form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 2010
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from _______ to _______
Commission File Number: 0-54241
_______________________
SI FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
_______________________
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Maryland
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80-0643149
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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803 Main Street, Willimantic, Connecticut
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06226
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(Address of principal executive offices)
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(Zip Code)
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(860) 423-4581
(Registrant’s telephone number, including area code)
_______________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of Exchange on which registered
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Common stock, par value $0.01 per share
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The Nasdaq Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
_______________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer x Smaller Reporting Company Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $26.4 million, which was computed by reference to the closing price of $6.30, at which the common equity was sold as of June 30, 2010. Solely for the purposes of this calculation, the shares held by SI Bancorp, MHC and the directors and officers of the registrant are deemed to be affiliates.
As of March 15, 2011, there were 10,576,849 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Annual Report to Shareholders and the Proxy Statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Parts II and III of this Form 10-K.
TABLE OF CONTENTS
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PART I.
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Page No.
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Item 1.
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1
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Item 1A.
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37
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Item 1B.
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42
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Item 2.
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42
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Item 3.
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42
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Item 4.
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43
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PART II.
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Item 5.
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43
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Item 6.
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43
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Item 7.
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45
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Item 7A.
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45
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Item 8.
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45
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Item 9.
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46
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Item 9A.
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46
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Item 9B.
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46
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PART III.
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Item 10.
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47
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Item 11.
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47
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Item 12.
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47
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Item 13.
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48
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Item 14.
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48
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PART IV.
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Item 15.
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48
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51
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Explanatory Note
SI Financial Group, Inc., a Maryland corporation (the “Registrant” or “SI Financial–Maryland”), was incorporated on September 7, 2010 to become the holding company for Savings Institute Bank and Trust Company (the “Bank”) upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the “Conversion”). The Conversion involved the sale by the Registrant of 6,544,493 shares of common stock in a public offering to depositors and community members, the exchange of 4,032,356 shares of common stock of the Registrant for shares of common stock of the former SI Financial Group, Inc. (the “Company”) held by persons other than SI Bancorp, MHC (the “MHC”), and the elimination of the Company and the MHC. The Conversion was completed on January 12, 2011. As the Conversion was completed after December 31, 2010, the information in this report is for the Company. Separate financial statements for the Registrant have not been included in this report because the Registrant, as of December 31, 2010, had not issued any shares and had engaged only in organizational activities to date, had no significant assets, contingent or other liabilities, revenues or expenses. Per share information in this report is based on outstanding shares as of the dates indicated and does not reflect the Conversion. Following the Conversion, the Registrant had 10,576,849 shares of common stock outstanding.
Forward-Looking Statements
This report may contain certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on management’s current expectations regarding our business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions. Management’s ability to predict results of the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the United States government, including policies of the United States Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company’s results are discussed in Item 1A. “Risk Factors” in the Company’s annual report on Form 10-K and in other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
PART I.
General
In certain instances where appropriate, the terms “we,” “us” and “our” refer to SI Financial Group, Inc. and Savings Institute Bank and Trust Company or both.
SI Financial Group, Inc. was established on August 6, 2004 to become the parent holding company for the Bank upon the conversion of the Bank’s former parent, SI Bancorp, Inc., from a state-chartered to a federally-chartered mutual holding company. At the same time, the Bank also converted from a state-chartered to a federally-chartered savings bank. On September 30, 2004, the Company completed its minority stock offering with the sale of 5,025,500 shares of its common stock to the public, 251,275 shares contributed to SI Financial Group Foundation and 7,286,975 issued to the MHC. The Bank is a wholly-owned subsidiary of the Company and management of the Company and the Bank are substantially similar. The Company neither owns nor leases any property, but instead uses the premises, equipment and other property of the Bank with the payment of appropriate rental fees, as required by applicable law and regulations. Thus, the financial information and discussion contained herein primarily relates to the activities of the Bank.
On January 12, 2011, SI Financial-Maryland completed its public stock offering and the concurrent conversion of the Bank from the mutual holding company structure to a stock holding company structure. A total of 6,544,493 shares of common stock were sold in the subscription and community offerings at $8.00 per share, including 392,670 shares purchased by the Bank’s Employee Stock Ownership Plan. Additional shares totaling 4,032,356 were issued in exchange for shares of the former federally-chartered SI Financial Group, Inc., at an exchange ratio of 0.8981. See Note 22 in the Company’s Consolidated Financial Statements included in the Company’s Annual Report to Shareholders, attached hereto as Exhibit 13, for more details.
The Bank operates as a community-oriented financial institution offering a full range of financial services to consumers and businesses in its market area, including insurance, trust and investment services. The Bank attracts deposits from the general public and uses those funds to originate one- to four-family residential, multi-family and commercial real estate, commercial business and consumer loans. Beginning in 2008, substantially all of the fixed-rate one- to four-family residential conforming loans the Bank originates are sold in the secondary market with the servicing retained. Such sales generate mortgage banking fees. The remainder of the Bank’s loan portfolio is originated for investment.
Availability of Information
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on the Company’s website, www.mysifi.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). The information on the Company’s website shall not be considered as incorporated by reference into this Form 10-K.
Market Area and Competition
The Company is headquartered in Willimantic, Connecticut, which is located in eastern Connecticut approximately 30 miles east of Hartford. The Bank operates 21 full-service offices throughout Windham, New London, Tolland, Hartford and Middlesex counties in Connecticut. The Bank’s primary lending area is eastern Connecticut and most of the Bank’s deposit customers reside in the areas surrounding the Bank’s branch offices. The economy in the Company’s market area is relatively diverse and primarily oriented to the educational, service, entertainment, manufacturing and retail industries. The major employers in the area include several institutions of higher education, the Mohegan Sun and Foxwoods casinos, General Dynamics Defense Systems and Pfizer, Inc. In addition, there are also many small to mid-sized businesses that support the local economy.
In view of the current economic downturn, our primary market area has remained a relatively stable banking market. Windham, New London, Tolland, Hartford and Middlesex counties have a total population of 1.6 million and total households of 616,000 according to SNL Financial. For 2010, median household income levels ranged from $58,000 to $78,000 in the five counties we maintain branch offices, compared to $70,000 for Connecticut as a whole and $54,000 for the United States according to published statistics.
The Bank faces significant competition for the attraction of deposits and origination of loans. The most direct competition for deposits has historically come from the several financial institutions operating in the Bank’s market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. The Bank also faces competition for investors’ funds from money market funds and other corporate and government securities. At June 30, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (the “FDIC”), the Bank held 20.69% of the deposits in Windham County, which is the largest market share out of 10 financial institutions with offices in this county. Also, at June 30, 2010, the Bank held 0.96% of the deposits in New London, Tolland, Hartford and Middlesex Counties, which is the 16th market share out of 35 financial institutions with offices in these counties. Bank of America Corp., Webster Bank Financial Corporation, The Toronto-Dominion Bank, People’s United Financial, Inc. and Banco Santander, S.A., all of which are large national or regional bank holding companies, also operate in the Bank’s market area. These institutions are significantly larger and, therefore, have significantly greater resources than the Bank does and may offer products and services that the Bank does not provide.
