offering) net of offering costs of $3,055,000. In accordance with the Plan, 1.5167 shares of Common Stock (without taking into consideration cash issued in lieu of fractional shares) were issued in exchange for each outstanding share of common stock of the Companys predecessor, also named Rockville Financial, Inc. (Old RFI), the former state-chartered mid-tier holding company for the Bank, held by persons other than Rockville Financial MHC, Inc., the mutual holding company that owned the majority of Old RFIs common stock. New Rockville Financial, Inc. changed its name to Rockville Financial, Inc. effective March 3, 2011. | ||
The conversion was accounted for as reorganization with no change to the historical basis of Rockville Financial, Inc.s assets, liabilities, and equity. All references to the number of shares outstanding for purposes of calculating per share amounts are restated to give retroactive recognition to the exchange ratio applied in the conversion. | ||
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 three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These interim consolidated financial statements should be read in conjunction with the Companys 2010 consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. | ||
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. |
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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 months ended March 31, 2011 and 2010: |
For the Three Months | ||||||||
Ended March 31, | ||||||||
(In thousands, except share data) | 2011 | 2010 | ||||||
Net (loss) income |
$ | (1,022 | ) | $ | 2,854 | |||
Weighted-average basic shares
outstanding |
29,049,681 | 28,084,679 | ||||||
Diluted effect of stock options |
| 5,081 | ||||||
Weighted-average diluted
shares |
29,049,681 | 28,089,760 | ||||||
Earnings (loss) per share: |
||||||||
Basic |
$ | (0.04 | ) | $ | 0.10 | |||
Diluted |
$ | (0.04 | ) | $ | 0.10 | |||
Share and per share amounts related to periods prior to the date of completion of the conversion (March 3, 2011) have been restated to give retroactive recognition to the exchange ratio applied in the conversion (1.5167). Treasury shares for 2010 and unallocated common shares held by the ESOP for 2011 and 2010 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 months ended March 31, 2011 and 2010, 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 months ended March 31, 2011, options to purchase 890,792 shares, of common stock were not considered in the computation of potential common shares for the purpose of diluted EPS as the Company recorded a loss for the quarter. For the three months ended March 31, 2010, options to purchase 676,259 shares of common stock were not considered in the computation of potential common shares for the purpose of diluted EPS as the effect of the including them would have been anti-dilutive. |
3. | Recent Accounting Pronouncements |
Receivables, Topic 310: In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU clarifies the guidance on a creditors evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. This guidance is effective for the Company for the first interim period beginning after June 15, 2011 but will be applied retrospectively to January 1, 2011 for the Companys 2011 annual report. It is not expected to have a material impact on the Companys consolidated financial statements. | ||
Receivables, Topic 310: In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-20 (see below). This ASU delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20. ASU No. 2011-02 (above) clarifies the guidance of what constitutes a troubled debt restructuring. It is not expected to 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, and, (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 |
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reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company has incorporated the end of reporting period disclosures in the December 31, 2010 consolidated financial statements. The disclosures about activity are incorporated into the March 31, 2011 consolidated financial statements and have significantly increased the Companys loan disclosures. |
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 assets 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 that are not adjusted by management. 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 enterprise obligations, mortgage-backed securities and corporate 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 March 31, 2011 | ||||||||||||||||
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 |
$ | 50,941 | $ | 3,014 | $ | 47,927 | $ | | ||||||||
Government-sponsored
residential mortgage-backed
securities |
100,109 | | 100,109 | | ||||||||||||
Corporate debt securities |
4,396 | | 4,396 | | ||||||||||||
Marketable equity securities |
17,900 | 17,827 | | 73 | ||||||||||||
Total |
$ | 173,346 | $ | 20,841 | $ | 152,432 | $ | 73 | ||||||||
11
Table of Contents
Fair Value Measurements | ||||||||||||||||
At December 31, 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 |
$ | 34,327 | $ | 3,017 | $ | 31,310 | $ | | ||||||||
Government-sponsored
residential mortgage-backed
securities |
70,390 | | 70,390 | | ||||||||||||
Corporate debt securities |
4,008 | | 4,008 | | ||||||||||||
Marketable equity securities |
16,722 | 16,649 | | 73 | ||||||||||||
Total |
$ | 125,447 | $ | 19,666 | $ | 105,708 | $ | 73 | ||||||||
There were no transfers in or out of Level 1 and Level 2 for the three months ended March 31, 2011 and 2010. |
The changes in Level 3 assets measured at fair value on a recurring basis are as follows: |
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Investment Securities Available for Sale: |
||||||||
Balance of recurring Level 3 assets at beginning of period |
$ | 73 | $ | 73 | ||||
Total gains or losses (realized/unrealized): |
||||||||
Included in earnings-realized |
| | ||||||
Included in earnings-unrealized |
| | ||||||
Included in other comprehensive income |
| | ||||||
Purchases, sales, issuances and settlements, net |
| | ||||||
Transfers in and/or out of Level 3 |
| | ||||||
Balance of recurring Level 3 assets at end of period |
$ | 73 | $ | 73 | ||||
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 at fair value 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 charge-offs and specific reserves 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. |
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Table of Contents
Assets Recorded at Fair Value on a Non-recurring Basis: | ||
The following table presents information related to the Companys assets measured at fair value on a non-recurring basis at March 31, 2011 and December 31, 2010: |
Fair Value Measurements At | ||||||||||||||||||||
March 31, 2011, using: | ||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||
in Active | ||||||||||||||||||||
Markets for | Other | Significant | Total Losses | |||||||||||||||||
Identical | Observable | Unobservable | for the three | |||||||||||||||||
Total | Assets | Inputs | Inputs | months ended | ||||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | March 31, 2011 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Other real estate owned |
$ | 716 | $ | | $ | | $ | 716 | $ | | ||||||||||
Impaired loans |
3,510 | | | 3,818 | (308 | ) | ||||||||||||||
Total |
$ | 4,226 | $ | | $ | | $ | 4,534 | $ | (308 | ) | |||||||||
Fair Value Measurements At | ||||||||||||||||||||
December 31, 2010, using: | ||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||
in Active | Total Losses | |||||||||||||||||||
Markets for | Other | Significant | for the year | |||||||||||||||||
Identical | Observable | Unobservable | ended | |||||||||||||||||
Total Fair | Assets | Inputs | Inputs | December 31, | ||||||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | 2011 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Other real estate owned |
$ | 990 | $ | | $ | | $ | 990 | $ | | ||||||||||
Impaired loans |
2,648 | | | 4,004 | (1,356 | ) | ||||||||||||||
Total |
$ | 3,638 | $ | | $ | | $ | 4,994 | $ | (1,356 | ) | |||||||||
There were no liabilities reported at fair value on a non-recurring basis on the consolidated statement of condition at March 31, 2011 or December 31, 2010. |
13
Table of Contents
Fair Value of Financial Instruments: |
As of March 31, 2011 and December 31, 2010, the carrying value and estimated fair values of the Companys financial instruments are as follows. |
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 229,664 | $ | 229,664 | $ | 60,708 | $ | 60,708 | ||||||||
Available for sale securities |
173,346 | 173,346 | 125,447 | 125,447 | ||||||||||||
Held to maturity securities |
12,239 | 13,092 | 13,679 | 14,638 | ||||||||||||
Loans held for sale |
374 | 374 | 380 | 380 | ||||||||||||
Loans receivable-net |
1,417,323 | 1,433,484 | 1,410,498 | 1,415,387 | ||||||||||||
FHLBB stock |
17,007 | 17,007 | 17,007 | 17,007 | ||||||||||||
Accrued interest receivable |
4,670 | 4,670 | 4,176 | 4,176 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
1,249,046 | 1,227,918 | 1,219,260 | 1,200,517 | ||||||||||||
Mortgagors and investors escrow accounts |
3,495 | 3,495 | 6,131 | 6,131 | ||||||||||||
Advances from FHLBB |
251,418 | 264,856 | 261,423 | 274,557 | ||||||||||||
Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company. |
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 March 31, 2011 and December 31,
2010 are as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2011 | (In thousands) | |||||||||||||||
Available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government and government-
sponsored enterprise obligations |
$ | 51,842 | $ | 1 | $ | 902 | $ | 50,941 | ||||||||
Government-sponsored residential
mortgage-backed
securities |
96,972 | 3,213 | 76 | 100,109 | ||||||||||||
Corporate debt securities |
5,902 | 9 | 1,515 | 4,396 | ||||||||||||
Total debt securities |
154,716 | 3,223 | 2,493 | 155,446 | ||||||||||||
Marketable equity securities, by sector: |
||||||||||||||||
Banks |
1,256 | 3,559 | 9 | 4,806 | ||||||||||||
Consumer and household products |
1,134 | 103 | 35 | 1,202 | ||||||||||||
Food and beverage service |
1,134 | 433 | | 1,567 | ||||||||||||
Government-sponsored enterprises |
283 | 513 | | 796 | ||||||||||||
Healthcare/pharmaceutical |
387 | 2 | 14 | 375 | ||||||||||||
Industrial |
695 | 411 | | 1,106 | ||||||||||||
Integrated utilities |
742 | 111 | 10 | 843 | ||||||||||||
Mutual funds |
2,677 | 88 | | 2,765 | ||||||||||||
Oil and gas |
754 | 750 | | 1,504 | ||||||||||||
Technology/Semiconductor |
228 | 150 | | 378 | ||||||||||||
Telecommunications |
661 | 82 | 1 | 742 | ||||||||||||
Transportation |
294 | 80 | | 374 | ||||||||||||
