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EX-31.1 - EXHIBIT 31.1 - Hampden Bancorp, Inc.hbnk_ex311-20141231.htm
EX-31.2 - EXHIBIT 31.2 - Hampden Bancorp, Inc.hbnk_ex312-20141231.htm
EX-32.0 - EXHIBIT 32.0 - Hampden Bancorp, Inc.hbnk_ex320-20141231.htm
EXCEL - IDEA: XBRL DOCUMENT - Hampden Bancorp, Inc.Financial_Report.xls
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER: 333-137359
HAMPDEN BANCORP, INC.
(Exact name of registrant as specified in its charter)

 
 
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
20-5714154
(IRS Employer Identification No.)

19 Harrison Ave.
Springfield, Massachusetts 01102
(Address of principal executive offices) (Zip Code)

(413) 736-1812
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o      Accelerated Filer þ     
Non-accelerated filer o Smaller reporting company o      
(Do not check if a smaller reporting company)

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

As of February 4, 2015 there were 5,554,440 shares of the registrant’s common stock outstanding.





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

 
 
 
Page No.

PART I - FINANCIAL INFORMATION
 
 
 
Financial Statements of Hampden Bancorp, Inc. and Subsidiaries
 
 
Consolidated Balance Sheets (unaudited) as of December 31, 2014 and June 30, 2014
3

 
Consolidated Statements of Net Income (unaudited) for the three and six months ended December 31, 2014 and 2013
4

 
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended December 31, 2014 and 2013
5

 
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended December 31, 2014 and 2013
6

 
Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2014 and 2013
7-8

 
Notes to Unaudited Consolidated Financial Statements
9

Management’s Discussion and Analysis of Financial Condition and Results of Operations
26

Quantitative and Qualitative Disclosures About Market Risks
39

Controls and Procedures
39

 
PART II - OTHER INFORMATION
Legal Proceedings
40

Risk Factors
40

Unregistered Sales of Equity Securities and Use of Proceeds
40

Defaults Upon Senior Securities
41

Mine Safety Disclosures
41

Item 5.
Other Information
41

Item 6.
Exhibits
41

SIGNATURES
42





PART 1 - FINANCIAL INFORMATION

Item I: Financial Statements of Hampden Bancorp, Inc. and Subsidiaries

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
ASSETS
 
December 31,
 
June 30,
 
2014
 
2014
Cash and due from banks
$
9,234

 
$
9,437

Federal funds sold and other short-term investments
14,567

 
3,230

Cash and cash equivalents
23,801

 
12,667

 
 
 
 
Securities available for sale, at fair value
130,844

 
133,936

Securities held to maturity, at cost
7,371

 
9,302

Federal Home Loan Bank of Boston stock, at cost
6,949

 
6,648

Loans held for sale
1,281

 
330

Loans, net of allowance for loan losses of $5,794 at December 31, 2014 and $5,651 at June 30, 2014
509,845

 
507,635

Other real estate owned
502

 
309

Premises and equipment, net
4,591

 
4,668

Accrued interest receivable
1,708

 
1,688

Deferred tax asset, net
4,156

 
4,182

Bank-owned life insurance
17,708

 
17,459

Other assets
2,345

 
2,673

  Total assets
$
711,101

 
$
701,497

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
$
406,262

 
$
407,508

Non-interest bearing deposits
82,630

 
84,224

                 Total deposits
488,892

 
491,732

 
 
 
 
Short-term borrowings
12,000

 
4,000

Long-term debt
118,803

 
112,446

Mortgagors' escrow accounts
1,176

 
1,184

Accrued expenses and other liabilities
4,508

 
4,976

Total liabilities
625,379

 
614,338

Commitments and contingencies (Notes 1 and 5)


 


Preferred stock ($.01 par value, 5,000,000 shares authorized, none issued or outstanding)

 

Common stock ($.01 par value, 25,000,000 shares authorized; 8,082,254 issued at December 31, 2014 and 8,034,027 issued at June 30, 2014; 5,541,004 outstanding at December 31, 2014 and 5,651,130 outstanding at June 30, 2014)
80

 
80

Additional paid-in capital
80,908

 
80,389

Unearned compensation - ESOP (296,798 shares unallocated at December 31, 2014 and 317,998 shares unallocated at June 30, 2014)
(2,968
)
 
(3,180
)
Unearned compensation - equity incentive plan
(5
)
 
(8
)
Retained earnings
38,201

 
37,697

Accumulated other comprehensive income
181

 
158

Treasury stock, at cost (2,541,250 shares at December 31, 2014 and 2,382,897 shares at June 30, 2014)
(30,675
)
 
(27,977
)
Total stockholders' equity
85,722

 
87,159

                 Total liabilities and stockholders' equity
$
711,101

 
$
701,497


See accompanying notes to unaudited consolidated financial statements.

