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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Commission file number: 333-174808

 

 

BSB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   80-0752082

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S Employer

Identification No.)

2 Leonard Street

Belmont, Massachusetts

  02478
(Address of Principal Executive Officers)   (Zip Code)

(617) 484-6700

(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  ¨    No  x

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 period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

BSB BANCORP, MHC

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Consolidated Financial Statements   
 

-    Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010

     3   
 

-    Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)

     4   
 

-    Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2011 and 2010 (unaudited)

     5   
 

-    Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)

     6   
 

-   Notes to Unaudited Consolidated Financial Statements

     8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

  Controls and Procedures      37   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      37   

Item 1A.

  Risk Factors      37   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 3.

  Defaults Upon Senior Securities      37   

Item 4.

  [Removed and Reserved]      38   

Item 5.

  Other Information      38   

Item 6.

  Exhibits      38   

EXPLANATORY NOTE

BSB Bancorp, Inc. (the “Registrant”), headquartered in Belmont, Massachusetts, is being formed to serve as the stock holding company for Belmont Savings Bank following the reorganization and stock offering as part of the mutual-to-stock conversion of BSB Bancorp, MHC. As of June 30, 2011, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, the financial information and other information included in this Quarterly Report on Form 10-Q is that of BSB Bancorp, MHC and its subsidiary.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BSB BANCORP, MHC

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     June 30, 2011      December 31, 2010  
     (unaudited)         

ASSETS

     

Cash and due from banks

   $ 2,244       $ 3,149   

Federal funds sold

     —           2,525   

Money market mutual funds

     5,333         7,762   

Interest-bearing deposits in other banks

     9,681         7,552   
  

 

 

    

 

 

 

Cash and cash equivalents

     17,258         20,988   

Interest-bearing time deposits with other banks

     119         119   

Investments in available-for-sale securities

     1         14,274   

Investments in held-to-maturity securities (fair value of $88,382 as of June 30, 2011 (unaudited) and $95,761 as of December 31, 2010)

     86,872         93,899   

Federal Home Loan Bank stock, at cost

     8,038         8,038   

Loans held-for-sale

     1,410         3,775   

Loans, net of allowance for loan losses of $3,739 as of June 30, 2011 (unaudited) and $2,889 as of December 31, 2010

     412,933         336,936   

Premises and equipment, net

     1,995         1,939   

Accrued interest receivable

     2,246         2,121   

Deferred tax asset, net

     3,160         2,913   

Income taxes receivable

     809         908   

Bank-owned life insurance

     12,181         11,954   

Other assets

     2,729         2,423   
  

 

 

    

 

 

 

Total assets

   $ 549,751       $ 500,287   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Deposits:

     

Noninterest-bearing

   $ 39,412       $ 30,210   

Interest-bearing

     356,265         316,689   
  

 

 

    

 

 

 

Total deposits

     395,677         346,899   

Federal Home Loan Bank of Boston (FHLBB) advances

     90,500         92,800   

Securities sold under agreements to repurchase

     2,830         2,654   

Other borrowed funds

     1,577         5,199   

Accrued interest payable

     159         223   

Deferred compensation liability

     3,958         3,929   

Due to broker

     5,117         —     

Other liabilities

     2,939         1,656   
  

 

 

    

 

 

 

Total liabilities

     502,757         453,360   
  

 

 

    

 

 

 

Equity:

     

Retained earnings

     46,993         45,652   

Accumulated other comprehensive income

     1         1,275   
  

 

 

    

 

 

 

Total equity

     46,994         46,927   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 549,751       $ 500,287   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

BSB BANCORP, MHC

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2011     2010     2011      2010  
     (unaudited)     (unaudited)  

Interest and dividend income:

         

Interest and fees on loans

   $ 4,760      $ 4,591      $ 9,167       $ 9,309   

Interest on debt securities:

         

Taxable

     566        757        1,161         1,551   

Dividends

     13        86        103         143   

Other interest income

     8        2        10         4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     5,347        5,436        10,441         11,007   
  

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense:

         

Interest on deposits

     966        978        1,856         1,991   

Interest on Federal Home Loan Bank advances

     535        929        1,140         1,966   

Interest on securities sold under agreements to repurchase

     4        9        9         17   

Interest on other borrowed funds

     12        58        57         118   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     1,517        1,974        3,062         4,092   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest and dividend income

     3,830        3,462        7,379         6,915   

Provision (benefit) for loan losses

     742        (4     1,218         280   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest and dividend income after provision (benefit) for loan losses

     3,088        3,466        6,161         6,635   
  

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest income (charges):

         

Customer service fees

     141        112        250         239   

Income from bank-owned life insurance

     88        104        196         239   

Net gain on sales of loans

     147        43        217         88   

Net gain on sales and calls of securities

     —          —          2,788         —     

Net loss on trading securities

     —          (1,267     —           (643

Other income

     56        22        67         63   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest income (charges)

     432        (986     3,518         (14
  

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest expense:

         

Salaries and employee benefits

     2,432        1,611        4,825         3,253   

Trustee fees

     91        70        159         158   

Occupancy expense

     172        169        381         346   

Equipment expense

     83        52        161         105   

Deposit insurance

     86        135        225         269   

Data processing

     282        335        477         572   

Professional fees

     179        157        306         257   

Marketing

     260        122        482         175   

Other expense

     333        220        624         416   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest expense

     3,918        2,871        7,640         5,551   
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income before income tax (benefit) expense

     (398     (391     2,039         1,070   

Income tax (benefit) expense

     (210     (233     698         327   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (188   $ (158   $ 1,341       $ 743   
  

 

 

   

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

BSB BANCORP, MHC

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

 

     Retained
Earnings
     Accumulated
Other
Comprehensive
Income
    Total
Equity
 

Balance at December 31, 2009

   $ 43,825       $ —        $ 43,825   

Comprehensive income:

       

Net income

     743           743   
  

 

 

    

 

 

   

 

 

 

Total comprehensive income

     743         —          743   
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2010

   $ 44,568       $ —        $ 44,568   
  

 

 

    

 

 

   

 

 

 

Balance at December 31, 2010

   $ 45,652       $ 1,275      $ 46,927   

Comprehensive income:

       

Net income

     1,341           1,341   

Net unrealized loss on securities available-for-sale, net of reclassification adjustment and tax effects

        (1,274     (1,274
  

 

 

    

 

 

   

 

 

 

Total comprehensive income

     1,341         (1,274     67   
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

   $ 46,993       $ 1      $ 46,994   
  

 

 

    

 

 

   

 

 

 

Reclassification disclosure:

 

     Six Months Ended
June 30, 2011
 
     (unaudited)  

Net unrealized holding gains on available-for sale securities

   $ 668   

Reclassification adjustment for realized gains in net income

     (2,788
  

 

 

 

Other comprehensive loss before income tax effect

     (2,120

Income tax benefit

     847   
  

 

 

 
     (1,273
  

 

 

 

Comprehensive income - pension

     —     

Income tax expense

     (1
  

 

 

 
     (1
  

 

 

 

Other comprehensive loss, net of tax

   $ (1,274
  

 

 

 

Accumulated other comprehensive income consists of the following:

 

     June 30, 2011      December 31, 2010  
     (unaudited)         

Net unrealized holding gains on available-for-sale securities, net of taxes

   $ —         $ 1,273   

Unrecognized retirement benefit, net of tax

     1         2   
  

 

 

    

 

 

 

Accumulated other comprehensive income

   $ 1       $ 1,275   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

BSB BANCORP, MHC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six months ended June 30,  
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 1,341      $ 743   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Amortization of securities, net

     573        429   

Net gain on sales and calls of securities

     (2,788     —     

Decrease in trading securities

     —          50   

Gain on sales of loans, net

     (217     (88

Loans originated for sale

     (24,956     (9,967

Proceeds from sales of loans

     27,538        9,505   

Provision for loan losses

     1,218        280   

Amortization of mortgage premium

     9        10   

Change in net deferred loan costs

     (1,472     (3

Depreciation and amortization expense

     216        164   

Deferred income tax expense (benefit)

