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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

OR

 

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File Number 000-52947

United Financial Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

74-3242562

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

95 Elm Street, West Springfield, Massachusetts  

01089

(Address of principal executive offices)   Zip Code

Registrant’s telephone number, including area code: (413) 787-1700

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  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter 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. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a 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.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $0.01 par value

19,674,932 shares outstanding as of May 1, 2013


Table of Contents

INDEX

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Condition (unaudited) March 31, 2013 and December 31, 2012

     1   
 

Consolidated Statements of Net Income (unaudited) Three Months Ended March 31, 2013 and 2012

     2   
 

Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended March  31, 2013 and 2012

     3   
 

Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended March  31, 2013 and 2012

     4   
 

Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2013 and 2012

     5   
 

Notes to Unaudited Consolidated Financial Statements

     7   

Item 2.

 

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

     25   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4.

 

Controls and Procedures

     36   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     36   

Item 1A.

 

Risk Factors

     36   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 3.

 

Defaults Upon Senior Securities

     37   

Item 4.

 

Mine Safety Disclosures

     37   

Item 5.

 

Other Information

     37   

Item 6.

 

Exhibits

     38   

SIGNATURES

     39   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(Dollars in thousands, except per share amounts)

 

 

     March 31,
2013
    December 31,
2012
 

ASSETS

    

Cash and due from banks

   $ 24,312      $ 28,972   

Interest-bearing deposits

     32,000        1,707   
  

 

 

   

 

 

 

Total cash and cash equivalents

     56,312        30,679   

Securities available for sale, at fair value

     282,897        294,322   

Securities held to maturity, at amortized cost (fair value of $78,554 at March 31, 2013 and $85,674 at December 31, 2012)

     76,107        82,986   

Loans held for sale

     953        632   

Loans, net of allowance for loan losses of $12,696 at March 31, 2013 and $12,089 at December 31, 2012

     1,830,155        1,807,401   

Other real estate owned

     1,411        2,578   

Accrued interest receivable

     6,837        6,790   

Deferred tax asset, net

     19,726        20,178   

Stock in the Federal Home Loan Bank of Boston

     17,334        18,554   

Banking premises and equipment, net

     25,058        25,064   

Bank-owned life insurance

     53,305        52,876   

Goodwill

     39,585        39,852   

Other assets

     19,521        20,391   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,429,201      $ 2,402,303   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Interest-bearing

   $ 1,580,863      $ 1,540,873   

Non-interest-bearing

     313,755        307,302   
  

 

 

   

 

 

 

Total deposits

     1,894,618        1,848,175   

Short-term borrowings

     66,663        79,229   

Long-term debt

     134,697        133,969   

Subordinated debentures

     5,653        9,630   

Escrow funds held for borrowers

     3,327        4,315   

Capitalized lease obligations

     4,669        4,711   

Accrued expenses and other liabilities

     13,219        15,085   
  

 

 

   

 

 

 

Total liabilities

     2,122,846        2,095,114   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share, authorized 50,000,000 shares; none issued

     —          —     

Common stock, par value $0.01 per share, authorized 100,000,000 shares; 24,266,428 shares issued at March 31, 2013 and December 31, 2012

     243        243   

Paid-in capital

     273,275        272,822   

Retained earnings

     89,848        87,153   

Treasury stock, at cost (4,324,279 shares at March 31, 2013 and 4,114,310 shares at December 31, 2012)

     (61,560     (58,430

Accumulated other comprehensive income, net of taxes

     4,549        5,401   
  

 

 

   

 

 

 

Total stockholders’ equity

     306,355        307,189   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,429,201      $ 2,402,303   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF NET INCOME (unaudited)

(Dollars in thousands, except per share amounts)

 

 

     Three Months Ended
March 31,
 
     2013     2012  

Interest and dividend income:

    

Loans

   $ 22,056      $ 14,075   

Investments

     2,313        2,855   

Other interest-earning assets

     18        41   
  

 

 

   

 

 

 

Total interest and dividend income

     24,387        16,971   

Interest expense:

    

Deposits

     2,803        2,753   

Short-term borrowings

     33        20   

Long-term debt

     1,058        1,098   
  

 

 

   

 

 

 

Total interest expense

     3,894        3,871   

Net interest income before provision for loan losses

     20,493        13,100   

Provision for loan losses

     950        650   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     19,543        12,450   
  

 

 

   

 

 

 

Non-interest income:

    

Fee income on depositors’ accounts

     1,499        1,408   

Wealth management income

     211        227   

Income from bank-owned life insurance

     513        440   

Net gain on sales of loans

     106        108   

Net loss on sales of securities

     (50     —     

Other income

     519        390   
  

 

 

   

 

 

 

Total non-interest income

     2,798        2,573   
  

 

 

   

 

 

 

Non-interest expense:

    

Salaries and benefits

     8,479        6,442   

Occupancy expenses

     1,628        874   

Marketing expenses

     538        440   

Data processing expenses

     1,207        1,020   

Professional fees

     678        506   

Acquisition related expenses

     158        —     

Branch closing expenses

     510        —     

FDIC insurance assessments

     298        269   

Low income housing tax credit fund

     175        243   

Other expenses

     2,179        1,481   
  

 

 

   

 

 

 

Total non-interest expense

     15,850        11,275   
  

 

 

   

 

 

 

Income before income taxes

     6,491        3,748   

Income tax expense

     1,790        899   
  

 

 

   

 

 

 

Net income

   $ 4,701      $ 2,849   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.23      $ 0.19   

Diluted

   $ 0.23      $ 0.19   

Weighted average shares outstanding:

    

Basic

     20,035,745        14,670,606   

Diluted

     20,289,297        14,987,033   

Dividends paid per share

   $ 0.10      $ 0.09   

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)

 

The components of comprehensive income and related tax effects are as follows:

 

     Three Months Ended
March 31,
 
     2013     2012  

Net Income

   $ 4,701      $ 2,849   
  

 

 

   

 

 

 

Other comprehensive loss:

    

Unrealized gains on securities:

    

Unrealized holding gains on available-for-sale securities

     (1,438     (335

Reclassification adjustment for losses realized in income

     50        —     
  

 

 

   

 

 

 

Net change in unrealized gains

     (1,388     (335

Tax effect

     536        132   
  

 

 

   

 

 

 

Net of tax amount

     (852     (203
  

 

 

   

 

 

 

Comprehensive income

   $ 3,849      $ 2,646   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 and 2012

(Dollars in thousands, except per share amounts)

 

 

     Common
Shares
Outstanding
    Common
Stock
     Paid-In
Capital
    Retained
Earnings
    Unearned
Compensation
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balances at December 31, 2011

     15,712,897      $ 187       $ 182,433      $ 89,019      $ (10,047   $ (40,983   $ 6,752      $ 227,361   

Net income

     —          —           —          2,849        —          —          —          2,849   

Other comprehensive loss

     —          —           —          —          —          —          (203     (203

Cash dividends paid ($0.09 per share)

     —          —           —          (1,322     —          —          —          (1,322

Treasury stock purchases

     (129,200     —           —          —          —          (2,054     —          (2,054