3

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(Dollars in thousands, except per share data)
(Unaudited)


 
Three Months Ended 
 December 31,
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Interest and dividend income:
 
 
 
 
 
 
 
Loans, including fees
$
5,810

 
$
5,728

 
$
11,734

 
$
11,237

Debt securities:
 
 
 
 
 
 
 
     Taxable
618

 
673

 
1,254

 
1,291

     Tax-exempt
24

 
12

 
49

 
17

Dividends
26

 
6

 
52

 
10

Federal funds sold and other short-term investments
8

 
9

 
12

 
22

Total interest and dividend income
6,486

 
6,428

 
13,101

 
12,577

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
Deposits
726

 
745

 
1,458

 
1,547

Borrowings:
 
 
 
 
 
 
 
     Short-term
11

 
10

 
23

 
19

     Long-term
544

 
576

 
1,084

 
1,026

Total interest expense
1,281

 
1,331

 
2,565

 
2,592

 
 
 
 
 
 
 
 
Net interest income
5,205

 
5,097

 
10,536

 
9,985

Provision for loan losses

 
150

 
150

 
250

Net interest income, after provision for loan losses
5,205

 
4,947

 
10,386

 
9,735

 
 
 
 
 
 
 
 
Non-interest income:
 

 
 

 
 
 
 
Customer service fees
545

 
560

 
1,095

 
1,130

Gain on sales of loans, net
103

 
100

 
219

 
185

Increase in cash surrender value of bank-owned life insurance
124

 
129

 
249

 
260

Other
84

 
122

 
263

 
439

Total non-interest income
856

 
911

 
1,826

 
2,014

 
 
 
 
 
 
 
 
Non-interest expense:
 

 
 

 
 
 
 
Salaries and employee benefits
2,485

 
2,278

 
4,968

 
4,499

Occupancy and equipment
444

 
467

 
884

 
930

Data processing services
255

 
212

 
530

 
414

Advertising
183

 
112

 
265

 
256

Net (gain) loss on other real estate owned
9

 
15

 
(36
)
 
19

FDIC insurance and assessment
98

 
99

 
188

 
196

Professional fees
1,462

 
590

 
1,818

 
950

Other general and administrative
596

 
487

 
1,236

 
1,001

Total non-interest expense
5,532

 
4,260

 
9,853

 
8,265

 
 
 
 
 
 
 
 
Income before income taxes
529

 
1,598

 
2,359

 
3,484

Income tax provision
359

 
577

 
1,017

 
1,256

Net income
$
170

 
$
1,021

 
$
1,342

 
$
2,228

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
0.03

 
$
0.19

 
$
0.26

 
$
0.42

Diluted
$
0.03

 
$
0.19

 
$
0.25

 
$
0.41

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
5,209,693

 
5,300,289

 
5,262,145

 
5,287,594

Diluted
5,343,116

 
5,443,078

 
5,392,725

 
5,422,530


See accompanying notes to unaudited consolidated financial statements.

4

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)




 
Three Months Ended 
 December 31,
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
170

 
$
1,021

 
$
1,342

 
$
2,228

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities
439

 
(411
)
 
49

 
(1,404
)
Tax effect
158

 
(148
)
 
26

 
(506
)
Other comprehensive income (loss), net-of-tax
281

 
(263
)
 
23

 
(898
)
Comprehensive income
$
451

 
$
758

 
1,365

 
1,330


See accompanying notes to unaudited consolidated financial statements.


5

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
(Unaudited)


 
 
 
 
 
Additional
Paid-in
Capital
 
Unearned
Compensation-
ESOP
 
Unearned
Compensation-
Equity
Incentive Plan
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
Common Stock
 
 
 
 
Retained
Earnings
 
 
Treasury
Stock
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
Total
Balance at June 30, 2013
5,629,099

 
$
80

 
$
79,926

 
$
(3,604
)
 
$
(16
)
 
$
34,450

 
$
346

 
$
(27,523
)
 
$
83,659

Comprehensive income

 

 

 

 

 
2,228

 
(898
)
 

 
1,330

Issuance of common stock for exercise of stock options
37,631

 

 
163

 

 

 

 

 

 
163

Cash dividends paid ($0.12 per share)

 

 

 

 

 
(632
)
 

 

 
(632
)
Common stock repurchased
(17,882
)
 

 

 

 

 

 

 
(274
)
 
(274
)
Stock-based compensation

 

 
18

 

 
4

 

 

 

 
22

Tax benefit from Equity Incentive Plan vesting

 

 
1

 

 

 

 

 

 
1

ESOP shares allocated or committed to be allocated (21,200 shares)

 

 
133

 
212

 

 

 

 