     599        (205

Income from bank owned life insurance

     (196     (239

Net change in:

    

Accrued interest receivable

     (125     (184

Other assets

     (306     912   

Income taxes receivable

     99        —     

Income taxes payable

     —          (335

Accrued interest payable

     (64     (267

Deferred compensation liability

     29        (2,214

Other liabilities

     1,311        532   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     2,809        (877
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Maturities of interest-bearing time deposits with other banks

       275   

Purchases of available-for-sale securities

     (709     —     

Proceeds from sales of available-for-sale securities

     15,650        —     

Proceeds from maturities, payments, and calls of held-to-maturity securities

     32,011        22,692   

Purchases of held-to-maturity securities

     (20,440     (32,035

Recoveries of loans previously charged off

     6        5   

Loan originations and principal collections, net

     (74,413     14,666   

Purchases of loans

     (1,345     (3,204

Capital expenditures

     (272     (160

Premiums paid on bank-owned life insurance

     (31     (55

Redemption of life insurance policies

     —          1,117   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (49,543     3,301   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

BSB BANCORP, MHC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)

 

     Six months ended June 30,  
     2011     2010  

Cash flows from financing activities:

    

Net increase in demand deposits, NOW and savings accounts

     45,694        19,104   

Net increase in time deposits

     3,084        2,325   

Proceeds from Federal Home Loan Bank advances

     14,500        13,000   

Principal payments on Federal Home Loan Bank advances

     (30,300     (32,000

Net change in short-term Federal Home Loan Bank advances

     13,500        —     

Net increase in securities sold under agreements to repurchase

     176        624   

Repayment of principal on other borrowed funds

     (3,622     (382

Net (decrease) increase in mortgagors’ escrow accounts

     (28     23   
  

 

 

   

 

 

 

Net cash provided by financing activities

     43,004        2,694   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (3,730     5,118   

Cash and cash equivalents at beginning of period

     20,988        16,398   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 17,258      $ 21,516   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid

   $ 3,126      $ 4,359   

Income taxes paid

     —          867   

Increase in due to broker

     5,117        —     

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

BSB BANCORP, MHC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of BSB Bancorp, MHC have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of BSB Bancorp, MHC include the balances and results of operations of BSB Bancorp, MHC, BSB Bancorp, Inc., a Massachusetts corporation, and its wholly-owned subsidiary Belmont Savings Bank (referred to herein as “the Company,” “we,” “us,” or “our”). Intercompany transactions and balances are eliminated in the consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2011 and December 31, 2010 and the results of operations and cash flows for the interim periods ended June 30, 2011 and 2010. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of BSB Bancorp Inc.’s Prospectus dated August 12, 2011, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 19, 2011.

NOTE 2 – RECENT PRONOUNCEMENTS

In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-28, “Intangibles – Goodwill and Other.” This ASU address when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earning disclosure requirements for business combinations. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures are also required under this ASU. The Company is currently evaluating the impact of this ASU. The ASU is expected to cause more loan modifications to be classified as Troubled Debt Restructurings and the Company is evaluating its modification programs and practices in light of the new ASU.

In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

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Table of Contents

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.” The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

NOTE 3 – INVESTMENTS IN SECURITIES

The amortized cost of available-for-sale securities and their approximate fair values are as follows:

 

     Amortized
Cost

Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-sale securities:

           

June 30, 2011 (unaudited):

           

Marketable equity securities

   $ 1       $ —         $ —         $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1       $ —         $ —         $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

Marketable equity securities

   $ 12,154       $ 2,120       $ —         $ 14,274   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,154       $ 2,120       $ —         $ 14,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of held-to-maturity securities and their approximate fair values are as follows:

 

     Amortized
Cost

Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Held-to-maturity securities:

           

June 30, 2011 (unaudited):

           

U.S. government and federal agency obligations

   $ 6,603       $ 156       $ —         $ 6,759   

U.S. government sponsored mortgage-backed securities

     32,420         717         289         32,848   

Corporate debt securities

     47,849         927         1         48,775   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 86,872       $ 1,800       $ 290       $ 88,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

U.S. government and federal agency obligations

   $ 23,419       $ 249       $ —         $ 23,668   

U.S. government sponsored mortgage-backed securities

     18,574         634         38         19,170   

Corporate debt securities

     51,906         1,048         31         52,923   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 93,899       $ 1,931       $ 69       $ 95,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2011 and December 31, 2010 is as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2011      December 31, 2010  
     Held-to-Maturity      Held-to-Maturity  
     Amortized
Cost Basis
     Fair
Value
     Amortized
Cost Basis
     Fair
Value
 
     (unaudited)                

Due within one year

   $ 29,882       $ 30,221       $ 32,778       $ 32,888   

Due after one year through five years

     24,570         25,313         42,547         43,703   

U.S. government sponsored mortgage-backed securities

     32,420         32,848         18,574         19,170   

During the six months ended June 30, 2011 (unaudited), proceeds from sales of available-for-sale securities amounted to $15,650. For the six months ended June 30, 2011 (unaudited) gross realized gains and gross realized losses on those sales amounted to $2,844 and $56, respectively. For the six month ended June 30, 2011 (unaudited) the income tax expense (benefit) related to the gross gains and losses were $1,155 and ($23), respectively. During the six months ended June 30, 2010 (unaudited), there were no security sales.

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

     Less than 12 Months      Over 12 Months  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

June 30, 2011 (unaudited):

           

U.S. government sponsored mortgage-backed securities

   $ 14,578       $ 249       $ 1,105       $ 40   

Corporate debt securities

     4,034         1         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 18,612       $ 250       $ 1,105       $ 40   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

U.S. government sponsored mortgage-backed securities

   $ —         $ —         $ 1,367       $ 38   

Corporate debt securities

     1,037         1         1,968         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,037       $ 1       $ 3,335       $ 69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At June 30, 2011 (unaudited), unrealized losses related to nine mortgage-backed securities with a 1.8% unrealized loss and three corporate debt securities with an unrealized loss of 0.03% were caused primarily by changes in market interest rates. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s June 30, 2011 (unaudited) quarterly review of securities in the investment portfolio, management deemed securities with unrealized losses as of June 30, 2011 (unaudited) to be temporarily impaired. At December 31, 2010, unrealized losses related to one mortgage-backed security with a 2.70% unrealized loss and two corporate debt securities with an unrealized loss of 1.02% were caused primarily by changes in market interest rates. Based on the Company’s December 31, 2010 quarterly review of securities in the investment portfolio, management deemed securities with unrealized losses as of December 31, 2010 to be temporarily impaired.

 

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The investment securities portfolio is generally evaluated for other-than-temporary impairment under ASC 320-10, “Investments - Debt and Equity Securities.” However, certain purchased beneficial interests, including non-agency mortgage-backed securities, are evaluated using ASC 325-40, “Investments – Other – Beneficial Interests in Securitized Financial Assets.”

 

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NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

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/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2011 or 2010.

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 real estate and home equity loans – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. Loans in this segment are generally collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily income-producing properties throughout New England. The underlying cash flows generated by the properties are 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 and continually monitors the cash flows of these loans.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

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Table of Contents

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 resultant decreased consumer and business spending, will have an effect on the credit quality in this segment.

Indirect auto loans – The Company’s interest in the vehicle is secured with a recorded lien on the state title of each automobile. Collections are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged in the event of repossession. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Consumer loans – Loans in this segment include secured and unsecured consumer loans. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Allocated Component:

The allocated component relates to loans that are classified as impaired. 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 borrower’s 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.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Generally, TDRs are measured using the discounted cash flow method except in instances where foreclosure is probable in which case the fair value of the collateral is used. All other impaired loans are collateral dependent and are measured through the collateral method. All loans, with the exception of consumer loans, on non-accrual status and TDR’s are considered to be impaired. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the valuation allowance.

Unallocated Component:

An unallocated component is maintained to cover uncertainties that could affect management’s 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.