Other industries |
1,017 | 442 | 17 | 1,442 | ||||||||||||
Total marketable equity securities |
11,262 | 6,724 | 86 | 17,900 | ||||||||||||
Total available for sale |
$ | 165,978 | $ | 9,947 | $ | 2,579 | $ | 173,346 | ||||||||
Held to maturity: |
||||||||||||||||
Debt securities: |
||||||||||||||||
Government-sponsored
residential
mortgage-backed
securities |
$ | 12,239 | $ | 853 | $ | | $ | 13,092 | ||||||||
At March 31, 2011, the net unrealized gain on securities available for sale of $7.4 million, net of income taxes of $2.6 million, or $4.8 million, is included in accumulated other comprehensive loss. |
15
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
December 31, 2010 | Cost | Gains | Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. Government and
government-sponsored enterprise
obligations |
$ | 35,018 | $ | | $ | 691 | $ | 34,327 | ||||||||
Government-sponsored residential
mortgage-backed securities |
67,047 | 3,358 | 15 | 70,390 | ||||||||||||
Corporate debt securities |
5,895 | | 1,887 | 4,008 | ||||||||||||
Total debt securities |
107,960 | 3,358 | 2,593 | 108,725 | ||||||||||||
Marketable equity securities, by sector: |
||||||||||||||||
Banks |
1,256 | 3,366 | 9 | 4,613 | ||||||||||||
Consumer and household products |
1,134 | 67 | 24 | 1,177 | ||||||||||||
Food and beverage service |
1,151 | 326 | 30 | 1,447 | ||||||||||||
Government-sponsored enterprises |
283 | 58 | 63 | 278 | ||||||||||||
Healthcare/pharmaceutical |
387 | | 44 | 343 | ||||||||||||
Industrial |
695 | 313 | 20 | 988 | ||||||||||||
Integrated utilities |
742 | 93 | | 835 | ||||||||||||
Mutual funds |
2,666 | 100 | | 2,766 | ||||||||||||
Oil and gas |
754 | 608 | | 1,362 | ||||||||||||
Technology/Semiconductor |
228 | 142 | | 370 | ||||||||||||
Telecommunications |
662 | 103 | 5 | 760 | ||||||||||||
Transportation |
294 | 57 | | 351 | ||||||||||||
Other industries |
1,030 | 420 | 18 | 1,432 | ||||||||||||
Total marketable equity securities |
11,282 | 5,653 | 213 | 16,722 | ||||||||||||
Total securities available for sale |
$ | 119,242 | $ | 9,011 | $ | 2,806 | $ | 125,447 | ||||||||
Held to maturity: |
||||||||||||||||
Debt securities: |
||||||||||||||||
Government-sponsored
residential
mortgage-backed
securities |
$ | 13,679 | $ | 959 | $ | | $ | 14,638 | ||||||||
At December 31, 2010, the net unrealized gain on securities available for sale of $6.2 million, net of income taxes of $2.2 million, or $4.0 million, is included in accumulated other comprehensive loss. |
The amortized cost and fair value of debt securities at March 31, 2011 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. |
Available for Sale | Held to Maturity | |||||||||||||||
Fair | Amortized | Fair | ||||||||||||||
Amortized Cost | Value | Cost | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Maturity: |
||||||||||||||||
Within 1 year |
$ | 3,014 | $ | 3,014 | $ | | $ | | ||||||||
After 1 but within 5 years |
31,300 | 31,077 | | | ||||||||||||
After 5 but within 10 years |
20,598 | 19,929 | | | ||||||||||||
After 10 years |
2,832 | 1,317 | | | ||||||||||||
57,744 | 55,337 | | | |||||||||||||
Mortgage-backed securities |
96,972 | 100,109 | 12,239 | 13,092 | ||||||||||||
$ | 154,716 | $ | 155,446 | $ | 12,239 | $ | 13,092 | |||||||||
16
Table of Contents
At March 31, 2011, securities with a fair value of $3.0 million were pledged to secure public deposits and U.S. Treasury, tax and loan payments. |
For the three months ended March 31, 2011, there were no gains on the sales of available for sale securities; there were gains of $188,000 for the same period last year. |
As of March 31, 2011, 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 March 31, 2011 and December 31, 2010: |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
March 31, 2011 | (In thousands) | |||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||
U.S. Government and
government-sponsored
enterprise obligations |
$ | 45,528 | $ | 902 | $ | | $ | | $ | 45,528 | $ | 902 | ||||||||||||
Government-sponsored
residential mortgage-backed
securities |
22,224 | 75 | 30 | 1 | 22,254 | 76 | ||||||||||||||||||
Corporate debt securities |
99 | 1 | 1,317 | 1,514 | 1,416 | 1,515 | ||||||||||||||||||
Total debt securities |
67,851 | 978 | 1,347 | 1,515 | 69,198 | 2,493 | ||||||||||||||||||
Marketable equity securities |
650 | 71 | 75 | 15 | 725 | 86 | ||||||||||||||||||
Total |
$ | 68,501 | $ | 1,049 | $ | 1,422 | $ | 1,530 | $ | 69,923 | $ | 2,579 | ||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
December 31, 2010 | (In thousands) | |||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||
U.S. Government and
government-sponsored
enterprises |
$ | 34,327 | $ | 691 | $ | | $ | | $ | 34,327 | $ | 691 | ||||||||||||
Government-sponsored
residential mortgage-backed
securities |
5,046 | 14 | 30 | 1 | 5,076 | 15 | ||||||||||||||||||
Corporate debt |
| | 3,908 | 1,887 | 3,908 | 1,887 | ||||||||||||||||||
Total debt securities |
39,373 | 705 | 3,938 | 1,888 | 43,311 | 2,593 | ||||||||||||||||||
Marketable equity securities |
1,097 | 152 | 624 | 61 | 1,721 | 213 | ||||||||||||||||||
Total |
$ | 40,470 | $ | 857 | $ | 4,562 | $ | 1,949 | $ | 45,032 | $ | 2,806 | ||||||||||||
Of the securities summarized above as of March 31, 2011, 30 issues have unrealized losses for less than twelve months and 4 issues had unrealized losses for twelve months or more. As of December 31, 2010, 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 March 31, 2011. |
17
Table of Contents
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 0.44% and 0.71% versus 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 March 31, 2011. |
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 March 31, 2011. |
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. | ||
6. | Loans Receivable and Allowance for Loan Losses |
A summary of the Companys loan portfolio is as follows: |
March 31, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
Real estate loans: |
||||||||
Residential |
$ | 715,153 | $ | 719,925 | ||||
Commercial |
498,725 | 489,511 | ||||||
Construction |
78,488 | 78,627 | ||||||
Commercial business loans |
134,082 | 130,303 | ||||||
Installment and collateral loans |
5,409 | 5,921 | ||||||
Total loans |
1,431,857 | 1,424,287 | ||||||
Net deferred loan costs and premiums |
492 | 523 | ||||||
Allowance for loan losses |
(15,026 | ) | (14,312 | ) | ||||
Loans, net |
$ | 1,417,323 | $ | 1,410,498 | ||||
18
Table of Contents
The following information relates to impaired loans as of and for the periods ended March 31, 2011 and December 31, 2010: |
March 31, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
Recorded investment in impaired loans for which
there is a related allowance for loan losses |
$ | 4,437 | $ | 2,233 | ||||
Recorded investment in impaired loans for which
there is no related allowance for loan losses |
8,593 | 10,127 | ||||||
Total impaired loans |
$ | 13,030 | $ | 12,360 | ||||
Valuation allowance related to impaired loans |
$ | 569 | $ | 358 | ||||
Average recorded investment in impaired loans |
$ | 12,695 | $ | 13,112 | ||||
Interest income recognized on impaired loans on
a cash basis |
$ | 118 | $ | 343 |
The Company has no commitments to lend additional funds to borrowers whose loans are impaired. | ||
Credit Quality Information | ||
The Company utilizes a nine grade internal loan rating system for residential and commercial real estate, construction, commercial and installment and other loans as follows: | ||
Loans rated 1 5: Loans in these categories are considered pass rated loans with low to average risk. | ||
Loans rated 6: Loans in this category are considered special mention. These loans are starting to show signs of potential weakness and are being closely monitored by management. | ||
Loans rated 7: Loans in this category are considered substandard. Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. | ||
Loans rated 8: Loans in this category are considered doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. | ||
Loans rated 9: Loans in this category are considered uncollectible (loss) and of such little value that their continuance as loans is not warranted. | ||
At the time of loan origination, a risk rating based on this 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 loans, 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 the Companys loan portfolio is reviewed by a third-party risk assessment firm on a semi-annual basis and by the Companys internal credit management function. The internal and external analysis of the loan portfolio is utilized 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 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. |
19
Table of Contents
The following table presents the Companys loans by risk rating at March 31, 2011 and December 31, 2010. |
Residential | Commercial | Installment | ||||||||||||||||||
Real Estate | Real Estate | Construction | Commercial | and Collateral | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||
Loans rated 1 - 5 |
$ | 705,613 | $ | 460,804 | $ | 70,591 | $ | 128,884 | $ | 5,366 | ||||||||||
Loans rated 6 |
1,729 | 22,373 | 2,981 | 1,786 | 10 | |||||||||||||||
Loans rated 7 |
7,741 | 15,548 | 4,916 | 2,747 | 33 | |||||||||||||||
Loans rated 8 |
70 | | | 665 | | |||||||||||||||
Loans rated 9 |
| | | | | |||||||||||||||
$ | 715,153 | $ | 498,725 | $ | 78,488 | $ | 134,082 | $ | 5,409 | |||||||||||
Residential | Commercial | Installment | ||||||||||||||||||
Real Estate | Real Estate | Construction | Commercial | and Collateral | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||
Loans rated 1 - 5 |
$ | 711,949 | $ | 451,723 | $ | 70,647 | $ | 125,280 | $ | 5,876 | ||||||||||
Loans rated 6 |
2,047 | 22,838 | 2,960 | 1,869 | 11 | |||||||||||||||
Loans rated 7 |
5,929 | 14,950 | 5,020 | 3,154 | 34 | |||||||||||||||
Loans rated 8 |
| | | | | |||||||||||||||
Loans rated 9 |
| | | | | |||||||||||||||
$ | 719,925 | $ | 489,511 | $ | 78,627 | $ | 130,303 | $ | 5,921 | |||||||||||
All loans rated 9 have been fully written-off. | ||
The Companys lending activities are conducted principally in Connecticut. The Company grants single-family and multi-family residential loans, commercial loans and a variety of consumer loans. In addition, the Company grants loans for the construction of residential homes, residential developments and land development projects. The ultimate repayment of these loans is dependent on the borrowers credit worthiness, the local economy and, for real estate loans, the local real estate market. |
20
Table of Contents
Changes in the allowance for loan losses are as follows for the periods indicated: |
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Balance, beginning of period |
$ | 14,312 | $ | 12,539 | ||||