Restricted shares forfeited

     (8,000     —           109        —          —          (109     —          —     

Cancellation of shares for tax withholdings on options exercised

     —          —           (83     —          —          —          —          (83

Reissuance of treasury shares in connection with stock options exercised

     14,925        —           (140     (10     —          205        —          55   

Reissuance of treasury shares in connection with restricted stock grants

     7,500        —           (120     17        —          103        —          —     

Stock-based compensation

     —          —           362        —          —          —          —          362   

ESOP shares committed to be released

     —          —           110        —          173        —          —          283   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2012

     15,598,122      $ 187       $ 182,671      $ 90,553      $ (9,874   $ (42,838   $ 6,549      $ 227,248   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

     20,152,118      $ 243       $ 272,822      $ 87,153      $ —        $ (58,430   $ 5,401      $ 307,189   

Net income

     —          —           —          4,701        —          —          —          4,701   

Other comprehensive loss

     —          —           —          —          —          —          (852     (852

Cash dividends paid ($0.10 per share)

     —          —           —          (2,006     —          —          —          (2,006

Treasury stock purchases

     (204,400     —           —          —          —          (3,047     —          (3,047

Shares repurchased in connection with restricted stock forfeited for tax purposes

     (569     —           —          —          —          (8     —          (8

Restricted shares forfeited

     (5,000     —           75        —          —          (75     —          —     

Stock-based compensation

     —          —           378        —          —          —          —          378   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2013

     19,942,149      $ 243       $ 273,275      $ 89,848      $ —        $ (61,560   $ 4,549      $ 306,355   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 and 2012

(Dollars in thousands)

 

 

     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 4,701      $ 2,849   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     950        650   

ESOP expense

     —          283   

Stock-based compensation

     378        362   

Amortization of premiums and discounts

     779        461   

Depreciation and amortization

     593        405   

Amortization of intangible assets

     193        23   

Net (loss) gain on sale and writedown of other real estate owned

     (74     22   

Net loss on sale of available for sale securities

     50        —     

Loans originated for sale

     (4,136     (4,734

Proceeds from sales of loans held for sale

     3,921        4,210   

Net gain on sale of loans

     (106     (108

Deferred tax provision (benefit)

     452        (362

Net increase in cash surrender value of bank-owned life insurance

     (428     (396

(Increase) decrease in accrued interest receivable

     (47     98   

Decrease (increase) in other assets

     1,479        (308

(Decrease) increase in accrued expenses and other liabilities

     (1,806     1,687   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,899        5,142   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of securities available for sale

     (16,632     (25,875

Proceeds from sales of securities available for sale

     2,563        —     

Proceeds from maturities, calls and principal repayments of securities available for sale

     23,518        14,119   

Proceeds from maturities, calls and principal repayments of securities held to maturity

     6,638        7,958   

Redemption of Federal Home Loan Bank of Boston stock

     1,220        911   

Proceeds from sales of other real estate owned

     1,591        695   

Net loan originations, purchases and principal repayments

     (24,054     (19,088

Purchases of property and equipment

     (583     (1,297
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,739     (22,577
  

 

 

   

 

 

 

 

(Continued)

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 and 2012 (Concluded)

(Dollars in thousands)

 

 

     2013     2012  

Cash flows from financing activities:

    

Net increase in deposits

   $ 46,443      $ 28,654   

Net change in short-term borrowings

     (12,566     6,301   

Proceeds from issuance of long-term debt

     6,331        1,626   

Repayment of long-term debt, net of amortization of discount

     (5,580     (1,756

Redemption of trust preferred securities

     (4,000     —     

Net (decrease) increase in escrow funds held for borrowers

     (988     147   

Payments on capitalized lease obligations

     (106     (103

Cancellation of shares for tax withholdings on options exercised

     —          (83

Reissuance of treasury shares in connection with stock options exercised

     —          55   

Treasury stock purchases

     (3,055     (2,054

Cash dividends paid

     (2,006     (1,322
  

 

 

   

 

 

 

Net cash provided by financing activities

     24,473        31,465   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     25,633        14,030   

Cash and cash equivalents at beginning of period

     30,679        61,518   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 56,312      $ 75,548   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period:

    

Interest on deposits, borrowings and other interest bearing liabilities

   $ 4,891      $ 4,012   

Income taxes – net

     1,040        2,177   

Non-cash items:

    

Transfer of loans to other real estate owned

     350        1,105   

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2013

Dollars in Thousands (except per share amounts)

 

 

NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of United Financial Bancorp, Inc. (“United Financial”), its wholly-owned subsidiary, United Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, UCB Securities, Inc. and UCB Securities, Inc. II, which are engaged in buying, selling and holding investment securities, and UB Properties, LLC and VB REO, LLC, which were formed to hold real estate assets acquired through foreclosure. All significant intercompany accounts and transactions have been eliminated in consolidation. These entities are collectively referred to herein as the “Company”.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for the fair presentation of the Company’s financial condition as of March 31, 2013 and the results of operations for the three months ended March 31, 2013 and 2012. The interim results of operations presented herein are not necessarily indicative of the results to be expected for the entire year or any other period. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2013.

NOTE B – RECENT ACCOUNTING PRONOUNCEMENTS

In October 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-04, Technical Amendments and Corrections to SEC Sections 2011-08. This ASU is intended to clarify the FASB Accounting Standards Codification (“Codification”) of correct unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in Topic 820, Fair Value Measurement. Amendments to the Codification without transition guidance are effective upon issuance for both public and non-public entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. This ASU was adopted in the first quarter of 2013 and did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This Update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line item of net income. This ASU is effective for public entities for reporting periods beginning after December 31, 2012. The Company adopted this ASU as of March 31, 2013 and there was no impact on the Company’s consolidated financial results as the amendments relate only to disclosures in the consolidated financial statements.

NOTE C – CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Management believes that the following policies would be considered critical under the SEC’s definition:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in adjustments to the amount of the recorded allowance for loan losses.

 

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Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, prior loss experience, current economic conditions, trends in non-performing, classified and impaired loans, charge-offs and delinquency rates, the adequacy of the underlying collateral, the size and composition of the loan portfolio, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

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.

The Company periodically may agree to modify the contractual terms of loans. A loan is classified as a troubled debt restructure (“TDR”) if the Company grants a concession to a borrower that is experiencing financial difficulties. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest, extending the maturity date or a partial forgiveness of debt. A TDR loan is returned to accrual status after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six months. All TDRs are classified as impaired.

The allowance consists of a specific, general, and unallocated component, as further described below.