 
345

Balance at December 31, 2013
5,648,848

 
$
80

 
$
80,241

 
$
(3,392
)
 
$
(12
)
 
$
36,046

 
$
(552
)
 
$
(27,797
)
 
$
84,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2014
5,651,130

 
$
80

 
$
80,389

 
$
(3,180
)
 
$
(8
)
 
$
37,697

 
$
158

 
$
(27,977
)
 
$
87,159

Comprehensive income

 

 

 

 

 
1,342

 
23

 

 
1,365

Issuance of common stock for exercise of stock options
48,227

 

 
327

 

 

 

 

 

 
327

Cash dividends paid ($0.16 per share)

 

 

 

 

 
(838
)
 

 

 
(838
)
Common stock repurchased
(158,353
)
 

 

 

 

 

 

 
(2,698
)
 
(2,698
)
Stock-based compensation

 

 
22

 

 
3

 

 

 

 
25

Tax benefit from Equity Incentive Plan vesting

 

 
1

 

 

 

 

 

 
1

ESOP shares allocated or committed to be allocated (21,200 shares)

 

 
169

 
212

 

 

 

 

 
381

Balance at December 31, 2014
5,541,004

 
$
80

 
$
80,908

 
$
(2,968
)
 
$
(5
)
 
$
38,201

 
$
181

 
$
(30,675
)
 
$
85,722


See accompanying notes to unaudited consolidated financial statements.

6


HAMPDEN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended 
 December 31,
 
2014
 
2013
Cash flows from operating activities:
 
Net income
$
1,342

 
$
2,228

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

 
 

Provision for loan losses
150

 
250

Changes in fair value of mortgage servicing rights
15

 
(68
)
Net amortization of securities premiums
153

 
221

Depreciation and amortization
389

 
353

Loans originated for sale
(13,793
)
 
(11,108
)
Proceeds from loan sales
13,061

 
11,914

Gain on sales of loans, net
(219
)
 
(185
)
Net (gain) loss on other real estate owned
(36
)
 
19

Increase in cash surrender value of bank-owned life insurance
(249
)
 
(260
)
Deferred tax provision

 
1

Employee Stock Ownership Plan expense
381

 
345

Stock-based compensation
25

 
22

Tax benefit from Equity Incentive Plan vesting
(1
)
 
(1
)
Net change in:
 

 
 

Accrued interest receivable
(20
)
 
(9
)
Other assets
313

 
(46
)
Accrued expenses and other liabilities
(468
)
 
(1,343
)
Net cash provided by operating activities
1,043

 
2,333

 
 
 
 
Cash flows from investing activities:
     Activity in available-for-sale securities:
 

 
 

Maturities and calls
5,505

 
800

Principal payments
13,301

 
16,612

Purchases
(13,887
)
 
(22,814
)
Purchase of loans
(1,905
)
 
(2,640
)
Net loan originations
(921
)
 
(44,529
)
Proceeds from sales of other real estate owned
309

 
389

Purchase of Federal Home Loan Bank stock
(301
)
 
(1,669
)
Purchase of premises and equipment
(311
)
 
(181
)
Net cash provided (used) by investing activities
1,790

 
(54,032
)
 
(continued)
 
See accompanying notes to unaudited consolidated financial statements.


7


HAMPDEN BANCORP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Concluded)
(In Thousands)
(Unaudited) 
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
 
Cash flows from financing activities:
 
 
 
Net change in deposits
(2,840
)
 
2,341

Net change in short-term borrowings
8,000

 
17,500

Proceeds from issuance of long-term debt
20,000

 
38,131

Repayment of long-term debt
(13,643
)
 
(16,249
)
Net change in mortgagors' escrow accounts
(8
)
 
42

Tax benefit from Equity Incentive Plan vesting
1

 
1

Issuance of common stock for exercise of stock options
327

 
163

Repurchase of common stock
(2,698
)
 
(274
)
Payment of dividends on common stock
(838
)
 
(632
)
Net cash provided by financing activities
8,301

 
41,023

 
 
 
 
Net change in cash and cash equivalents
11,134

 
(10,676
)
 
 
 
 
Cash and cash equivalents at beginning of period
12,667

 
25,618

 
 
 
 
Cash and cash equivalents at end of period
$
23,801

 
$
14,942

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid on deposits
$
1,458

 
$
1,547

Interest paid on borrowings
1,098

 
1,053

Income taxes paid
1,690

 
1,220

Transfers from loans to other real estate owned
466

 
461

 
See accompanying notes to unaudited consolidated financial statements.


8

HAMPDEN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. The results shown for the interim periods ended December 31, 2014 are not necessarily indicative of the results to be obtained for a full year. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2014 included in the Company’s most recent Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on September 12, 2014.