Provision for loan losses: |
||||||||
Real estate |
425 | 846 | ||||||
Commercial |
74 | 124 | ||||||
Consumer |
2 | 1 | ||||||
Unallocated |
251 | (68 | ) | |||||
Loans charged-off: |
||||||||
Real estate |
(80 | ) | | |||||
Commercial |
| (25 | ) | |||||
Consumer |
(8 | ) | (6 | ) | ||||
Recoveries of loans previously
charged-off: |
||||||||
Real estate |
47 | 2 | ||||||
Commercial |
1 | 1 | ||||||
Consumer |
2 | 4 | ||||||
Balance, end of period |
$ | 15,026 | $ | 13,418 | ||||
Further information pertaining to the allowance for loan losses and impaired loans at March 31, 2011 and December 31, 2010 follows: |
Residential Real | Commercial | Installment and | ||||||||||||||||||||||||||
March 31, 2011 | Estate | Real Estate | Construction | Commercial | Collateral | Unallocated | Total | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Amount of allowance
for loan losses
for loans deemed to
be impaired |
$ | 269 | $ | 75 | $ | | $ | 216 | $ | 9 | $ | | $ | 569 | ||||||||||||||
Amount of allowance
for loan losses for
loans not deemed to
be impaired |
4,651 | 5,492 | 1,672 | 2,190 | 75 | 377 | 14,457 | |||||||||||||||||||||
Loans deemed to be
impaired |
6,812 | 2,967 | 2,171 | 1,047 | 33 | | 13,030 | |||||||||||||||||||||
Loans not deemed to
be impaired |
708,341 | 495,758 | 76,317 | 133,035 | 5,376 | | 1,418,827 |
Residential Real | Commercial | Installment and | ||||||||||||||||||||||||||
December 31, 2010 | Estate | Real Estate | Construction | Commercial | Collateral | Unallocated | Total | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Amount of allowance
for loan losses
for loans deemed to
be impaired |
$ | 156 | $ | 21 | $ | | $ | 176 | $ | 5 | $ | | $ | 358 | ||||||||||||||
Amount of allowance
for loan losses for
loans not deemed to
be impaired |
4,532 | 5,448 | 1,653 | 2,120 | 76 | 125 | 13,954 | |||||||||||||||||||||
Loans deemed to be
impaired |
5,976 | 2,990 | 2,646 | 714 | 34 | | 12,360 | |||||||||||||||||||||
Loans not deemed to
be impaired |
713,949 | 486,521 | 75,981 | 129,589 | 5,887 | | 1,411,927 |
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Table of Contents
The following is a summary of past due and non-accrual loans at March 31, 2011 and December 31, 2010: |
Past Due 90 Days or | ||||||||||||||||||||||||
30-59 Days Past | Greater than 89 | More and Still | ||||||||||||||||||||||
March 31, 2011 | Due | 60-89 Days Past Due | Days Past Due | Total Past Due | Accruing | Loans on Non-accrual | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Residential |
$ | 8,154 | $ | 941 | $ | 3,402 | $ | 12,497 | $ | | $ | 6,812 | ||||||||||||
Commercial |
| | 1,798 | 1,798 | | 2,967 | ||||||||||||||||||
Construction |
47 | | 2,171 | 2,218 | | 2,171 | ||||||||||||||||||
Commercial business loans |
3,714 | 318 | 71 | 4,103 | | 1,047 | ||||||||||||||||||
Installment and collateral loans |
1 | | 33 | 34 | | 33 | ||||||||||||||||||
Total |
$ | 11,916 | $ | 1,259 | $ | 7,475 | $ | 20,650 | $ | | $ | 13,030 | ||||||||||||
Past Due 90 Days or | ||||||||||||||||||||||||
30-59 Days Past | Greater than 89 | More and Still | ||||||||||||||||||||||
December 31, 2010 | Due | 60-89 Days Past Due | Days Past Due | Total Past Due | Accruing | Loans on Non-accrual | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Residential |
$ | 7,899 | $ | 1,634 | $ | 2,952 | $ | 12,485 | $ | | $ | 5,976 | ||||||||||||
Commercial |
| | 2,347 | 2,347 | | 2,990 | ||||||||||||||||||
Construction |
1,101 | 187 | 2,646 | 3,934 | | 2,646 | ||||||||||||||||||
Commercial business loans |
200 | 119 | 445 | 764 | | 714 | ||||||||||||||||||
Installment and collateral |
11 | 4 | 34 | 49 | | 34 | ||||||||||||||||||
Total |
$ | 9,211 | $ | 1,944 | $ | 8,424 | $ | 19,579 | $ | | $ | 12,360 | ||||||||||||
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Table of Contents
The following is a summary of impaired loans with and without a valuation allowance as of March 31, 2011. |
March 31, 2011 | ||||||||||||||||||||||||
Interest | ||||||||||||||||||||||||
Unpaid | Average | Interest | Income | |||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recognized on a | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Cash Basis | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Impaired loans without a
valuation allowance: |
||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Residential |
$ | 4,868 | $ | 4,868 | $ | | $ | 4,836 | $ | 51 | $ | 51 | ||||||||||||
Commercial |
1,170 | 1,170 | | 1,782 | 36 | 36 | ||||||||||||||||||
Construction |
2,171 | 2,171 | | 2,409 | | | ||||||||||||||||||
Commercial business loans |
382 | 382 | | 330 | 8 | 8 | ||||||||||||||||||
Installment and collateral |
2 | 2 | | 5 | ||||||||||||||||||||
Total |
8,593 | 8,593 | | 9,362 | 95 | 95 | ||||||||||||||||||
Impaired loans with a
valuation allowance: |
||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Residential |
1,675 | 1,944 | 269 | 1,557 | 18 | 18 | ||||||||||||||||||
Commercial |
1,722 | 1,797 | 75 | 1,196 | | | ||||||||||||||||||
Construction |
| | | | | | ||||||||||||||||||
Commercial business loans |
449 | 665 | 216 | 551 | 4 | 4 | ||||||||||||||||||
Installment and collateral |
22 | 31 | 9 | 29 | 1 | 1 | ||||||||||||||||||
Total |
3,868 | 4,437 | 569 | 3,333 | 23 | 23 | ||||||||||||||||||
Total |
$ | 12,461 | $ | 13,030 | $ | 569 | $ | 12,695 | $ | 118 | $ | 118 | ||||||||||||
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Table of Contents
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. 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. |
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Non-performing assets: |
||||||||
Residential real estate(1) |
$ | 5,331 | $ | 4,638 | ||||
Commercial real estate |
2,653 | 2,675 | ||||||
Construction |
2,171 | 2,646 | ||||||
Commercial business loans |
382 | 714 | ||||||
Installment and other loans |
33 | 34 | ||||||
Total non-accrual loans(2) |
10,570 | 10,707 | ||||||
Accruing loan past due 90 days or more |
| | ||||||
Troubled debt restructurings |
2,460 | 1,653 | ||||||
Total non-performing loans |
13,030 | 12,360 | ||||||
Other real estate owned |
716 | 990 | ||||||
Total non-performing assets |
$ | 13,746 | $ | 13,350 | ||||
Total non-performing loans to total loans |
0.91 | % | 0.87 | % | ||||
Total non-performing assets to total assets |
0.72 | % | 0.80 | % | ||||
Allowance for loan losses as a percent of total loans |
1.05 | % | 1.00 | % | ||||
Allowance for loan losses as a percent of
non-performing loans |
115.32 | % | 115.79 | % |
(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 $704,000 and $677,000 at March 31, 2011 and December 31, 2010, respectively. |
Management has established the allowance for loan loss in accordance with GAAP for the period ending March 31, 2011 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 March 31, 2011 based upon the analysis conducted and given the portfolio composition, delinquencies, charge offs and risk rating changes experienced during the first quarter of 2011 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. | ||
Loan Servicing | ||
The Company services certain loans for third parties. The aggregate of loans serviced for others was $121.7 million and $120.5 million as of March 31, 2011 and December 31, 2010, respectively. The balances of these loans are not included in the accompanying consolidated statements of condition. | ||
The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of servicing rights was determined using pretax internal rates of return ranging from 8.0% to 10.0% and the Public Securities Association (PSA) Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 257%. |
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Table of Contents
Mortgage servicing assets are included in other assets on the statements of condition. The activity for the three months ended March 31, 2011 and 2010 is as follows: |
For the Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Mortgage servicing rights: |
||||||||
Balance at beginning of period |
$ | 858 | $ | 475 | ||||
Additions |
48 | 497 | ||||||
Amortization |
(53 | ) | (114 | ) | ||||
Balance, end
of period |
853 | 858 | ||||||
Valuation
allowances: |
||||||||
Balance at beginning of period |
| | ||||||
Write-downs |
(21 | ) | | |||||
Balance, end
of period |
(21 | ) | | |||||
Mortgage
servicing assets, net |
$ | 832 | $ | 858 | ||||
Fair value of mortgage
servicing assets at end of
period |
$ | 1,052 | $ | 1,011 | ||||
7. | Other Real Estate Owned | |
Other real estate owned was $716,000 as of March 31, 2011 compared to $990,000 at December 31, 2010. Other real estate owned consisted of $588,000 of commercial real estate properties and $128,000 of residential real estate properties which are held for sale at March 31, 2011. Other income totaling $3,000 was generated in the first quarter of 2011 from the rental of other real estate owned property. Other real estate owned expenses were $59,000 and $368,000 for the quarters ended March 31, 2011 and 2010, respectively. | ||
The following is a summary of the activity for other real estate owned: |
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Balance, beginning of period |
$ | 990 | $ | 3,061 | ||||
Additions |
184 | 108 | ||||||
Proceeds from sales |
(426 | ) | (39 | ) | ||||
(Loss) gain on sales |
(32 | ) | 1 | |||||
Balance, end of period |
$ | 716 | $ | 3,131 | ||||
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Table of Contents
8. | Benefit Plans | |
The following information pertains to the Companys benefit plans. The amounts related to the Pension Plan, Supplemental Plans and the SERPs are reflected in the tables that follow as Pension Plans. The amounts related to the Companys post-retirement medical, health and life insurance benefit plans for retirees and employees hired prior to March 1, 1993 are reflected in the tables that follow as Other Post-Retirement Benefits. | ||
Components of Net Periodic Benefit Cost |
Other Post-Retirement | ||||||||||||||||
Pension Plans | Benefits | |||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Service cost |
$ | 215 | $ | 207 | $ | 5 | $ | 4 | ||||||||
Interest cost |
340 | 319 | 31 | 30 | ||||||||||||
Expected return on
plan assets |
(418 | ) | (365 | ) | | | ||||||||||
Amortization of net
actuarial losses |
140 | 140 | 19 | 15 | ||||||||||||
Amortization of prior
service cost (benefit) |
(2 | ) | (9 | ) | 2 | 5 | ||||||||||
Net periodic benefit cost |
$ | 275 | $ | 292 | $ | 57 | $ | 54 | ||||||||
For the three months ended March 31, 2011, the Company contributed $27,000 to the post-retirement benefit plan. The Company anticipates contributing an additional $118,000 in the remaining nine months of 2011 to the post-retirement benefit plan. | ||
