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EX-31.1 - EXHIBIT 31.1 - Hampden Bancorp, Inc.a6717548ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - Hampden Bancorp, Inc.a6717548ex31_2.htm
UNITED STATES 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
 
or
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 
 
FOR THE TRANSITION PERIOD FROM                      TO                     
 
COMMISSION FILE NUMBER : 333-137359
 
Hampden Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-5714154
(IRS Employer Identification No.)
 
19 Harrison Ave.
Springfield, Massachusetts 01102
(Address of principal executive offices) (Zip Code)
 
(413) 736-1812
(Registrant’s 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. Yes þ No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
 
Large accelerated filer o
Accelerated Filer o
 
 
 Non-accelerated filer o
Smaller reporting company þ
 
 
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes  o No  þ
 
As of May 3, 2011, there were 6,798,999 shares of the registrant’s common stock outstanding.
 
 
 

 
 
HAMPDEN BANCORP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
HAMPDEN BANCORP, INC. AND SUBSIDIARIES

   
Page No.
 
PART I — FINANCIAL INFORMATION
       
         
       
         
   
3
 
         
   
        4
 
         
   
5
 
         
   
6-7
 
         
   
8
 
         
   
22
 
         
   
36
 
         
   
36
 
         
PART II — OTHER INFORMATION
       
         
   
37
 
         
   
37
 
         
   
37
 
         
   
37
 
         
   
37
 
         
   
37
 
         
   
38
 
         
   
40
 
 
 
2

 
 
PART 1 – FINANCIAL INFORMATION
 
HAMPDEN BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
ASSETS
           
   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
 
Cash and due from banks
  $ 27,088     $ 20,770  
Federal funds sold and other short-term investments
    10,559       9,263  
Cash and cash equivalents
    37,647       30,033  
                 
Securities available for sale, at fair value
    113,128       111,379  
Federal Home Loan Bank of Boston stock, at cost
    5,233       5,233  
Loans held for sale
    420       933  
Loans, net of allowance for loan losses of $5,080
               
at March 31, 2011 and $6,314 at June 30, 2010
    392,792       412,614  
Other real estate owned
    985       911  
Premises and equipment, net
    5,553       5,097  
Accrued interest receivable
    1,572       1,751  
Deferred tax asset, net
    3,887       3,420  
Bank-owned life insurance
    10,635       10,325  
Other assets
    3,165       2,343  
    $ 575,017     $ 584,039  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Deposits
  $ 421,112     $ 420,060  
Securities sold under agreements to repurchase
    7,279       6,806  
Long-term debt
    47,660       58,196  
Mortgagors' escrow accounts
    986       849  
Accrued expenses and other liabilities
    5,105       3,355  
Total liabilities
    482,142       489,266  
                 
Commitments (Note 5)
               
                 
Preferred stock ($.01 par value, 5,000,000 shares authorized, none issued or outstanding)
    -       -  
Common stock ($.01 par value, 25,000,000 shares authorized, 7,949,879 issued;
               
6,798,999 outstanding at March 31, 2011 and 7,117,274 at June 30, 2010)
    79       79  
Additional paid-in-capital
    78,375       77,959  
Unearned compensation - ESOP (455,794 shares unallocated at March 31, 2011 and
         
487,594 shares unallocated at June 30, 2010)
    (4,558 )     (4,876 )
Unearned compensation - equity incentive plan
    (1,048 )     (1,450 )
Retained earnings
    30,492       29,781  
Accumulated other comprehensive income
    1,377       1,869  
Treasury stock, at cost (1,150,880 shares at March 31, 2011 and 832,605 shares at June 30, 2010)
    (11,842 )     (8,589 )
Total stockholders' equity
    92,875       94,773  
    $ 575,017     $ 584,039  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
3

 
 
HAMPDEN BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
   
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Interest and dividend income:
                       