 

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Table of Contents

Loans consisted of the following:

 

     June 30,
2011
    December 31,
2010
 
     Amount     Percent     Amount     Percent  
     (unaudited)              

Mortgage loans:

        

Residential one-to-four family

   $ 169,900        40.97   $ 183,584        54.11

Commercial real estate loans (1)

     117,002        28.22        91,221        26.89   

Equity lines of credit

     39,546        9.54        30,921        9.11   

Construction loans

     16,527        3.99        13,835        4.08   

Second mortgage loans

     517        0.12        503        0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     343,492        82.84        320,064        94.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans

     19,363        4.67        14,012        4.13   

Consumer loans:

        

Indirect auto loans

     50,883        12.27        3,717        1.10   

Other consumer loans (2)

     906        0.22        1,467        0.43   
  

 

 

   

 

 

   

 

 

   

 

 

 
     71,152        17.16        19,196        5.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     414,644        100.00     339,260        100.00
    

 

 

     

 

 

 

Net deferred loan costs

     2,034          562     

Net unamortized mortgage premiums

     (6       3     

Allowance for loan losses

     (3,739       (2,889  
  

 

 

     

 

 

   

Total loans, net

   $ 412,933        $ 336,936     
  

 

 

     

 

 

   

 

(1) Includes multi-family real estate loans.
(2) Other consumer loans consist primarily of passbook loans, consumer lines of credit and overdraft protection, consumer unsecured loans and new auto loans.

 

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Table of Contents

The following tables present the activity in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 (unaudited) and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at June 30, 2011 (unaudited) and December 31, 2010. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest or any deferred loan fees or costs, as amounts are not significant.

 

     Three Months Ended June 30, 2011  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending Balance  

Residential one-to-four family

   $ 986       $ 243      $ (210   $ —         $ 1,019   

Commercial real estate

     1,414         (39     —          —           1,375   

Construction

     147         39        —          —           186   

Commercial

     252         66        (24     —           294   

Home equity

     200         200        (83     —           317   

Indirect auto

     310         222        (8     —           524   

Consumer

     19         5        (8     2         18   

Unallocated

     —           6        —          —           6   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 3,328       $ 742      $ (333   $ 2       $ 3,739   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30, 2011  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending Balance  

Residential one-to-four family

   $ 1,057       $ 172      $ (210   $ —         $ 1,019   

Commercial real estate

     1,136         239        —          —           1,375   

Construction

     140         46        —          —           186   

Commercial

     261         94        (61     —           294   

Home equity

     236         164        (83     —           317   

Indirect auto

     38         494        (8     —           524   

Consumer

     21         3        (12     6         18   

Unallocated

     —           6        —          —           6   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,889       $ 1,218      $ (374   $ 6       $ 3,739   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended June 30, 2010  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending Balance  

Residential one-to-four family

   $ 1,129       $ 21      $ —        $ —         $ 1,150   

Commercial real estate

     1,076         22        —          —           1,098   

Construction

     192         (15     —          —           177   

Commercial

     146         (23     —          —           123   

Home equity

     175         1        —          —           176   

Indirect auto

     —           —          —          —           —     

Consumer

     33         (10     (2     1         22   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,751       $ (4   $ (2   $ 1       $ 2,746   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30, 2010  
     Beginning balance      Provision (benefit)     Charge-offs     Recoveries      Ending Balance  

Residential one-to-four family

   $ 1,027       $ 123      $ —        $ —         $ 1,150   

Commercial real estate

     911         187        —          —           1,098   

Construction

     193         (16     —          —           177   

Commercial

     142         (19     —          —           123   

Home equity

     184         (8     —          —           176   

Indirect auto

     —           —          —          —           —     

Consumer

     16         13        (12     5         22   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,473       $ 280      $ (12   $ 5       $ 2,746   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
    June 30, 2011 (unaudited)              
    Individually evaluated for impairment     Collectively evaluated for impairment     Total  
    Loan balance     Allowance     Loan balance     Allowance     Loan Balance     Allowance  

Residential one-to-four family

  $ 2,482      $ 179      $ 167,418      $ 840      $ 169,900      $ 1,019   

Commercial real estate

    —          —          117,002        1,375        117,002        1,375   

Construction

    —          —          16,527        186        16,527        186   

Commercial

    —          —          19,363        294        19,363        294   

Home equity

    1,123        48        38,940        269        40,063        317   

Indirect auto

    —          —          50,883        524        50,883        524   

Consumer

    —          —          906        18        906        18   

Unallocated

    —          —          —          6        —          6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,605      $ 227      $ 411,039      $ 3,512      $ 414,644      $ 3,739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2010              
    Individually evaluated for impairment     Collectively evaluated for impairment     Total  
    Loan balance     Allowance     Loan balance     Allowance     Loan Balance     Allowance  

Residential one-to-four family

  $ 669      $ 119      $ 182,915      $ 938      $ 183,584      $ 1,057   

Commercial real estate

    —          —          91,221        1,136        91,221        1,136   

Construction

    —          —          13,835        140        13,835        140   

Commercial

    37        37        13,975        224        14,012        261   

Home equity

    200        —          31,224        236        31,424        236   

Indirect auto

    —          —          3,717        38        3,717        38   

Consumer

    —          —          1,467        21        1,467        21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 906      $ 156      $ 338,354      $ 2,733      $ 339,260      $ 2,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of June 30, 2011 (unaudited):

 

     Impaired loans with a specific allowance  
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Specific
Allowance
     Income
Recognized
     Income
Recognized on a
Cash basis
 

Residential one-to-four family

   $ 1,388       $ 1,388       $ 758       $ 179       $ 13       $ 13   

Commercial real estate

     —           —           —           —           —           —     

Construction

     —           —           —           —           —           —     

Commercial

     —           —           7         —           —           —     

Equity lines of credit

     417         417         334         48         1         1   

Indirect auto

     —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1,805       $ 1,805       $ 1,099       $ 227       $ 14       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Impaired loans with no specific allowance         
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Income
Recognized
     Income
Recognized on a
Cash basis
    

Residential one-to-four family

   $ 1,094       $ 1,094       $ 1,040       $ 14       $ 14      

Commercial real estate

     —           —           —           —           —        

Construction

     —           —           —           —           —        

Commercial

     —           —           —           —           —        

Equity lines of credit

     706         706         547         6         6      

Indirect auto

     —           —           —           —           —        

Consumer

     —           —           —           —           —        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Totals

   $ 1,800       $ 1,800       $ 1,587       $ 20       $ 20      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

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Table of Contents

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2010:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
For Credit Losses
 

Impaired loans without a valuation allowance:

        

Mortgage loans on real estate:

        

Equity lines of credit

   $ 200       $ 200       $ —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans without a valuation allowance

     200         200         —     
  

 

 

    

 

 

    

 

 

 

Impaired loans with a valuation allowance:

        

Mortgage loans on real estate:

        

Residential one-to-four family

     669         669         119   

Other loans:

        

Commercial loans

     37         37         37   
  

 

 

    

 

 

    

 

 

 

Total impaired loans with a valuation allowance

     706         706         156   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 906       $ 906       $ 156   
  

 

 

    

 

 

    

 

 

 

The following is a summary of past due and non-accrual loans at June 30, 2011 (unaudited) and December 31, 2010:

 

     June 30, 2011  
     Current      30–59 Days      60–89 Days      Greater
Than 90 days
     Total
Past Due
     Total
Loans
     90 days
or more
and accruing
     Recorded
Investment in Loans
on Non-accrual
 

Real estate loans:

                       

Residential one-to-four family

   $ 166,606       $ 1,487       $ 997       $ 810       $ 3,294       $ 169,900       $ —         $ 2,482   

Commercial real estate

     117,002         —           —           —           —           117,002         —           —     

Equity lines of credit

     38,178         1,152         200         533         1,885         40,063         —           1,123   

Construction

     16,527         —           —           —           —           16,527         —           —     

Other loans:

                       

Commercial

     19,363         —           —           —           —           19,363         —           —     

Indirect auto

     50,883         —           —           —           —           50,883         —           —     

Consumer

     899         3         —           4         7         906         —           4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 409,458       $ 2,642       $ 1,197       $ 1,347       $ 5,186       $ 414,644       $ —         $ 3,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Current      30–59 Days      60–89 Days      Greater
Than 90 days
     Total
Past Due
     Total
Loans
     90 Days
or More
and Accruing
     Recorded
Investment in Loans
on Non-accrual
 

Real estate loans:

                       

Residential one-to-four family

   $ 179,161       $ 2,863       $ 507       $ 1,053       $ 4,423       $ 183,584       $ —         $ 1,053   

Commercial real estate

     90,229         495         497         —           992         91,221         —           —     

Equity lines of credit

     30,185         308         314         617         1,239         31,424         —           617   

Construction

     13,835         —           —           —           —           13,835         —           —     

Other loans:

                    —           —           —     

Commercial

     13,975         —           —           37         37         14,012         —           37   

Indirect auto

     3,717         —           —           —           —           3,717         —           —     

Consumer

     1,463         4         —           —           4         1,467         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 332,565       $ 3,670       $ 1,318       $ 1,707       $ 6,695       $ 339,260       $ —         $ 1,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit Quality Information

The Company utilizes a seven grade internal loan rating system for commercial, commercial real estate and construction loans, and for certain residential real estate, home equity and consumer loans that are rated if the loans become delinquent.