The Bank’s competition for loans comes primarily from financial institutions in its market area, and to a lesser extent from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.
The Bank expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s growth in the future.
Lending Activities
General. The Bank’s loan portfolio consists primarily of one- to four-family residential mortgage loans, multi-family and commercial real estate loans and commercial business loans. To a much lesser extent, the loan portfolio includes construction and consumer loans. At December 31, 2010, the Bank had loans held for sale totaling $7.4 million.
The following table summarizes the composition of the Bank’s loan portfolio at the dates indicated.
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At December 31,
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2010
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2009
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2008
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2007
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2006
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(Dollars in Thousands)
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Percent
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Percent
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Percent
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Percent
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Percent
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| |
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Amount
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of Total
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Amount
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of Total
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Amount
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of Total
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Amount
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of Total
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Amount
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of Total
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Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Residential - 1 to 4 family
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$ |
270,923 |
|
|
|
44.46 |
% |
|
$ |
306,244 |
|
|
|
50.12 |
% |
|
$ |
332,399 |
|
|
|
53.46 |
% |
|
$ |
330,389 |
|
|
|
55.87 |
% |
|
$ |
309,695 |
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|
53.65 |
% |
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Multi-family and commercial
|
|
|
160,015 |
|
|
|
26.26 |
|
|
|
159,781 |
|
|
|
26.15 |
|
|
|
158,693 |
|
|
|
25.52 |
|
|
|
132,819 |
|
|
|
22.46 |
|
|
|
118,600 |
|
|
|
20.55 |
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|
Construction
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|
|
6,952 |
|
|
|
1.14 |
|
|
|
11,400 |
|
|
|
1.87 |
|
|
|
27,892 |
|
|
|
4.49 |
|
|
|
37,231 |
|
|
|
6.29 |
|
|
|
44,647 |
|
|
|
7.73 |
|
|
Total real estate loans
|
|
|
437,890 |
|
|
|
71.86 |
|
|
|
477,425 |
|
|
|
78.14 |
|
|
|
518,984 |
|
|
|
83.47 |
|
|
|
500,439 |
|
|
|
84.62 |
|
|
|
472,942 |
|
|
|
81.93 |
|
| |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
|
|
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Commercial business loans:
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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SBA and USDA guaranteed
|
|
|
116,492 |
|
|
|
19.11 |
|
|
|
77,310 |
|
|
|
12.65 |
|
|
|
45,704 |
|
|
|
7.35 |
|
|
|
42,267 |
|
|
|
7.15 |
|
|
|
51,358 |
|
|
|
8.90 |
|
|
Other
|
|
|
26,310 |
|
|
|
4.32 |
|
|
|
30,239 |
|
|
|
4.95 |
|
|
|
34,945 |
|
|
|
5.62 |
|
|
|
27,583 |
|
|
|
4.66 |
|
|
|
23,813 |
|
|
|
4.13 |
|
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Total commercial business loans
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|
142,802 |
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|
|
23.43 |
|
|
|
107,549 |
|
|
|
17.60 |
|
|
|
80,649 |
|
|
|
12.97 |
|
|
|
69,850 |
|
|
|
11.81 |
|
|
|
75,171 |
|
|
|
13.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
25,533 |
|
|
|
4.19 |
|
|
|
22,573 |
|
|
|
3.69 |
|
|
|
18,762 |
|
|
|
3.02 |
|
|
|
17,774 |
|
|
|
3.01 |
|
|
|
18,489 |
|
|
|
3.20 |
|
|
Other
|
|
|
3,167 |
|
|
|
0.52 |
|
|
|
3,513 |
|
|
|
0.57 |
|
|
|
3,345 |
|
|
|
0.54 |
|
|
|
3,330 |
|
|
|
0.56 |
|
|
|
10,616 |
|
|
|
1.84 |
|
|
Total consumer loans
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|
|
28,700 |
|
|
|
4.71 |
|
|
|
26,086 |
|
|
|
4.26 |
|
|
|
22,107 |
|
|
|
3.56 |
|
|
|
21,104 |
|
|
|
3.57 |
|
|
|
29,105 |
|
|
|
5.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
609,392 |
|
|
|
100.00 |
% |
|
|
611,060 |
|
|
|
100.00 |
% |
|
|
621,740 |
|
|
|
100.00 |
% |
|
|
591,393 |
|
|
|
100.00 |
% |
|
|
577,218 |
|
|
|
100.00 |
% |
|
Deferred loan origination costs, net of deferred fees
|
|
|
1,621 |
|
|
|
|
|
|
|
1,523 |
|
|
|
|
|
|
|
1,570 |
|
|
|
|
|
|
|
1,390 |
|
|
|
|
|
|
|
1,258 |
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(4,799 |
) |
|
|
|
|
|
|
(4,891 |
) |
|
|
|
|
|
|
(6,047 |
) |
|
|
|
|
|
|
(5,245 |
) |
|
|
|
|
|
|
(4,365 |
) |
|
|
|
|
|
Loans receivable, net
|
|
$ |
606,214 |
|
|
|
|
|
|
$ |
607,692 |
|
|
|
|
|
|
$ |
617,263 |
|
|
|
|
|
|
$ |
587,538 |
|
|
|
|
|
|
$ |
574,111 |
|
|
|
|
|
One- to Four-Family Residential Loans. The Bank’s primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings in its market area. The Bank offers fixed-rate and adjustable-rate mortgage loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of current and anticipated future interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on the Bank’s interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined on the basis of the Bank’s pricing criteria and competitive market conditions.
The Bank offers fixed-rate loans with terms of 10, 15, 20 or 30 years. The Bank’s adjustable-rate mortgage loans are based primarily on 30-year amortization schedules. Interest rates and payments on adjustable-rate mortgage loans adjust annually after a one, three, five, seven or ten-year initial fixed period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically equal to 2.75% (2.875% for jumbo loans) above the one-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.
Generally, the Bank does not originate conventional loans with loan-to-value ratios exceeding 95% and generally originates loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied one- to four-family residences. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. The Bank requires all properties securing mortgage loans to be appraised by a board approved independent licensed appraiser and requires title insurance on all first mortgage loans. Borrowers must obtain hazard insurance and flood insurance for loans on property located in a flood zone before closing the loan.
In an effort to provide financing for moderate income and first-time buyers, the Bank offers loans insured by the Federal Housing Administration and the Veterans Administration and participates in the Connecticut Housing Finance Authority Program. The Bank offers fixed-rate residential mortgage loans through these programs to qualified individuals and originates the loans using modified underwriting guidelines.