The Company contributed $800,000 to the Pension Plan in April 2011 and expects no more contributions in the remaining nine months of 2011. | ||
The Company contributes to the 401(k) Plan, an automatic 3% of pay safe harbor contribution for all employees that are fully vested. The 401(k) expense for the three months ended March 31, 2011 and 2010 was $151,000 and $133,000, 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, 2011. 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. Prior to the |
26
Table of Contents
Companys second-step stock offering effective March 3, 2011, the Plan allowed for the issuance of a maximum of 349,830 restricted stock shares and 874,575 stock options. After adjusting for the 1.5167 exchange ratio established as a result of the stock offering, as of March 31, 2011, there were 24,406 restricted stock shares and 417,438 stock options that remain available for future grants under the Plan. There were 6,166 restricted shares and 44,685 stock options awards granted in 2011. | ||
Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $112,000, with a related tax benefit recorded of $39,000, for the three months ended March 31, 2011 of which Director share-based compensation expense recognized (in the consolidated statement of operations as other non-interest expense) was $15,000, and officer share-based compensation expense recognized (in the consolidated statement of operations as salaries and benefit expense) was $97,000. The quarter ended March 31, 2011 includes $47,000 related to 3,542 vested restricted shares used for income tax withholding on behalf of certain executives which occurred in the first three months of 2011. | ||
Stock Options: The following table presents the activity related to stock options under the Plan for the three months ended March 31, 2011: |
Weighted Average | Aggregate | |||||||||||||||
Weighted | Remaining | Intrinsic | ||||||||||||||
Stock | Average | Contractual Term | Value | |||||||||||||
Options | Exercise Price | (in years) | (In thousands) | |||||||||||||
Stock options outstanding at December 31, 2010(1) |
846,107 | $ | 8.44 | |||||||||||||
Granted |
44,685 | 10.54 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
| | ||||||||||||||
Stock options outstanding at March 31, 2011 |
890,792 | $ | 8.54 | 7.2 | $ | 6,946 | ||||||||||
Options exercisable at March 31, 2011 |
702,089 | $ | 8.73 | 6.8 | $ | |
(1) | The December 31, 2010 number of shares and weighted average price have been restated to reflect an exchange rate of 1.5167 related to the Companys second-step stock offering. |
The aggregate fair value of vested options was $122,000 and $85,000 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011, the unrecognized cost related to the stock options awarded of $467,000 will be recognized over a weighted-average period of 3.1 years. | ||
The Company uses the Black-Scholes option pricing model for estimating the fair value of stock options granted. The weighted-average estimated fair values of 2011 stock option grants and the assumptions that were used in calculating such fair values were based on estimates at the date of grant as follows: |
2011 | ||||
Weighted per share average fair value of options
granted |
$ | 4.14 | ||
Assumptions: |
||||
Risk-free interest rate |
2.35 | % | ||
Expected volatility |
49.77 | % | ||
Expected dividend yield |
2.47 | % | ||
Expected life of options granted |
6.0 years |
The expected volatility was determined using both the Companys historical trading volatility as well as the historical volatility of an index published by SNL Financial for mutual holding companys common stock over the expected average life of the options. The index was used as the Companys previous structure was as a mutual holding company and the stock has been publicly traded since May 23, 2005. | ||
The Company estimates option forfeitures using historical data on employee terminations. | ||
The expected life of stock options granted represents the period of time that stock options granted are expected to be outstanding. | ||
The risk-free interest rate for periods within the contractual life of the stock option is based on the average five-and seven-year U.S. Treasury Note yield curve in effect at the date of grant. | ||
The expected dividend yield reflects an estimate of the dividends the Company expects to declare over the expected life of the options granted. | ||
Stock options provide grantees the option to purchase shares of common stock at a specified exercise price and expire ten years from the date of grant. |
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Table of Contents
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 three months ended March 31, 2011: |
Weighted Average | ||||||||
Number | Grant-Date | |||||||
of Shares | Fair Value | |||||||
Unvested as of December 31, 2010(1) |
41,916 | $ | 7.27 | |||||
Granted |
6,166 | 10.54 | ||||||
Vested |
(13,287 | ) | 7.66 | |||||
Forfeited |
| | ||||||
Unvested as of March 31, 2011 |
34,795 | $ | 7.71 |
(1) | The December 31, 2010 number of shares and weighted average price have been restated to reflect an exchange rate of 1.5167 related to the Companys second-step stock offering. |
The fair value of restricted shares that vested during the three months ended March 31, 2011 and 2010 was $102,000 and $89,000, respectively. There were 6,166 shares of restricted stock granted during the three months ended March 31, 2011. As of March 31, 2011, there was $240,000 of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a weighted-average period of 2.7 years. | ||
Of the remaining unvested restricted stock, 3,562 shares will vest in 2011, 16,848 shares in 2012, 8,357 shares in 2013, 4,795 shares in 2014 and 1,233 in 2015. All unvested restricted stock shares are expected to vest. | ||
10. | Income Taxes | |
As of March 31, 2011 and December 31, 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 after December 31, 2006. | ||
As of March 31, 2011 and December 31, 2010, the Company has not accrued any interest and penalties related to certain tax positions. |
28
Table of Contents
11. | Accumulated Other Comprehensive Loss | |
Components of accumulated other comprehensive loss, 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, 2010 |
$ | (5,315 | ) | $ | 4,033 | $ | (1,282 | ) | ||||
Change |
110 | 755 | 865 | |||||||||
March 31, 2011 |
$ | (5,205 | ) | $ | 4,788 | $ | (417 | ) | ||||
The following table summarizes comprehensive income and the related tax effects for the three months ended March 31, 2011: |
Three Months Ended | ||||
March 31, 2011 | ||||
(In thousands) | ||||
Net loss |
$ | (1,022 | ) | |
Unrealized gain on securities available for sale |
1,161 | |||
Income tax provision |
406 | |||
Net unrealized gain on securities available for sale |
755 | |||
Benefit plan amortization |
169 | |||
Income tax provision |
59 | |||
Net benefit plan amortization |
110 | |||
Total other comprehensive income, net of tax |
865 | |||
Total comprehensive loss |
$ | (157 | ) | |
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 risk including 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. |
29
Table of Contents
Financial instruments whose contract amounts represent credit risk are as follows: |
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Commitments to extend credit: |
||||||||
Commitments to grant loans |
$ | 37,568 | $ | 68,993 | ||||
Undisbursed construction loans |
84,173 | 87,544 | ||||||
Undisbursed home equity lines of credit |
155,092 | 143,904 | ||||||
Undisbursed commercial lines of credit |
58,803 | 60,587 | ||||||
Standby letters of credit |
10,428 | 10,368 | ||||||
Unused checking overdraft lines of credit |
89 | 94 | ||||||
Total |
$ | 346,153 | $ | 371,490 | ||||
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 March 31, 2011, the Bank exceeded all regulatory capital requirements and is considered well capitalized under regulatory guidelines. |
30
Table of Contents
The following is a summary of the Companys and the Banks regulatory capital amounts and ratios as of March 31, 2011 and December 31, 2010 compared to the Federal Deposit Insurance Corporations requirements for classification as a well-capitalized institution and for minimum capital adequacy: |
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: |
||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 254,746 | 18.6 | % | $ | 109,333 | 8.0 | % | $ | 136,666 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets |
239,345 | 17.5 | 54,676 | 4.0 | 82,014 | 6.0 | ||||||||||||||||||
Tier I capital to adjusted total average assets |
239,345 | 13.3 | 72,201 | 4.0 | 90,251 | 5.0 | ||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 167,793 | 12.7 | % | $ | 105,530 | 8.0 | % | $ | 131,913 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets |
153,090 | 11.6 | 52,744 | 4.0 | 79,116 | 6.0 | ||||||||||||||||||
Tier I capital to adjusted total average assets |
153,090 | 9.1 | 67,515 | 4.0 | 84,394 | 5.0 | ||||||||||||||||||
Rockville Financial, Inc.: |
||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 350,660 | 25.7 | % | $ | 109,368 | 8.0 | % | N/A | N/A | ||||||||||||||
Tier I capital to risk weighted assets |
335,259 | 24.5 | 54,669 | 4.0 | N/A | N/A | ||||||||||||||||||
Tier I capital to adjusted total average assets |
335,259 | 18.2 | 73,562 | 4.0 | N/A | N/A | ||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
$ | 181,178 | 13.7 | % | $ | 105,566 | 8.0 | % | N/A | N/A | ||||||||||||||
Tier I capital to risk weighted assets |
166,475 | 12.6 | 52,765 | 4.0 | N/A | N/A | ||||||||||||||||||
Tier I capital to adjusted total average assets |
166,475 | 10.4 | 64,090 | 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 March 31, 2011, $21.0 million is available for payment of dividends. | ||
A reconciliation of the Companys capital to regulatory capital is as follows: |
March 31, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
Total capital per financial statements |
$ | 336,074 | $ | 166,428 | ||||
Accumulated other comprehensive loss |
417 | 1,282 | ||||||
Intangible assets |
(1,149 | ) | (1,149 | ) | ||||
Servicing assets |
(83 | ) | (86 | ) | ||||
Total Tier 1 capital |
335,259 | 166,475 | ||||||
Allowance for loan and other losses includible in Tier 2
capital |
15,401 | 14,703 | ||||||
Total capital per regulatory reporting |
$ | 350,660 | $ | 181,178 | ||||
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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. | ||
| Strong competition within our market area may limit our growth and profitability. | ||
| 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. | ||
| 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 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.