Loans rated 1 - 3: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: 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 5: 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 obligors 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 6: 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 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial, commercial real estate loans, and construction loans. On an annual basis, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loans by risk rating at June 30, 2011 (unaudited) and December 31, 2010:

 

     June 30, 2011  
     Loans rated 1-3      Loans rated 4      Loans rated 5      Loans not rated (A)      Total  

Residential one-to-four family

   $ 1,966       $ —         $ 2,913       $ 165,021       $ 169,900   

Commercial real estate

     115,866         1,136         —           —           117,002   

Construction

     14,968         —           1,559         —           16,527   

Commercial

     19,363         —           —           —           19,363   

Home equity

     —           —           1,123         38,940         40,063   

Indirect auto

     —           —           —           50,883         50,883   

Consumer

     —           —           —           906         906   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 152,163       $ 1,136       $ 5,595       $ 255,750       $ 414,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Loans rated 1-3      Loans rated 4      Loans rated 5      Loans not rated (A)      Total  

Residential one-to-four family

   $ —         $ 554       $ 1,190       $ 181,840       $ 183,584   

Commercial real estate

     90,077         1,144         —           —           91,221   

Construction

     12,188         1,647         —           —           13,835   

Commercial

     14,012         —           —           —           14,012   

Home equity

     —           1,417         —           30,007         31,424   

Indirect auto

     —           —           —           3,717         3,717   

Consumer

     —           —           —           1,467         1,467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 116,277       $ 4,762       $ 1,190       $ 217,031       $ 339,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Residential real estate, home equity, indirect auto loans and consumer loans are not formally risk rated by the Company.

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Most of these loans are sold without recourse, and the Company releases the servicing rights. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company also periodically sells auto loans to other financial institutions without recourse, and the Company generally provides servicing for these loans. At June 30, 2011 (unaudited) and December 31, 2010, residential loans previously sold and serviced by the Company were $26,386 and $33,284, respectively. At June 30, 2011 (unaudited) and December 31, 2010, auto loans previously sold and serviced by the Company were $12,524 and $0, respectively.

 

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As of June 30, 2011 (unaudited) and December 31, 2010, loans sold with recourse amounted to $1,577 and $5,199, respectively. The Company has not incurred, nor expects to incur, any losses related to the loans sold with recourse.

There was no valuation allowance for mortgage servicing rights at June 30, 2011 (unaudited) and December 31, 2010. There were no additions to or writedowns in the valuation allowance during the six months ended June 30, 2011 and 2010 (unaudited) and the year ended December 31, 2010.

NOTE 5 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under generally accepted accounting principles. The guidance allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for June 30, 2011 (unaudited) and December 31, 2010.

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. There were no significant transfers between level 1 and 2 of the fair value hierarchy for the period ended June 30, 2011 (unaudited) and the year ended December 31, 2010.

The Company’s investment in mortgage-backed securities and other debt securities available-for-sale is generally classified within level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party. For level 3 inputs, fair value is based upon management estimates of the value of the underlying collateral or the present value of the expected cash flows.

The following summarizes assets measured at fair value as of June 30, 2011 and December 31, 2010.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     Level 1      Level 2      Level 3      Assets at
Fair Value
 

At June 30, 2011 (unaudited)

           

Securities available-for-sale

   $ 1       $ —         $ —         $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 1       $ —         $ —         $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010

           

Securities available-for-sale

   $ 14,274       $ —         $ —         $ 14,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 14,274       $ —         $ —         $ 14,274   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 assets and liabilities for the period ended June 30, 2011 (unaudited) and December 31, 2010.

Assets Measured at Fair Value on a Non-recurring Basis

The Company may also 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 application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2011 (unaudited).

The following tables summarize the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2011(unaudited). The losses represent the amount of write-down recorded during the six-month period on the assets held at June 30, 2011(unaudited):

 

     June 30, 2011 (unaudited)  
     Level 1      Level 2      Level 3  

Impaired loans

   $ —         $ —         $ 1,869   
  

 

 

    

 

 

    

 

 

 

Totals

   $ —         $ —         $ 1,869   
  

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Level 1      Level 2      Level 3  

Impaired loans

   $ —         $ —         $ 550   
  

 

 

    

 

 

    

 

 

 

Totals

   $ —         $ —         $ 550   
  

 

 

    

 

 

    

 

 

 

 

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    Fair Value Measurements
Using Significant Unobservable Inputs
Level 3
 
    Impaired Loans  
    (unaudited)  

Beginning balance, December 31, 2010

  $ 550   

Transfers in

    2,388   

Transfers out

    (540

Losses

    (519

Principal Payments

    (10
 

 

 

 

Ending balance, June 30, 2011

  $ 1,869   
 

 

 

 

At June 30, 2011(unaudited), the amount of impaired loans represents the carrying value and related charge-offs and allocated reserves on impaired loans for which adjustments are based on current appraised value of the collateral or where current appraised value is not obtained, management’s discounted estimate of the collateral. Appraised values are typically based on a blend of (a) an income approach using observable cash flows to measure fair value and (b) a market approach using observable market comparables.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from its disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (unaudited)                

Financial assets:

           

Cash and cash equivalents

   $ 17,258       $ 17,258       $ 20,988       $ 20,988   

Interest-bearing time deposits with other banks

     119         128         119         122   

Investments in available-for-sale securities

     1         1         14,274         14,274   

Held-to-maturity securities

     86,872         88,382         93,899         95,761   

Federal Home Loan Bank stock

     8,038         8,038         8,038         8,038   

Loans held-for-sale

     1,410         1,455         3,775         3,827   

Loans, net

     412,933         417,195         336,936         341,517   

Accrued interest receivable

     2,246         2,246         2,121         2,121   

Financial liabilities:

           

Deposits

     395,677         387,434         346,899         348,684   

Federal Home Loan Bank advances

     90,500         91,406         92,800         94,266   

Securities sold under agreements to repurchase

     2,830         2,830         2,654         2,654   

Other borrowed funds

     1,577         1,600         5,199         5,160   

Accrued interest payable

     159         159         223         223   

Mortgagors’ escrow accounts

     251         251         279         279   

Due to broker

     5,117         5,117         —           —     

 

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NOTE 6 – SECURITIES SOLD UNDER AGREEMENTS AND OTHER BORROWED FUNDS

The securities sold under agreements to repurchase as of June 30, 2011 (unaudited) and December 31, 2010 are securities sold on a short-term basis by the Company that have been accounted for not as sales but as borrowings. The securities consisted of U.S. government and federal agency obligations. The securities were held in the Company’s safekeeping account at Brown Brothers, Harriman and Company under the control of the Company. The securities are pledged to the purchasers of the securities. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements.