Loans, including fees
  $ 5,401     $ 5,867     $ 16,889     $ 17,523  
Debt securities
    758       965       2,384       3,147  
Dividends
    10       2       13       8  
Federal funds sold and other short-term investments
    8       5       34       17  
Total interest and dividend income
    6,177       6,839       19,320       20,695  
                                 
Interest expense:
                               
Deposits
    1,296       1,706       4,316       5,467  
Borrowings
    478       618       1,577       2,035  
Total interest expense
    1,774       2,324       5,893       7,502  
                                 
Net interest income
    4,403       4,515       13,427       13,193  
Provision for loan losses
    600       1,395       1,200       4,037  
Net interest income, after provision for loan losses
    3,803       3,120       12,227       9,156  
                                 
Non-interest income:
                               
Customer service fees
    444       457       1,375       1,418  
Gain (loss) on sales or calls/impairment of securities, net
    (113 )     1       (105 )     15  
Gain on sales of loans, net
    49       21       440       65  
Increase in cash surrender value of life insurance
    99       101       309       313  
Other
    138       18       214       162  
Total non-interest income
    617       598       2,233       1,973  
                                 
Non-interest expense:
                               
Salaries and employee benefits
    2,402       2,388       7,277       7,150  
Occupancy and equipment
    491       452       1,387       1,303  
Data processing services
    178       240       526       707  
Advertising
    178       234       534       726  
Write-down of (gain on) other real estate owned
    -       -       (15 )     253  
FDIC insurance and assessment expenses
    153       163       461       433  
Other general and administrative
    786       789       2,456       2,335  
Total non-interest expense
    4,188       4,266       12,626       12,907  
                                 
Income (loss) before income taxes
    232       (548 )     1,834       (1,778 )
                                 
Income tax provision (benefit)
    (21 )     (405 )     546       (803 )
                                 
Net income (loss)
  $ 253     $ (143 )   $ 1,288     $ (975 )
                                 
Earnings (loss) per share
                               
Basic
  $ 0.04     $ (0.02 )   $ 0.21     $ (0.15 )
Diluted
  $ 0.04     $ (0.02 )   $ 0.20     $ (0.15 )
                                 
Weighted average shares outstanding
                               
Basic
    6,197,596       6,481,991       6,254,803       6,533,619  
Diluted
    6,413,654       6,481,991       6,356,285       6,533,619  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
HAMPDEN BANCORP, INC. AND SUBSIDIARIES
 (Dollars in thousands)
 
                     
Unearned
       
Accumulated
       
         
Additional
   
Unearned
   
Compensation -
       
Other
       
   
Common Stock
   
Paid-in
   
Compensation
   
Equity
   
Retained
 
Comprehensive
   
Treasury
 
 
   
Shares
   
Amount
   
Capital
   
- ESOP
   
Incentive Plan
   
Earnings
 
Income (Loss)
   
Stock
 
Total
 
   
(Unaudited)
 
Balance at June 30, 2009
  7,446,752     $ 79     $ 77,603     $ (5,300 )   $ (2,127 )   $ 30,986     $ 507     $ (5,090 )   $ 96,658  
                                                                       
Comprehensive loss:
                                                                     
Net loss
  -       -       -       -       -       (975 )     -       -       (975 )
Net unrealized gain on securities
                                                                     
available for sale, net of reclassification
                                                                     
adjustment and tax effects
  -       -       -       -       -       -       925       -       925  
Total comprehensive loss
                                                                  (50 )
Cash dividends paid ($0.09 per share)
  -       -       -       -       -       (607 )     -       -       (607 )
Common stock repurchased
  (295,278 )     -       -       -       -       -       -       (3,166 )     (3,166 )
Stock-based compensation
  -       -       250       -       476       -       -       -       726  
Tax benefit from Equity Incentive Plan vesting
  -       -       10       -       -       -       -       -       10  
Forfeiture of restricted stock
  -       -       -       -       45       (45 )     -       -       -  
ESOP shares committed to be allocated                                                                       
(31,800 shares)
  -       -       15       318       -       -       -       -       333  
Balance at March 31, 2010
  7,151,474     $ 79     $ 77,878     $ (4,982 )   $ (1,606 )   $ 29,359     $ 1,432     $ (8,256 )     93,904  
                                                                       