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Overview
Rockville Financial, Inc., (the Company), a state-chartered bank holding company holds all
of the common stock of Rockville Bank (the Bank). The Federal Reserve Board regulates the
Company. The Company is the successor through reorganization effective March 3, 2011 to
Rockville Financial, Inc. (Old RFI), a mid-tier holding company that owned the Bank and
which itself was owned by Rockville Financial MHC, Inc. as majority owner and public
stockholders.
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 continuing to expand our commercial real estate and
commercial business lending activities and growing our deposit base.
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 share-based compensation.
Allowance for Loan Losses: The allowance for loan losses is established as embedded losses
are estimated to have occurred through the provisions for losses charged against operations
and is maintained at a level that management considers adequate to absorb losses in the loan
portfolio. Managements judgment in determining the adequacy of the allowance is inherently
subjective and is based on past loan loss experience, known and inherent losses and size of
the loan portfolios, an assessment of current economic and real estate market conditions,
estimates of the current value of underlying collateral, review of regulatory authority
examination reports and other relevant factors. An allowance is maintained for impaired
loans to reflect the difference, if any, between the carrying value of the loan and the
present value of the projected cash flows, observable fair value or collateral value. Loans
are charged-off against the allowance for loan losses when management believes that the
uncollectibility of principal is confirmed. Any subsequent recoveries are credited to the
allowance for loan losses when received. In connection with the determination of the
allowance for loan losses, management obtains independent appraisals for significant
properties, when considered necessary.
General component:
The general component of the allowance for loan losses is based on historical loss
experience adjusted for qualitative factors stratified by the following loan segments:
residential real estate, commercial real estate, construction, commercial and consumer.
Management uses a rolling average of historical losses based on a time frame appropriate to
capture relevant loss data for each loan segment. This historical loss factor is adjusted
for the following qualitative factors: levels and trends in delinquencies; level and trend
of charge-offs and recoveries; trends in volume and types of loans; effects of changes in
risk selection and underwriting standards changes in risk selection and underwriting
standards; experience and depth of lending weighted average risk rating; and national and
local economic trends and conditions. There were no changes in the Companys policies or
methodology pertaining to the general component of the allowance for loan losses during the
first quarter of 2011.
The qualitative factors are determined based on the various risk characteristics of each
loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential first and second mortgages The Bank establishes maximum loan-to-value and
debt-to-income ratios and minimum credit scores as an integral component of the underwriting
criteria. Loans in these segments are collateralized by owner-occupied residential real
estate and repayment is dependent on the income and credit quality of the individual
borrower. Within the qualitative allowance factors, national and local economic trends
including unemployment rates and potential declines in property value are key elements
reviewed as a
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component of establishing the appropriate allocation. Overall economic conditions,
unemployment rates and housing price trends will influence the underlying credit quality of
these segments.
Commercial real estate Loans in this segment are primarily income-producing properties
throughout Connecticut and select markets in the Northeast. The underlying cash flows
generated by the properties could be adversely impacted by a downturn in the economy as
evidenced by increased vacancy rates, which in turn, will have an effect on the credit
quality in this segment. Management obtains rent rolls annually, continually monitors the
cash flows of these loans and performs stress testing.
Construction loans Loans in this segment primarily include commercial real estate
development and residential subdivision loans for which payment is derived from sale of the
property. Credit risk is affected by cost overruns, time to sell at an adequate price, and
market conditions.
Commercial loans Loans in this segment are made to businesses and are generally secured
by assets of the business. Repayment is expected from the cash flows of the business. A
weakened economy and its effect on business profitability and cash flow could have an effect
on the credit quality in this segment.
Consumer loans Loans in this segment are generally unsecured and repayment is dependent
on the credit quality of the individual borrower.
Allocated component:
The allocated component relates to loans that are classified as impaired. Impairment is
measured on a loan by loan basis for commercial, commercial real estate and construction
loans by either the present value of expected future cash flows discounted at the loans
effective interest rate or the fair value of the collateral if the loan is collateral
dependent. An allowance is established when the discounted cash flows (or collateral value)
of the impaired loan is lower than the carrying value of that loan. Residential and consumer
loans are evaluated for impairment if payments are 90 days or more delinquent. Updated
property evaluations are obtained at time of impairment and serve as the basis for the loss
allocation if foreclosure is probable or the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
The Company periodically may agree to modify the contractual terms of loans. When a loan is
modified and a concession is made to a borrower experiencing financial difficulty, the
modification is considered a troubled debt restructuring (TDR). All TDRs are initially
classified as impaired.
Unallocated component:
An unallocated component is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies for
estimating allocated and general reserves in the portfolio.
When a loan is determined to be impaired the Company makes a determination if the repayment
of the obligation is collateral dependent. As a majority of impaired loans are
collateralized by real estate, appraisals on the underlying value of the property securing
the obligation are utilized in determining the specific impairment amount that is allocated
to the loan as a component of the allowance calculation. If the loan is collateral
dependent, an updated appraisal is obtained within a short period of time from the date the
loan is determined to be impaired; typically no longer than 30 days for a residential
property and 90 days for a commercial real estate property. The appraisal and the appraised
value are reviewed for adequacy and then further discounted for estimated disposition costs
and the period of time until resolution, in order to determine the impairment amount. The
Company updates the appraised value at least annually and on a more frequent basis if
current market factors indicate a potential change in valuation.
The majority of the Companys loans are collateralized by real estate located in central and
eastern Connecticut in addition to a portion of the commercial real estate loan portfolio
located in the Northeast region of the United States. Accordingly, the collateral value of a
substantial portion of the Companys loan portfolio and real estate acquired through
foreclosure is susceptible to changes in market conditions in these areas. The allowance for
loan losses has been determined in accordance with GAAP, under which we are required to
maintain an allowance for
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probable losses at the balance sheet date. We are responsible for the timely and periodic
determination of the amount of the allowance required. We believe that our allowance for
loan losses is adequate to cover specifically identifiable losses, as well as, estimated
losses inherent in our portfolio that are probable, but not specifically identifiable.
While management uses available information to recognize losses on loans, future additions
to the allowance or charge-offs may be necessary based on changes in economic conditions,
particularly in Hartford, New London and Tolland Counties in Connecticut. In addition,
various regulatory agencies, as an integral part of their examination process, periodically
review the Companys allowance for loan losses. Such agencies have the authority to require
the Company to recognize additions to the allowance or charge-offs based on the agencies
judgments about information available to them at the time of their examination.
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 in excess of $250,000 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. On an annual basis
updated financial information is reviewed on all commercial loans with a relationship
exposure of $250,000 and greater and the risk rating is evaluated based on current operating
performance. Commercial loans under $250,000 and residential mortgage loans are re-evaluated
if there is a delinquency greater than 30 days.
The credit quality of the Companys commercial loan portfolio is further reviewed by a third
party risk assessment firm which performs semi-annual reviews encompassing 65% to 70% of the
commercial loan portfolio on an annual basis. Review findings and any related risk rating
changes are reported to senior management, the Board Lending Committee and the Board of
Directors.
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. In the
first quarter of 2011, the Company experienced losses totaling $29,000 consisting of one
available for sale equity security which was deemed to be other-than-temporarily impaired.
Held to maturity securities are comprised of U.S. government-sponsored mortgage-backed
securities with no unrealized losses at March 31, 2011. 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 March 31, 2011, 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 after December 31, 2006. 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 March 31, 2011, 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 March 31, 2011, our net deferred tax asset was $11.2 million
and there was no valuation allowance.
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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
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 share-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 Months Ended March 31, 2011 and 2010
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 months ended March 31, 2011and 2010.