Multi-Family and Commercial Real Estate Loans. The Bank makes multi-family and commercial real estate loans throughout its market area for the purpose of acquiring, developing, improving or refinancing multi-family and commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. The Bank offers fixed-rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate. The Bank’s multi-family and commercial real estate loans are generally secured by owner-occupied properties, including churches, retail facilities and other owner-occupied properties located in its market area and used for businesses. The Bank intends to continue to emphasize this segment of its loan portfolio, as market conditions permit, as such loans produce yields that are generally higher than one- to four-family residential loans and are more sensitive to changes in market interest rates.
The Bank originates adjustable-rate multi-family and commercial real estate loans for amortization periods up to 25 years. Interest rates and payments on these loans typically adjust every five years after a five-year initial fixed-rate period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically 2.5-3.0% above the classic advance rates offered by the Federal Home Loan Bank of Boston (the “FHLB”). There are no adjustment period or lifetime interest rate caps. Loans are secured by first mortgages that generally do not exceed 75% of the property’s appraised value. At December 31, 2010, the largest outstanding multi-family or commercial real estate loan was $7.0 million. This loan is secured by a nursing home and rehabilitation facility and was performing according to its terms at December 31, 2010.
Construction and Land Loans. The Bank originates loans to individuals, and to a lesser extent, builders, to finance the construction of residential dwellings. The Bank also originates construction loans for commercial development projects, including condominiums, apartment buildings, single-family subdivisions as well as owner-occupied properties used for businesses. Residential construction loans generally provide for the payment of interest only during the construction phase, which is usually twelve months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Commercial construction loans generally provide for the payment of interest only during the construction phase which may range from three to twenty-four months. Loans generally can be made with a maximum loan-to-value ratio of 80% on residential construction, 75% on construction for nonresidential properties and 80% of the lesser of the appraised value or cost of the project on multi-family construction. At December 31, 2010, the largest outstanding commercial construction loan commitment for the construction of a residential housing development was $2.0 million, of which $144,000 was outstanding and the largest residential construction loan commitment was $1.8 million, of which $1.5 million was outstanding. These loans were performing according to their terms at December 31, 2010. Primarily all commitments to fund construction loans require an appraisal of the property by a board approved independent licensed appraiser. Also, inspections of the property are required before the disbursement of funds during the term of the construction loan.
The Bank also originates land loans to individuals, local contractors and developers only for making improvements on approved building lots, subdivisions and condominium projects within two years of the date of the loan. Such loans to individuals generally are written with a maximum loan-to-value ratio based upon the appraised value or purchase price of the land. Maximum loan-to-value ratio on raw land is 50%, while the maximum loan-to-value ratio for land development loans involving approved projects is 65%. The Bank offers fixed-rate land loans and variable-rate land loans that adjust annually. Interest rates and payments on adjustable-rate land loans are adjusted to a rate typically equal to the then current prime rate as reported in The Wall Street Journal plus a 1.0–2.0% margin. The maximum amount by which the interest rate may be increased or decreased is generally 2% annually and the lifetime interest rate cap is generally 6% over the initial rate of the loan. Land loans totaled $532,000 at December 31, 2010.
Commercial Business Loans. The Bank originates commercial business loans to a variety of professionals, sole proprietorships and small businesses primarily in its market area. The Bank offers a variety of commercial lending products, the maximum amount of which is limited by the Bank’s in-house loans to one borrower limit. At December 31, 2010, the largest commercial loan was a $1.4 million loan, which is secured by a clinical office building. This loan was performing according to its terms at December 31, 2010.
The Bank offers loans secured by business assets other than real estate, such as business equipment and inventory. These loans are originated with maximum loan-to-value ratios of 75% of the value of the personal property. The Bank originates lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. These loans convert to a term loan at the expiration of a draw period, which is not to exceed twelve months, and will be paid over a pre-defined amortization period. Additional products such as time notes, letters of credit and equipment lease financing are offered. Additionally, the Bank purchases the portion of commercial business loans that are fully guaranteed by the Small Business Administration (“SBA”) and the United States Department of Agriculture (“USDA”). At December 31, 2010, purchased SBA and USDA loans totaled $116.5 million.
When originating commercial business loans, the Bank considers the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, viability of the industry in which the customer operates and the value of the collateral.
Consumer Loans. The Bank offers a variety of consumer loans, primarily home equity lines of credit, and, to a lesser extent, loans secured by marketable securities, passbook or certificate accounts, motorcycles, automobiles and recreational vehicles, as well as unsecured loans. Generally, the Bank offers automobile loans with a maximum loan-to-value ratio of 100% of the purchase price for new vehicles. Unsecured loans generally have a maximum borrowing limit of $10,000 and a maximum term of five years.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and their ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. A home equity line of credit may be drawn down by the borrower for an initial period of five years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. If the draw period is not extended for an additional 4 years and 10 months, the borrower has to pay back the amount outstanding under the line of credit over a term not to exceed ten years, beginning at the end of the five-year period. The Bank will offer home equity loans with a maximum combined loan-to-value ratio of 80%.
Loan Underwriting Risks. While the Bank anticipates that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability and collateral value of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make the Bank’s loan portfolio more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income-producing properties, the Bank generally requires borrowers and loan guarantors to provide annual financial statements and/or tax returns. In reaching a decision on whether to make a multi-family or commercial real estate loan, consideration is given to the net operating income of the property, the borrower’s expertise, credit history and the profitability and value of the underlying property. The Bank generally requires that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental screens, surveys and inspections are obtained when circumstances suggest the possibility of the presence of hazardous materials. Further, in connection with our ongoing monitoring of the loan, the Bank typically reviews the property, the underlying loan and guarantors annually.
Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction, the estimated cost (including interest) of construction and the ability of the project to be sold upon completion. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or before the maturity of the loan, with a building having a value that is insufficient to assure full repayment. If the Bank is forced to foreclose on a building before or at completion due to a borrower default, the Bank may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property the value of which tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s underlying business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant significant collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Loan Originations, Purchases, Sales and Servicing. Loan originations come from a number of sources. The primary source of loan originations are the Bank’s in-house loan originators, and to a lesser extent, advertising and referrals from customers.
Regularly, the Bank will purchase whole participations in loans fully guaranteed by the SBA and the USDA. The loans are primarily for commercial and agricultural properties located throughout the United States. The Bank purchased $54.0 million and $40.9 million in loans during 2010 and 2009, respectively.
At December 31, 2010, the Bank was a participating lender on three loans totaling $4.3 million, which are secured by commercial real estate. These loans are serviced by the lead lenders. The Bank generally performs its own underwriting analysis before purchasing loans and therefore believes there should not be a greater risk of default on these obligations. However, in a purchased participation loan, the Bank does not service the loan and thus are subject to the policies and practices of the lead lender with regard to monitoring delinquencies, pursuing collections and instituting foreclosure proceedings.