Balance at June 30, 2010
  7,117,274     $ 79     $ 77,959     $ (4,876 )   $ (1,450 )   $ 29,781     $ 1,869     $ (8,589 )   $ 94,773  
Comprehensive income:
                                                                     
Net income
  -       -       -       -       -       1,288       -       -       1,288  
Net unrealized loss on securities
                                                                     
available for sale, net of reclassification                                                                      
adjustment and tax effects
  -       -       -       -       -       -       (492 )     -       (492 )
Total comprehensive income
                                                                  796  
Cash dividends paid ($0.09 per share)
  -       -       -       -       -       (577 )     -       -       (577 )
Common stock repurchased
  (318,275 )     -       -       -       -       -       -       (3,253 )     (3,253 )
Stock-based compensation
  -       -       365       -       402       -       -       -       767  
Tax benefit from Equity Incentive Plan vesting
  -       -       46       -       -       -       -       -       46  
ESOP shares allocated or committed to be                                                                       
allocated (31,800 shares)
  -       -       5       318       -       -       -       -       323  
Balance at March 31, 2011
  6,798,999     $ 79     $ 78,375     $ (4,558 )   $ (1,048 )   $ 30,492     $ 1,377     $ (11,842 )   $ 92,875  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
HAMPDEN BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
   
Nine Months Ended
March 31,
 
   
2011
   
2010
 
   
(Unaudited)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 1,288     $ (975 )
Adjustments to reconcile net income (loss) to net cash
               
provided by operating activities:
               
Provision for loan losses
    1,200       4,037  
Net amortization of securities
    133       92  
Depreciation and amortization
    577       559  
Impairment loss on securities
    58       -  
Loss (gain) on sales or calls of securities, net
    47       (15 )
Loans originated for sale
    (17,703 )     (11,350 )
Proceeds from loan sales
    18,656       12,330  
Gain on sales of loans, net
    (440 )     (65 )
Write-down of (gain on) other real estate owned
    2       253  
Increase in cash surrender value of bank-owned
               
life insurance
    (310 )     (313 )
Deferred tax benefit
    (146 )     (8 )
Employee Stock Ownership Plan expense
    323       333  
Stock-based compensation
    767       726  
Tax benefit from Equity Incentive Plan
    (46 )     (10 )
Net change in:
               
Accrued interest receivable
    179       56  
Other assets
    (822 )     (1,596 )
Accrued expenses and other liabilities
    1,796       (2,609 )
Net cash provided by operating activities
    5,559       1,445  
                 
Cash flows from investing activities:
               
Activity in available-for-sale securities:
               
Sales
    122       359  
Maturities and calls
    26,318       9,981  
Principal payments
    24,340       24,883  
Purchases
    (53,580 )     (30,809 )
Purchase of loans
    -       (3,204 )
Proceeds from sale of other real estate owned
    409       284  
Loan originations, net of principal payments
    18,137       (24,290 )
Purchase of premises and equipment
    (1,033 )     (1,307 )
Net cash provided (used) by investing activities
    14,713       (24,103 )
 
(continued)



See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
 
HAMPDEN BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)
 
   
Nine Months Ended
March 31,
 
   
2011
   
2010
 
   
(Unaudited)
 
Cash flows from financing activities:
           
Net change in deposits
    1,052       29,909  
Net change in repurchase agreements
    473       (1,890 )
Net change in short-term borrowings
    -       (1,500 )
Proceeds from long-term debt
    -       961  
Repayment of long-term debt
    (10,536 )     (12,000 )
Net change in mortgagors' escrow accounts
    137       78  
Repurchase of common stock
    (3,253 )     (3,166 )
Tax benefit from Equity Incentive Plan vesting
    46       10  
Payment of dividends on common stock
    (577 )     (607 )
Net cash provided (used) by financing activities
    (12,658 )     11,795  
                 