Income Statement Summary
For the Three Months Ended | ||||||||||||
March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Net interest income |
$ | 13,395 | $ | 13,398 | $ | (3 | ) | |||||
Provision for loan losses |
752 | 903 | (151 | ) | ||||||||
Non-interest income |
1,688 | 1,687 | 1 | |||||||||
Non-interest expense |
15,944 | 9,635 | 6,309 | |||||||||
(Loss) income before income taxes |
(1,613 | ) | 4,547 | (6,160 | ) | |||||||
Income tax (benefit) provision |
(591 | ) | 1,693 | (2,284 | ) | |||||||
Net (loss) income |
$ | (1,022 | ) | $ | 2,854 | $ | (3,876 | ) | ||||
For the three months ended March 31, 2011, the Company experienced a loss before income
taxes of $1.6 million, a $6.2 million decline as compared to the same period ended March 31,
2010. The decrease in net income primarily resulted from a one-time contribution of $5.0
million, $3.3 million after tax, made by the
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Company to the Rockville Bank Foundation, Inc. which represented 3.0% of the net proceeds of
the stock conversion offering. The $3,000 decrease in net interest income was due to the
combination of a decrease of $212,000 in interest and dividend income and a $209,000
decrease in total interest expense despite growth in average earning assets of $232.5
million and $75.1 million in interest-bearing deposits which were neutralized by the effects
of current lower interest rates.
Non-interest expense increased $6.3 million for the quarter-ended March 2011 compared to the
same period in 2010. In addition to the $5.0 million contribution to the Rockville Bank
Foundation, Inc., increases in salaries and employee benefits of $881,000, service bureau
fees of $60,000, occupancy and equipment of $39,000, professional fees of $294,000, marketing and promotions of $50,000 and FDIC
assessments of $114,000 were partially offset by lower other real estate owned expense of
$309,000. Income before income taxes decreased $6.2 million to a loss of $1.6 million in
the first quarter of 2011 compared to $4.5 million of income for the same period last year.
The provision for loan losses declined $151,000 to $752,000 in the first quarter 2011 from
the same period last year, the level determined by management to be adequate based on
continued assessments of estimated exposure on impaired loans.
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 March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest and | Yield/ | Interest and | ||||||||||||||||||||||
Average Balance | Dividends | Cost | Average Balance | Dividends | Yield/ Cost | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans receivable, net (1) |
$ | 1,414,634 | $ | 17,535 | 4.96 | % | $ | 1,356,843 | $ | 17,641 | 5.20 | % | ||||||||||||
Investment securities |
137,819 | 1,166 | 3.38 | 119,345 | 1,300 | 4.36 | ||||||||||||||||||
Federal Home Loan Bank stock |
17,007 | 13 | 0.31 | 17,007 | | | ||||||||||||||||||
Other earning assets |
156,992 | 15 | 0.04 | 762 | | | ||||||||||||||||||
Total interest-earning assets |
1,726,452 | 18,729 | 4.34 | 1,493,957 | 18,941 | 5.07 | ||||||||||||||||||
Non-interest-earning assets |
113,814 | 66,449 | ||||||||||||||||||||||
Total assets |
$ | 1,840,266 | $ | 1,560,406 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW and money market accounts |
$ | 345,363 | 357 | 0.41 | $ | 341,796 | 404 | 0.47 | ||||||||||||||||
Savings accounts (5) |
167,331 | 118 | 0.28 | 150,406 | 128 | 0.34 | ||||||||||||||||||
Time deposits |
551,217 | 2,436 | 1.77 | 485,227 | 2,468 | 2.03 | ||||||||||||||||||
Total interest-bearing deposits |
1,063,911 | 2,911 | 1.09 | 977,429 | 3,000 | 1.23 | ||||||||||||||||||
Advances from the Federal Home Loan Bank |
254,953 | 2,423 | 3.80 | 266,294 | 2,543 | 3.82 | ||||||||||||||||||
Total interest-bearing liabilities |
1,318,864 | 5,334 | 1.62 | % | 1,243,723 | 5,543 | 1.78 | % | ||||||||||||||||
Non-interest-bearing liabilities |
301,733 | 157,181 | ||||||||||||||||||||||
Total liabilities |
1,620,597 | 1,400,904 | ||||||||||||||||||||||
Stockholders equity |
219,669 | 159,502 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 1,840,266 | $ | 1,560,406 | ||||||||||||||||||||
Net interest income |
$ | 13,395 | $ | 13,398 | ||||||||||||||||||||
Net interest rate spread (2) |
2.72 | % | 3.29 | % | ||||||||||||||||||||
Net interest-earning assets (3) |
$ | 407,588 | $ | 250,234 | ||||||||||||||||||||
Net interest margin (4) |
3.10 | % | 3.59 | % | ||||||||||||||||||||
Average interest-earning assets to average
interest-bearing liabilities |
130.90 | % | 120.12 | % |
(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. |
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.
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Three Months Ended | ||||||||||||
March 31, 2011 | ||||||||||||
Compared to | ||||||||||||
March 31, 2010 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due To | ||||||||||||
Volume | Rate | Net | ||||||||||
(in thousands) | ||||||||||||
Interest and dividend income: |
||||||||||||
Loans receivable |
$ | 735 | $ | (841 | ) | $ | (106 | ) | ||||
Securities interest, dividends &
income from other assets |
984 | (1,090 | ) | (106 | ) | |||||||
Total earning assets |
1,719 | (1,931 | ) | (212 | ) | |||||||
Interest expense: |
||||||||||||
NOW and money market accounts |
4 | (51 | ) | (47 | ) | |||||||
Savings accounts |
13 | (23 | ) | (10 | ) | |||||||
Time deposits |
313 | (345 | ) | (32 | ) | |||||||
Total interest-bearing deposits |
330 | (419 | ) | (89 | ) | |||||||
FHLB Advances |
(108 | ) | (12 | ) | (120 | ) | ||||||
Total interest-bearing liabilities |
222 | (431 | ) | (209 | ) | |||||||
Change in net interest income |
$ | 1,497 | $ | (1,500 | ) | $ | (3 | ) | ||||
Net Interest Income: Net interest income before the provision for loan loss was $13.4
million for the three months ended March 31, 2011 and 2010. The $3,000 decrease in net
interest income was due to the combination of an increase in average interest-earning assets
of $232.5 million and a reduction in the yield on earning assets of 73 basis points and an
increase of $86.5 million of interest-bearing deposits and a 14 basis point reduction to the
deposit cost of funds and an $11.3 million reduction in FHLB borrowings with a 2 basis point
reduction in the cost of borrowing.
Average earning assets increased by $232.5 million, or 15.6%, to $1.73 billion. Most of the
increase was due to the additional $168.0 million in net proceeds received from the
Companys stock conversion in the first quarter of 2011. In the first quarter of 2011
interest income on earning assets was $18.7 million, a decrease of $212,000, yielding an
average of 4.34%, a decrease of 73 basis points, as compared to the same period of 2010.
Average interest-bearing liabilities increased $75.1 million, or 6.0%, to $1.32 billion for
the three months ended March 31, 2011, costing an average of 1.62%, a decrease of 16 basis
points. Average time deposits increased $66.0 million in the first quarter of 2011. Average
NOW and money market account balances increased $3.6 million and average savings account
balances increased $16.9 million compared to the same period last year. In the first
quarter of 2011, the cost of interest-bearing liabilities was $5.3 million, a decrease of
$209,000 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 $57.8 million and an average increase in investment securities
of $18.5 million. The increase in average interest-bearing liabilities reflects the net
impact of continued growth of average core interest-bearing deposits of $20.5 million and
time deposits of $66.0 million which was offset by reductions in FHLB borrowings of $11.3
million. Average net interest-earning assets increased by $157.4 million to $407.6 million
due to the additional proceeds from the conversion of the Companys stock in the first
quarter 2011. The Companys net interest margin declined 49 basis points to 3.10% compared
to 3.59% for the same period in the prior year as the net proceeds from the stock conversion
were placed in relatively low-yielding short-term investments. Current strategies include
expanding our retail and residential lending, which comprise a significant portion of our
portfolio as well expanding our commercial real estate and commercial business loans. We
routinely consider and assess branch expansion opportunities within and outside our market
area.
The Companys net interest rate spread decreased 57 basis points to 2.72% from 3.29% in
the first quarter 2010 due to a decrease of 73 basis points in the earning asset yield,
partially offset by a 16 basis point reduction in the cost of funds.
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Interest and Dividend Income: Interest and dividend income decreased $212,000, or 1.1%, to
$18.7 million for the three months ended March 31, 2011 from $18.9 million for the same
period in the prior year. An increase of $18.5 million of average investment securities
along with a 98 basis point decline in rates accounted for a $134,000 reduction in interest
and dividend income on investment securities. Interest income on loans receivable decreased
$106,000, or 0.60%, to $17.5 million. The decrease in loan interest income was due a 24
basis point reduction on average loan yields which was partially offset by an increase in
average loans for the period of $57.8 million, or 4.3%. 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 73 basis points to 4.34% from 5.07%. The decrease in the
average yield was attributable to the addition of new loans and investments at lower yields
than the first quarter last year, runoff of loans at yields higher than that currently
offered 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 March 31, 2011 compared to the
same period last year. The one-year Constant Maturity Treasury Bill Index used to re-price
adjustable rate residential mortgages decreased 13 basis points during the past year to
0.30% at March 31, 2011 compared to 0.43% at March 31, 2010.
Interest Expense: Interest expense for the three months ended March 31, 2011 decreased
$209,000, or 3.8%, to $5.3 million from $5.5 million compared to the same period last year.
The savings resulted from a decrease of 16 basis points paid on average interest-bearing
liabilities in combination with a $75.1 million, or a 6.0%, increase in average
interest-bearing liabilities. The decrease in the cost of funds was primarily due to the
impact the sustained low interest rate environment had on the Banks time deposits during
the first quarter of 2011 resulting in expense savings of $209,000. Average balances on
interest-bearing deposits rose to $1.06 billion, an increase of $86.5 million led by the
growth in time deposits of $66.0 million, followed by savings accounts of $16.9 million and
NOW and money market accounts of $3.6 million. Generally, management would prefer to fund
growth with deposits instead of wholesale borrowings. The additional equity generated from
the stock conversion and the current market conditions have allowed the Company to eliminate
its demand for new wholesale borrowings. Average outstanding advances from the Federal Home
Loan Bank were $255.0 million, down $11.3 million from the first quarter of 2010. The
interest rate on these borrowings averaged 3.80%, a decrease of 2 basis points compared to
the average rate of 3.82% last 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 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 $752,000 for the three months ended March 31, 2011, as compared to $903,000
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
March 31, 2011, the allowance for loan losses totaled $15.0 million, which represented 1.05%
of total loans and 115.32% of non-performing loans compared to an allowance for loan losses
of $14.3 million, which represented 1.00% of total loans and 115.79% of non-performing loans
as of December 31, 2010.
