CBNK-2013.09.30-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

Commission File Number: 000-51996
 
CHICOPEE BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Massachusetts
 
20-4840562
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
70 Center Street, Chicopee, Massachusetts
 
01013
(Address of principal executive offices)
(Zip Code)
(413) 594-6692
(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 [X]    No [   ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [  ]
Accelerated Filer [X]
Non-Accelerated Filer [  ]
Smaller Reporting Company [  ]

Indicate be check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]    No [X]

As of November 1, 2013, there were 5,417,485 shares of the Registrant’s Common Stock outstanding.




CHICOPEE BANCORP, INC.
FORM 10-Q
INDEX

 
 
 
   Page
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.   OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements
CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)
 
September 30,
2013
 
December 31,
2012
ASSETS
(Unaudited)
 
 
Cash and due from banks
$
22,196

 
$
11,073

Federal funds sold
2,126

 
3,372

Interest-bearing deposits with the Federal Reserve Bank of Boston
29,269

 
25,163

Total cash and cash equivalents
53,591

 
39,608

 
 
 
 
Available-for-sale securities, at fair value
631

 
621

Held-to-maturity securities, at cost (fair value $60,977 and $67,108 at
 

 
 

September 30, 2013 and December 31, 2012, respectively)
55,119

 
59,568

Federal Home Loan Bank stock, at cost
3,914

 
4,277

Loans, net of allowance for loan losses ($4,439 at
 

 
 

September 30, 2013 and $4,364 at December 31, 2012)
461,309

 
465,211

Loans held for sale
135

 

Other real estate owned (OREO)
501

 
572

Mortgage servicing rights
422

 
368

Bank owned life insurance
14,082

 
13,807

Premises and equipment, net
9,181

 
9,459

Accrued interest and dividends receivable
1,613

 
1,567

Deferred income tax asset
3,249

 
3,252

FDIC prepaid insurance

 
467

Other assets
1,125

 
1,205

Total assets
$
604,872

 
$
599,982

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Deposits
 

 
 

Demand deposits
$
102,818

 
$
75,407

NOW accounts
39,932

 
36,711

Savings accounts
50,696

 
48,882

Money market deposit accounts
127,678

 
127,730

Certificates of deposit
163,390

 
177,447

Total deposits
484,514

 
466,177

 
 
 
 
Securities sold under agreements to repurchase
1,793

 
9,763

Advances from Federal Home Loan Bank
26,348

 
33,332

Accrued expenses and other liabilities
937

 
741

Total liabilities
513,592

 
510,013

 
 
 
 
Stockholders' equity
 

 
 

Common stock (no par value, 20,000,000 shares authorized, 7,439,368
 
 

shares issued; 5,414,885 and 5,428,505 shares outstanding at September 30, 2013 and December 31, 2012)
72,479

 
72,479

Treasury stock, at cost (2,024,483 and 2,010,783 shares at September 30, 2013 and December 31, 2012)
(26,809
)
 
(26,567
)
Additional paid-in-capital
3,294

 
3,044

Unearned compensation (restricted stock awards)
(14
)
 
(18
)
Unearned compensation (Employee Stock Ownership Plan)
(3,645
)
 
(3,868
)
Retained earnings
45,942

 
44,873

Accumulated other comprehensive income
33

 
26

Total stockholders' equity
91,280

 
89,969

Total liabilities and stockholders' equity
$
604,872

 
$
599,982

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 


1



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except for Number of Shares and Per Share Amounts)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Interest and dividend income:
 
 
 
 
 
 
 
Loans, including fees
$
5,272

 
$
5,660

 
$
16,080

 
$
17,017

Interest and dividends on securities
424

 
425

 
1,275

 
1,248

Other interest-earning assets
14

 
15

 
44

 
54

Total interest and dividend income
5,710

 
6,100

 
17,399

 
18,319

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
Deposits
899

 
1,107

 
2,823

 
3,380

Securities sold under agreements to repurchase
2

 
2

 
9

 
11

Other borrowed funds
168

 
264

 
537

 
982

Total interest expense
1,069

 
1,373

 
3,369

 
4,373

 
 
 
 
 
 
 
 
Net interest income
4,641

 
4,727

 
14,030

 
13,946

Provision for loan losses
212

 
169

 
270

 
240

Net interest income after provision for loan losses
4,429

 
4,558

 
13,760

 
13,706

 
 
 
 
 
 
 
 
Non-interest income:
 

 
 

 
 
 
 
Service charges, fees and commissions
695

 
621

 
1,689

 
1,694

Loan sales and servicing, net
70

 
18

 
559

 
286

Net loss on sale of OREO
(93
)
 