The Bank originates conventional conforming one- to four-family loans which meet Fannie Mae underwriting standards. Beginning in 2008, substantially all one- to four-family residential conforming loans have been sold in the secondary market on a servicing retained basis. Such loans are sold to Fannie Mae, the Connecticut Housing Finance Authority and the FHLB under the Mortgage Partnership Finance Program (“MPF”). The decision to sell loans in the secondary market is based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management. Generally, loans are sold without recourse. The Bank utilizes the proceeds from these sales primarily to meet liquidity needs. Proceeds from the sale of loans totaled $49.1 million and $56.9 million for the years ended December 31, 2010 and 2009, respectively. The Bank intends to continue to originate these types of loans for sale in the secondary market in the future to increase its noninterest income.
At December 31, 2010, the Bank retained the servicing rights on $148.6 million of loans for others, consisting primarily of fixed-rate mortgage loans sold with or without recourse to third parties. Loan repurchase commitments are agreements to repurchase loans previously sold upon the occurrence of conditions established in the contract, including default by the underlying borrower. At December 31, 2010, the balance of loans sold with recourse totaled $19,000. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, processing insurance and tax payments on behalf of borrowers, assisting in foreclosures and property dispositions when necessary and general administration of loans.
The following table sets forth the Bank’s loan originations, loan purchases, loan sales, principal repayments, net charge-offs and other reductions on loans for the years indicated.
| |
|
Years Ended December 31,
|
|
|
(In Thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
| |
|
|
|
|
|
|
|
|
|
|
Loans at beginning of year
|
|
$ |
611,060 |
|
|
$ |
621,740 |
|
|
$ |
591,393 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
104,497 |
|
|
|
129,948 |
|
|
|
118,113 |
|
|
Commercial business loans
|
|
|
5,337 |
|
|
|
4,386 |
|
|
|
15,778 |
|
|
Consumer loans
|
|
|
12,210 |
|
|
|
11,990 |
|
|
|
7,697 |
|
|
Total loan originations
|
|
|
122,044 |
|
|
|
146,324 |
|
|
|
141,588 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
53,953 |
|
|
|
40,876 |
|
|
|
12,281 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal loan repayments, prepayments and other, net
|
|
|
125,719 |
|
|
|
131,940 |
|
|
|
108,693 |
|
|
Loan sales
|
|
|
49,107 |
|
|
|
56,336 |
|
|
|
14,232 |
|
|
Loan charge-offs
|
|
|
1,015 |
|
|
|
4,075 |
|
|
|
597 |
|
|
Transfers to other real estate owned
|
|
|
1,824 |
|
|
|
5,529 |
|
|
|
- |
|
|
Total deductions
|
|
|
177,665 |
|
|
|
197,880 |
|
|
|
123,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in loans
|
|
|
(1,668 |
) |
|
|
(10,680 |
) |
|
|
30,347 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at end of year
|
|
$ |
609,392 |
|
|
$ |
611,060 |
|
|
$ |
621,740 |
|
Loan Maturity. The following table shows the contractual maturity of the Bank’s loan portfolio at December 31, 2010. The table does not reflect any estimate of prepayments, which significantly shortens the average life of all loans and may cause actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude deferred loan fees and costs.
| |
|
Amounts Due In
|
|
|
(In Thousands)
|
|
One Year
|
|
|
More Than
One Year to
|
|
|
More Than
|
|
|
Total
Amount
|
|
| |
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Due
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
116 |
|
|
$ |
6,833 |
|
|
$ |
263,974 |
|
|
$ |
270,923 |
|
|
Multi-family and commercial
|
|
|
321 |
|
|
|
6,160 |
|
|
|
153,534 |
|
|
|
160,015 |
|
|
Construction
|
|
|
1,185 |
|
|
|
- |
|
|
|
5,767 |
|
|
|
6,952 |
|
|
Total real estate loans
|
|
|
1,622 |
|
|
|
12,993 |
|
|
|
423,275 |
|
|
|
437,890 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
9,214 |
|
|
|
8,748 |
|
|
|
124,840 |
|
|
|
142,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
269 |
|
|
|
1,382 |
|
|
|
27,049 |
|
|
|
28,700 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$ |
11,105 |
|
|
$ |
23,123 |
|
|
$ |
575,164 |
|
|
$ |
609,392 |
|
While one- to four-family residential real estate loans are normally originated with terms of up to 30 years, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon the sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase, sale and refinancing activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.
The following table sets forth the dollar amount of all scheduled maturities of loans at December 31, 2010 that are due after December 31, 2011, and have either fixed interest rates or adjustable interest rates.
| |
|
Due After December 31, 2011
|
|
|
(In Thousands)
|
|
Fixed
|
|
|
|
|
|
|
|
| |
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
184,768 |
|
|
$ |
86,039 |
|
|
$ |
270,807 |
|
|
Multi-family and commercial
|
|
|
13,366 |
|
|
|
146,328 |
|
|
|
159,694 |
|
|
Construction
|
|
|
5,614 |
|
|
|
153 |
|
|
|
5,767 |
|
|
Total real estate loans
|
|
|
203,748 |
|
|
|
232,520 |
|
|
|
436,268 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
44,896 |
|
|
|
88,692 |
|
|
|
133,588 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
7,765 |
|
|
|
20,666 |
|
|
|
28,431 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$ |
256,409 |
|
|
$ |
341,878 |
|
|
$ |
598,287 |
|
Loan Approval Procedures and Authority. The Bank’s lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the Company’s Board of Directors and management. All residential mortgages and home equity lines of credit in excess of $6.0 million or all commercial loans and other consumer loans in excess of $2.0 million require the approval of the Board of Directors. The Loan Committee of the Board of Directors has the authority to approve: (1) residential mortgage loans and consumer home equity lines of credit up to $6.0 million and (2) commercial and other consumer loans up to $2.0 million. The President and the Senior Credit Officer have approval for: (1) residential mortgage loans that conform to Fannie Mae and Freddie Mac standards up to $2.0 million or $417,000 for those that are non-conforming and (2) consumer and commercial loans up to $250,000 individually or $2.0 million jointly for home equity lines of credit or $1.0 million jointly for commercial and other consumer loans. Additionally, certain loan and branch personnel have the authority to approve residential mortgage loans up to $417,000, home equity lines up to $250,000 and consumer loans up to $100,000.
Loans to One Borrower. The maximum amount that the Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to 15% of the Bank’s stated capital and reserves. At December 31, 2010, the Bank’s general regulatory limit on loans to one borrower was approximately $11.4 million. At that date, the Bank’s largest lending relationship was $8.1 million, representing a commercial business loan, two commercial real estate loans for a nursing home and rehabilitation facility and a commercial real estate loan to purchase an adjacent property. These loans were performing according to their terms at December 31, 2010.
Loan Commitments. The Bank issues commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to customers. Generally, our mortgage loan commitments expire in 60 days or less from the date of the application.
Delinquencies. When a borrower fails to make a required loan payment, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank makes initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. When the loan becomes 90 days past due, a letter is sent notifying the borrower that foreclosure proceedings will commence if the loan is not brought current within 30 days. Generally, when the loan becomes 120 days past due, the Bank will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer or commercial loan. If a foreclosure action is instituted and the loan is not brought current, paid in full or refinanced before the foreclosure sale, the real property securing the loan is typically sold at foreclosure. The Bank may consider loan repayment arrangements with certain borrowers under certain circumstances.