Net change in cash and cash equivalents
    7,614       (10,863 )
                 
Cash and cash equivalents at beginning of period
    30,033       36,248  
                 
Cash and cash equivalents at end of period
  $ 37,647     $ 25,385  
                 
Supplemental cash flow information:
               
Interest paid on deposits
  $ 4,316     $ 5,467  
Interest paid on borrowings
    1,603       2,045  
Income taxes paid
    482       362  
Transfer from loans to OREO
    485       89  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
7

 
 
HAMPDEN BANCORP, INC AND SUBSIDIARIES
(Unaudited)
 
1. Basis of presentation and consolidation
 
The consolidated financial statements include the accounts of Hampden Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, Hampden Bank (the “Bank”) and Hampden LS, Inc.  Hampden Bank is a Massachusetts chartered stock savings bank. The Company contributed funds to Hampden LS, Inc. to enable it to make a 15-year loan to the employee stock ownership plan (the “ESOP”) to allow it to purchase shares of the Company’s common stock as part of the completion of the initial public offering. Hampden Bank has two wholly-owned subsidiaries, Hampden Investment Corporation, which engages in buying, selling, holding and otherwise dealing in securities, and Hampden Insurance Agency, which ceased selling insurance products in November of 2000 and remains inactive.  All significant intercompany accounts and transactions have been eliminated in consolidation.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. The results shown for the interim period ended March 31, 2011 are not necessarily indicative of the results to be obtained for a full year. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2010 included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (‘SEC”) on September 7, 2010.

In preparing the consolidated interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the statement of financial condition and reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred income taxes, and other-than-temporary impairment of investment securities.

2. Recent Accounting Pronouncements

 In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-16, Accounting for Transfers of Financial Assets. This update is designed to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of the statement are to be applied to transfers that occur on or after the effective date. This guidance was adopted as of July 1, 2010 and did not have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single Asset.  This update is effective for modifications of loans accounted for with pools in the first interim or annual period ending on or after July 15, 2010.  This update provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition.  It allows acquired assets with common risk characteristics to be accounted for in the aggregate as a pool.  This update has no impact on the Company’s consolidated financial statements.
 
In May 2010, the FASB issued ASU 2010-11, Scope Exception Related to Embedded Credit Derivatives, This is an update to Accounting Standards Codification (“ASC”) Topic 815 Derivatives and Hedging and is effective for fiscal quarters beginning after June 15, 2010. This ASU clarifies that the scope exception in Paragraphs 815-15-15-8 through 15-9 only applies to the transfer of credit risk in the form of subordination of one financial instrument to another.  This would apply to a securitization that is issued in several tranches and one tranche is subordinate to another tranche of the same securitization. Under these circumstances the embedded credit derivative does not have to be analyzed under the above paragraphs for possible bifurcation.  This update did not have an impact on the Company’s consolidated financial statements.
 
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This Update requires an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s loan portfolio, (2) how that risk is analyzed and assessed in arriving at the allowance for loan and lease losses, and (3) the changes and reasons for those changes in the allowance for loan and lease 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 were adopted by the Company as of December 31, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010, and were adopted by the Company as of January 1, 2011. The FASB, in January 2011, has issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendment temporarily delayed the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities.
 
 
8

 
 
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  This Update provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring (“TDR”).  This Update is effective for the first interim or annual period beginning on or after June 15, 2011, with retrospective application to the beginning of the annual period of adoption.  The measurement of impairment should be done prospectively in the period of adoption for loans that are newly identified as TDRs upon adoption of this Update.  In addition, the TDR disclosures required by ASU 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses should be provided beginning in the period of adoption of this Update. The Company will adopt this Update on July 1, 2011 and is currently evaluating the impact of adoption on its consolidated financial statements.