(112
)
 
(154
)
 
(220
)
Income from bank owned life insurance
92

 
93

 
275

 
285

Other non-interest income

 

 
24

 
34

Total non-interest income
764

 
620

 
2,393

 
2,079

 
 
 
 
 
 
 
 
Non-interest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
2,564

 
2,447

 
7,656

 
8,064

Occupancy expenses
390

 
367

 
1,169

 
1,127

Furniture and equipment
194

 
179

 
633

 
594

FDIC insurance assessment
53

 
89

 
179

 
272

Data processing
316

 
285

 
928

 
817

Professional fees
159

 
136

 
528

 
447

Advertising
164

 
141

 
456

 
440

Stationery, supplies and postage
62

 
70

 
212

 
249

Other non-interest expense
603

 
648

 
2,033

 
2,004

Total non-interest expenses
4,505

 
4,362

 
13,794

 
14,014

 
 
 
 
 
 
 
 
Income before income taxes
688

 
816

 
2,359

 
1,771

Income tax expense
115

 
193

 
476

 
300

Net income
$
573

 
$
623

 
$
1,883

 
$
1,471

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

Diluted
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

 
 
 
 
 
 
 
 
Adjusted weighted average shares outstanding:
 

 
 

 
 
 
 
Basic
5,035,488

 
5,077,268

 
5,038,735

 
5,132,576

Diluted
5,138,815

 
5,102,842

 
5,125,438

 
5,158,479

 
 
 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 

 
 
 
 


2



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended
 
September 30,
 
2013
 
2012
Net income
$
573

 
$
623

 
 
 
 
Other comprehensive income, net of tax
 

 
 

Unrealized holding gains arising during period on investment securities available-for-sale
29

 
6

Tax effect
(10
)
 
(2
)
Other comprehensive income, net of tax
19

 
4

Comprehensive income
$
592

 
$
627

 
 
 
 
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Net income
$
1,883

 
$
1,471

 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
Unrealized holding gains (losses) arising during period on investment securities available-for-sale
10

 
(23
)
Tax effect
(3
)
 
8

Other comprehensive income (loss), net of tax
7

 
(15
)
Comprehensive income
$
1,890

 
$
1,456

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
 



3



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2013 and 2012
(Dollars In Thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Unearned Compensation(restricted stock awards)
 
Unearned Compensation (Employee Stock Ownership Plan)
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at December 31, 2012
$
72,479

 
$
(26,567
)
 
$
3,044

 
$
(18
)
 
$
(3,868
)
 
$
44,873

 
$
26

 
$
89,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 

 
1,883

 

 
1,883

Change in net unrealized loss on securities available-for-sale (net of deferred income taxes of $3)

 

 

 

 

 

 
7

 
7

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
1,890

Stock option expense (net of income tax benefit of $3)

 

 
94

 

 

 

 

 
94

Treasury stock purchased (13,700 shares)

 
(242
)
 

 

 

 

 

 
(242
)
Change in unearned compensation:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restricted stock award expense

 

 

 
4

 

 

 

 
4

Common stock held by ESOP committed to be released

 

 
156

 

 
223

 

 

 
379

Cash dividends declared ($0.15 per share)

 

 

 

 

 
(814
)
 

 
(814
)
Balance at September 30, 2013
$
72,479

 
$
(26,809
)
 
$
3,294

 
$
(14
)
 
$
(3,645
)
 
$
45,942

 
$
33

 
$
91,280

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
72,479

 
$
(22,190
)
 
$
2,800

 
$
(546
)
 
$
(4,166
)
 
$
42,408

 
$
(3
)
 
$
90,782

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 

 
1,471

 

 
1,471

Change in net unrealized loss on securities available-for-sale (net of deferred income taxes of $8)

 

 

 

 

 

 
(15
)
 
(15
)
Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
1,456

Stock option expense (net of income tax benefit of $51)

 

 
263

 

 

 

 

 
263

Treasury stock purchased (273,273 shares)

 
(3,883
)
 

 

 

 

 

 
(3,996
)
Stock options exercised

 

 
(53
)
 

 

 

 

 
(53
)
Change in unearned compensation:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restricted stock award expense

 

 

 
527

 

 

 

 
527

Common stock held by ESOP committed to be released

 

 
98

 

 
223

 

 

 
321

Balance at September 30, 2012
$
72,479

 
$
(26,073
)
 
$
2,995

 
$
(19
)
 
$
(3,943
)
 
$
43,879

 
$
(18
)
 
$
89,300

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 

 
 

 
 

 
 

 
 


4



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
(In Thousands)
Net income
$
1,883