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

On November 3, 2014, the board of directors of the Company unanimously approved a merger agreement between the Company and Berkshire Hills Bancorp, Inc. ("Berkshire Hills"). The Company is holding a special meeting on Thursday, March 12, 2015 at 10:00 a.m., Eastern Time, at the Sheraton Springfield Monarch Place Hotel, Springfield, Massachusetts 01144, for its stockholders of record on January 29, 2015, to vote on the proposals necessary to complete the merger. If the merger agreement is approved and the merger is subsequently completed, the Company will merge with and into Berkshire Hills, the Company's separate corporate existence will thereupon cease and Berkshire Hills will continue as the surviving corporation. The expenses associated with this merger totaled $695,000 for the six months ended December 31, 2014.

Under the terms of the merger agreement, each outstanding share of the Company's common stock will be converted into the right to receive 0.81 shares of Berkshire Hills' common stock. Berkshire Hills' common stock is listed on the New York Stock Exchange under the symbol ‘‘BHLB.’’ Completion of the merger is subject to the receipt of regulatory approvals and the approval of the stockholders of the Company, as well as customary conditions.

2. Recent Accounting Pronouncements

     In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU was issued to clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the ASU amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and the ASU is to be adopted using either a modified retrospective transition method or a prospective transition method. The Company does not believe this ASU will have a material effect on the Company's consolidated financial statements for the interim and annual periods other than the additional disclosures required.


9



3. Earnings Per Share
    
Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock) were issued during the period. Unallocated common shares held by the ESOP are shown as a reduction in stockholders' equity and are included in the weighted-average number of common shares outstanding for both basic and diluted EPS calculations as they are committed to be released.

Earnings per common share have been computed based upon the following:
 
 
Three Months Ended December 31,
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
Net income available to common stock (in thousands)
$
170

 
$
1,021

 
$
1,342

 
$
2,228

 
 
 
 
 
 
 
 
Average number of shares issued
8,052,517

 
8,020,607

 
8,043,998

 
8,012,352

Less: average unallocated ESOP shares
(303,763
)
 
(346,159
)
 
(309,081
)
 
(351,477
)
Less: average treasury stock
(2,537,261
)
 
(2,371,759
)
 
(2,470,851
)
 
(2,370,760
)
Less: average unvested restricted stock awards
(1,800
)
 
(2,400
)
 
(1,921
)
 
(2,521
)
Average number of basic shares outstanding
5,209,693

 
5,300,289

 
5,262,145

 
5,287,594

 
 
 
 
 
 
 
 
Plus: dilutive unvested restricted stock awards
1,269

 
1,380

 
1,329

 
1,427

Plus: dilutive stock option shares
132,154

 
141,409

 
129,251

 
133,509

Average number of diluted shares outstanding
5,343,116

 
5,443,078

 
5,392,725

 
5,422,530

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.03

 
$
0.19

 
$
0.26

 
$
0.42

Diluted earnings per share
$
0.03

 
$
0.19

 
$
0.25

 
$
0.41

 
4. Dividends
    
     On November 4, 2014, the Company declared a cash dividend of $0.08 per common share which was paid on November 28, 2014 to stockholders of record as of the close of business on November 14, 2014.

On February 3, 2014, the Company announced that its Board of Directors had declared a cash dividend of $0.08 per common share. The dividend will be paid on February 27, 2014 to shareholders of record as of February 13, 2014.

5.   Loan Commitments
 
Outstanding loan commitments totaled $124.6 million at December 31, 2014 and $134.1 million at June 30, 2014. Loan commitments primarily consist of commitments to originate new loans as well as the outstanding unused portions of home equity, business and other lines of credit, and unused portions of construction loans.
 









10



6. Fair Value of Assets and Liabilities
 
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1:
  
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
 
 
Level 2:
  
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; and quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology are derived principally from or can be corroborated by observable market data by correlation or other means.
 
 
Level 3:
  
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Where assets or liabilities are measured at fair value, transfers between levels are recognized at the end of the reporting period, if applicable.
 
Methods and assumptions for valuing the Company’s financial instruments are set forth below. Estimated fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction costs.
 
Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.
     
Securities: The securities measured at fair value utilizing Level 1 and Level 2 inputs are government-sponsored enterprises, corporate bonds and other obligations, mortgage-backed securities and common stocks. The fair values used by the Company are obtained from an independent pricing service which are not adjusted by management and, represents either quoted market prices for identical securities, quoted market prices for comparable securities or fair values determined by pricing models that consider observable market data, such as interest rate volatilities, credit spreads and prices from market makers and live trading systems and other market indicators, industry and economic events. Municipal securities are valued utilizing Level 3 inputs. Since there is no readily available market pricing and no active market to sell these securities, management believes that the amortized cost of these securities approximates fair value based on their relatively short terms to maturity.
 