Specific component. The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for the commercial segments (commercial and industrial, commercial real estate and construction) by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. A specific allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of the loan. Groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual loans in the consumer segments (residential real estate, home equity and consumer loans) for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

The Company has established a Business Banking unit within its Commercial Lending Department. The portfolio is made up of both commercial and industrial loans less than $250,000 and commercial real estate loans less than $500,000 which are managed by exception. This grouping of loans is considered a homogenous pool of loans and collectively evaluated for impairment. Accordingly, the Company does not separately identify individual loans within this unit for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

General component. The general component is based on historical loss experience adjusted for qualitative factors stratified by each of the loan segments: commercial and industrial, commercial real estate, construction, business banking commercial and industrial, business banking commercial real estate, residential real estate, home equity and consumer. Management uses an average of historical losses based on a time

 

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frame appropriate to capture relevant loss data for each loan class. This historical loss factor for each loan class is adjusted for the following qualitative factors: the levels/trends in delinquencies, classified and non-accruals; levels and trends in charge-offs and recoveries; 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 and depth of lending management and staff; national and local economic trends and industry conditions; and effects of changes in credit concentrations. This analysis establishes factors that are applied to each loan segment to determine the amount of the general component of the allowance for loan losses. In the second quarter of 2012, management made refinements to its allowance for loan loss methodology to incorporate the establishment of the Business Banking unit into the Company’s approach. This refinement did not have a material effect on the loan loss provision or the total allowance for loan loss.

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.

Reserve for unfunded commitments. The Company also maintains a reserve for unfunded credit commitments to provide for the risk of loss inherent in these arrangements. The reserve is determined using a methodology similar to the analysis of the allowance for loan losses, taking into consideration probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities and was $213 and $0 at March 31, 2013 and 2012, respectively.

Evaluation of the Investment Portfolio for Other-Than-Temporary Impairment. The evaluation of the investment portfolio for other-than-temporary impairment is also a critical accounting estimate. On a quarterly basis, management reviews securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary. Declines in the fair value of marketable equity securities below their cost that are deemed to be other-than-temporary based on the severity and duration of the impairment are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses for securities, impairment is required to be recognized if (1) we intend to sell the security; (2) it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired securities that management intends to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit related other-than-temporary impairment is recognized in other comprehensive income, net of applicable taxes.

Income Taxes. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. In determining the valuation allowance, the Company uses historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

 

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Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Valuation of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to the financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value, the notes to the financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

NOTE D – EARNINGS PER SHARE

Earnings per share (“EPS”) has been computed by dividing net income by weighted average shares outstanding before any dilution and excluding the weighted average number of unallocated shares held by the Bank’s employee stock ownership plan (the “ESOP”). Diluted earnings per share has been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if potential common shares were converted into common stock using the treasury stock method.

The calculation of basic and diluted earnings per common share for the periods indicated is presented below.

 

     Three Months Ended
March 31,
 
     2013      2012  

Net income

   $ 4,701       $ 2,849   
  

 

 

    

 

 

 

Weighted average common shares applicable to basic EPS (1)

     20,035,745         14,670,606   

Effect of dilutive potential common shares (2) (3)

     253,552         316,427   
  

 

 

    

 

 

 

Weighted average common shares applicable to diluted EPS

     20,289,297         14,987,033   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.23       $ 0.19   

Diluted

   $ 0.23       $ 0.19   

 

(1) Share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) are included in basic EPS using the two-class method.
(2) Options to purchase 217,892 and 110,229 shares for the three months ended March 31, 2013 and 2012, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive.
(3) Includes incremental shares related to dilutive stock options.

 

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NOTE E – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items are components of accumulated other comprehensive income.

The components of accumulated other comprehensive income and related tax effects are as follows:

 

    

March 31,
2013

   

December 31,
2012

 

Net unrealized gain on securities available for sale

   $ 8,759      $ 10,147   

Tax effect

     3,311        3,847   
  

 

 

   

 

 

 

Net-of-tax amount

     5,448        6,300   
  

 

 

   

 

 

 

Pension liability

     (1,432     (1,432

Tax effect

     (533     (533
  

 

 

   

 

 

 

Net-of-tax amount

     (899     (899
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 4,549      $ 5,401   
  

 

 

   

 

 

 

NOTE F – INVESTMENT SECURITIES

The amortized cost and fair value of securities classified as available for sale and held to maturity are as follows:

 

     Amortized
Cost
     Unrealized     Fair Value  
        Gains      Losses    

Securities Available for Sale

          

March 31, 2013:

          

Debt Securities:

          

Government-sponsored enterprises

   $ 2,098       $ 1       $ (8   $ 2,091   

Government-sponsored and government-guaranteed mortgage-backed securities

     242,544         8,505         (538     250,511   

Private label mortgage-backed securities

     129         1         —          130   

Municipal bonds

     28,076         582         (443     28,215   

Corporate bonds

     1,291         659         —          1,950   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 274,138       $ 9,748       $ (989   $ 282,897   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012:

          

Debt Securities:

          

Government-sponsored enterprises

   $ 3,234       $ 2       $ (3   $ 3,233   

Government-sponsored and government-guaranteed mortgage-backed securities

     248,370         9,836         (444     257,762   

Private label mortgage-backed securities

     2,568         54         (56     2,566   

Municipal bonds

     28,713         595         (481     28,827   

Corporate bonds

     1,290         644         —          1,934   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 284,175       $ 11,131       $ (984   $ 294,322   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Amortized
Cost
     Unrealized      Fair Value  
        Gains      Losses     

Securities Held to Maturity

           

March 31, 2013:

           

Government-sponsored and government-guaranteed mortgage-backed securities

   $ 51,264       $ 2,048       $ —         $ 53,312   

Private label mortgage-backed securities

     72         2         —           74   

Industrial revenue bonds

     18,700         —           —           18,700   

State of Israel bonds

     150         —           —           150   

Municipal bonds

     5,921         397         —           6,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 76,107       $ 2,447       $ —         $ 78,554   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012:

           

Government-sponsored and government-guaranteed mortgage-backed securities

   $ 57,986       $ 2,214       $ —         $ 60,200   

Private label mortgage-backed securities

     79         2         —           81   

Industrial revenue bonds

     18,847         —           —           18,847   

State of Israel bonds

     150         —           —           150   

Municipal bonds

     5,924         472         —           6,396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,986       $ 2,688       $ —         $ 85,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of debt securities available for sale and held to maturity at March 31, 2013 are shown below. Actual maturities will differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties.

 

     At March 31, 2013  
     Securities
Available for Sale
     Securities
Held to Maturity
 
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due in one year or less

   $ —         $ —         $ 25       $ 25   

Due from one year to five years

     1,810         1,839         886         936   

Due from five years to ten years

     14,943         15,212         1,436         1,531   

Due after ten years

     14,712         15,205         22,424         22,676   
  

 

 

    

 

 

    

 

 

    

 

 

 
     31,465         32,256         24,771         25,168   

Mortgage-backed securities

     242,673         250,641         51,336         53,386   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 274,138       $ 282,897       $ 76,107       $ 78,554   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturities are based on the final contractual payment dates, and do not reflect the impact of potential prepayments or early redemptions.

The Company’s portfolio of mortgage-backed securities, which represent interests in pools of residential mortgage loans, consists primarily of securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae), all of which are federal government owned or sponsored enterprises.