 
$
1,471

Adjustments to reconcile net income to net cash
 

 
 

provided by operating activities:
 

 
 

Depreciation and amortization
721

 
748

       Gain on disposal of premises and equipment
(24
)
 

Provision for loan losses
270

 
240

Increase in cash surrender value of life insurance
(275
)
 
(285
)
Realized gains on sales of mortgage loans
(180
)
 
(128
)
Decrease in other assets
48

 
347

Increase in accrued interest and dividends receivable
(46
)
 
(533
)
Decrease in FDIC prepaid insurance
467

 
272

Net change in loans originated for resale
(135
)
 
1,635

Net loss on sales of OREO
154

 
220

Decrease in other liabilities
197

 
182

Change in unearned compensation
383

 
735

Stock option expense
94

 
263

Net cash provided by operating activities
3,557

 
5,167

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to premises and equipment
(268
)
 
(491
)
Loan originations and principal collections, net
3,150

 
(25,749
)
Proceeds from sales of OREO
401

 
675

Purchases of held-to-maturity securities
(27,015
)
 
(34,953
)
Maturities of held-to-maturity securities
30,390

 
45,139

Proceeds from principal paydowns of held-to-maturity securities
1,079

 
1,337

Proceeds from sale of FHLB stock
362

 
213

Net cash provided (used) by investing activities
8,099

 
(13,829
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net increase in deposits
18,336

 
21,732

Net decrease in securities sold under agreements to repurchase
(7,969
)
 
(5,132
)
Payments on long-term FHLB advances
(6,984
)
 
(23,630
)
Treasury stock purchased
(242
)
 
(3,883
)
Cash dividends paid on common stock
(814
)
 

Stock options exercised

 
(53
)
Net cash provided (used) by financing activities
2,327

 
(10,966
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
13,983

 
(19,628
)
 
 
 
 
Cash and cash equivalents at beginning of year
39,608

 
61,122

 
 
 
 
Cash and cash equivalents at end of period
$
53,591

 
$
41,494

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid on deposits
$
2,823

 
$
3,380

Interest paid on borrowings
556

 
909

Income taxes paid
346

 
361

Transfers from loans to OREO
483

 
520

Gain on acquisition of OREO

 
34

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.
 

 
 


5



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 30, 2013 and 2012

1. Basis of Presentation

Chicopee Bancorp, Inc. (the “Corporation”) has no significant assets other than all of the outstanding shares of its wholly-owned subsidiaries, Chicopee Savings Bank (the “Bank”) and Chicopee Funding Corporation (collectively, the “Company”). The Corporation was formed on March 14, 2006 and became the holding company for the Bank upon completion of the Bank’s conversion from a mutual savings bank to a stock savings bank.  The conversion of the Bank was completed on July 19, 2006.  The accounts of the Bank include its wholly-owned subsidiaries and a 99% owned subsidiary.  The consolidated financial statements of the Company as of September 30, 2013 and for the periods ended September 30, 2013 and 2012 included herein are unaudited.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations, changes in stockholders’ equity and cash flows, as of and for the periods covered herein, have been made.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.

The results for the three and nine month interim periods ended September 30, 2013 are not necessarily indicative of the operating results for a full year.


2. Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the adjusted weighted-average number of common shares outstanding during the period.  The adjusted outstanding common shares equals the gross number of common shares issued less average treasury shares, unallocated shares of the Chicopee Savings Bank Employee Stock Ownership Plan (“ESOP”), and average dilutive restricted stock awards under the 2007 Equity Incentive Plan. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate to outstanding stock options and certain stock awards and are determined using the treasury stock method.

Earnings per share is computed as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (in thousands)
$
573

 
$
623

 
$
1,883

 
$
1,471

 
 
 
 
 
 
 
 
Weighted average number of common shares issued
7,439,368

 
7,439,368

 
7,439,368

 
7,439,368

Less: average number of treasury shares
(2,015,832
)
 
(1,929,399
)
 
(2,012,484
)
 
(1,848,185
)
Less: average number of unallocated ESOP shares
(386,848
)
 
(416,605
)
 
(386,848
)
 
(416,605
)
Less: average number of dilutive restricted stock awards
(1,200
)
 
(16,096
)
 
(1,301
)
 
(42,002
)
 
 
 
 
 
 
 
 
Adjusted weighted average number of common shares outstanding
5,035,488

 
5,077,268

 
5,038,735

 
5,132,576

Plus: dilutive outstanding restricted stock awards
377

 
12,872

 
370

 
25,419

Plus: dilutive outstanding stock options
102,950

 
12,702

 
86,333

 
484

Weighted average number of diluted shares outstanding
5,138,815

 
5,102,842

 
5,125,438

 
5,158,479

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic-common stock
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

Basic-unvested share-based payment awards
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

Diluted-common stock
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

Diluted-unvested share-based payment awards
$
0.11

 
$
0.12

 
$
0.37

 
$
0.29

 


6



There were 100,000 and 73,000 stock options that were not included in the calculation of diluted earnings per share for the three months ended September 30, 2013 and 2012, respectively, because the effect was anti-dilutive. There were 100,000 and 583,198 stock options that were not included in the calculation of diluted earnings per share for the nine months ended September 30, 2013 and 2012, respectively, because the effect was anti-dilutive.