Management reports monthly to the Board of Directors or a committee of the Board regarding the amount of loans delinquent 30 days or more, all loans in foreclosure and all foreclosed and repossessed property that the Bank owns.
The following table provides information about delinquencies in the Bank’s loan portfolio at the dates indicated.
| |
|
December 31, 2010
|
|
|
December 31, 2009
|
|
| |
|
60-89 Days
|
|
|
90 Days or More
|
|
|
60-89 Days
|
|
|
90 Days or More
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
Principal
Balance
|
|
| |
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
of Loans
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
|
9 |
|
|
$ |
1,291 |
|
|
|
19 |
|
|
$ |
2,364 |
|
|
|
2 |
|
|
$ |
484 |
|
|
|
14 |
|
|
$ |
2,393 |
|
|
Multi-family and commercial
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
44 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
82 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
375 |
|
|
Total real estate loans
|
|
|
9 |
|
|
|
1,291 |
|
|
|
21 |
|
|
|
2,490 |
|
|
|
2 |
|
|
|
484 |
|
|
|
15 |
|
|
|
2,768 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA and USDA guaranteed
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
46 |
|
|
|
1 |
|
|
|
8 |
|
|
|
1 |
|
|
|
27 |
|
|
Total commercial business loans
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
46 |
|
|
|
1 |
|
|
|
8 |
|
|
|
1 |
|
|
|
27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
1 |
|
|
|
50 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total consumer loans
|
|
|
2 |
|
|
|
51 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans
|
|
|
11 |
|
|
$ |
1,342 |
|
|
|
22 |
|
|
$ |
2,536 |
|
|
|
3 |
|
|
$ |
492 |
|
|
|
16 |
|
|
$ |
2,795 |
|
Classified Assets. Management of the Bank, including the Managed Asset Committee, consisting of a number of the Bank’s officers, review and classify the assets of the Bank on a monthly basis and the Board of Directors reviews the results of the reports on a quarterly basis. Federal regulations and the Bank’s internal policies require that management utilize an internal asset classification system to monitor and evaluate the credit risk inherent in its loan portfolio. In addition, the Office of Thrift Supervision (the “OTS”) has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets; substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have all the weaknesses inherent in those classified as “substandard” with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high probability of loss. Assets classified as “loss” are those assets considered uncollectible and of such little value that continuance as assets of the institution are not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weakness deserving close attention. If the Bank classifies an asset as a loss, a loan loss allowance in the amount of 100% of the portion of the asset classified as a loss is established.
The following table shows the aggregate amounts of the Bank’s criticized and classified assets as of December 31, 2010.
| |
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
(In Thousands)
|
|
Loss
|
|
|
Doubtful
|
|
|
Substandard
|
|
|
Mention
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,066 |
|
|
$ |
834 |
|
|
Multi-family and commercial
|
|
|
- |
|
|
|
- |
|
|
|
9,271 |
|
|
|
16,260 |
|
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
82 |
|
|
|
366 |
|
|
Total real estate loans
|
|
|
- |
|
|
|
- |
|
|
|
12,419 |
|
|
|
17,460 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USDA and SBA guaranteed
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
- |
|
|
|
70 |
|
|
|
3,239 |
|
|
|
2,896 |
|
|
Total commercial business loans
|
|
|
- |
|
|
|
70 |
|
|
|
3,239 |
|
|
|
2,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
- |
|
|
|
- |
|
|
|
50 |
|
|
|
- |
|
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
Total consumer loans
|
|
|
- |
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
|
Total classified loans
|
|
|
- |
|
|
|
70 |
|
|
|
15,709 |
|
|
|
20,356 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-backed
|
|
|
- |
|
|
|
- |
|
|
|
3,676 |
|
|
|
- |
|
|
Collateralized debt obligations
|
|
|
- |
|
|
|
- |
|
|
|
6,716 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified investment securities
|
|
|
- |
|
|
|
- |
|
|
|
10,392 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total criticized and classified assets
|
|
$ |
- |
|
|
$ |
70 |
|
|
$ |
26,101 |
|
|
$ |
20,356 |
|
At December 31, 2010, total classified assets related to forty-two commercial real estate loans totaling $25.5 million, thirty-one residential mortgage loans totaling $3.9 million, twenty-four commercial business loans totaling $6.2 million, three commercial construction loans totaling $448,000 and ten investment securities with a carrying value totaling $10.4 million. Substandard assets include $15.7 million of substandard loans, of which $4.9 million were nonperforming at December 31, 2010. Of the $4.9 million in nonperforming loans, residential real estate loans totaling $2.4 million, construction loans totaling $82,000 and commercial real estate loans totaling $44,000 were 90 days or more past due. The largest substandard loan, a commercial construction loan totaling $4.5 million, was delinquent in payments but not 60 days or more past due at December 31, 2010. The substandard assets also included seven collateralized debt obligations totaling $6.7 million and three non-agency mortgage-backed securities totaling $3.7 million. None of the $20.4 million of special mention loans were 60 days or more past due at December 31, 2010.
Other than disclosed in the above tables, there are no other loans at December 31, 2010 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.
Nonperforming Assets and Restructured Loans. The Bank considers repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and any previously recorded interest is reversed and recorded as a reduction of loan interest and fee income. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest balance as determined at the time of collection of the loan.
Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed assets until it is sold. When property is acquired, it is recorded at the lower of its cost or fair value, less estimated selling expenses. Holding costs and declines in fair value after acquisition of the property result in charges against income.
The Bank periodically may agree to modify the contractual terms of loans. When a loan is modified and concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments, due to the borrower’s financial condition, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.
The following table provides information with respect to the Bank’s nonperforming assets and TDRs as of the dates indicated. The Company had no accruing loans past due 90 days or more at each of the dates indicated.