Other borrowed funds consist of the balance of loans sold with recourse. On March 16, 2006, seventeen loans with an aggregate principal balance of $10,449 were sold to another financial institution (investor). As of June 30, 2011 (unaudited) and December 31, 2010, the principal balance of these loans totaled $1,577 and $5,199, respectively. The agreement related to this sale contains provisions requiring the Company during the initial 120 months to repurchase any loan that becomes 90 days past due. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date.

NOTE 7 – POST RETIREMENT BENEFITS

Supplemental Retirement Plans

The Company has supplemental retirement plans for eligible executive officers that provide for a lump sum benefit upon termination of employment at or after age 55 and completing 10 or more years of service (certain reduced benefits are available prior to attaining age 55 or fewer than 10 years of service), subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the service period. The estimated liability at June 30, 2011 (unaudited) and December 31, 2010 relating to these plans was $1,079 and $1,028, respectively.

The Company has a supplemental retirement plan for eligible trustees that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the estimated period of service. The estimated liability for the six months ended June 30, 2011 (unaudited) and the year ended December 31, 2010 relating to this plan was $571 and $580, respectively.

Effective October 1, 2010, the Company established the Belmont Savings Bank Supplemental Executive Retirement Plan. The purpose of this plan is to permit certain employees of the Company to receive supplemental retirement income from the Company. At June 30, 2011 (unaudited) and December 31, 2010, there were three participants in this plan, respectively. The plan is unfunded.

Profit-Sharing Plan

The Company’s Board of Trustees has authorized a profit-sharing plan whereby officers and employees with at least three months of service are eligible to participate. The profit-sharing plan provides for a cash payment to each eligible participant based upon a predetermined percentage of the Company’s net operating earnings each fiscal year. In 2005, a new Incentive Compensation Plan was created for the management team and they became ineligible to participate in the profit-sharing plan. The profit-sharing plan was terminated during 2010. Profit-sharing plan expense for both the six months ended June 30, 2011 (unaudited) and for the year ended December 31, 2010 amounted to $0.

Incentive Compensation Plan

In 2005, the Board of Trustees approved an incentive compensation plan whereby all members of the management team with at least one full year of service are eligible to participate. This plan was amended in 2008. The incentive compensation plan provides for a cash payment to eligible participants based on the Company’s income benchmarks and a participant’s level of participation as defined in the plan. Compensation expense recognized was $140 and $68 for the three months ended June 30, 2011 and 2010 (unaudited), respectively and $396 and $140 for the six months ended June 30, 2011 and 2010 (unaudited), respectively.

Defined Contribution Plan

The Company sponsors a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Under the provisions of this plan, employees are able to contribute up to an annual limit of the lesser of 75% of eligible compensation or the maximum allowed by the Internal Revenue Service. The Company’s contributions for the three months ended June 30, 2011 and 2010 (unaudited) totaled $155 and $83, respectively and for the six months ended June 30, 2011 and 2010 (unaudited) totaled $299 and $183, respectively.

Salary Deferral Plan

The Company has a salary deferral plan by which selected employees and Trustees of the Company are entitled to elect, prior to the beginning of each year, to defer the receipt of an amount of their compensation for the forthcoming year. The recorded liability at June 30, 2011 (unaudited) and December 31, 2010 relating to this plan was $2,085 and $2,070, respectively.

 

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Capital Appreciation Plan

Effective September 30, 2010, the Company established the Capital Appreciation Plan. The purpose of this plan is to attract, retain, and motivate certain key employees and trustees of the Company. Eligible participants may receive an award based on capital appreciation of the Bank and the Bank’s return on average assets, entitling the employee or trustee to a specific percentage of the Employee or Trustee Capital Appreciation Pool as outlined in the plan. The value of any award payable to a participant shall be paid in the form of a single lump sum. The vesting period associated with the Plan begins the date a participant is awarded a Capital Appreciation Award and ends on June 30, 2014. The Company recognized no expense in relation to the plan during the six months ended June 30, 2011 (unaudited) or during the year ended December 31, 2010.

Severance Agreements

The Company entered into severance agreements with two executives effective May 12, 2010. Upon separation of service from the Company, each executive is entitled to a severance benefit as defined in the agreements. The benefit amount shall be distributed in installments in accordance with the Company’s payroll schedule for executive employees, provided that the undistributed balance, if any, as of the first anniversary of the first installment shall be distributed in a lump sum. In addition, for up to one year following separation from service, the executives may continue to participate in the Company’s group health plan. Both executives have terminated employment with the Company during 2010 and have begun receiving severance benefits in accordance with each individual’s agreement. The recorded liability at June 30, 2011 (unaudited) and December 31, 2010 relating to the severance agreements was $64 and $200, respectively.

NOTE 8 – PLEDGED ASSETS

The following securities and loans were pledged to secure securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

 

June 30, 2011 (unaudited)    Securities held-to-
maturity (at cost)
     Loans
receivable
     Total pledged
assets
 

Repurchase agreements

   $ 5,943       $ —         $ 5,943   

FHLBB borrowings

     18,554         133,981         152,535   

Federal Reserve Bank LOC

     10,479         —           10,479   
  

 

 

    

 

 

    

 

 

 

Total pledged assets

   $ 34,976       $ 133,981       $ 168,957   
  

 

 

    

 

 

    

 

 

 
December 31, 2010    Securities held-to-
maturity (at cost)
     Loans
receivable
     Total pledged
assets
 

Repurchase agreements

   $ 7,788       $ —         $ 7,788   

FHLBB borrowings

     24,586         142,146         166,732   

Federal Reserve Bank LOC

     11,558         —           11,558   
  

 

 

    

 

 

    

 

 

 

Total pledged assets

   $ 43,932       $ 142,146       $ 186,078   
  

 

 

    

 

 

    

 

 

 

NOTE 9 – SUBSEQUENT EVENTS

BSB Bancorp, MHC adopted a plan of conversion on June 2, 2011, as amended on August 10, 2011, pursuant to which Belmont Savings Bank (the “Bank”) will convert from the mutual holding company to the stock holding company form of organization. In connection with the conversion, the Bank will become a wholly owned subsidiary of BSB Bancorp, Inc., a Maryland corporation (the “Company”), and the Company will offer shares of its common stock to eligible depositors of the Bank, to the Bank’s employee stock ownership plan, to employees, officers, trustees, directors and corporators of the Bank and to the general public. The conversion is subject to approval by BSB Bancorp, MHC’s corporators and the receipt of regulatory approval and orders for at least 5,780,000 shares of the Company’s common stock. Upon the completion of the conversion, BSB Bancorp, MHC and the Bank’s current Massachusetts chartered mid-tier holding company, BSB Bancorp, Inc., will cease to exist.

The cost of conversion and issuing the capital stock will be deferred and deducted from the proceeds of the offering. In the event the conversion and offering are not completed, any deferred costs will be charged to operations. Through June 30, 2011, the Company had incurred approximately $491,000 (unaudited) in conversion costs, which are included in other assets on the consolidated balance sheet.

 

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In connection with the plan of conversion, the Company plans to establish the Belmont Savings Bank Foundation (the “Foundation”). The Foundation will be funded with $200,000 in cash and 2.0% of the Company’s stock that is sold in the offering.

At the time of conversion from a mutual holding company to a stock holding company, the Company will substantially restrict retained earnings by establishing a liquidation account and the Bank will establish a parallel liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis discusses the changes in financial condition and results of operation of the Company, and should be read in conjunction with both the unaudited consolidated interim financial statements and notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this document, except as required by law.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

our ability to successfully implement our new business strategy, which includes significant asset and liability growth;

 

   

our ability to increase our market share in our market areas and capitalize on growth opportunities;

 

   

our ability to successfully implement our branch network expansion strategy;

 

   

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

   

competition among depository and other financial institutions;

 

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inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

   

adverse changes in the securities markets;

 

   

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

   

our ability to successfully integrate acquired entities, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

changes in our organization, compensation and benefit plans;

 

   

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

   

changes in the financial condition or future prospects of issuers of securities that we own.