3. Equity Incentive Plan

Stock Options

The Company’s 2007 Equity Incentive Plan (the “Plan”) was approved by the Company’s stockholders at the annual meeting of the Company’s stockholders on May 30, 2007. The Plan provides that the Company may grant options to directors, officers and employees for up to 743,936 shares of common stock. Both incentive stock options and non-qualified stock options may be granted under the Plan. The exercise price for each option is equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The stock options vest over five years in five equal installments on each anniversary of the date of grant.

The Company recognizes compensation expense over the vesting period, based on the grant-date fair value of the options granted. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for options granted during the year ended December 31, 2012, and the nine months ended September 30, 2013:
 
 
Nine Months Ended September 30,
 
Year Ended
December 31,
 
2013
 
2012
Expected dividend yield
1.39
%
 
0.86
%
Weighted average expected term
6.50 years

 
6.50 years

Weighted average expected volatility
24.06
%
 
23.27
%
Weighted average risk-free interest rate
1.25
%
 
1.40
%
 
Expected volatility is based on the historical volatility of the Company’s stock and other factors. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses historical data, such as option exercise and employee termination rates, to calculate the expected option life.

A summary of options under the Plan as of September 30, 2013, and changes during the nine months ended September 30, 2013, is as follows:
 
 
Number of
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic
Value
(000's)
Outstanding at December 31, 2012
595,198

 
$
14.24

 
5.15

 
$
983

Granted
100,000

 
16.55

 
9.32

 

Exercised

 

 

 

Forfeited or expired

 

 

 

Outstanding at September 30, 2013
695,198

 
$
14.57

 
5.11

 
$
2,112

Exercisable at September 30, 2013
534,598

 
$
14.26

 
3.99

 
$
1,790

Exercisable at September 30, 2012
517,598

 
$
14.27

 
4.87

 
$
92

 





7



The Company granted 100,000 stock options during the nine months ended September 30, 2013 with a fair value of $3.59. The weighted-average grant-date fair value of options granted during 2012 was $3.32. The weighted-average grant-date fair value of the options outstanding and exercisable at September 30, 2013 was $3.81 and $3.90, respectively. For the nine months ended September 30, 2013 and 2012, share based compensation expense applicable to options granted under the Plan was $94,000 and $263,000 and the related tax benefit was $3,000 and $51,000, respectively. As of September 30, 2013, unrecognized stock-based compensation expense related to non-vested options amounted to $474,000. This amount is expected to be recognized over a period of 3.79 years.

Stock Awards

The Plan provides that, the Company may grant stock awards to its directors, officers and employees for up to 297,574 shares of common stock. The stock awards vest 20% per year beginning on the first anniversary of the date of grant. The fair market value of the stock awards, based on the market price at the date of grant, is recorded as unearned compensation. Unearned compensation is amortized over the applicable vesting period. The weighted-average grant-date fair value of stock awards as of September 30, 2013 is $14.08. The Company recorded compensation cost related to stock awards of approximately $4,000 and $527,000 in the nine months ended September 30, 2013 and 2012, respectively. Stock awards with a fair value of $854,000, vested during the year ended December 31, 2012. No stock awards were granted prior to July 1, 2007. The Company granted 2,000 stock awards during the year ended December 31, 2011 with a grant price of $14.08. There were no awards granted by the Company during the nine months ended September 30, 2013. As of September 30, 2013, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $14,000. This amount is expected to be recognized over a period of 2.44 years.

A summary of the status of the Company’s stock awards as of September 30, 2013, and changes during the nine months ended September 30, 2013, is as follows:
 
Nonvested Shares                                    
Number of
Shares
 
Weighted
Average
Grant-Date
Fair Value
 
 
 
 
Outstanding at December 31, 2012
1,600

 
$
14.08

Granted

 

Vested
400

 
14.08

Forfeited

 

Outstanding at September 30, 2013
1,200

 
$
14.08

 

4.     Long-term Incentive Plan
 
On March 13, 2012, the Company adopted the Chicopee Bancorp, Inc. 2012 Phantom Stock Unit Award and Long-Term Incentive Plan (the “Phantom Stock Plan”), effective January 1, 2012, to promote the long-term financial success of the Company and its subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interest with those of the Company’s stockholders.
 