| |
|
At December 31,
|
|
|
(Dollars in Thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
2,901 |
|
|
$ |
2,597 |
|
|
$ |
2,795 |
|
|
$ |
755 |
|
|
$ |
392 |
|
|
Multi-family and commercial
|
|
|
1,775 |
|
|
|
- |
|
|
|
832 |
|
|
|
42 |
|
|
|
- |
|
|
Construction
|
|
|
82 |
|
|
|
375 |
|
|
|
5,483 |
|
|
|
6,082 |
|
|
|
- |
|
|
Total real estate loans
|
|
|
4,758 |
|
|
|
2,972 |
|
|
|
9,110 |
|
|
|
6,879 |
|
|
|
392 |
|
|
Commercial business loans
|
|
|
116 |
|
|
|
35 |
|
|
|
217 |
|
|
|
733 |
|
|
|
71 |
|
|
Consumer loans
|
|
|
51 |
|
|
|
- |
|
|
|
1 |
|
|
|
20 |
|
|
|
929 |
|
|
Total nonaccrual loans
|
|
|
4,925 |
|
|
|
3,007 |
|
|
|
9,328 |
|
|
|
7,632 |
|
|
|
1,392 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned, net (1)
|
|
|
1,285 |
|
|
|
3,680 |
|
|
|
- |
|
|
|
913 |
|
|
|
- |
|
|
Total nonperforming assets
|
|
|
6,210 |
|
|
|
6,687 |
|
|
|
9,328 |
|
|
|
8,545 |
|
|
|
1,392 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing troubled debt restructurings
|
|
|
5,261 |
|
|
|
67 |
|
|
|
69 |
|
|
|
71 |
|
|
|
72 |
|
|
Total nonperforming assets and troubled debt restructurings
|
|
$ |
11,471 |
|
|
$ |
6,754 |
|
|
$ |
9,397 |
|
|
$ |
8,616 |
|
|
$ |
1,464 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
0.80 |
% |
|
|
0.49 |
% |
|
|
1.50 |
% |
|
|
1.29 |
% |
|
|
0.24 |
% |
|
Total nonperforming loans to total assets
|
|
|
0.53 |
% |
|
|
0.34 |
% |
|
|
1.09 |
% |
|
|
0.97 |
% |
|
|
0.18 |
% |
|
Total nonperforming assets and troubled debt restructurings to total assets
|
|
|
1.24 |
% |
|
|
0.77 |
% |
|
|
1.10 |
% |
|
|
1.09 |
% |
|
|
0.19 |
% |
___________
(1) Other real estate owned balances are shown net of related write-downs or valuation allowance.
The decrease in nonperforming assets was primarily due to a decrease in other real estate owned offset by an increase in nonaccrual loans. Nonaccrual loans increased due to the addition of three commercial real estate loans totaling $1.8 million and an increase in residential one- to four-family loans of $304,000 at December 31, 2010. The remaining nonaccrual loans consisted of twenty-five residential loans and two consumer loans.
Other real estate owned decreased $2.4 million from December 31, 2009 to December 31, 2010, primarily as a result of the sale of seven residential and three commercial properties with an aggregate carrying value of $3.6 million. During 2010, we acquired one commercial and seven residential properties with a net carrying value of $1.8 million and reduced the carrying value of three commercial properties and five residential properties in the amount of $472,000.
As of December 31, 2010, troubled debt restructuring increased $6.1 million, of which $922,000 is included in nonaccrual loans, as a result of interest rate concessions for seven commercial real estate loans and two residential real estate loans. As of December 31, 2010, all borrowers are performing in accordance with the terms of their restructured loan agreements and the Bank anticipates that the borrowers will repay all contractual principal and interest.
Interest income that would have been recorded for the year ended December 31, 2010 had nonaccruing loans and troubled debt restructurings been current in accordance with their original terms and had been outstanding throughout the period amounted to $335,000. The amount of interest recognized on impaired loans was $165,000 for the year ended December 31, 2010.
Allowance for Loan Losses. The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, if necessary.
Management's judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience and evaluations of loans and other relevant factors.
The allowance for loan losses consists of the following key elements:
|
|
o
|
Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the present value of expected cash flows (or collateral value or observable market price if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan.
|
|
|
o
|
General valuation allowance. The general component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are segregated by category and assigned an allowance percentage based on historical loan loss experience adjusted for qualitative factors stratified by the following loan segments: residential one- to four-family, multi-family and commercial real estate, construction, commercial business and consumer. Management uses a rolling average of historical losses based on the time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; level of charge-offs and nonperforming loans; 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 and national and local economic trends and conditions.
|
|
|
o
|
Unallocated allowance. 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 specific and general losses in the portfolio.
|
In computing the allowance for loan losses, we do not assign a general valuation allowance to the USDA and SBA loans that we purchase as such loans are fully guaranteed. Such loans account for $116.5 million, or 19.1% of the loan portfolio at December 31, 2010.
The majority of the Company's loans are collateralized by real estate located in eastern Connecticut. Accordingly, the collateral value of a substantial portion of the Company's loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions.
Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with U.S. generally accepted accounting principles, the regulatory agencies, in reviewing the loan portfolio, may request that the Company increase its allowance for loan losses based on judgments different from those of the Company. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
| |
|
December 31,
|
|
| |
|
---------------2010---------------
|
|
|
---------------2009---------------
|
|
|
---------------2008---------------
|
|
| (Dollars in Thousands) |
|
Amount
|
|
|
% of
Allowance
in each
Category
to Total
Allowance
|
|
|
% of
Loans in
each
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
in each
Category
to Total
Allowance
|
|
|
% of
Loans in
each
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
in each
Category
to Total
Allowance
|
|
|
% of
Loans in
each
Category
to Total
Loans
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
915 |
|
|
|
19.06 |
% |
|
|
44.46 |
% |
|
$ |
1,028 |
|
|
|
21.02 |
% |
|
|
50.12 |
% |
|
$ |
906 |
|
|
|
14.98 |
% |
|
|
53.46 |
% |
|
Multi-family and commercial
|
|
|
2,700 |
|
|
|
56.27 |
|
|
|
26.26 |
|
|
|
2,443 |
|
|
|
49.95 |
|
|
|
26.15 |
|
|
|
2,358 |
|
|
|
38.99 |
|
|
|
25.52 |
|
|
Construction
|
|
|
64 |
|
|
|
1.34 |
|
|
|
1.14 |
|
|
|
221 |
|
|
|
4.51 |
|
|
|
1.87 |
|
|
|
1,533 |
|
|
|
25.36 |
|
|
|
4.49 |
|
|
Commercial business
|
|
|
790 |
|
|
|
16.45 |
|
|
|
23.43 |
|
|
|
906 |
|
|
|
18.53 |
|
|
|
17.60 |
|
|
|
1,097 |
|
|
|
18.13 |
|
|
|
12.97 |
|
|
Consumer loans
|
|
|
330 |
|
|
|
6.88 |
|
|
|
4.71 |
|
|
|
293 |
|
|
|
5.99 |
|
|
|
4.26 |
|
|
|
153 |
|
|
|
2.54 |
|
|
|
3.56 |
|
|
Total allowance for loan losses
|
|
$ |
4,799 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
$ |
4,891 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
$ |
6,047 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
| |
|
December 31,
|
|
| |
|
---------------2007---------------
|
|
|
---------------2006---------------
|
|
|
(Dollars in Thousands)
|
|
Amount
|
|
|
% of
Allowance
in each
Category
to Total
Allowance
|
|
|
% of
Loans in
each
Category
to Total
Loans
|
|
|
Amount
|
|
|
% of
Allowance
in each
Category
to Total
Allowance
|
|
|
% of
Loans in
each
Category
to Total
Loans
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
$ |
823 |
|
|
|
15.69 |
% |
|
|
55.87 |
% |
|
$ |
794 |
|
|
|
18.19 |
% |
|
|
53.65 |
% |
|
Multi-family and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
commercial
|
|
|
1,679 |
|
|
|
32.01 |
|
|
|
22.46 |
|
|
|
1,744 |
|
|
|
39.95 |
|
|
|
20.55 |
|
|
Construction
|
|
|
1,653 |
|
|
|
31.52 |
|
|
|
6.29 |
|
|
|
706 |
|
|
|
16.18 |
|
|
|
7.73 |
|
|
Commercial business
|
|
|
922 |
|
|
|
17.57 |
|
|
|
11.81 |
|
|
|
783 |
|
|
|
17.94 |
|
|
|
13.03 |
|
|
Consumer loans
|
|
|
168 |
|
|
|
3.21 |
|
|
|
3.57 |
|
|
|
338 |
|
|
|
7.74 |
|
|
|
5.04 |
|
|
Total allowance for loan losses
|
|
$ |
5,245 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
$ |
4,365 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
The following table sets forth an analysis of the allowance for loan losses for the years indicated.