Potential problem loans: The internal and external analysis of the loan portfolio is
utilized 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 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. Typically, loans risk rated Substandard or more severe are
transferred to the Special Assets area. All special mention, substandard and doubtful loans
are included on the Companys watchlist which is updated quarterly. See Footnote 6
Loans Receivable and Allowance for Loan Losses in the accompanying Interim Financial
Statements for further information.
The Company closely monitors the watchlist for signs of deterioration to mitigate the growth
in non-accrual loans. At March 31, 2011, watchlist loans totaled $60.6 million, of which
$47.6 million are not considered impaired.
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Non-interest Income: Sources of non-interest income primarily include banking service
charges on deposit accounts, Infinex brokerage and insurance fees, Rockville Bank Mortgage,
Incs loan broker fees, bank-owned life insurance, gains and losses on investment
securities, gains on sale of loans, mortgage servicing income, safe deposit box rental
fees, brokerage fees and insurance commissions. Other-than-temporary impairment of
securities is also included in non-interest income.
Non-interest income, which increased $1,000 to $1.7 million for the first quarter 2011
compared to the same quarter last year, was mainly the result of an increase in service
charges and fees of $354,000 which was offset by a reduction of $188,000 on the sale of
securities in the first quarter of 2011, a $29,000 other-than-temporary loss on one
available for sale security and the receipt of $100,000 less in net gains on the sale of
loans. Service charges and fees increased to $1.6 million in the first quarter of 2011 from
$1.2 million in the same period last year. The increase resulted primarily from an increase
of $349,000 in loan fee income generated by Rockville Bank Mortgage, Inc. which began
operations in January 2010 and an additional $83,000 in ATM fees, generated partially from
the elimination of service charge waivers to the SUM network (an interbank network of ATM
service providers) customers, which was offset by a net reduction in insufficient funds fees
totaling $42,000 and reductions in loan servicing income of $25,000 and Infinex fees of
$9,000 compared to the first quarter of 2010.
During the first quarter of 2011, the Company realized gains of $59,000 on the sale of fixed
rate residential mortgages compared to $159,000 for the same period last year. The Companys
asset-liability committees strategy continues to include sales of longer-term, fixed rate
residential mortgages in the secondary market; however, sales volume of fixed rate
residential mortgages has fallen in 2011 due to lower demand. There were no gains on the
sale of securities in the first quarter of 2011compared to $188,000 for the quarter ended
March 31, 2010. There was $29,000 of other-than-temporarily impairment securities in the
first quarter of 2011 compared to none in the first quarter of 2010.
Non-interest Expense: The following table summarizes non-interest expense for the three
months ended March 31, 2011 and 2010:
Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Salaries and employee benefits |
$ | 5,671 | $ | 4,790 | $ | 881 | ||||||
Service bureau fees |
1,059 | 999 | 60 | |||||||||
Occupancy and equipment |
1,166 | 1,127 | 39 | |||||||||
Professional fees |
684 | 390 | 294 | |||||||||
Marketing and promotions |
324 | 274 | 50 | |||||||||
FDIC assessments |
514 | 400 | 114 | |||||||||
Other real estate owned |
59 | 368 | (309 | ) | ||||||||
Contribution to Rockville Bank Foundation |
5,043 | | 5,043 | |||||||||
Other |
1,424 | 1,287 | 137 | |||||||||
Total non-interest expense |
$ | 15,944 | $ | 9,635 | $ | 6,309 | ||||||
Non-interest expense increased $6.3 million, or 65.5%, to $15.9 million for the three months
ended March 31, 2011 compared to $9.6 million for the same period in the prior year. Salary
and employee benefits expense increased $881,000, which was mainly attributable to increases
in salary and related payroll tax expense of $544,000, bonus accruals of $154,000 and ESOP
expense of $135,000. Service bureau fees increased $60,000 as the result of higher ATM
servicing fees of $25,000, other service bureau fees of $35,000 and wide-area network
servicing fees of $1,000. Occupancy and equipment expense increased $39,000 mainly due to
increases in janitorial service and supplies expense of $34,000, rent expense of $31,000 and
real estate taxes of $19,000 which was offset by reductions in depreciation expense of
$42,000. Professional fees increased $294,000 in the first quarter 2011 compared to the
first quarter of 2010 which was attributable to an increase of consulting fees as management
retained consultation to evaluate our infrastructure needs as we prepare to leverage our
capital and accelerate our growth following the second step conversion. Marketing and
promotions expense increased $50,000 mainly due to the introduction of the Companys new
chief executive officer and increased advertising to take advantage of competitive
opportunities. Other real estate owned expense decreased $309,000 for the quarter ended
March 31, 2011, as the average recorded value of OREO properties declined $2.2 million
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compared to the same quarter last year. During the first quarter, the Company contributed
$5.0 million to the Rockville Bank Foundation, Inc. which
represented 3.0% of the net proceeds
from the second-step conversion.
The following table summarizes significant components of other non-interest expense for
the three months ended March 31, 2011 and 2010:
Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
(In thousands) | ||||||||||||
Telephone |
$ | 53 | $ | 48 | $ | 5 | ||||||
Postage |
132 | 113 | 19 | |||||||||
Collections |
79 | 163 | (84 | ) | ||||||||
Directors fees and stock expense |
153 | 171 | (18 | ) | ||||||||
Courier services |
74 | 76 | (2 | ) | ||||||||
Mortgage loan servicing |
53 | 71 | (18 | ) | ||||||||
Mortgage appraisal / credit reports |
118 | 64 | 54 | |||||||||
Dues and subscriptions |
58 | 50 | 8 | |||||||||
Printing and forms |
72 | 103 | (31 | ) | ||||||||
Other |
632 | 428 | 204 | |||||||||
Total other non-interest expense |
$ | 1,424 | $ | 1,287 | $ | 137 | ||||||
Income Tax Provision: The income tax benefit was $591,000 for the first quarter of 2011,
resulting from the $1.6 million loss before taxes, compared to income tax expense of $1.7
million on pretax income of $4.5 million in the first quarter of last year. Income taxes are
provided on an interim basis using the estimated annual effective tax rate. The effective
tax rate was 36.6% and 37.2% of pretax (loss) income for the three months ended March 31,
2011 and 2010, respectively.
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. In 2010, the
Company began paying Massachusetts state income tax on a portion of our income and will file
a corporation income tax return for 2010 with the State of Massachusetts.
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
Summary: The Companys total assets increased $221.8 million, or 13.2%, to $1.90
billion at March 31, 2011, from $1.68 billion at December 31, 2010, primarily due to the
second-step conversion completed on March 3, 2011 which raised $168.0 million. Proceeds from
the conversion were used to purchase short-term investments, available for sale securities
and to pay off maturing FHLB advances. Cash and cash equivalents increased to $229.7
million, or 278.3%, at March 31, 2011 from $60.7 million at December 31, 2010. Available for
sale securities increased to $173.3 million, or 38.2%, at March 31, 2011 from $125.4 million
at year end. Net loans receivable increased $6.8 million, or 0.5%, to $1.42 billion at March
31, 2011 compared to December 31, 2010.
Deposits increased $29.8 million, or 2.4%, from December 31, 2010, to $1.25 billion at March
31, 2011. Interest-bearing deposits grew $33.2 million in the first three months of 2011 to
$1.08 billion from $1.05 billion at December 31, 2010. Non-interest-bearing deposits totaled
$165.3 million at March 31, 2011, a decrease of $3.4 million from year end 2010. Federal
Home Loan Bank advances decreased $10.0 million, or 3.8%, to $251.4 million at March 31,
2011 from $261.4 million at December 31, 2010.
Total stockholders equity increased $169.6 million, or 101.9%, to $336.1 million at March
31, 2011 compared to $166.4 million at December 31, 2010. This was due to the capital raised
in the second-step conversion completed in the first quarter of 2011. As a result, common
stock increased $168.0 million, net of retired treasury shares totaling $9.5 million, and
additional paid-in capital increased $9.8 million resulting in a net increase in total
capital of $169.6 million. Also contributing to the increase in equity was a decrease of
$865,000 in the accumulated other comprehensive loss, net of tax. Increases in the level of
unallocated ESOP shares to $10.3 million, which were purchased after the second-step
conversion, the reduction of retained earnings created by the
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payment of the first quarter dividend and the first quarter 2011 loss combined to reduce
total equity by $9.1 million.
Investment Securities: At March 31, 2011, the Companys investment portfolio of $185.6
million, or 9.8% of total assets, consisted of available for sale securities of $173.3
million and held to maturity securities of $12.2 million. The increase in available for sale
securities of $47.9 million from year end was mainly due to the purchase of $34.6 million of
government-sponsored enterprise mortgage-backed investments and $16.8 million of U.S.
Government-sponsored enterprise investments offset by $4.7 million of principal payments of
government-sponsored enterprise mortgage-backed securities. At March 31, 2011, the available
for sale securities portfolio was comprised of $51.8 million in U.S. Government and U.S.
Government-sponsored enterprise securities, $5.9 million in corporate bonds, $97.0 million
in U.S. Government-sponsored mortgage-backed securities and $11.3 million in marketable
equity securities. The net unrealized gains on available for sale securities increased $1.2
million to $7.4 million at March 31, 2011 from $6.2 million at December 31, 2010. 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 three months of 2011. The held to maturity securities
portfolio had an amortized cost of $12.2 million comprised of U.S. Government-sponsored
mortgage-backed securities that had a fair market value of $13.1 million at March 31, 2011.