A total of 150,000 phantom stock units will be available for awards under the Phantom Stock Plan. The only awards that may be granted under the Phantom Stock Plan are Phantom Stock Units. A Phantom Stock Unit represents the right to receive a cash payment on the determination date equal to the book value of a share of the Company’s stock on the determination date. The settlement of a Phantom Stock Unit on the determination date shall be in cash. Unless the Compensation Committee of the Board of Directors of the Company determines otherwise, the required period of service for full vesting will be three years. The Company's total expense under the Phantom Stock Plan for the three months ended September 30, 2013, and 2012, was $4,000 and $8,000, respectively. The Company’s total expense under the Phantom Stock Plan for the nine months ended September 30, 2013, and 2012, was $11,000 and $26,000, respectively.








8



5.      Recent Accounting Pronouncements (Applicable to the Company)

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2011-11, “Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities,” amending Topic 210.  The amendments require an entity to disclose both gross and net information about both instruments and transactions that are eligible for offset on the balance sheet and instruments and transactions that are subject to an agreement similar to a master netting arrangement.  This guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods, with retrospective disclosure for all comparative periods presented.  The adoption of ASU 2011-11 did not have a material impact on the Company's consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income". This ASU improves the reporting of reclassifications out of accumulated other comprehensive income. The amendments in the ASU seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective for reporting periods beginning after December 15, 2012, with early adoption permitted. The adoption of ASU 2013-02 did not have a material effect on the Company's consolidated financial statements.








































9



6.      Investment Securities

The following tables set forth, at the dates indicated, information regarding the amortized cost and fair value, with gross unrealized gains and losses of the Company's investment securities:
 
 
September 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In Thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Marketable equity securities
$
581

 
$
55

 
$
(5
)
 
$
631

Total available-for-sale securities
$
581

 
$
55

 
$
(5
)
 
$
631

 
 
 
 
 
 
 
 
Held-to-maturity securities
 

 
 

 
 

 
 

U.S. Treasury securities
$
10,997

 
$
3

 
$

 
$
11,000

Corporate and industrial
 

 
 

 
 

 
 

revenue bonds
35,034

 
5,804

 

 
40,838

Certificates of deposit
8,373

 
15

 

 
8,388

Collateralized mortgage obligations
715

 
36

 

 
751

Total held-to-maturity securities
$
55,119

 
$
5,858

 
$

 
$
60,977

 
 
 
 
 
 
 
 
Non-marketable securities
 

 
 

 
 

 
 

Federal Home Loan Bank stock
$
3,914

 
$

 
$

 
$
3,914

Banker's Bank stock
183

 

 

 
183

Total non-marketable securities
$
4,097

 
$

 
$

 
$
4,097

 
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In Thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Marketable equity securities
$
581

 
$
40

 
$

 
$
621

Total available-for-sale securities
$
581

 
$
40

 
$

 
$
621

 
 
 
 
 
 
 
 
Held-to-maturity securities
 

 
 

 
 

 
 

U.S. Treasury securities
$
13,691

 
$
2

 
$

 
$
13,693

Corporate and industrial
 

 
 

 
 

 
 

revenue bonds
35,656

 
7,481

 

 
43,137

Certificates of deposit
9,041

 
4

 

 
9,045

Collateralized mortgage obligations
1,180

 
53

 

 
1,233

Total held-to-maturity securities
$
59,568

 
$
7,540

 
$

 
$
67,108

 
 
 
 
 
 
 
 
Non-marketable securities
 

 
 

 
 

 
 

Federal Home Loan Bank stock
$
4,277

 
$

 
$

 
$
4,277

Banker's Bank stock
183

 

 

 
183

Total non-marketable securities
$
4,460

 
$

 
$

 
$
4,460

 
At September 30, 2013 and December 31, 2012, securities with an amortized cost of $11.3 million and $12.6 million, respectively, were pledged as collateral to support securities sold under agreements to repurchase.

10



The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2013 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The collateralized mortgage obligations are allocated to maturity categories according to final maturity date.
 