In April 2011, the FASB issued ASU No 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements.  This Update amendments removes the from the assessment of effective control (1) the criterion used to assess effective control relating to the transferor’s ability to repurchase or redeem financial assets even in the event of a default by the transferee  and (2) the collateral maintenance implementation  guidance related to that criterion.  This Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company will adopt this Update on January 1, 2012 and is currently evaluating the impact of adoption on its consolidated financial statements.

3. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders' equity and are included in the weighted-average number of common shares outstanding for both basic and diluted EPS calculations as they are committed to be released.
 
Earnings per share for the three and nine month periods ended March 31, 2011 and 2010 have been computed as follows:
 
   
Three Months Ended March 31,
   
Nine Months Ended March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income (loss) applicable to common stock (in thousands)
  $ 253     $ (143 )   $ 1,288     $ (975 )
                                 
Average number of shares issued
    7,949,879       7,949,879       7,949,879       7,949,879  
Less: average unallocated ESOP shares
    (462,745 )     (505,146 )     (473,436 )     (515,837 )
Less: average treasury stock
    (1,149,250 )     (753,901 )     (1,052,680 )     (662,487 )
Less: average unvested restricted stock awards
    (140,288 )     (208,841 )     (168,960 )     (237,936 )
Average number of basic shares outstanding
    6,197,596       6,481,991       6,254,803       6,533,619  
                                 
Plus: dilutive unvested restricted stock awards
    206,856       -       98,415       -  
Plus: dilutive stock option shares
    9,202       -       3,067       -  
Average number of diluted shares outstanding
    6,413,654       6,481,991       6,356,285       6,533,619  
                                 
Basic earnings (loss) per share
  $ 0.04     $ (0.02 )   $ 0.21     $ (0.15 )
Diluted earnings (loss) per share
  $ 0.04     $ (0.02 )   $ 0.20     $ (0.15 )
 
There were 553,000 stock options for the three and nine months ended March 31, 2010 that were excluded from the diluted earnings per share because their effect was anti-dilutive. There were 317,996 shares of restricted stock for the three and nine months ending March 31, 2010 that were excluded from the diluted earnings per share because their effect is anti-dilutive due to the net loss.

4. Dividends

On February 1, 2011, the Company declared a cash dividend of $0.03 per common share which was paid on February 25, 2011 to stockholders of record as of the close of business on February 11, 2011.

On May 3, 2011, the Company declared a cash dividend of $0.03 per common share which is payable on May 31, 2011 to stockholders of record as of the close of business on May 16, 2011.
 
 
9

 
 
5. Loan Commitments
 
Outstanding loan commitments totaled $79.3 million at March 31, 2011, compared to $74.8 million as of June 30, 2010. Loan commitments primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity, business and other lines of credit, and unused portions of construction loans.
 
6. Fair Value of Financial Assets and Liabilities
 
Generally Accepted Accounting Principles (“GAAP”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
 
 
Level 1:
  
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
     
 
Level 2:
  
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; and  quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology  are derived principally from or can be corroborated by observable market data by correlation or other means.
     
 
Level 3:
  
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
    The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
 
Cash and cash equivalents: The carrying amounts of cash and federal funds sold and other short-term investments approximate fair values.
 
Securities available for sale: The fair values used by the Company are obtained from an independent pricing service, which represents either quoted market prices for identical securities, quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events.  These values are not adjusted by the Company.
 
Federal Home Loan Bank of Boston Stock: The carrying amount of Federal Home Loan Bank (“FHLB”) stock approximates fair value based upon the redemption provisions of the FHLB of Boston.
 
Loans held for sale: Fair value of loans held for sale are estimated based on commitments on hand from investors or prevailing market prices.
 