Additional factors that may affect our results are discussed under the heading “Risk Factors” in our prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 19, 2011. Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in BSB Bancorp Inc.’s Prospectus dated August 12, 2011 , as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 19, 2011.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010

Total Assets. Total assets increased $49.5 million to $549.8 million at June 30, 2011, from $500.3 million at December 31, 2010. The increase was primarily the result of a $76.0 million, or 22.6%, increase in net loans, partially offset by a $14.3 million decrease in securities available for sale, a $7.0 million, or 7.5%, decrease in securities held to maturity, and a $3.7 million, or 17.8%, decrease in cash and cash equivalents.

Loans. Net loans increased by $76.0 million to $412.9 million at June 30, 2011 from $336.9 million at December 31, 2010. The increase in net loans was primarily due to increases of $47.2 million in indirect automobile loans, $25.8 million, or 28.2%, in commercial real estate loans, $8.6 million, or 27.9%, in home equity lines of credit, $5.4 million, or 38.2%, in commercial business loans, and $2.7 million, or 19.5%, in construction loans, partially offset by a $13.7 million, or 7.5%, decrease in one- to four-family residential loans. The increase in commercial real estate loans, home equity lines of credit, indirect auto and commercial business loans reflected our continued emphasis on originating these types of loans according to our strategic plan.

Investment Securities. Total investment securities decreased $21.3 million to $86.9 million at June 30, 2011, from $108.2 million at December 31, 2010, reflecting our funding of higher-yielding loans during the six month period ended June 30, 2011. During the six months ended June 30, 2011, we sold our entire $12.9 million portfolio of marketable equity securities for $15.7 million in proceeds and a net realized gain of $2.8 million. The remainder of the decrease in investment securities resulted from decreases of $16.8 million, or 71.8%, in U.S. government and federal agency obligations and $4.1 million, or 7.8%, in corporate debt securities, partially offset by a $13.8 million, or 74.5%, increase in U.S. government and agency-sponsored mortgage-backed securities.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $3.7 million to $17.3 million at June 30, 2011, from $21.0 million at December 31, 2010. The decrease reflected our funding of loans during the six-month period ended June 30, 2011.

 

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Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At June 30, 2011, our investment in bank-owned life insurance was $12.2 million, an increase of $227,000 from $12.0 million at December 31, 2010, reflecting an increase in cash value.

Deposits. Deposits increased $48.8 million, or 14.1%, to $395.7 million at June 30, 2011 from $346.9 million at December 31, 2010. The increase in deposits was primarily due to an increase of $39.6 million, or 12.5%, in interest bearing accounts, reflecting our promotion of our PlatinumBlue high yield savings accounts, which has enabled us to build broader deposit relationships with our customers. The increase in deposits was also due to an increase of $9.2 million, or 30.5%, in non-interest bearing accounts, reflecting our success in expanding services to consumers and small business customers. We also attribute the increase to customers seeking the safety of insured deposits given the volatility of alternative investments.

The following table sets forth the Company’s deposit accounts at the dates indicated:

 

     June 30, 2011     December 31, 2010  
     Amount      Percent     Amount      Percent  
     (unaudited)               

Deposit type:

          

Demand deposits

   $ 39,412         9.96   $ 30,210         8.71

Interest-bearing checking accounts

     23,746         6.00        26,296         7.58   

Regular savings accounts

     193,265         48.84        153,208         44.17   

Money market deposits

     12,656         3.20        13,671         3.94   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total transaction accounts

     269,079         68.00        223,385         64.40   
  

 

 

    

 

 

   

 

 

    

 

 

 

Term certificates less than $100,000

     58,490         14.78        61,610         17.76   

Term certificates $100,000 or more

     68,108         17.22        61,904         17.84   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total certificate accounts

     126,598         32.00        123,514         35.60   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 395,677         100.00   $ 346,899         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Borrowings. At June 30, 2011, borrowings consisted of advances from the Federal Home Loan Bank of Boston, securities sold to customers under agreements to repurchase, or “repurchase agreements”, and other borrowed funds consisting of the balance of loans that we sold with recourse to another financial institution in March 2006.

Total borrowings decreased $5.7 million, or 5.7%, to $94.9 million at June 30, 2011, from $100.7 million at December 31, 2010. Advances from the Federal Home Loan Bank of Boston decreased $2.3 million to $90.5 million at June 30, 2011, from $92.8 million at December 31, 2010, and repurchase agreements increased $176,000 to $2.8 million at June 30, 2011, from $2.7 million at December 31, 2010. Other borrowed funds decreased $3.6 million to $1.6 million at June 30, 2011, from $5.2 million at December 31, 2010.

 

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The following table sets forth the Company’s short-term borrowings and long-term debt for the dates indicated:

 

     June 30, 2011      December 31, 2010  
     (unaudited)         

Long-term borrowed funds:

     

Federal Home Loan Bank of Boston long-term advances

   $ 24,500       $ 36,500   

Other borrowed funds

     1,577         5,199   
  

 

 

    

 

 

 
     26,077         41,699   
  

 

 

    

 

 

 

Short-term borrowed funds:

     

Federal Home Loan Bank of Boston short-term advances

     66,000         56,300   

Repurchase agreements

     2,830         2,654   
  

 

 

    

 

 

 
     68,830         58,954   
  

 

 

    

 

 

 

Total borrowed funds

   $ 94,907       $ 100,653   
  

 

 

    

 

 

 

Equity. Total equity capital increased $67,000 to $47.0 million at June 30, 2011, from $46.9 million at December 31, 2010. The increase was attributable to $1.3 million of net income, partially offset by a $1.3 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income resulted primarily from the after-tax effect of changes in unrealized gains on securities available for sale related to the sale during the six months ended June 30, 2011 of our entire portfolio of marketable equity securities.

 

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

 

     At June 30,
2011
    At December 31,
2010
 
     (unaudited)        

Non-accrual loans:

    

Mortgage loans:

    

One-to-four family

   $ 2,482      $ 1,053   

Commercial real estate

     —          —     

Construction loans

     —          —     

Equity lines of credit

     1,123        617   

Second mortgage loans

     —          —     

Commercial loans

     —          37   

Consumer loans:

    

Indirect auto loans

     —          —     

Other consumer loans

     4        —     
  

 

 

   

 

 

 

Total non-accrual loans

     3,609        1,707   
  

 

 

   

 

 

 

Loans delinquent 90 days or greater and still accruing:

    

Mortgage loans:

    

Residential one-to-four family

     —          —     

Commercial real estate

     —          —     

Construction loans

     —          —     

Equity lines of credit

     —          —     

Second mortgage loans

     —          —     

Commercial loans

     —          —     

Consumer loans:

    

Indirect auto loans

     —          —     

Other consumer loans

     —          —     
  

 

 

   

 

 

 

Total loans 90 days delinquent and still accruing

     —          —     
  

 

 

   

 

 

 

Total non-performing loans

     3,609        1,707   
  

 

 

   

 

 

 

Other real estate owned

     —          —     
  

 

 

   

 

 

 

Total non-performing assets (NPAs)

   $ 3,609      $ 1,707   
  

 

 

   

 

 

 

Troubled debt restructures included in NPAs

   $ 614      $ 629   

Troubled debt restructures not included in NPAs

     —          —     
  

 

 

   

 

 

 

Total troubled debt restructures

   $ 614      $ 629   
  

 

 

   

 

 

 

Ratios:

    

Non-performing loans to total loans

     0.87     0.50

Non-performing assets to total assets

     0.66     0.34

Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At June 30, 2011, we had $614,000 of troubled debt restructurings related to two loans. One of these loans was a one- to four-family residential mortgage loan and the other was a home equity line of credit.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

General. Net loss for the three months ended June 30, 2011 was $188,000, compared to a net loss of $158,000 for the three months ended June 30, 2010. The change in operating results for the three months ended June 30, 2011 compared to the 2010 period resulted from an increase of $1.0 million in noninterest expense and a $746,000 increase in provision for loan losses, partially offset by increases of $1.4 million in noninterest income and $368,000 in net interest and dividend income.