Held-to-maturity
 
Amortized
Cost
 
Fair Value
 
(In Thousands)
Within 1 year
$
19,370

 
$
19,388

From 1 to 5 years
440

 
462

From 5 to 10 years
8,339

 
9,401

Over 10 years
26,970

 
31,726

 
$
55,119

 
$
60,977

 
Unrealized Losses on Investment Securities
Management conducts, at least on a monthly basis, a review of its investment portfolio including available-for-sale and held-to-maturity securities to determine if the fair value of any security has declined below its cost or amortized cost and whether such security is other-than-temporarily impaired (“OTTI”). Securities are evaluated individually based on guidelines established by the FASB and the internal policy of the Company and include but are not limited to: (1) intent and ability of the Company to retain the investment for a period of time sufficient to allow for the anticipated recovery in fair value; (2) percentage and length of time which an issue is below book value; (3) financial condition and near-term prospects of the issuer; (4) whether the debtor is current on contractually obligated interest and principal payments; (5) the volatility of the market price of the security; and (6) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest due.

As of September 30, 2013 management determined that there were no securities other-than-temporarily impaired. During the year ended December 31, 2012, management deemed that three equity securities issued by one company in the financial industry had other-than-temporary impairment and a write down was recorded in the amount of $37,000. Management evaluated these securities according to the Company's OTTI policy and determined the declines in value to be other-than-temporary.

The following table presents the fair value of investments with continuous unrealized losses as of September 30, 2013:
 
 
September 30, 2013
 
 
 Less Than Twelve Months
 
 Twelve Months and Over
 
 Total
 
 
 (In Thousands)
 
 
 
 
 Gross
 
 
 
 Gross
 
 
 
 Gross
 
 
 Fair
 
 Unrealized
 
 Fair
 
 Unrealized
 
 Fair
 
Unrealized
 
 
 Value
 
 Losses
 
 Value
 
 Losses
 
 Value
 
 Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
 
$
212

 
$
(5
)
 
$

 
$

 
$
212

 
$
(5
)
Total temporarily impaired securities
 
$
212

 
$
(5
)
 
$

 
$

 
$
212

 
$
(5
)

There were no continuous unrealized losses as of December 31, 2012.
 
U.S. Treasury Securities
There were no unrealized losses within the U.S. Treasury securities portfolio at September 30, 2013 and December 31, 2012, respectively. The portfolio ended with an unrealized gain of $3,000 and $2,000 as of September 30, 2013 and December 31, 2012, respectively.







11



Collateralized Mortgage Obligations (“CMO”)
As of September 30, 2013 and December 31, 2012, there were no unrealized losses within the CMO portfolio. The portfolio ended with an unrealized gain of $36,000 and $53,000 as of September 30, 2013 and December 31, 2012, respectively.

As of September 30, 2013, the Company had seven CMO bonds, or nine individual issues, with an aggregate book value of $715,000, there were no bonds with a FICO score less than 650. Since the purchase of these bonds, interest payments have been current and the Company expects to receive all principal and interest due.

As of December 31, 2012, the Company had nine CMO bonds, or 12 individual issues, with an aggregate book value of $1.2 million, which included one bond, with a FICO score less than 650. This risk is mitigated by loan-to-value ratios of less than 65%. Since the purchase of these bonds, interest payments have been current and the Company expects to receive all principal and interest due.

Corporate and Industrial Revenue Bonds
As of September 30, 2013 and December 31, 2012, there were no unrealized losses within the corporate industrial revenue bond category. As of September 30, 2013, the Company had six tax-exempt industrial revenue bonds ("IRB"), with an aggregate book value of $35.0 million. These IRBs have a tax equivalent adjustment based on a tax rate of 41%. The portfolio ended with unrealized gains of $5.8 million and $7.5 million as of September 30, 2013 and December 31, 2012, respectively.

As of December 31, 2012, the Company had six tax-exempt IRBs, with an aggregate book value of $35.7 million. These IRBs have a tax equivalent adjustment based on a tax rate of 41%.

Marketable Equity Securities
Unrealized losses within the marketable equity securities portfolio at September 30, 2013 related to three securities issued by one company in the financial industry.  As of September 30, 2013, all unrealized losses were for less than 12 months. In reviewing these marketable securities for OTTI, it was determined that there was no impairment. Management will continue to conduct, on at least a monthly basis, a review if its investment portfolio to determine if the value of any security has declined below its cost and whether such security is other-than-temporarily impaired. There were no unrealized losses within the marketable equity securities portfolio at December 31, 2012

Non-Marketable Securities
The Company is a member of the Federal Home Loan Bank (“FHLB”). The FHLB is a cooperatively owned wholesale bank for housing and finance in the six New England States. Its mission is to support the residential mortgage and community development lending activities of its members, which include over 450 financial institutions across New England. As a requirement of membership in the FHLB, the Company must own a minimum required amount of FHLB stock, calculated periodically based primarily on the Company’s level of borrowings from the FHLB. The Company uses the FHLB for much of its wholesale funding needs. As of September 30, 2013 and December 31, 2012, the Company’s investment in FHLB stock totaled $3.9 million and $4.3 million, or 39,141 and 42,765 shares, respectively.

FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. Shares held in excess of the minimum required amount are generally redeemable at par value. However, in the first quarter of 2009 the FHLB announced a moratorium on such redemptions in order to preserve its capital in response to current market conditions and declining retained earnings. The minimum required shares are redeemable, subject to certain limitations, five years following termination of FHLB membership. The Company has no intention of terminating its FHLB membership. As of September 30, 2013 and December 31, 2012, the Company received $12,000, and $22,000, in dividend income from its FHLB stock investment, respectively. On February 22, 2012, the FHLB announced that the Board of Directors approved the repurchase of excess capital stock from its members. On March 11, 2013, the FHLB repurchased $362,000 of FHLB stock, representing 3,624 shares.

The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2013. The Company will continue to monitor its investment in FHLB stock.

Banker’s Bank Northeast stock is carried at cost and is evaluated for impairment based on an estimate of the ultimate recovery to par value. As of September 30, 2013 and December 31, 2012, the Company’s investment in Banker’s Bank totaled $183,000.






12



7.      Loans and Allowance for Loan Losses

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the respective portfolio.
 
 
September 30, 2013
 
December 31, 2012
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
(Dollars In Thousands)
Real estate loans:
 
 
 
 
 
 
 
Residential1
$
114,042

 
24.5
%
 
$
120,265

 
25.7
%
Home equity
32,342

 
7.0
%
 
31,731

 
6.8
%
Commercial
186,536

 
40.1
%
 
189,472

 
40.4
%
      Total
332,920

 
71.6
%
 
341,468

 
72.9
%
 
 
 
 
 
 
 
 
Construction-residential
5,192

 
1.1
%
 
4,334

 
0.9
%
Construction-commercial
34,154

 
7.3
%
 
35,781

 
7.6
%
      Total
39,346

 
8.4
%
 
40,115

 
8.5
%
 
 
 
 
 
 
 
 
            Total real estate loans
372,266

 
80.0
%
 
381,583

 
81.4
%
 
 
 
 
 
 
 
 
Consumer loans
2,419

 
0.6
%
 
2,492

 
0.6
%
Commercial and industrial loans
90,154

 
19.4
%
 
84,583

 
18.0
%
      Total loans
464,839

 
100.0
%
 
468,658

 
100.0
%
 
 
 
 
 
 
 
 
Deferred loan origination costs, net
909

 
 

 
917

 
 

Allowance for loan losses
(4,439
)
 
 

 
(4,364
)
 
 

      Loans, net
$
461,309

 
 

 
$
465,211

 
 

 
 
 
 
 
 
 
 
1 Excludes loans held for sale of $135,000 at September 30, 2013. There were no loans held for sale at December 31, 2012.
 
The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and therefore not included in the Company’s consolidated statements of financial condition. The Company and participating lenders share proportionally, based on participating agreements, any gains or losses the may result from the borrowers lack of compliance with the terms of the loan. The Company continues to service the loans on behalf of the participating lenders. At September 30, 2013 and December 31, 2012, the Company was servicing loans for participating lenders totaling $20.6 million and $19.3 million, respectively.

In accordance with the Company’s asset/liability management strategy and in an effort to reduce interest rate risk, the Company continues to sell fixed rate, low coupon residential real estate loans to the secondary market. The unpaid principal balance of mortgages that are serviced for others was $98.0 million and $87.1 million at September 30, 2013 and December 31, 2012, respectively. Servicing rights will continue to be retained on all loans written and sold in the secondary market.

Credit Quality
 
To evaluate the risk in the loan portfolio, internal credit risk ratings are used for the following loan segments: commercial real estate, commercial construction and commercial. The risks evaluated in determining an adequate credit risk rating, include the financial strength of the borrower and the collateral securing the loan. All commercial real estate, commercial construction and commercial loans are rated from one through nine. Credit risk ratings one through five are considered pass ratings. Classified assets include credit risk ratings of special mention, substandard, doubtful and loss. At least quarterly, classified assets are reviewed by management and by an independent third party. Credit risk ratings are updated as soon as information is obtained that indicates a change in the credit risk rating may be warranted.
 



13



The following describes the credit risk ratings:

Special mention. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the following categories but possess potential weaknesses.

Substandard. Assets that have one or more defined weakness and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Non-accruing loans are typically classified as substandard.
 
Doubtful. Assets that have the weaknesses of substandard assets 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 possibility of loss.
 