Loans: Fair values for loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This analysis assumes no prepayment. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
 
Mortgage servicing rights: Mortgage servicing rights (“MSR”) are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage lender. The fair value of servicing rights is estimated using a present value cash flow model. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
 
Deposits and mortgage escrow accounts: The fair values for non-certificate accounts and mortgage escrow accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.
 
 
10

 
 
Securities sold under agreements to repurchase: The carrying amount of repurchase agreements approximates fair value based on the short duration of the agreements.
 
Long-term debt: The fair values of the Company's advances are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
 
Accrued interest: The carrying amounts of accrued interest approximate fair value.
 
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of off-balance sheet financial instruments at March 31, 2011 and June 30, 2010 was not material.
 
The Company does not measure any liabilities at fair value on either a recurring or non-recurring basis.
 
The following table presents the balances of assets measured at fair value on a recurring basis as of March 31, 2011 and June 30, 2010:
 
     
Level 1
   
Level 2
   
Level 3
   
Total
 
 
March 31, 2011
 
(Dollars in thousands)
 
 
Debt securities:
                       
 
Government-sponsored enterprises
  $ -     $ 4,497     $ -     $ 4,497  
 
Corporate bonds and other obligations
    -       999       -       999  
 
Residential mortgage-backed securities:
                         
 
Agency
    -       100,025       -       100,025  
 
Non-agency
    -       6,766       -       6,766  
 
Total debt securities
    -       112,287       -       112,287  
 
Marketable equity securities
    841       -       -       841  
 
Mortgage servicing rights
    -       467       -       467  
 
Total assets at fair value
  $ 841     $ 112,754     $ -     $ 113,595  
 
 
June 30, 2010
                       
 
Debt securities:
                       
 
Government-sponsored enterprises
  $ -     $ 10,027     $ -     $ 10,027  
 
Residential mortgage-backed securities:
                         
 
Agency
    -       91,876       -       91,876  
 
Non-agency
    -       9,097       -       9,097  
 
Total debt securities
    -       111,000       -       111,000  
 
Marketable equity securities
    379       -       -       379  
 
Mortgage servicing rights
    -       501       -       501  
 
Total assets at fair value
  $ 379     $ 111,501     $ -     $ 111,880  
 
Also, the Company may be required, from time to time, to measure certain other financial assets on a non-recurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs, charge-offs, and specific loss allocations of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of March 31, 2011 and June 30, 2010.
 
     
Level 1
   
Level 2
   
Level 3
 
 
March 31, 2011
 
(Dollars in thousands)
 
 
Impaired loans
  $ -     $ -     $ 1,050  
 
Other real estate owned
    -       -       985  
 
Total assets
  $ -     $ -     $ 2,035  
 
 
June 30, 2010
                 
 
Impaired loans
  $ -     $ -     $ 5,208  
 
Other real estate owned
    -       -       911  
 
Total assets
  $ -     $ -     $ 6,119  
 
 
11

 
 
During the three and nine months ended March 31, 2011 and 2010 there were no transfers from levels 1, 2, or 3.
 
The amount of impaired loans represents the carrying value of loans that include adjustments which are based on the estimated fair value of the underlying collateral. The fair value of collateral used by the Company represents the amount expected to be received from the sale of the property, net of selling costs, as determined by an independent, licensed or certified appraiser using observable market data. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, as well as relevant legal, physical and economic factors. The Company had a $42,000 gain on impaired loans for the three months ended March 31, 2011 and a $159,000 loss on impaired loans for the nine months ended March 31, 2011 compared to losses of $756,000 and $2.7 million for the three and nine months ended March 31, 2010, respectively. The resulting loss was recognized in earnings through the provision for loan loss. The Company charges off any collateral shortfall on collaterally dependent impaired loans.
 
The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned (“OREO”) in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. The Company did not record any losses on OREO for the three and nine months ended March 31, 2011 and 2010.
 