Federal Home Loan Bank of Boston ("FHLB") stock: The carrying amount of FHLB stock approximates fair value based upon the redemption provisions of the FHLB.
 
Loans held for sale: Fair value of loans held for sale are estimated based on commitments on hand from investors or prevailing market prices.

Loans: Fair values for loans are estimated using discounted cash flow analysis, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. This analysis assumes no prepayment. Fair values for non-performing loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Mortgage servicing rights: Mortgage servicing rights (“MSR”) are the rights of a mortgage servicer to collect mortgage payments and forward them, after deducting a fee, to the mortgage lender. The fair value of servicing rights is estimated using a present value cash flow model. The fair value of MSR is highly sensitive to changes in assumptions. Changes in prepayment speed assumptions generally have the most significant impact on the fair value of our MSR. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of MSR. As interest rates rise, mortgage loan prepayments slow down, which results in an increase in the fair value of MSR. Thus, any measurement of the fair value of our MSR is limited by the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different point in time.
 

11


Deposits and mortgage escrow accounts: The fair values for non-certificate accounts and mortgage escrow accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificate accounts are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
Short-term borrowings: The carrying amount of short-term borrowings approximates fair value.
 
Long-term debt: The fair values of the Company's advances are estimated using discounted cash flow analysis based on current market borrowing rates for similar types of borrowing arrangements.

Accrued interest: The carrying amounts of accrued interest approximate fair value.
 
Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of off-balance sheet financial instruments at December 31, 2014 and June 30, 2014 were not material.

The Company does not measure any liabilities at fair value on either a recurring or non-recurring basis.

The following table presents the balances of assets measured at fair value on a recurring basis as of December 31, 2014 and June 30, 2014:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2014
 
(In Thousands)
Securities available for sale:
 
 
 
 
 
 
 
 
    Debt securities
 
$

 
$
130,765

 
$

 
$
130,765

    Marketable equity securities
 
79

 

 

 
79

Mortgage servicing rights
 

 

 
856

 
856

Total
 
$
79

 
$
130,765

 
$
856

 
$
131,700

 
 
 
 
 
 
 
 
 
June 30, 2014
 
 

 
 

 
 

 
 

Securities available for sale:
 
 
 
 
 
 
 
 
    Debt securities
 
$

 
$
133,857

 
$

 
$
133,857

    Marketable equity securities
 
79

 

 

 
79

Mortgage servicing rights
 

 

 
792

 
792

Total
 
$
79

 
$
133,857

 
$
792

 
$
134,728

 
The table below presents, for the three and six months ended December 31, 2014 and 2013, the changes in Level 3 assets that are measured at fair value on a recurring basis:
 
 
Mortgage Servicing Rights
 
Three Months Ended 
 December 31,
 
Six Months Ended 
 December 31,
 
2014
 
2013
 
2014
 
2013
 
(In Thousands)
Beginning balance
$
870

 
$
830

 
$
792

 
$
654

   Changes in fair value
(53
)
 
(76
)
 
(15
)
 
68

   Capitalized servicing assets
39

 
29

 
79

 
61

   Transfers in and/or out of Level 3

 

 

 

Ending balance
$
856

 
$
783

 
$
856

 
$
783

 


12


Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the carrying value of the related individual assets as of December 31, 2014 and June 30, 2014, all classified in Level 3 fair value hierarchy:
 
 
December 31,
 
June 30,
 
2014
 
2014
 
(In Thousands)
Impaired loans
$
455

 
$
461

Other real estate owned ("OREO")
502

 
309

Total
$
957

 
$
770

 
During the six months ended December 31, 2014 and 2013 there were no transfers between Levels 1, 2, or 3.

The amount of impaired loans represents the carrying value of loans that include adjustments which are based on the estimated fair value of the underlying collateral. The fair value of collateral used by the Company represents the current tax assessed value, discounted by 20%. This data includes information such as selling price of similar properties, expected future cash flows or earnings of the subject property based on current market expectations, as well as relevant legal, physical and economic factors. If the impaired loan is being actively marketed, the Company uses the realtor’s market analysis or listing price discounted by 10% and less 5% for realtor commission, instead of the tax assessment. The Company had a $592,000 and a $641,000 loss on impaired loans for the three and six months ended December 31, 2014, respectively. There was no gain or loss for the three and six months ended December 31, 2013. Any resulting losses are recognized in earnings through the provision for loan losses. The Company charges off any collateral shortfall on collateral dependent impaired loans.
 
The Company classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as OREO in its consolidated financial statements. When property is placed into OREO, it is recorded at the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management, or its designee, inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. The Company had a $9,000 loss on OREO for the three months ended December 31, 2014 and a $36,000 gain on OREO for the six months ended December 31, 2014. The Company had a $15,000 and a $19,000 loss on OREO for the three and six months ended December 31, 2013, respectively.