 

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Table of Contents

Gross unrealized losses and fair values at March 31, 2013 and December 31, 2012 aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position follow:

 

     Less than 12 months     12 months or longer      Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Number of
Securities
     Fair
Value
     Unrealized
Losses
 

At March 31, 2013:

                   

Securities Available for Sale

                   

Debt Securities:

                   

Government-sponsored enterprises

   $ 1,241       $ (8   $ —         $ —           3       $ 1,241       $ (8

Government-sponsored and government-guaranteed mortgage-backed securities

     73,763         (538     —           —           103         73,763         (538

Municipal bonds

     14,199         (443     —           —           34         14,199         (443
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 89,203       $ (989   $ —         $ —           140       $ 89,203       $ (989
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no securities classified as held to maturity in an unrealized loss position as of March 31, 2013.

 

     Less than 12 months     12 months or longer      Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
     Number of
Securities
     Fair
Value
     Unrealized
Losses
 

At December 31, 2012:

                   

Securities Available for Sale

                   

Debt Securities:

                   

Government-sponsored enterprises

   $ 1,998       $ (3   $ —         $ —           5       $ 1,998       $ (3

Government-sponsored and government-guaranteed mortgage-backed securities

     41,537         (444     —           —           81         41,537         (444

Private label mortgage-backed securities

     1,671         (56     —           —           9         1,671         (56

Municipal bonds

     16,293         (481     —           —           38         16,293         (481
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,499       $ (984   $ —         $ —           133       $ 61,499       $ (984
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no securities classified as held to maturity in an unrealized loss position as of December 31, 2012.

Management evaluated the securities in the preceding tables and has determined that no declines in the fair value of the Company’s securities portfolio are deemed to be other-than-temporary as of March 31, 2013. In its evaluation, management considered the types of securities, including if the securities were U.S. Government issued, the credit rating on the securities, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position, intent and ability to hold the securities to expected recovery of value and other meaningful information. The Company does not intend to sell any impaired debt securities and is unlikely to be required to sell any impaired debt security before its maturity or market price recovery.

 

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NOTE G – LOANS

The components of the loan portfolio were as follows at March 31, 2013 and December 31, 2012:

 

     March 31,
2013
    December 31,
2012
 

Commercial:

    

Commercial and industrial

   $ 313,478      $ 306,192   

Commercial real estate

     824,701        814,692   

Construction

     63,797        52,778   

Consumer:

    

Residential real estate

     440,638        441,874   

Home equity

     176,124        179,039   

Consumer

     20,593        21,501   
  

 

 

   

 

 

 

Total loans

     1,839,331        1,816,076   

Net deferred loan costs and fees

     3,520        3,414   

Allowance for loan losses

     (12,696     (12,089
  

 

 

   

 

 

 

Loans, net

   $ 1,830,155      $ 1,807,401   
  

 

 

   

 

 

 

The Company transferred a portion of its originated commercial real estate and commercial and industrial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated statements of condition. The Company and participating lenders share ratably in any losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At March 31, 2013 and December 31, 2012, the Company was servicing loans for participants aggregating $57.9 million and $57.7 million, respectively.

As of March 31, 2013 and December 31, 2012, the Company had two loans that were transferred to participants, which did not meet the requirements to be considered a participating interest. These transferred loans are reported as secured borrowings in the amount of $2.8 million and $2.4 million at March 31, 2013 and December 31, 2012, respectively, and are reported in long-term debt on the consolidated statement of condition.

The Company established a Business Banking unit within its Commercial Lending Department during the second quarter of 2012. The portfolio is made up of both commercial and industrial and commercial real estate loans. As a result, the Company has reallocated charge offs, recoveries, and allowance for loan losses accordingly. A summary of the activity pertaining to the allowance for loan losses for the three months ended March 31, 2013 and 2012 is as follows:

 

                         Business Banking                                
     Commercial
and
Industrial
    Commercial
Real Estate
     Construction      Commercial
and
Industrial
    Commercial
Real Estate
    Residential     Home
Equity
    Consumer     Unallocated     Total  

Three Months Ended

                      

March 31, 2013:

                      

Beginning balance

   $ 2,680      $ 5,497       $ 710       $ 788      $ 706      $ 602      $ 383      $ 83      $ 640      $ 12,089   

Charge-offs

     (307     —           —           (27     —          (5     (26     (8     —          (373

Recoveries

     15        —           —           —          —          —          —          15        —          30   

Provision (credit)

     780        228         296         (89     (59     (14     12        (22     (182     950   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,168      $ 5,725       $ 1,006       $ 672      $ 647      $ 583      $ 369      $ 68      $ 458      $ 12,696   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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                       Business Banking                                  
     Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Commercial
and
Industrial
     Banking
Commercial
Real Estate
     Residential     Home
Equity
    Consumer     Unallocated      Total  

Three Months Ended

                       

March 31, 2012:

                       

Beginning balance

   $ 3,446      $ 5,572      $ 860      $ —         $ —         $ 666      $ 474      $ 114      $ —         $ 11,132   

Charge-offs

     (128     (216     (76     —           —           (88     —          (5     —           (513

Recoveries

     30        25        1        —           —           —          —          —          —           56   

Provision (credit)

     72        229        20        —           —           266        (64     (3     130         650   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,420      $ 5,610      $ 805      $ —         $ —         $ 844      $ 410      $ 106      $ 130       $ 11,325   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at March 31, 2013 and December 31, 2012 is as follows:

 

                          Business Banking                                     
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Commercial
and
Industrial
     Commercial
Real Estate
     Residential      Home
Equity
     Consumer      Unallocated      Total  

At March 31, 2013:

                             

Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment

   $ 342       $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ 342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment

   $ 2,826       $ 5,725       $ 1,006       $ 672       $ 647       $ 583       $ 369       $ 68       $ 458       $ 12,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 281,878       $ 743,361       $ 63,797       $ 31,600       $ 81,340       $ 440,638       $ 176,124       $ 20,593       $ —         $ 1,839,331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired and individually evaluated for impairment

   $ 5,657       $ 3,044       $ 192       $ —         $ —         $ —         $ —         $ —         $ —         $ 8,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired and collectively evaluated for impairment

   $ 275,555       $ 737,279       $ 62,646       $ 31,600       $ 81,340       $ 440,638       $ 176,124       $ 20,593       $ —         $ 1,825,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans acquired with deteriorated credit quality and deemed to be impaired

   $ 666       $ 3,039       $ 959       $ —         $ —         $ —         $ —         $ —         $ —         $ 4,664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Business Banking                                     
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Commercial
and
Industrial
     Commercial
Real Estate
     Residential      Home
Equity
     Consumer      Unallocated      Total  

At December 31, 2012:

                             

Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment

   $ 32       $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment

   $ 2,648       $ 5,497       $ 710       $ 788       $ 706       $ 602       $ 383       $ 83       $ 640       $ 12,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 272,789       $ 732,272       $ 52,778       $ 33,403       $ 82,420       $ 441,874       $ 179,039       $ 21,501       $ —         $ 1,816,076   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired and individually evaluated for impairment

   $ 5,943       $ 3,882       $ 591       $ —         $ —         $ —         $ —         $ —         $ —         $ 10,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired and collectively evaluated for impairment

   $ 266,091       $ 722,470       $ 51,838       $ 33,403       $ 82,420       $ 441,874       $ 179,039       $ 21,501       $ —         $ 1,798,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans acquired with deteriorated credit quality and deemed to be impaired