Net Interest and Dividend Income. Net interest and dividend income increased $368,000 to $3.8 million for the three months ended June 30, 2011, compared to $3.5 million for the three months ended June 30, 2010. The increase in net interest and dividend

 

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income was primarily due to an increase in our net interest earning assets, and the cost of our interest-bearing liabilities decreasing faster than the yields on our interest-earning assets in a period of declining market interest rates. Net interest-earning assets increased to $68.8 million for the three months ended June 30, 2011 from $52.3 million for the three months ended June 30, 2010. Our net interest margin increased 9 basis points to 2.98% for the three months ended June 30, 2011, compared to 2.89% for the three months ended June 30, 2010, and our net interest rate spread increased 12 basis points to 2.81% for the three months ended June 30, 2011, compared to 2.69% for the three months ended June 30, 2010.

Interest and Dividend Income. Interest and dividend income decreased $89,000 to $5.3 million for the three months ended June 30, 2011, from $5.4 million for the three months ended June 30, 2010. The decrease in interest and dividend income was primarily due to a $264,000 decrease in interest and dividend income on securities and a $169,000 increase in interest income on loans. The decrease in interest income on loans resulted from a 60 basis point decrease in the average yield on loans to 4.71% from 5.31%, primarily due to lower market interest rates during the period. The decrease in yield on loans was partially offset by an increase in the average balance of loans of $58.1 million to $405.0 million for the three months ended June 30, 2011, from $346.9 million for the three months ended June 30, 2010. The decrease in interest and dividend income on securities was primarily due to a 5 basis point decrease in the average yield on securities other than Federal Home Loan Bank Stock to 3.01% from 3.06%, and a $33.8 million decrease in the average balance of such securities to $76.2 million for the three months ended June 30, 2011. The decrease in the average yield on securities other than Federal Home Loan Bank Stock was primarily due to lower market interest rates during the period. Dividends on Federal Home Loan Bank Stock increased to $6,000 for the three months ended June 30, 2011, from no dividend paid for the three months ended June 30, 2010.

Interest Expense. Interest expense decreased $457,000 to $1.5 million for the three months ended June 30, 2011, from $2.0 million for the three months ended June 30, 2010. The decrease resulted from a 49 basis point decrease in the cost of interest-bearing liabilities, partially offset by an $18.6 million, or 4.3%, increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased by $12,000 to $966,000 for the three months ended June 30, 2011, from $978,000 for the three months ended June 30, 2010. This decrease was primarily due to a 21 basis point decrease in the average cost of interest-bearing deposits to 1.10% for the three months ended June 30, 2011, from 1.31% for the three months ended June 30, 2010. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended June 30, 2011, reflecting lower market interest rates compared to the prior period. The decrease in average cost was partially offset by a $53.8 million increase in the average balance of interest-bearing deposits to $353.8 million for the three months ended June 30, 2011, from $300.0 million for the three months ended June 30, 2010.

Interest expense on borrowings decreased $445,000 to $551,000 for the three months ended June 30, 2011, from $996,000 for the three months ended June 30, 2010. This decrease was primarily due to a $30.8 million decrease in the average balance of Federal Home Loan Bank advances to $87.3 million for the three months ended June 30, 2011, from $118.1 million for the three months ended June 30, 2010, and a 69 basis point decrease in the average cost of such advances to 2.46% for the three months ended June 30, 2011, from 3.15% for the three months ended June 30, 2010.

Provision for Loan Losses. Based on our methodology for establishing our allowance for loan losses and provisions for loan losses discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $742,000 for the three months ended June 30, 2011, compared to a benefit of $4,000 for the three months ended June 30, 2010. The allowance for loan losses was $3.7 million, or 0.9% of total loans, at June 30, 2011, compared to $2.7 million, or 0.8% of total loans, at June 30, 2010. The increase in the provision reflected management’s assessment of the risk in the portfolio resulting from increases in our commercial real estate loans, commercial business loans, home equity lines of credit and consumer loans.

Noninterest Income. Noninterest income improved by $1.4 million to $432,000 for the three months ended June 30, 2011, from a charge of $986,000 for the three months ended June 30, 2010. The improvement was primarily due to a $1.3 million net loss on trading securities that occurred in the three-month period ended June 30, 2010, compared to no such losses in the 2011 period. In addition, net gain on sale of loans increased $104,000 to $147,000 for the three months ended June 30, 2011, from $43,000 for the three months ended June 30, 2010. The net loss on trading securities during the three months ended June 30, 2010 was due to market volatility and general economic factors. The net gain on sale of loans was primarily due to $98,000 from the sale of indirect automobile loans in the 2011 period, compared to $0 from the sale of such loans in 2010.

Noninterest Expense. Noninterest expense increased $1.0 million to $3.9 million for the three months ended June 30, 2011, from $2.9 million for the three months ended June 30, 2010. The largest components of this increase were salaries and employee benefits, which increased $821,000, or 51.0%, marketing (in support of our new business initiatives), which increased $138,000, or 113.1%, and other noninterest expense, which increased $113,000, or 51.4%. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense.

Income Tax Expense. We recorded an income tax benefit of $210,000 for the three months ended June 30, 2011, compared to an income tax benefit of $233,000 for the three months ended June 30, 2010. The reduction in the tax benefit was due to higher tax exempt income in the 2010 period. The effective tax rate for the three months ended June 30, 2011 was 52.8% compared to 59.6% for the same period in 2010.

 

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The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as 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.

 

     For the Three Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield/  Rate(1)     Average
Outstanding
Balance
    Interest      Yield/  Rate(1)  

Interest-earning assets:

              

Total loans

   $ 404,998      $ 4,760         4.71   $ 346,930      $ 4,591         5.31

Securities

     76,153        572         3.01     109,989        839         3.06

FHLB stock

     8,038        6         0.30     8,038        —           —     

Other

     25,631        9         0.14     14,797        6         0.16
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     514,820        5,347         4.17     479,754        5,436         4.54

Non-interest-earning assets

     20,992             26,989        
  

 

 

        

 

 

      

Total assets

   $ 535,812           $ 506,743        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Regular savings accounts

   $ 185,919      $ 330         0.71   $ 130,846      $ 272         0.83

Checking accounts

     24,118        6         0.10     28,271        11         0.16

Money market accounts

     12,305        7         0.23     13,995        24         0.69

Certificates of deposit

     131,429        623         1.90     126,910        671         2.12
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     353,771        966         1.10     300,022        978         1.31

Federal Home Loan Bank advances

     87,291        535         2.46     118,112        929         3.15

Securities sold under agreements to repurchase

     3,399        4         0.47     3,826        9         0.94

Other borrowed funds

     1,585        12         3.04     5,492        58         4.24
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     446,046        1,517         1.36     427,452        1,974         1.85

Non-interest-bearing liabilities

     42,504             34,174        
  

 

 

        

 

 

      

Total liabilities

     488,550             461,626        

Equity

     47,262             45,117        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 535,812           $ 506,743        
  

 

 

        

 

 

      

Net interest and dividend income

     $ 3,830           $ 3,462      
    

 

 

        

 

 

    

Net interest rate spread (2)

          2.81          2.69

Net interest-earning assets (3)

   $ 68,774           $ 52,302        
  

 

 

        

 

 

      

Net interest margin (4)

          2.98          2.89

Average interest-earning assets to interest-bearing liabilities

     115.42          112.24     

 

(1) Yields and rates for the three-month periods ended June 30, 2011 and 2010 are annualized.
(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 represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest and dividend income divided by average total interest-earning assets.

 

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The following table presents the effects of changing rates and volumes on our net interest and dividend income for the fiscal years and 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). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     Three Months Ended June 30,  
     2011 vs. 2010  
    

Increase (Decrease)

Due to

    Total
Increase
 
     Volume     Rate     (Decrease)  

Interest-earning assets:

      

Loans

   $ 520      $ (351   $ 169   

Securities and FHLB stock

     (233     (28     (261

Other

     4        (1     3   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 291      $ (380   $ (89
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Regular savings accounts

   $ 88      $ (30   $ 58   

Checking accounts

     (1     (4     (5

Money market accounts

     (3     (14     (17

Certificates of deposit

     25        (73     (48
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     109        (121     (12

Federal Home Loan Bank advances

     (214     (180     (394

Securities sold under agreements to repurchase

     (1     (4     (5

Other borrowed funds

     (33     (13     (46
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ (139   $ (318   $ (457
  

 

 

   

 

 

   

 

 

 

Change in net interest and dividend income

   $ 430      $ (62   $ 368   
  

 

 

   

 

 

   

 

 

 

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General. Net income increased $598,000, or 80.5%, to $1.3 million for the six months ended June 30, 2011, from $743,000 for the six months ended June 30, 2010. The increase was primarily due to a $3.5 million increase in noninterest income and a $464,000 increase in net interest and dividend income, partially offset by a $2.1 million increase in noninterest expense and a $938,000 increase in the provision for loan losses.