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.















13


The carrying amounts and related estimated fair values of the Company's financial instruments are as follows. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
  
 
 
Carrying
Amount
 
  Fair Value
December 31, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In Thousands)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
23,801

 
$
23,801

 
$

 
$

 
$
23,801

Securities available for sale
 
130,844

 
79

 
130,765

 

 
130,844

Securities held to maturity
 
7,371

 

 

 
7,371

 
7,371

Federal Home Loan Bank stock
 
6,949

 

 

 
6,949

 
6,949

Loans held for sale
 
1,281

 

 
1,281

 

 
1,281

Loans, net
 
509,845

 

 

 
516,233

 
516,233

Accrued interest receivable
 
1,708

 

 

 
1,708

 
1,708

Mortgage servicing rights (1)
 
856

 

 

 
856

 
856

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 
Deposits
 
488,892

 

 

 
496,672

 
496,672

Short-term borrowings
 
12,000

 

 
12,000

 

 
12,000

Long-term debt
 
118,803

 

 
120,144

 

 
120,144

Mortgagors' escrow accounts
 
1,176

 

 

 
1,176

 
1,176

 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 

 
 

 
 

 
 

 
 
Financial assets:
 
 

 
 

 
 

 
 

 
 
Cash and cash equivalents
 
$
12,667

 
$
12,667

 
$

 
$

 
$
12,667

Securities available for sale
 
133,936

 
79

 
133,857

 

 
133,936

Securities held to maturity
 
9,302

 

 

 
9,302

 
9,302

Federal Home Loan Bank stock
 
6,648

 

 

 
6,648

 
6,648

Loans held for sale
 
330

 

 
330

 

 
330

Loans, net
 
507,635

 

 

 
513,765

 
513,765

Accrued interest receivable
 
1,688

 

 

 
1,688

 
1,688

Mortgage servicing rights (1)
 
792

 

 

 
792

 
792

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 
Deposits
 
491,732

 

 

 
493,500

 
493,500

Short-term borrowings
 
4,000

 

 
4,000

 

 
4,000

Long-term debt
 
112,446

 

 
113,823

 

 
113,823

Mortgagors' escrow accounts
 
1,184

 

 

 
1,184

 
1,184

 (1) Included in other assets

14


7. Investment Securities

The amortized cost and estimated fair value of the Company's investment securities, with gross unrealized gains and losses, follows:
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In Thousands)
Available for Sale
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Corporate bonds
$
3,021

 
$
38

 
$

 
$
3,059

Residential mortgage-backed securities:
 
 
 

 
 

 
 

Agency
125,977

 
1,561

 
(1,343
)
 
126,195

Non-agency
1,513

 
6

 
(8
)
 
1,511

Total debt securities
130,511

 
1,605

 
(1,351
)
 
130,765

Marketable equity securities
51

 
28

 

 
79

Total securities available for sale
$
130,562

 
$
1,633

 
$
(1,351
)
 
$
130,844

 
 
 
 
 
 
 
 
Held to Maturity
 
 
 
 
 
 
 
Municipal bonds
$
7,371

 
$

 
$

 
$
7,371

Total securities held to maturity
$
7,371

 
$

 
$

 
$
7,371

 
June 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In Thousands)
Available for Sale
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Corporate bonds
$
3,026

 
$
60

 
$

 
$
3,086

Residential mortgage-backed securities:
 
 
 

 
 

 
 

Agency
128,938

 
1,629

 
(1,494
)
 
129,073

Non-agency
1,688

 
15

 
(5
)
 
1,698

Total debt securities
133,652

 
1,704

 
(1,499
)
 
133,857

Marketable equity securities
51

 
28

 

 
79

Total securities available for sale
$
133,703

 
$
1,732

 
$
(1,499
)
 
$
133,936

 
 
 
 
 
 
 
 
Held to Maturity
 
 
 
 
 
 
 
Municipal bonds
$
9,302

 
$

 
$

 
$
9,302

Total securities held to maturity
$
9,302

 
$

 
$

 
$
9,302

 
Residential mortgage-backed agency securities are mortgage-backed securities that have been issued by the federal government or its agencies or government-sponsored enterprises. Residential mortgage-backed non-agency securities are mortgage-backed securities that have been issued by private mortgage originators.
 