   $ 755       $ 5,920       $ 349       $ —         $ —         $ —         $ —         $ —         $ —         $ 7,024   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

The following is a summary of past due loans at March 31, 2013 and December 31, 2012:

 

     30-59
Days
Past Due
     60-89
Days
Past
Due
     90 Days
and

Over
Past

Due
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investments
> 90 Days
and
Accruing
 

At March 31, 2013:

                    

Commercial:

                    

Commercial and industrial

   $ 3,212       $ 1,408       $ 3,186       $ 7,806       $ 305,672       $ 313,478       $ —     

Commercial real estate

     6,493         2,263         4,635         13,391         811,310         824,701         —     

Construction

     —           639         —           639         63,158         63,797         —     

Consumer:

                    

Residential real estate

     3,546         1,698         2,489         7,733         432,905         440,638         —     

Home equity

     1,000         528         252         1,780         174,344         176,124         —     

Consumer

     28         65         227         320         20,273         20,593         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,279       $ 6,601       $ 10,789       $ 31,669       $ 1,807,662       $ 1,839,331       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2012:

                    

Commercial:

                    

Commercial and industrial

   $ 3,974       $ 1,155       $ 4,442       $ 9,571       $ 296,621       $ 306,192       $ —     

Commercial real estate

     6,326         1,136         5,351         12,813         801,879         814,692         —     

Construction

     2,853         —           —           2,853         49,925         52,778         —     

Consumer:

                    

Residential real estate

     11,760         2,450         2,615         16,825         425,049         441,874         —     

Home equity

     1,044         161         137         1,342         177,697         179,039         —     

Consumer

     329         35         120         484         21,017         21,501         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,286       $ 4,937       $ 12,665       $ 43,888       $ 1,772,188       $ 1,816,076       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of impaired loans at March 31, 2013 and December 31, 2012:

 

     At March 31, 2013      At December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commercial and industrial

   $ 5,726       $ 5,726          $ 6,666       $ 6,997      

Commercial real estate

     6,083         6,662            9,802         10,736      

Construction

     1,151         1,151            940         940      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 12,960       $ 13,539          $ 17,408       $ 18,673      
  

 

 

    

 

 

       

 

 

    

 

 

    

With an allowance recorded:

                 

Commercial and industrial

     597         878       $ 342         32         32       $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 597       $ 878       $ 342       $ 32       $ 32       $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 13,557       $ 14,417       $ 342       $ 17,440       $ 18,705       $ 32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is a summary of information pertaining to impaired loans:

 

     Three Months Ended March 31, 2013      Three Months Ended March 31, 2012  
     Average
Recorded
Investment on
Impaired Loans
     Interest Income      Average
Recorded
Investment on
Impaired Loans
     Interest Income  
        Recognized      Recognized
on a
Cash Basis
        Recognized      Recognized
on a
Cash Basis
 

Commercial:

                 

Commercial and industrial

   $ 6,680       $ 379       $ 310       $ 3,982       $ 8       $ 8   

Commercial real estate

     7,512         18         10         3,540         15         5   

Construction

     1,725         3         —           720         7         —     

Consumer:

                 

Residential real estate

     —           3         3         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,917       $ 403       $ 323       $ 8,242       $ 30       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of non-accrual loans, at March 31, 2013 and December 31, 2012:

 

     March 31,
2013
     December 31,
2012
 

Commercial:

     

Commercial and industrial

   $ 5,602       $ 5,538   

Commercial real estate

     4,635         5,596   

Construction

     959         349   

Consumer:

     

Residential real estate

     2,524         2,970   

Home equity

     252         137   

Consumer

     227         120   
  

 

 

    

 

 

 

Total

   $ 14,199       $ 14,710   
  

 

 

    

 

 

 

The following table represents modifications that were deemed to be troubled debt restructures for the three months ended March 31, 2013 and 2012:

 

     Three Months Ended March 31, 2013      Three Months Ended March 31, 2012  
     Number  of
Contracts
     Outstanding Recorded Investment      Number  of
Contracts
     Outstanding Recorded Investment  
        Pre-Modification      Post-Modification         Pre-Modification      Post-Modification  

Troubled Debt

                 

Restructurings:

                 

Commercial and industrial

     2       $ 1,824       $ 1,420         1       $ 140       $ 140   

Commercial real estate

     —           —           —           4         1,211         1,211   

Construction

     —           —           —           2         613         613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 1,824       $ 1,420         7       $ 1,964       $ 1,964   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2013, the modifications related to two commercial and industrial loans to one borrower that were restructured as part of an agreement with the customer whereby the Bank received a cash paydown. The modifications lowered the interest rate and extended the maturity of these loans.

At March 31, 2012, the modifications provided on one commercial and industrial loan and four commercial real estate loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. The modifications provided on the two construction loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. Management performs a discounted cash flow calculation or collateral analysis if the loan is collateral dependent to determine the amount of impaired reserve required on each of the troubled debt restructures. Any reserve required is recorded through the provision for loan losses.

As of March 31, 2013 and 2012, there have been no TDRs that have subsequently defaulted (defined as thirty or more days past due) within one year of modification.

 

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Table of Contents

CREDIT QUALITY INFORMATION

The Company utilizes a nine grade risk rating system for commercial and industrial, commercial real estate and construction loans as follows:

Pass: Loans within these five categories are considered low to average risk.

Special Mention: Loans in this category portray one or more weaknesses that may be tolerated in the short run. Assets in this category are currently protected but are potentially weak and are being closely monitored by management.

Substandard: Loans in this category are considered inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Doubtful: Loans in this category have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, however, its classification as an estimated loss is deferred until a more exact determination of the extent of the loss is ascertained.

Loss: Loans in this category are considered uncollectible and of such little value that their continuance as loans is not warranted.

The Company does not assign risk ratings to residential real estate, home equity and consumer loans unless they are contractually past due 90 days or more or where legal action has commenced against the borrower. All other consumer loans are charged off when they become contractually past due 120 days. Loans not assigned a rating are considered “pass.”

Business banking loans are assigned a Pass rating unless they are contractually past due 90 days or more, legal action has commenced against the borrower or other criteria for a risk rating change as defined within the business banking loan policy have been triggered. Upon one or more of these events, the loan will be risk rated Substandard.