| |
|
Years Ended December 31,
|
|
|
(Dollars in Thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at beginning of year
|
|
$ |
4,891 |
|
|
$ |
6,047 |
|
|
$ |
5,245 |
|
|
$ |
4,365 |
|
|
$ |
3,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
902 |
|
|
|
2,830 |
|
|
|
1,369 |
|
|
|
1,062 |
|
|
|
881 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
|
(285 |
) |
|
|
(257 |
) |
|
|
(80 |
) |
|
|
- |
|
|
|
- |
|
|
Multi-family and commercial
|
|
|
(221 |
) |
|
|
(149 |
) |
|
|
(42 |
) |
|
|
(246 |
) |
|
|
- |
|
|
Construction
|
|
|
(293 |
) |
|
|
(2,927 |
) |
|
|
(41 |
) |
|
|
- |
|
|
|
- |
|
|
Commercial business loans
|
|
|
(166 |
) |
|
|
(645 |
) |
|
|
(359 |
) |
|
|
- |
|
|
|
- |
|
|
Consumer loans
|
|
|
(50 |
) |
|
|
(97 |
) |
|
|
(75 |
) |
|
|
(188 |
) |
|
|
(199 |
) |
|
Total charge-offs
|
|
|
(1,015 |
) |
|
|
(4,075 |
) |
|
|
(597 |
) |
|
|
(434 |
) |
|
|
(199 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - 1 to 4 family
|
|
|
1 |
|
|
|
43 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
Multi-family and commercial
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
131 |
|
|
|
- |
|
|
Construction
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Commercial business loans
|
|
|
3 |
|
|
|
37 |
|
|
|
21 |
|
|
|
- |
|
|
|
2 |
|
|
Consumer loans
|
|
|
3 |
|
|
|
9 |
|
|
|
5 |
|
|
|
117 |
|
|
|
6 |
|
|
Total recoveries
|
|
|
21 |
|
|
|
89 |
|
|
|
30 |
|
|
|
252 |
|
|
|
12 |
|
|
Net charge-offs
|
|
|
(994 |
) |
|
|
(3,986 |
) |
|
|
(567 |
) |
|
|
(182 |
) |
|
|
(187 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$ |
4,799 |
|
|
$ |
4,891 |
|
|
$ |
6,047 |
|
|
$ |
5,245 |
|
|
$ |
4,365 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans outstanding at year end
|
|
|
0.78 |
% |
|
|
0.80 |
% |
|
|
0.97 |
% |
|
|
0.89 |
% |
|
|
0.76 |
% |
|
Allowance to nonperforming loans
|
|
|
97.44 |
|
|
|
162.65 |
|
|
|
64.83 |
|
|
|
68.72 |
|
|
|
313.58 |
|
|
Net charge-offs to average loans outstanding during the year
|
|
|
0.16 |
|
|
|
0.64 |
|
|
|
0.09 |
|
|
|
0.03 |
|
|
|
0.03 |
|
The allowance as a percentage of total loans declined to 0.78% at December 31, 2010 compared to 0.80% at December 31, 2009. The lower provision for 2010 resulted from a reduction in net loan charge-offs, predominately construction loans, offset by an increase in specific loan loss allowances on nonperforming loans. Higher loan charge-offs for the year ended December 31, 2009 primarily related to two commercial construction loan relationships aggregating $2.9 million. Specific loan loss allowances relating to impaired loans increased to $502,000 at December 31, 2010 compared to $267,000 at December 31, 2009. At December 31, 2010, nonperforming loans totaled $4.9 million, compared to $3.0 million at December 31, 2009. While the Company has no direct exposure to sub-prime mortgages in its loan portfolio, economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans.
Risk Management
Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available for sale securities, that are accounted for on a mark-to-market basis. Other risks that the Company faces are operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in the Company’s customer base or revenue.
Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. Further, the Company has strengthened its oversight of problem assets by maintaining a Managed Assets Committee. The Committee, which consists of our Chief Executive Officer, Chief Financial Officer and other loan and credit administration officers, meets monthly to review classified and watch list credits to ensure the appropriateness of the current classification and to attempt to identify any new problem loans. The Board of Directors reviews the committee’s reports on a quarterly basis.
Investment Activities
The Company has legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, government-sponsored enterprises, state and municipal governments, mortgage-backed securities and certificates of deposit of federally-insured institutions. Within certain regulatory limits, the Company also may invest a portion of its assets in corporate securities and mutual funds. The Company is also required to maintain an investment in FHLB stock. While the Company has the authority under applicable law and its investment policies to invest in derivative securities, the Company had no such investments at December 31, 2010.
The Company’s primary source of income continues to be derived from its loan portfolio. The investment portfolio is mainly used to meet the cash flow needs of the Company, provide adequate liquidity for the protection of customer deposits and yield a favorable return on investments. The type of securities and the maturity periods are dependent on the composition of the loan portfolio, interest rate risk, liquidity position and tax strategies of the Company. The Company’s investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak, to generate a favorable return and to assist in the financing needs of various local public entities, subject to credit quality review and liquidity concerns.
The Company’s Board of Directors has the overall responsibility for the investment portfolio, including approval of the Company’s Investment Policy and appointment of the Investment Committee. The Investment Committee is responsible for the approval of investment strategies and monitoring investment performance. The execution of specific investment initiatives and the day-to-day oversight of the Company’s investment portfolio is the responsibility of the Chief Executive Officer and the Chief Financial Officer. These officers, and others designated by the Board, are authorized to execute investment transactions up to specified limits based on the type of security without prior approval of the Investment Committee. Transactions exceeding these limitations require the approval of two of these officers, one of whom must be either the Chief Executive Officer or the Chief Financial Officer. Individual investment transactions are reviewed and approved by the Board of Directors on a monthly basis, while portfolio composition and performance are reviewed at least quarterly by the Investment Committee. Management determines the appropriate classification of securities at the date individual securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.