15


The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2014 are set forth below. Expected maturities will differ from contractual maturities because the issuer may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Securities Available for Sale
 
Securities Held to Maturity
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In Thousands)
Within 1 year
$
999

 
$
1,004

 
$
4,697

 
$
4,697

After 1 year but within 5 years
2,022

 
2,055

 
1,742

 
1,742

After 5 years but within 10 years

 

 
932

 
932

Total bonds, obligations, and municipals
3,021

 
3,059

 
7,371

 
7,371

Residential mortgage-backed securities:
 
 
 

 
 
 
 
Agency
125,977

 
126,195

 

 

Non-agency
1,513

 
1,511

 

 

Total debt securities
$
130,511

 
$
130,765

 
$
7,371

 
$
7,371

 
Information pertaining to securities with gross unrealized losses at December 31, 2014 and June 30, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:
 
Less Than Twelve Months
 
Over Twelve Months
 
Total
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
(In Thousands)
December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
$

 
$

 
$
1,343

 
$
67,249

 
$
1,343

 
$
67,249

Non-agency

 

 
8

 
818

 
8

 
818

 
$

 
$

 
$
1,351

 
$
68,067

 
$
1,351

 
$
68,067

June 30, 2014:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities:
 
 
 

 
 

 
 

 
 

 
 

Agency
$
38

 
$
7,357

 
$
1,456

 
$
51,094

 
$
1,494

 
$
58,451

Non-agency
1

 
143

 
4

 
234

 
5

 
377

 
$
39

 
$
7,500

 
$
1,460

 
$
51,328

 
$
1,499

 
$
58,828

 
Management conducts, at least on a quarterly basis, a review of our investment securities to determine if the value of any security has declined below its cost or amortized cost and whether such decline represents other-than-temporary impairment (“OTTI”). There was no impairment charge recognized for the six months ended December 31, 2014 and 2013.

     At December 31, 2014, 52 debt securities had unrealized losses with an aggregate depreciation of 2.0% from the Company's amortized cost basis. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government, its agencies or government-sponsored enterprises, whether downgrades by bond rating agencies have occurred, and industry analysts' reports. The unrealized losses in residential mortgage-backed securities were primarily caused by interest rate changes. As management has not decided to sell these securities, nor is it likely that the Company will be required to sell these securities, no declines are deemed to be other than temporary. At December 31, 2014, ten securities issued by private mortgage originators had unrealized losses. Such securities had an amortized cost of $826,000 and a fair value of $818,000. All of these investments are “Senior” Class tranches and have underlying credit enhancement. These securities were originated in the period 2002-2005 and are performing in accordance with contractual terms. Management estimates the loss projections for each security by evaluating the industry rating, amount of delinquencies, amount of foreclosure, amount of other real estate owned, average credit scores, average amortized loan to value and credit enhancement. Based on this review, management determined that no OTTI existed as of December 31, 2014.

16



8. Loans
 
The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the total loan portfolio at the dates indicated.

 
 
December 31, 2014
 
June 30, 2014
 
 
 
 
 
Amount
 
Percent
 
Amount
 
Percent
 
Change
 
% Change
 
(Dollars In Thousands)
 
 
 
 
Mortgage loans on real estate:
 
 
 
 
 
 
 
 
 
 
 
One- to four-family
$
106,993

 
20.85
%
 
$
107,498

 
21.05
%
 
$
(505
)
 
(0.5
)%
Commercial
207,393

 
40.42
%
 
200,750

 
39.31
%
 
6,643

 
3.3
 %
Home equity:
 

 
 
 
 

 
 
 
 
 
 
First lien
34,904

 
6.80
%
 
36,299

 
7.11
%
 
(1,395
)
 
(3.8
)%
Second lien
42,440

 
8.27
%
 
39,845

 
7.80
%
 
2,595

 
6.5
 %
Construction:
 

 
 
 
 

 
 
 
 
 
 
Residential
2,434

 
0.47
%
 
3,807

 
0.75
%
 
(1,373
)
 
(36.1
)%
Commercial
34,707

 
6.77
%
 
36,189

 
7.09
%
 
(1,482
)
 
(4.1
)%
Total mortgage loans on real estate
428,871

 
83.60
%
 
424,388

 
83.11
%
 
4,483

 
1.1
 %
Other loans:
 

 
 
 
 

 
 
 
 
 
 
Commercial
53,160

 
10.36
%
 
54,756

 
10.72
%
 
(1,596
)
 
(2.9
)%
Consumer:
 

 
 
 
 

 
 
 
 
 
 
Manufactured homes
22,125

 
4.31
%
 
21,766

 
4.26
%
 
359

 
1.6
 %
Automobile and other secured loans
5,949

 
1.16
%
 
7,172

 
1.40
%
 
(1,223
)
 
(17.1
)%
Other
2,928

 
0.57
%
 
2,566

 
0.50
%
 
362

 
14.1
 %
Total other loans
84,162

 
16.40
%
 
86,260

 
16.89
%
 
(2,098
)
 
(2.4
)%
Total loans
513,033

 
100.00
%
 
510,648

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net deferred loan costs
2,606

 
 
 
2,638

 
 
 
 
 
 
Allowance for loan losses
(5,794
)
 
 
 
(5,651
)
 
 
 
 
 
 
Total loans, net
$
509,845

 
 
 
$
507,635

 
 
 
 
 
 

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations, which are further described below.
Specific Allocation
 
Specific allocations are made for loans determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or fair value of collateral for collateral dependent loans. The Company charges off any collateral shortfall on collaterally dependent impaired loans.