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

The following tables presents the Company’s loan segment by internally assigned grades:

 

     At March 31, 2013  
Commercial:    Commercial &
Industrial
     Commercial
Real Estate
     Construction      Total  

Grade:

           

Pass

   $ 280,677       $ 772,543       $ 57,189       $ 1,110,409   

Special Mention

     15,608         28,240         1,387         45,235   

Substandard

     16,548         23,918         5,221         45,687   

Doubtful

     645         —           —           645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 313,478       $ 824,701       $ 63,797       $ 1,201,976   
  

 

 

    

 

 

    

 

 

    

 

 

 
Consumer:    Residential      Home Equity      Consumer      Total  

Grade:

           

Pass

   $ 437,635       $ 175,728       $ 20,364       $ 633,727   

Special Mention

     —           —           —           —     

Substandard

     3,003         396         229         3,628   

Doubtful

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 440,638       $ 176,124       $ 20,593       $ 637,355   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     At December 31, 2012  
Commercial:    Commercial &
Industrial
     Commercial
Real Estate
     Construction      Total  

Grade:

           

Pass

   $ 275,279       $ 762,240       $ 46,196       $ 1,083,715   

Special Mention

     14,788         29,092         1,632         45,512   

Substandard

     15,472         23,360         4,950         43,782   

Doubtful

     653         —           —           653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 306,192       $ 814,692       $ 52,778       $ 1,173,662   
  

 

 

    

 

 

    

 

 

    

 

 

 
Consumer:    Residential      Home Equity      Consumer      Total  

Grade:

           

Pass

   $ 439,201       $ 178,920       $ 21,382       $ 639,503   

Special Mention

     —           —           —           —     

Substandard

     2,673         119         119         2,911   

Doubtful

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 441,874       $ 179,039       $ 21,501       $ 642,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE H – COMMITMENTS

Financial instruments with off-balance sheet risk at March 31, 2013 and December 31, 2012 were as follows:

 

     March 31,
2013
     December 31,
2012
 

Unused lines of credit

   $ 320,620       $ 308,683   

Amounts due mortgagors

     40,876         36,365   

Standby letters of credit

     3,692         3,573   

Commitments to originate loans

     65,571         63,974   

The Company has also committed to invest up to $10.0 million, representing 25% of the Class A or senior investor balance, in low income housing tax credit funds by the end of 2015. At March 31, 2013, the Company invested $8.1 million in the funds, which has been reduced by net operating losses of $1.4 million. The net carrying balance of $6.7 million is included in other assets on the Company’s consolidated statement of condition. As a Class A investor, the Company has the right to transfer its investment to the fund’s Class B investor at the end of 10 years at which time the Company would have no compliance requirements or interest in the fund. The fund structure contemplates that the Class A investors will receive 95% of the tax credits and net operating losses for a period of eight years or until the minimum investment return has been met. Net operating losses allocated to the Company are recognized as they are incurred and recorded in non-interest expense.

In 2012, the Company committed to and invested $1.8 million, or 50% interest, in a new markets housing tax credit fund. At March 31, 2013, the fund recorded losses of $34,000 of which the Company will be allocated $17,000.

The Company has committed to invest $2.0 million in another low income housing tax credit fund by the end of 2015. At March 31, 2013, the Company invested $347,000 in this fund.

 

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Table of Contents

NOTE I – DEPOSITS

Deposit accounts, by type, are summarized as follows at March 31, 2013 and December 31, 2012:

 

     March 31,
2013
     December 31,
2012
 

Demand

   $ 313,755       $ 307,302   

NOW

     82,338         87,983   

Savings

     351,935         350,188   

Money market

     414,452         395,293   

Certificates of deposit

     732,138         707,409   
  

 

 

    

 

 

 
   $ 1,894,618       $ 1,848,175   
  

 

 

    

 

 

 

NOTE J – CONTINGENCIES

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to its foreclosure on a loan property. The litigants claim that Commonwealth National Bank acted in bad faith and in violation of applicable law and that its actions resulted in a sale of the underlying property for less than its market value, thereby causing damage to the parties. During the third quarter of 2011 the judge issued a ruling in favor of the Bank. The litigants have appealed the decision. The Bank believes these claims and the appeal are without merit and is vigorously defending the litigation. No estimate of any reasonably possible loss or range of loss to the Bank can be made at this time.

The Bank is also a defendant in other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE K – FAIR VALUES OF ASSETS AND LIABILITIES

The Company groups its assets and 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, as follows:

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 government-sponsored enterprises 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. Level 2 includes U.S. government and mortgage-backed securities issued by government-sponsored enterprises. 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 valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and 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. Level 3 also includes corporate bonds that have fair values derived from unobservable issuer-provided financial information and discounted cash flow models.

 

20


Table of Contents

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

 

     Level 1      Level 2      Level 3      Total
Fair Value
 

At March 31, 2013

           

Securities available for sale:

           

Government-sponsored enterprises

   $ —         $ 2,091       $ —         $ 2,091   

Government-sponsored and government-guaranteed mortgage-backed securities

     —           250,511         —           250,511   

Private label mortgage-backed securities

     —           130         —           130   

Municipal bonds

     —           28,215         —           28,215   

Corporate bonds

     —           —           1,950         1,950   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 280,947       $ 1,950       $ 282,897   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Level 1      Level 2      Level 3      Total
Fair Value
 

At December 31, 2012

           

Securities available for sale:

           

Government-sponsored enterprises

   $ —         $ 3,233       $ —         $ 3,233   

Government-sponsored and government-guaranteed mortgage-backed securities

     —           257,762         —           257,762   

Private label mortgage-backed securities

     —           2,566         —           2,566   

Municipal bonds

     —           28,827         —           28,827   

Corporate bonds

     —           —           1,934         1,934   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 292,388       $ 1,934       $ 294,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no liabilities measured at fair value on a recurring basis at March 31, 2013 or December 31, 2012.

The table below presents the changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2013.

 

Balance at December 31, 2012

   $ 1,934   

Change in unrealized gain

     16   
  

 

 

 

Balance at March 31, 2013

   $ 1,950   
  

 

 

 

Due to the lack of observable market data, corporate bonds were included in Level 3 of the fair value hierarchy. The fair value has been derived by third party pricing services using pricing models and techniques which require significant judgment and estimation. Pricing models and techniques are dependent upon several unobservable inputs including the discount rate, the interest rate environment, credit defaults and losses and financial performance.

There were no transfers in or out of levels 1 and 2.

 

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Table of Contents

The Company may be required, from time to time, to measure at fair value certain other assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs of individual assets. The following tables summarize the fair value hierarchy used to determine the adjustment and the carrying value of the related individual assets for the three and three months ended March 31, 2013 and 2012.

 

                          Three Months Ended
March 31, 2013
 
     At March 31, 2013      Total
Gains/(Losses)
 
     Level 1      Level 2      Level 3     

Assets:

           

Loans

   $ —         $ —         $ 680       $ (485

Other real estate owned

     —           —           177         (19
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ —         $ 857       $ (504
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ended
March 31, 2012
 
     At March 31, 2012      Total
Gains/(Losses)
 
     Level 1      Level 2      Level 3     

Assets:

           

Loans

   $ —         $ —         $ 1,015       $ (214

Other real estate owned

     —           —           790         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ —         $ 1,805       $ (214
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of loans represents the carrying value of impaired loans net of related write-downs and valuation allowances for which adjustments are based on the estimated fair value of the underlying collateral. The other real estate owned amount represents the carrying value for which adjustments are also based on the estimated fair value of the property.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a market may not readily exist for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:

Cash and Cash Equivalents and Short-term Investments. The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Investment Securities and FHLBB Stock. The fair value of securities to be held to maturity and securities available for sale is estimated based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Ownership of Federal Home Loan Bank of Boston (“FHLBB”) stock is restricted to member banks; therefore, the stock is not traded. The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.

 

22


Table of Contents

Loans. For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential mortgage, commercial real estate, commercial and industrial, construction and consumer loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using assumptions developed by management and a valuation model provided by a third party specialist.