Net Interest and Dividend Income. Net interest and dividend income increased by $464,000 to $7.4 million for the six months ended June 30, 2011, from $6.9 million for the six months ended June 30, 2010. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets, and the cost of our interest-bearing liabilities decreasing faster than the yields on our interest-earning assets in a period of declining market interest rates. Net interest-earning assets increased to $64.1 million for the six months ended June 30, 2011 from $50.8 million for the six months ended June 30, 2010. Our net interest margin increased 8 basis points to 2.99% for the six months ended June 30, 2011, compared to 2.91% for the six months ended June 30, 2010, and our net interest rate spread increased 10 basis points to 2.81% for the six months ended June 30, 2011, compared to 2.71% for the six months ended June 30, 2010.

Interest and Dividend Income. Interest and dividend income decreased $566,000 to $10.4 million for the six months ended June 30, 2011, from $11.0 million for the six months ended June 30, 2010. The decrease in interest and dividend income was primarily due to a $430,000 decrease in interest and dividend income on securities and a $142,000 decrease in interest income on loans. The decrease in interest income on loans resulted from a 53 basis point decrease in the average yield on loans to 4.84% from 5.37%, primarily due to lower market interest rates during the period. The decrease in yield on loans was partially offset by an

 

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increase in the average balance of loans of $32.3 million to $382.0 million for the six months ended June 30, 2011, from $349.7 million for the six months ended June 30, 2010. The decrease in interest and dividend income on securities was primarily due to a 32 basis point decrease in the average yield on securities other than Federal Home Loan Bank Stock to 2.86% from 3.18%, and an $18.9 million decrease in the average balance of such securities to $88.1 million for the six months ended June 30, 2011. The decrease in the average yield on securities other than Federal Home Loan Bank Stock was primarily due to lower market interest rates during the period. Dividends on Federal Home Loan Bank Stock increased to $12,000 for the six months ended June 30, 2011, from no dividend paid for the six months ended June 30, 2010.

Interest Expense. Interest expense decreased $1.0 million to $3.1 million for the six months ended June 30, 2011, from $4.1 million for the six months ended June 30, 2010. The decrease resulted from a 50 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $4.9 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased by $135,000 to $1.9 million for the six months ended June 30, 2011, from $2.0 million for the six months ended June 30, 2010. This decrease was primarily due to a 25 basis point decrease in the average cost of interest-bearing deposits to 1.10% for the six months ended June 30, 2011, from 1.35% for the six months ended June 30, 2010. We experienced decreases in the average cost across all categories of interest-bearing deposits for the six months ended June 30, 2011, reflecting lower market interest rates compared to the prior period. The decrease in average cost was partially offset by a $42.4 million increase in the average balance of interest-bearing deposits to $339.5 million for the six months ended June 30, 2011, from $297.1 million for the six months ended June 30, 2010.

Interest expense on borrowings decreased $895,000 to $1.2 million for the six months ended June 30, 2011, from $2.1 million for the six months ended June 30, 2010. This decrease was primarily due to a $34.4 million decrease in the average balance of Federal Home Loan Bank advances to $88.2 million for the six months ended June 30, 2011, from $122.6 million for the six months ended June 30, 2010, and a 62 basis point decrease in the average cost of such advances to 2.61% for the six months ended June 30, 2011, from 3.23% for the six months ended June 30, 2010.

Provision for Loan Losses. We recorded a provision for loan losses of $1.2 million for the six months ended June 30, 2011, compared to a provision for loan losses of $280,000 for the six months ended June 30, 2010. The allowance for loan losses was $3.7 million, or 0.9% of total loans, at June 30, 2011, compared to $2.7 million, or 0.8% of total loans, at June 30, 2010. The increase in the provision reflected management’s assessment of the risk in the portfolio resulting from increases in our commercial real estate loans, commercial business loans, home equity lines of credit and consumer loans.

Noninterest Income. Noninterest income improved to $3.5 million for the six months ended June 30, 2011, from a charge of $14,000 for the six months ended June 30, 2010. The improvement was primarily due to an increase of $2.8 million in net realized gain on sales and calls of securities, a $643,000 loss on trading securities for the 2010 period compared to no loss in 2011, and a $129,000 increase in gain on sales of loans. The increase in net realized gain on sales and calls of securities resulted from the sale of our entire portfolio of marketable equity securities during the 2011 period. The net gain on sale of loans was primarily due to $106,000 from the sale of indirect automobile loans in the 2011 period, compared to $0 from the sale of such loans in 2010.

Noninterest Expense. Noninterest expense increased $2.0 million to $7.6 million for the six months ended June 30, 2011, from $5.6 million for the six months ended June 30, 2010. The largest components of this increase were salaries and employee benefits, which increased $1.6 million, or 48.3%, marketing (in support of our new business initiatives), which increased $307,000, or 175.4%, and other noninterest expense, which increased $208,000, or 50.0%. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense.

Income Tax Expense. As a result of higher pre-tax income, we recorded a provision for income taxes of $698,000 for the six months ended June 30, 2011, compared to a provision for income taxes of $327,000 for the six months ended June 30, 2010, reflecting effective tax rates of 34.2% and 30.6%, respectively.

 

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The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as 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.

 

     For the Six Months Ended June 30,  
     2011     2010  
     Average
Outstanding
Balance
    Interest      Yield/  Rate(1)     Average
Outstanding
Balance
    Interest      Yield/  Rate(1)  

Interest-earning assets:

              

Total loans

   $ 382,040      $ 9,167         4.84   $ 349,700      $ 9,309         5.37

Securities

     88,091        1,251         2.86     107,008        1,688         3.18

FHLB stock

     8,038        12         0.30     8,038        —           —     

Other

     19,648        11         0.11     14,848        10         0.14
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     497,817        10,441         4.23     479,594        11,007         4.63

Non-interest-earning assets

     22,448             26,991        
  

 

 

        

 

 

      

Total assets

   $ 520,265           $ 506,585        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Regular savings accounts

   $ 174,161      $ 610         0.71   $ 127,991      $ 558         0.88

Checking accounts

     23,820        13         0.11     28,273        22         0.16

Money market accounts

     12,857        17         0.27     13,686        48         0.71

Certificates of deposit

     128,634        1,216         1.91     127,106        1,363         2.16
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     339,472        1,856         1.10     297,056        1,991         1.35

Federal Home Loan Bank advances

     88,188        1,140         2.61     122,592        1,966         3.23

Securities sold under agreements to repurchase

     3,132        9         0.58     3,587        17         0.96

Other borrowed funds

     2,898        57         3.97     5,576        118         4.27
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     433,690        3,062         1.42     428,811        4,092         1.92

Non-interest-bearing liabilities

     39,405             32,981        
  

 

 

        

 

 

      

Total liabilities

     473,095             461,792        

Equity

     47,170             44,793        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 520,265           $ 506,585        
  

 

 

        

 

 

      

Net interest and dividend income

     $ 7,379           $ 6,915      
    

 

 

        

 

 

    

Net interest rate spread (2)

          2.81          2.71

Net interest-earning assets (3)

   $ 64,127           $ 50,783        
  

 

 

        

 

 

      

Net interest margin (4)

          2.99          2.91

Average interest-earning assets to interest-bearing liabilities

     114.79          111.84     

 

(1) Yields and rates for the six-month periods ended June 30, 2011 and 2010 are annualized.
(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 represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest and dividend income divided by average total interest-earning