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
 
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:
 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
   
(In Thousands)
 
Financial assets:
                       
Cash and cash equivalents
  $ 37,647     $ 37,647     $ 30,033     $ 30,033  
Securities available for sale
    113,128       113,128       111,379       111,379  
Federal Home Loan Bank stock
    5,233       5,233       5,233       5,233  
Loans held for sale
    420       420       933       933  
Loans, net
    392,792       406,408       412,614       432,845  
Accrued interest receivable
    1,572       1,572       1,751       1,751  
Mortgage servicing rights (1)
    467       467       501       501  
                                 
Financial liabilities:
                               
Deposits
    421,112       424,582       420,060       422,968  
Securities sold under agreements to repurchase
    7,279       7,279       6,806       6,806  
Long-term debt
    47,660       50,078       58,196       61,459  
Mortgagors' escrow accounts
    986       986       849       849  
                                 
(1) Included in other assets.
                               
 
 
12

 
 
7. Securities Available For Sale
 
The amortized cost and estimated fair value of securities available for sale, with gross unrealized gains and losses, are as follows:
 
   
March 31, 2011
 
   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
   
(In Thousands)
 
Debt securities:
                       
Government-sponsored enterprise obligations
  $ 4,500     $ 4     $ (7 )   $ 4,497  
Corporate bonds
    995       4       -       999  
Residential mortgage-backed securities:
                               
Agency
    97,862       2,454       (291 )     100,025  
Non-agency
    6,793       104       (131 )     6,766  
Total debt securities
    110,150       2,566       (429 )     112,287  
Marketable equity securities
    831       19       (9 )     841  
Total securities available for sale
  $ 110,981     $ 2,585     $ (438 )   $ 113,128  
                                 
                                 
   
June 30, 2010
 
   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
   
(In Thousands)
 
Debt securities:
                               
Government-sponsored enterprise obligations
  $ 9,992     $ 35     $ -     $ 10,027  
Residential mortgage-backed securities:
                               
Agency
    88,842       3,050       (16 )     91,876  
Non-agency
    9,024       184       (111 )     9,097  
Total debt securities
    107,858       3,269       (127 )     111,000  
Marketable equity securities
    561       -       (182 )     379  
Total securities available for sale
  $ 108,419     $ 3,269     $ (309 )   $ 111,379  

The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2011 is set forth below. Expected maturities will differ from contractual maturities because the issuer may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
March 31, 2011
 
   
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
Within 1 year
  $ -     $ -  
Over 1 year through 5 years
    5,495       5,496  
Total bonds and obligations
    5,495       5,496  
Residential mortgage-backed securities:
         
Agency
    97,862       100,025  
Non-agency
    6,793       6,766  
Total debt securities
  $ 110,150     $ 112,287  
 
At March 31, 2011 and June 30, 2010, the carrying value of securities pledged to secure repurchase agreements was $9,475,000 and $8,265,000, respectively.
 
 
13

 
 
The industries represented by our marketable equity securities portfolio are as follows:
 
   
March 31, 2011
 
   
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
Aerospace/Defense
  $ 49     $ 56  
Biotechnology
    38       38  
Cosmetics/Personal
    51       49  
Electronics
    52       50  
Environmental
    51       52  
Food
    101       101  
Healthcare - products
    102       99  
Household products
    50       56  
Media
    50       52  
Pharmaceuticals
    50       52  
Retail
    187       184  
Telecommunications
    50       52  
Total equity securities
  $ 831     $ 841  
 
Information pertaining to securities with gross unrealized losses at March 31, 2011 and June 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair Value
   
Gross
Unrealized
Losses
   
Fair Value
 
   
(In Thousands)
 
March 31, 2011:
                       
Government-sponsored enterprise obligations
  $ 7     $ 2,493     $ -     $ -  
Residential mortgage-backed securities:
                               