The fair values of residential mortgage, commercial real estate, commercial and industrial, construction and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans Held for Sale. Fair values are based on commitments in effect from investors or prevailing market rates.

Deposits. The fair value of deposits with no stated maturity, such as demand deposits, NOW, regular savings, and money market deposit accounts, is equal to the amount payable on demand. The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The fair value estimate of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits having similar remaining maturities.

Short-term Borrowings. For short-term borrowings maturing within one year, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Long-term Debt. The fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Repurchase Agreements. The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.

Subordinated Debentures. The Company has outstanding subordinated debt in the form of trust preferred securities issued through a private placement offering. The fair value estimate is determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities.

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note I, the fair value equals the carrying amounts which are not significant.

Summary of Fair Values of Financial Instruments. 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 disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

 

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The fair value of the Company’s financial instruments is as follows at dates indicated:

 

     At March 31, 2013  
     Carrying
Value
     Level 1      Level 2      Level 3      Estimated
Fair Value
 

Financial Assets:

              

Cash and cash equivalents

   $ 56,312       $ 56,312       $ —         $ —         $ 56,312   

Securities available for sale

     282,897         —           280,947         1,950         282,897   

Securities held to maturity

     76,107         —           78,554         —           78,554   

Stock in Federal Home Loan Bank of Boston

     17,334         —           —           17,334         17,334   

Net loans and loans held for sale

     1,831,108         —           —           1,857,968         1,857,968   

Financial Liabilities:

              

Deposits (with no stated maturity)

     1,162,480         —           —           1,162,480         1,162,480   

Time deposits

     732,138         —           —           738,481         738,481   

Federal Home Loan Bank of Boston advances

     134,856         —           —           138,232         138,232   

Repurchase agreements

     63,752         —           —           64,856         64,856   

Subordinated debentures

     5,653         —           5,653         —           5,653   

 

     At December 31, 2012  
     Carrying
Value
     Level 1      Level 2      Level 3      Estimated
Fair Value
 

Financial Assets:

              

Cash and cash equivalents

   $ 30,679       $ 30,679       $ —         $ —         $ 30,679   

Securities available for sale

     294,322         —           292,388         1,934         294,322   

Securities held to maturity

     82,986         —           85,674         —           85,674   

Stock in Federal Home Loan Bank of Boston

     18,554         —           —           18,554         18,554   

Net loans and loans held for sale

     1,808,033         —           —           1,846,519         1,846,519   

Financial Liabilities:

              

Deposits (with no stated maturity)

     1,140,766         —           —           1,140,766         1,140,766   

Time deposits

     707,409         —           —           711,845         711,845   

Federal Home Loan Bank of Boston advances

     141,525         —           —           145,543         145,543   

Repurchase agreements

     69,229         —           —           70,082         70,082   

Subordinated debentures

     9,630         —           9,630         —           9,630   

NOTE L – PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company maintains a Senior Executive Retirement Plan (“SERP”) and a Director Retirement Plan. These plans had no assets at March 31, 2013 and 2012. The following table presents the components of the net periodic benefit cost for the indicated periods:

 

     For the Three Months Ended
March 31,
 
     2013      2012  
     SERP      Director
Retirement
Plan
     SERP      Director
Retirement
Plan
 

Periodic benefit cost:

           

Service cost

   $ 100       $ 14       $ 79       $ 23   

Interest cost

     47         11         44         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension cost

     147         25         123         37   

Prior service cost amortization

     50         11         29         9   

Net loss amortization

     —           12         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 197       $ 48       $ 152       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefits expected to be paid over the next five years as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 have not changed. These plans are funded on a pay-as-you-go-basis and the Company does not expect to make any contributions to these plans in 2013.

 

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Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, future strategies, technological developments, new products, and similar matters. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes factors that could cause the Company’s actual results to differ materially from the anticipated results expressed in the Company’s forward-looking statements. Factors that may cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, general economic conditions, changes in market interest rates and real estate values, changes in the size, composition or risks in the loan and securities portfolios, loan or deposit demand, changes in asset quality, including levels of delinquent, classified and charged-off loans, legislative, accounting or regulatory changes, and significant increases in competitive pressures. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 under “Item 1A. Risk Factors”. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets increased $26.9 million, or 1.1%, to $2.43 billion at March 31, 2013 from $2.40 billion at December 31, 2012 reflecting growth in net loans and interest-bearing deposits, partially offset by decreases in securities available for sale and held to maturity investment securities. Net loans increased $22.8 million, or 1.3%, to $1.83 billion at March 31, 2013 from $1.81 billion at December 31, 2012 due to growth of $11.0 million, or 20.9%, in construction loans, $10.0 million, or 1.2%, in commercial mortgages and $7.3 million, or 2.4%, in commercial and industrial loans, as a result of successful business development efforts and competitive products and pricing. These increases were offset by decreases in home equity loans of $2.9 million, or 1.6%, and residential mortgages of $1.2 million, or 0.3%. Home equity loan balances declined due to the decreased usage of existing home equity lines. The decrease in residential mortgages is primarily due to payments and $3.8 million in sales of 30-year fixed rate loan originations, offset by originations of 10- and 15-year fixed rate loans. Interest-bearing deposits increased $30.3 million primarily reflecting excess cash on deposit at the Federal Reserve Bank. Securities available for sale decreased $11.4 million, or 3.9%, to $282.9 million at March 31, 2013 from $294.3 million at December 31, 2012 primarily due to repayments of government-sponsored agency debt and mortgage-backed securities of $23.5 million, partially offset by purchases of fixed- and variable-rate agency mortgage-backed securities totaling $16.6 million. Securities held to maturity decreased $6.9 million, or 8.3%, to $76.1 million at March 31, 2013 from $83.0 million at December 31, 2012 as a result of repayments of government-sponsored agency debt and mortgage-backed securities.

Total deposits increased $46.4 million, or 2.5%, to $1.89 billion at March 31, 2013 compared to $1.85 billion at December 31, 2012 reflecting growth of $21.7 million, or 1.9%, in core account balances and an increase of $24.7 million, or 3.5%, in certificates of deposit. Core deposit balances were $1.16 billion, or 61.4% of total deposits, at March 31, 2013 compared to $1.14 billion, or 61.7% of total deposits, at December 31, 2012. The growth in core deposit account balances was driven by sales and marketing initiatives, competitive products and pricing, attention to excellence in customer service and targeted promotional activities. The increase in certificates of deposit is attributable to the purchase of $20.0 million in brokered CDs with a weighted average rate of 0.30% and a maturity of three months. Short-term borrowings decreased $12.6 million, or 15.9%, to $66.7 million at March 31, 2013 from $79.2 million at December 31, 2012 mainly due to a decrease in overnight customer repurchase agreements. Total subordinated debentures decreased $4.0

 

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Table of Contents

million, or 41.3%, to $5.7 million at March 31, 2013 as a result of the full redemption of callable debt instruments previously issued by New England Bancshares, Inc. At March 31, 2013, the Company continued to have considerable liquidity including significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank of Boston and access to funding through the repurchase agreement and brokered deposit markets.