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 and interest when due according to the contractual terms of the loan agreement. Impaired loans are generally placed on non-accrual status either when there is reasonable doubt as to the full collection of payments or when the loans become 90 days past due, unless an evaluation clearly indicates that the loan is well secured and in the process of collection. Impairment is measured on a loan by loan basis for commercial loans 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, adjusted for market conditions and selling expenses, if the loan is collateral dependent.
 




17


The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructure (“TDR”). All TDRs are initially classified as impaired and may be evaluated for removal from impaired status after one year of current payments for a modified loan with a market rate for that borrower at the time of restructuring.

General Allocation
 
The general allocation is determined by segregating the remaining loans by type of loan and payment history. Consideration is given to historical loss experience and qualitative factors such as delinquency trends, changes in underwriting standards or lending policies, procedures and practices, experience and depth of management and lending staff, and general economic conditions. This analysis establishes loss factors that are applied to the loan groups to determine the amount of the general allocations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses that have been established which could have a material negative effect on financial results. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended December 31, 2014.
 
On a quarterly basis, management’s Loan Review Committee ("the Committee") reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process specific loans with risk ratings of six (special mention) or higher are analyzed to determine their potential risk of loss. This process concentrates on watch list, non-accrual and classified loans. Any loan determined to be impaired is evaluated for potential loss exposure. Any shortfall results in a charge-off if the likelihood of loss is evaluated as probable. The Company’s policy for charging off uncollectible loans is based on an analysis of the financial condition of the borrower and/or the collateral value. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value, discounted cash flow valuation or other available information.
 
The qualitative factors are assessed based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
 
Residential real estate - The Company generally does not originate loans with a loan-to-value ratio greater than 80% unless there is private mortgage insurance. All loans in this segment are collateralized by one- to four-family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
 
Commercial real estate - Loans in these segments are primarily income-producing properties throughout Massachusetts and Connecticut. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy, as evidenced by increased vacancy rates, which in turn will have an effect on the credit quality in this segment. Management requires annual borrower financial statements, obtains rent rolls annually and continually monitors the cash flows of these loans.
 
Home equity loans - Loans in this segment are secured by first or second mortgages on one- to four-family owner occupied properties, and are generally underwritten in amounts such that the combined first and second mortgage balances generally do not exceed 85% of the value of the property serving as collateral at time of origination. The lines-of-credit are available to be drawn upon for 10 to 20 years, at the end of which time they become term loans amortized over 5 to 10 years. Interest rates on home equity lines normally adjust based on the month-end prime rate published in the Wall Street Journal.
 
Residential construction loans - Loans in this segment primarily include construction to permanent non-speculative real estate loans. All loans in this segment are collateralized by one- to four-family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
 
Commercial construction loans - Loans in this segment primarily include construction to permanent non-speculative real estate loans. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy, which in turn will have an effect on the credit quality in this segment.

Commercial loans - Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy may have an effect on the credit quality in this segment.

Automobile and other secured loans - Loans in this segment include consumer non-real estate secured loans that the Company originates as well as automobile loans that the Company purchases from a third party. The Company has the ability to select the automobile loans it purchases based on its own underwriting standards.

18


 Manufactured home loans - Loans in this segment are secured by first liens on properties located primarily in the Northeast. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in this segment. The Company has the ability to select the manufactured home loans it purchases based on its own underwriting standards.
 
Other consumer loans - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Credit Quality Information
 
The Company utilizes a nine grade internal loan rating system for all loans as follows:
 
Loans rated 1 – 5: Loans in these categories are considered “pass” rated loans with low to average risk.
 
Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
 
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
 
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
 
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. These loans are generally charged off at each quarter end.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, commercial construction and commercial loans. The Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. All credits rated 6 or worse are reviewed on a quarterly basis by management. At origination, management assigns risk ratings to one- to four-family residential loans, home equity loans, residential construction loans, manufactured home loans, and other consumer loans. The Company updates these risk ratings as needed based primarily on delinquency, bankruptcy, or tax delinquency.
 
    























19


The following tables present the Company’s loans by risk rating at December 31, 2014 and June 30, 2014:
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One- to Four-Family
 
Commercial
 Real Estate
 
Home Equity
 First Lien
 
Home Equity
 Second Lien
 
Residential
Construction
 
Commercial
Construction
 
 
(In Thousands)
Loans rated 1-5
 
$
103,480

 
$
194,219

 
$
34,878