Agency
    286       28,228       5       944  
Non-agency
    -       -       131       2,577  
Marketable equity securities
    6       196       3       98  
    $ 299     $ 30,917     $ 139     $ 3,619  
                                 
June 30, 2010:
                               
Residential mortgage-backed securities:
                               
Agency
  $ 9     $ 1,031     $ 7     $ 1,309  
Non-agency
    42       591       69       3,002  
Marketable equity securities
    -       -       182       379  
    $ 51     $ 1,622     $ 258     $ 4,690  
 
Management conducts, at least on a quarterly basis, a review of our investment securities to determine if the value of any security has declined below its cost or amortized cost and whether such decline represents other-than-temporary impairment (“OTTI”).
 
At March 31, 2011, six marketable equity securities had unrealized losses with aggregate depreciation of 2.9% from the Company's cost basis. The majority of these unrealized losses relate to the banking, retail, healthcare, and insurance industries. In analyzing the issuer's financial condition, management considers industry analysts’ reports and financial performance. The Company recorded a loss of $58,000 for four marketable equity securities that the Company considered to be OTTI securities for the three and nine months ended March 31, 2011. There were no impairment charges recognized for the three or nine months ended March 31, 2010.
 
At March 31, 2011, twenty-nine debt securities had unrealized losses with aggregate depreciation of 1.2% from the Company's amortized cost basis. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst's reports. Because the majority of these securities have been issued by the Federal government or its agencies and as management has not decided to sell these securities, nor is it likely that the Company will be required to sell these securities, no declines are deemed to be other than temporary. At March 31, 2011, we held eleven securities issued by private mortgage originators that had unrealized losses which had an amortized cost of $2.7 million and a fair value of $2.6 million. All of these investments are “Senior” Class tranches and have underlying credit enhancement.  These securities were originated in the period 2002-2005 and are performing in accordance with contractual terms. Management estimates the loss projections for each security by evaluating the industry rating, amount of delinquencies, amount of foreclosure, amount of other real estate owned, average credit scores, average amortized loan to value and credit enhancement.  Based on this review, management determines whether other-than-temporary impairment existed. Management has determined that no other-than-temporary impairment existed as of March 31, 2011. We will continue to evaluate these securities for other-than-temporary impairment, which could result in a future non-cash charge to earnings.
 
 
14

 
 
8. Loans
 
Net loans at March 31, 2011 were $392.8 million, a decrease of $19.8 million or 4.8% from $412.6 million at June 30, 2010. The following table sets forth the composition of the Company’s loan portfolio (not including loans held for sale) in dollar amounts and as a percentage of the total loan portfolio at the dates indicated.
 
   
At March 31, 2011
   
At June 30, 2010
             
   
Amount
   
Percent
   
Amount
   
Percent
   
Change
   
% Change
 
   
(Dollars In Thousands)
             
Mortgage loans on real estate:
                                   
1-4 family residential
  $ 121,825       30.82 %   $ 130,977       31.49 %     (9,152 )     (6.99 ) %
Commercial real estate
    149,693       37.87       138,746       33.35       10,947       7.89 %
Home equity:
                                               
First lien
    22,737       5.75       22,600       5.43       137       0.61 %
Second lien
    39,938       10.10       42,406       10.19       (2,468 )     (5.82 ) %
Construction:
                                               
Residential construction
    3,043       0.77       3,730       0.90       (687 )     (18.42 ) %
Commercial construction
    1,866       0.47       9,730       2.34       (7,864 )     (80.82 ) %
Total mortgage loans on real estate
    339,102       85.79       348,189       83.70       (9,087 )     (2.61 ) %
                                                 
Other loans:
                                               
Commercial
    32,521       8.23       42,539       10.23       (10,018 )     (23.55 ) %
Consumer:
                                               
Manufactured homes
    19,812       5.01       20,997       5.05       (1,185 )     (5.64 ) %
Other
    3,816       0.97       4,260       1.02       (444 )     (10.42 ) %