Total stockholders’ equity decreased $834,000, or 0.3%, to $306.4 million at March 31, 2013 from $307.2 million at December 31, 2012 as a result of repurchases of common stock totaling $3.0 million, cash dividend payments amounting to $2.0 million and $852,000 in other comprehensive loss, partially offset by net income of $4.7 million.

Credit Quality and Reserve Coverage

The Company actively manages credit risk through its underwriting practices, loan review activities and collection operations, and does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alternative-A-paper borrowers. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. Non-accrual loans totaled $14.2 million, or 0.77% of total loans, at March 31, 2013 compared to $14.7 million, or 0.81% of total loans, at December 31, 2012. Classified loans, which are loans that are of lesser quality and are reported as special mention, substandard, doubtful or loss, increased $2.3 million, or 2.5%, to $95.2 million at March 31, 2013 compared to $92.9 million at December 31, 2012, primarily due to an increase in classified commercial and industrial and construction loans. Other real estate owned totaled $1.4 million at March 31, 2013 and includes three properties with a book balance of $359,000 that are under contract to sell. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At March 31, 2013, the ratio of the allowance for loan losses to total loans was 0.69% compared to 0.67% at December 31, 2012. Excluding the impact of acquired loans totaling $616.2 million at March 31, 2013 and $664.6 million at December 31, 2012, the ratio of the allowance for loan losses to total loans would have been 1.04% at March 31, 2013 and 1.05% at December 31, 2012. Net charge-offs totaled $343,000, or 0.07% of average loans outstanding on an annualized basis, for the three months ended March 31, 2013 as compared to net charge-offs of $457,000, or 0.16% of average loans outstanding on an annualized basis, for the same period in 2012. Net charge-offs in both periods consisted primarily of commercial loans. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for disclosures about the allowance for loan losses.

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income earned on interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, FHLBB advances and repurchase agreements.

Our results of operations also are affected by provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of deposit account fees, wealth management fees, increases in the cash surrender value of bank-owned life insurance, gains on sale of loans and securities and miscellaneous other income. Non-interest expense consists primarily of salaries and benefits, occupancy, marketing, data processing, professional fees, FDIC insurance assessments, low income housing tax credit fund and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

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Table of Contents

Net Income. Net income increased $1.9 million, or 65.0%, to $4.7 million for the first quarter of 2013 compared to net income of $2.8 million for the same period in 2012. Excluding branch closing costs totaling $510,000 ($302,000 net of tax benefit) and acquisition related expenses of $158,000 ($152,000 net of tax benefit) resulting from the Company’s acquisition of New England Bancshares, Inc. (“NEBS”) in November 2012, net income would have increased by $2.3 million, or 80.9%, to $5.2 million for the first quarter of 2013. The improved quarterly operating results were largely due to growth in net interest income of $7.4 million, driven by net interest margin expansion and an increase in average interest earning assets and, to a lesser extent, an increase in non-interest income. These positive results were offset in part by increases of $4.6 million in non-interest expense and $300,000 in provision for loan losses. Diluted earnings per share increased $0.04, or 21.1%, to $0.23 for the three months ended March 31, 2013 compared to $0.19 for the same period last year due to improved earnings, offset in part by an increase in weighted average shares outstanding. Total diluted weighted average shares increased by 5.3 million shares for the three months ended March 31, 2013 compared to the same period in 2012 due to the issuance of shares for the acquisition of NEBS, partially offset by the repurchase of shares under the Company’s current stock repurchase plan. Excluding the after tax impact of branch closing costs and acquisition related expenses, diluted earnings per share would have increased $0.06, or 32%, to $0.25 for the three months ended March 31, 2013 compared to the same period in 2012.

 

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Table of Contents

Average Balances and Yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.

 

     Three Months Ended March 31,  
     2013     2012  
     Average
Balance
     Interest
and
Dividends
     Yield/
Cost
    Average
Balance
     Interest
and
Dividends
     Yield/
Cost
 
     (Dollars in thousands)  

Interest-earning assets:

                

Loans:

                

Residential real estate(1)

   $ 445,630       $ 4,217         3.79   $ 315,439       $ 3,712         4.71

Commercial real estate

     864,727         11,692         5.41     491,552         6,943         5.65

Home equity

     178,172         1,494         3.35     135,891         1,231         3.62

Commercial and industrial

     319,971         4,329         5.41     175,687         1,993         4.54

Consumer and other

     22,120         324         5.86     14,974         196         5.24
  

 

 

    

 

 

      

 

 

    

 

 

    

Total loans(2)

     1,830,620         22,056         4.82     1,133,543         14,075         4.97

Investment securities

     365,237         2,313         2.53     338,405         2,855         3.37

Other interest-earning assets

     21,985         18         0.33     54,067         41         0.30
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     2,217,842         24,387         4.40     1,526,015         16,971         4.45

Noninterest-earning assets(3)

     179,185              102,056         
  

 

 

         

 

 

       

Total assets

   $ 2,397,027            $ 1,628,071         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings accounts

   $ 350,418         335         0.38   $ 254,668         368         0.58

Money market accounts

     406,860         393         0.39     303,684         442         0.58

NOW accounts

     79,082         90         0.46     48,478         40         0.33

Certificates of deposit

     715,763         1,985         1.11     418,420         1,903         1.82
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     1,552,123         2,803         0.72     1,025,250         2,753         1.07

FHLBB advances

     136,627         792         2.32     105,302         822         3.12

Other interest-bearing liabilities

     82,224         299         1.45     51,899         296         2.28
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,770,974         3,894         0.88     1,182,451         3,871         1.31

Demand deposits

     302,851              206,035         

Other noninterest-bearing liabilities

     16,649              11,731         
  

 

 

         

 

 

       

Total liabilities

     2,090,474              1,400,217         

Stockholders’ equity

     306,553              227,854         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 2,397,027            $ 1,628,071         
  

 

 

         

 

 

       

Net interest income

      $ 20,493            $ 13,100      
     

 

 

         

 

 

    

Interest rate spread(4)

           3.52           3.14

Net interest-earning assets(5)

   $ 446,868            $ 343,564         
  

 

 

         

 

 

       

Net interest margin(6)

           3.70           3.43

Average interest-earning assets to average interest-bearing liabilities

           125.23           129.06

 

(1) Includes loans held for sale.
(2) Loans, including non-accrual loans, are net of deferred loan origination costs and advanced funds.
(3) Includes bank-owned life insurance, the income on which is classified as non-interest income.
(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to 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 March 31,  
     2013 vs. 2012  
     Increase (Decrease) Due to        
     Volume     Rate     Net  
     (In thousands)  

Interest-earning assets:

      

Loans:

      

Residential real estate(1)

   $ 1,329      $ (824   $ 505   

Commercial real estate

     5,058        (309     4,749   

Home equity

     360        (97     263   

Commercial and industrial

     1,892        444        2,336   

Consumer and other

     103        25        128   
  

 

 

   

 

 

   

 

 

 

Total loans

     8,742        (761     7,981   

Investment securities

     213        (755     (542

Other interest-earning assets

     (26     3        (23
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     8,929        (1,513     7,416   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings accounts

     113