At December 31, 2010, the Company’s investment portfolio consisted of available for sale securities, totaling $180.0 million and trading securities totaling $248,000, together representing 19.5% of assets. The Company’s available for sale securities consisted primarily of “agency” mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less, U.S. Government and agency obligations, “private-label” mortgage-backed securities with maturities of 30 years or less and government-sponsored enterprises securities with maturities of 20 years or less and corporate debt securities. The Company’s trading securities consisted solely of collateralized debt obligations.
During the third quarter of 2010, the Company elected to fair value two collateralized debt obligations, previously reported as available for sale securities, and reclassified them to trading securities in accordance with applicable guidance. These securities had amortized costs of $248,000, $1.7 million and $1.2 million and fair values of $248,000, $739,000 and $1.2 million at December 31, 2010, 2009 and 2008, respectively. Cumulative unrealized losses at the date of election totaling $652,000 were reclassified from accumulated other comprehensive loss to retained earnings as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not purchase securities with the intent of selling them in the near term, thus there are no other securities in the trading portfolio. For the year ended December 31, 2010, the net loss in fair value on trading securities held at the reporting date was $408,000.
The following table sets forth the amortized costs and fair values of the Company’s securities portfolio at the dates indicated.
| |
|
December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(In Thousands)
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
| |
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$ |
23,399 |
|
|
$ |
23,583 |
|
|
$ |
35,945 |
|
|
$ |
36,229 |
|
|
$ |
2,453 |
|
|
$ |
2,415 |
|
|
Government-sponsored enterprises
|
|
|
29,912 |
|
|
|
29,993 |
|
|
|
13,980 |
|
|
|
14,035 |
|
|
|
25,985 |
|
|
|
26,587 |
|
|
Mortgage-backed securities: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - residential
|
|
|
84,408 |
|
|
|
87,370 |
|
|
|
89,751 |
|
|
|
93,099 |
|
|
|
81,383 |
|
|
|
83,651 |
|
|
Non-agency - residential
|
|
|
11,039 |
|
|
|
10,455 |
|
|
|
18,690 |
|
|
|
16,219 |
|
|
|
36,347 |
|
|
|
30,463 |
|
|
Non-agency - HELOC
|
|
|
3,797 |
|
|
|
3,199 |
|
|
|
4,328 |
|
|
|
2,196 |
|
|
|
3,089 |
|
|
|
2,816 |
|
|
Corporate debt securities
|
|
|
14,502 |
|
|
|
14,717 |
|
|
|
6,979 |
|
|
|
7,321 |
|
|
|
5,901 |
|
|
|
5,958 |
|
|
Collateralized debt obligations
|
|
|
6,466 |
|
|
|
2,532 |
|
|
|
8,153 |
|
|
|
5,038 |
|
|
|
6,625 |
|
|
|
5,392 |
|
|
Obligations of state and political subdivisions
|
|
|
6,800 |
|
|
|
6,905 |
|
|
|
5,003 |
|
|
|
5,131 |
|
|
|
4,000 |
|
|
|
4,037 |
|
|
Tax-exempt securities
|
|
|
140 |
|
|
|
144 |
|
|
|
3,210 |
|
|
|
3,219 |
|
|
|
280 |
|
|
|
280 |
|
|
Foreign government securities
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
Total debt securities
|
|
|
180,563 |
|
|
|
178,998 |
|
|
|
186,139 |
|
|
|
182,587 |
|
|
|
166,163 |
|
|
|
161,699 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities - financial services
|
|
|
1,024 |
|
|
|
1,038 |
|
|
|
1,043 |
|
|
|
975 |
|
|
|
1,060 |
|
|
|
1,000 |
|
|
Total available for sale securities
|
|
|
181,587 |
|
|
|
180,036 |
|
|
|
187,182 |
|
|
|
183,562 |
|
|
|
167,223 |
|
|
|
162,699 |
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
248 |
|
|
|
248 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total securities
|
|
$ |
181,835 |
|
|
$ |
180,284 |
|
|
$ |
187,182 |
|
|
$ |
183,562 |
|
|
$ |
167,223 |
|
|
$ |
162,699 |
|
___________
|
|
(1)
|
Agency securities refer to debt obligations issued or guaranteed by government corporations or government-sponsored enterprises (“GSEs”). Non-agency securities, or private-label securities, are the sole obligation of their issuer and are not guaranteed by one of the GSEs or the U.S. Government.
|
The Company had no individual investments that had an aggregate book value in excess of 10% of its shareholders’ equity at December 31, 2010.
The following table sets forth the amortized cost, weighted-average yields and contractual maturities of securities at December 31, 2010. Weighted-average yields on tax-exempt securities are not presented on a tax equivalent basis because the impact would be insignificant. Certain mortgage-backed securities and collateralized debt obligations have adjustable interest rates and will reprice periodically within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2010, the amortized cost of mortgage-backed securities with adjustable rates totaled $28.8 million.
| |
|
|
|
|
|
|
|
More than One Year
|
|
|
More than Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
One Year or Less
|
|
|
to Five Years
|
|
|
to Ten Years
|
|
|
More than Ten Years
|
|
|
Total
|
|
|
(Dollars in Thousands)
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Available for sales securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency obligations
|
|
$ |
- |
|
|
|
0.00 |
% |
|
$ |
1,698 |
|
|
|
2.30 |
% |
|
$ |
7,321 |
|
|
|
2.90 |
% |
|
$ |
14,380 |
|
|
|
3.10 |
% |
|
$ |
23,399 |
|
|
|
2.98 |
% |
|
Government-sponsored enterprises
|
|
|
2,000 |
|
|
|
3.37 |
|
|
|
24,993 |
|
|
|
1.95 |
|
|
|
2,919 |
|
|
|
2.57 |
|
|
|
- |
|
|
|
0.00 |
|
|
|
29,912 |
|
|
|
2.11 |
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - residential
|
|
|
- |
|
|
|
0.00 |
|
|
|
4,619 |
|
|
|
3.79 |
|
|
|
16,579 |
|
|
|
4.59 |
|
|
|
63,210 |
|
|
|
3.89 |
|
|
|
84,408 |
|
|
|
4.02 |
|
|
Non-agency - residential
|
|
|
- |
|
|
|
0.00 |
|
|
|
- |
|
|
|
0.00 |
|
|
|
- |
|
|
|
0.00 |
|
|
|
11,039 |
|
|
|
5.14 |
|
|
|
11,039 |
|
|
|
5.14 |
|
|
Non-agency - HELOC
|
|
|
- |
|
|
|
0.00 |
|
|
|
- |
|
|
|
0.00 |
|
|
|
- |
|
|
|
0.00 |
|
|
|
3,797 |
|
|
|
1.01 |
|
|
|
3,797 |
|
|
|
1.01 |
|
|
Corporate debt securities
|
|
|
495 |
|
|
|
2.56 |
|
|
|
10,172 |
|
|
|
2.73 |
|
|
|
2,835 |
|
|
|
3.23 |
|
|
|
1,000 |
|
|
|
4.82 |
|
|
|
14,502 |
|
|
|