Principal payments totaling $1.4 million were made in held to maturity securities during the
three months ended March 31, 2011; there were no purchases.
Lending Activities: Net loans receivable increased $6.8 million to $1.42 billion at March
31, 2011. The increase was primarily due to increases in commercial real estate loans of
$9.2 million and commercial business loans of $3.8 million. Residential real estate loans
decreased $4.8 million to $715.2 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 $139,000 to $78.5 million from year end. As of
March 31, 2011 and December 31, 2010, commercial business loans consisted of $19.2 million
and $19.6 million, respectively, of loans fully guaranteed by the United States Department
of Agriculture.
Deposits: Deposits increased $29.8 million to $1.25 billion at March 31, 2011 compared to
$1.22 billion at December 31, 2010. At March 31, 2011, non-interest-bearing deposits were
$165.3 million, a decrease of $3.4 million and interest-bearing deposits were $1.08 billion,
an increase of $33.2 million, compared to December 31, 2010. Money market and investment
savings account balances were $231.7 million, an increase of $4.7 million, regular savings
and club account balances were $170.9 million, an increase of $8.5 million, and NOW account
balances were $117.8 million, an increase of $441,000 as compared to December 31, 2010.
Certificates of deposit balances were $563.4 million, an increase of $19.5 million in the
first three months of 2011 compared to year end resulting from the introduction of a new,
13-month certificate of deposit yielding 1.25%, adding $29.9 million in deposit balances.
At March 31, 2011, core deposits were $685.7 million, an increase of $10.3 million compared
to December 31, 2010. 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 March 31, 2011, $229.7
million of the Companys assets were invested in cash and cash equivalents compared to $60.7
million at December 31, 2010. Most of this growth was recorded in short-term investments
which increased $141.1 million at March 31, 2011 due to the receipt of $168.0 million in net
proceeds from the second-step conversion. 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.
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For the three months ended March 31, 2011, net loans receivable increased $6.8 million due
to increased levels of commercial real estate and commercial business loans. Total net loan
originations declined $13.3 million from the same period last year. The Company purchased
$51.6 million of available for sale investment securities during the three months ended
March 31, 2011. There were no sales of available for sale securities in the first three
months of 2011. The Company received $4.7 million in net principal reductions on available
for sale mortgage-backed securities and $1.4 million in principal payments on held to
maturity securities during the three months ended March 31,
2011. There were no calls and $100,000 of
maturities of investment securities during the three months ended March 31, 2011.
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 March 31, 2011, the Company had $251.4 million in advances from the Federal Home
Loan Bank of Boston and an additional available borrowing limit of $116.9 million based on
collateral requirements of the Federal Home Loan Bank of Boston. Internal policies limit
borrowings to 30% of total assets, or $569.9 million at March 31, 2011.
At March 31, 2011, the Company had outstanding commitments to originate loans of $37.6
million and unfunded commitments under construction loans, lines of credit and stand-by
letters of credit of $308.6 million. At March 31, 2011, time deposits scheduled to mature in
less than one year totaled $398.3 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 March 31, 2011 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
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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.
Percentage Increase | ||||
(Decrease) in | ||||
Estimated | ||||
Net Interest Income | ||||
Over 12 Months | ||||
400 basis point increase in rates |
9.31 | % | ||
50 basis point decrease in rates |
(1.85 | ) |
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 March 31, 2011, income
at risk (i.e., the change in net interest income) increased 9.31% and decreased 1.85% based
on a 400 basis point average increase or a 50 basis point average decrease, respectively. At
March 31, 2011, return on assets is modeled to increase by 18 basis points and decrease 3
basis points 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.
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.
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Item 1A. Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A
of the Companys annual report on Form 10-K for the period ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 3, 2011, Rockville Financial, Inc. completed its stock offering in connection
with the second-step conversion of Rockville Financial MHC, Inc. As part of
the conversion, New Rockville Financial, Inc. succeeded Rockville Financial, Inc as the
stock holding company of Rockville Bank, and Rockville Financial MHC,
Inc. was
dissolved. A total of 17,109,886 shares representing Rockville
Financial MHC, Inc.s ownership interest in Rockville Financial, Inc. were sold by New Rockville
Financial, Inc. in a subscription offering. Pursuant to a Registration Statement on Form S-1
shares of New Rockville Financial, Inc. were sold for a purchase price of $10.00 per share.
In addition, each outstanding share of Rockville Financial, Inc. as of March 3, 2011 was
exchanged for 1.5167 shares of New Rockville Financial, Inc. common stock. New Rockville
Financial, Inc. changed its name to Rockville Financial, Inc. effective March 3, 2011. As a
result of completion of the offering, 29,501,170 shares of Rockville Financial, Inc. common
stock were outstanding as of March 31, 2011.
A total of $168.0 million, net of offering costs of $3.1 million, was raised as of March 3,
2011. Keefe, Bruyette & Woods, Inc. (KBW) was engaged to assist in the marketing of the
common stock. For their services, KBW received fees totaling $1.4 million. Other significant
expenses included legal fees of $450,000, word processing and printing fees of $400,000,
accounting fees of $302,000, and interest paid on stock order refunds totaling $47,000.
Fifty percent of the net proceeds, or $84.0 million, of the stock offering were contributed
to Rockville Bank. Three percent, or $5.0 million, of the net proceeds were contributed to
the Rockville Bank Foundation, Inc. with the balance of the second-step proceeds, or $79.0
million, retained by Rockville Financial, Inc. Rockville Financial, Inc. utilized $7.1
million of the proceeds to purchase 684,395 shares of common stock in the open market for
the Employee Stock Ownership Plan (ESOP).
Initially, both Rockville Financial, Inc. and Rockville Bank have invested the net proceeds
from the stock offering in short-term investments, government agency securities and
mortgage-backed securities. In addition, some of the proceeds were used to pay off maturing
FHLB borrowings. Current strategies include expanding our retail and residential lending,
which comprise a significant portion of our portfolio as well expanding our commercial real
estate and commercial business loans. We routinely consider and assess branch expansion
opportunities within and outside our market area.
Rockville Financial, Inc.s common stock is quoted on the NASDAQ Global Select Stock Market
under the symbol RCKB.
Repurchase of Equity Securities During 2011:
Effective January 2008, the Company adopted a plan to repurchase up to 978,400 of our
outstanding shares of common stock on the open market. At December 31, 2010, there were
674,718 shares available to be purchased under this program (based on the Reorganization
exchange ratio of 1.5167, this is 1,483,939 shares). These shares were cancelled during the
conversion; Rockville Financial, Inc. is prohibited from purchasing its shares for one year
following the conversion except for limited purposes.
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 | Amended and Restated Plan of Conversion and Reorganization (incorporated herein by reference to Exhibit 2.1 to the Registration Statement filed on the Form S-1 for Rockville Financial, Inc. on September 16, 2010) | ||
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, Inc. on September 16, 2010) | ||
3.1.1 | Amendment of Certificate of Incorporation of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.1.1 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010) | ||
3.2 | Bylaws of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010) | ||
4.1 | Form of Common Stock Certificate of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010) | ||
10.1 | Advisory Agreement entered into by and between Rockville Bank and William J. McGurk (incorporated herein by reference to Exhibit 10.1 to the Current Report on the Companys Form 8-K filed on January 26, 2011) | ||
10.2 | Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and John T. Lund, effective January 4, 2010 (incorporated herein by reference to Exhibit 3.1 to the Current Report on the Companys Form 8-K filed on January 7, 2010) | ||
10.2.1. | Supplemental Executive Retirement Agreement of Rockville Bank for John T. Lund effective December 6, 2010 (incorporated by reference to Exhibit 10.3.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011) | ||
10.2.2 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and John L. Lund, effective January 1, 2011 (incorporated herein by reference to Exhibit 10.15 to the Current Report on the Companys Form 8-K filed on January 10, 2011) | ||
10.2.3 | 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 Rockville Financial, Inc.s Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239)) | ||
10.3 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank Christopher E. Buchholz, effective January 1, 2011 (incorporated herein by reference to Exhibit 10.3 to the Current Report on the Companys Form 8-K filed on January 10, 2011) |
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10.4 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2009 (incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 11, 2009) | ||
10.4.1 | Rockville Bank Extension Notice Agreement by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2010 (incorporated by reference to Exhibit 10.5.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 10, 2010) | ||
10.4.2 | Supplemental Executive Retirement Agreement of Rockville Bank for Richard J. Trachimowicz effective December 6, 2010 (incorporated by reference to Exhibit 10.5.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011) | ||
10.4.3 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2011 (incorporated herein by reference to Exhibit 10.5 to the Current Report on the Companys Form 8-K filed on January 10, 2011) | ||
10.5 | 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) | ||
10.6 | 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. 000-52139)) | ||
10.7 | 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 New, Inc. on September 16, 2010) | ||
10.7.1 | 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) | ||
10.8 | Executive Split Dollar Life Insurance Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.11 to the Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on December 17, 2004 (File No. 333-121421)) | ||
10.9 | 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) | ||
10.10 | 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)) | ||
10.11 | Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and William H.W. Crawford IV, effective January 3, 2011 (incorporated herein by reference to Exhibit 10.15 to the Current Report on the Companys Form 8-K filed on January 6, 2011) | ||
10.12 | Supplemental Executive Retirement Agreement of Rockville Bank for Mark A. Kucia effective December 6, 2010 (incorporated by reference to Exhibit 10.13 to the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011) | ||
10.12.1 | Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Mark A. Kucia, effective January 1, 2011(incorporated by reference to Exhibit 10.13.1 to the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011) |
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14 | Rockville Financial, Inc., Rockville Bank, Standards of Conduct Policy Employees (incorporated herein by reference to Exhibit 14 to the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 17, 2008) | ||
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 | |||
John T. Lund | ||||
SVP, Chief Financial Officer and Treasurer | ||||
Date: May 10, 2011
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