Loss. Assets rated in this category are considered uncollectible and are charged off against the allowance for loan losses.
 
Residential real estate and residential construction loans are categorized into pass and substandard risk ratings. Substandard residential loans are loans that are on nonaccrual status and are individually evaluated for impairment.
 
Consumer loans are considered nonperforming when they are 90 days past due or have not returned to accrual status. Consumer loans are not individually evaluated for impairment.
 
Home equity loans are considered nonperforming when they are 90 days past due or have not returned to accrual status. Each nonperforming home equity loan is individually evaluated for impairment.
 
The following table presents an analysis of total loans segregated by risk rating and segment as of September 30, 2013:
 
 
Commercial Credit Risk Exposure
 
Commercial and Industrial
 
Commercial
Construction
 
Commercial
Real Estate
 
Total
 
(In Thousands)
Pass
$
82,533

 
$
24,825

 
$
172,657

 
$
280,015

Special mention
4,977

 
5,507

 
6,878

 
17,362

Substandard
2,644

 
3,822

 
7,001

 
13,467

Doubtful

 

 

 

Loss

 

 

 

   Total commercial loans
$
90,154

 
$
34,154

 
$
186,536

 
$
310,844

 
 
 
 
 
 
 
 
 
Residential Credit Risk Exposure
 
Residential
Real Estate
 
Residential
Construction
 
 

 
Total
 
(In Thousands)
Performing
$
111,645

 
$
5,192

 
 

 
$
116,837

Substandard (accruing)
245

 

 
 

 
245

Substandard (nonaccrual)
2,152

 

 
 
 
2,152

   Total residential loans
$
114,042

 
$
5,192

 
 

 
$
119,234

 
 
 
 
 
 
 
 
 
Consumer Credit Risk Exposure
 
Consumer
 
Home Equity
 
 

 
Total
 
(In Thousands)
Performing
$
2,396

 
$
32,061

 
 

 
$
34,457

Substandard (accruing)

 
50

 
 
 
50

Nonperforming (nonaccrual)
23

 
231

 
 

 
254

   Total consumer loans
$
2,419

 
$
32,342

 
 

 
$
34,761





14



The following table presents an analysis of total loans segregated by risk rating and segment as of December 31, 2012:
 
 
Commercial Credit Risk Exposure
 
Commercial and Industrial
 
Commercial
Construction
 
Commercial
Real Estate
 
Total
 
(In Thousands)
Pass
$
75,656

 
$
23,214

 
$
178,337

 
$
277,207

Special mention
8,006

 
8,164

 
7,529

 
23,699

Substandard
874

 
4,403

 
3,606

 
8,883

Doubtful
47

 

 

 
47

Loss

 

 

 

   Total commercial loans
$
84,583

 
$
35,781

 
$
189,472

 
$
309,836

 
 
 
 
 
 
 
 
 
Residential Credit Risk Exposure
 
Residential
Real Estate
 
Residential
Construction
 
 

 
Total
 
(In Thousands)
Performing
$
117,612

 
$
4,003

 
 

 
$
121,615

Substandard (accruing)
66

 

 
 
 
66

Substandard (nonaccrual)
2,587

 
331

 
 

 
2,918

   Total residential loans
$
120,265

 
$
4,334

 
 

 
$
124,599

 
 
 
 
 
 
 
 
 
Consumer Credit Risk Exposure
 
Consumer
 
Home Equity
 
 

 
Total
 
(In Thousands)
Performing
$
2,468

 
$
31,635

 
 

 
$
34,103

Nonperforming (nonaccrual)
24

 
96

 
 

 
120

   Total consumer loans
$
2,492

 
$
31,731

 
 

 
$
34,223


Allowance for Loan Losses
 
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general and allocated components, as further described below.

General Component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following portfolio segments: residential real estate, residential construction, commercial real estate, commercial, commercial construction, consumer and home equity. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each portfolio segment. Management deems 36 months to be an appropriate time frame on which to base historical losses for each portfolio segment. This historical loss factor is adjusted for qualitative factors for each portfolio segment including, but not limited to: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and changes in lending policies, experience, ability, depth of lending management and staff; and national and local economic conditions. Management follows a similar process to estimate its liability for off-balance-sheet commitments to extend credit.

The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:





15



Risk Characteristics

Residential real estate loans enable the borrower to purchase or refinance existing homes, most of which serve as the primary residence of the owner. Repayment is dependent on the credit quality of the borrower. Factors attributable to failure of repayment may include a weakened economy and/or unemployment, as well as possible personal considerations. While the Company anticipates adjustable-rate mortgages will better offset the potential 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 of the underlying property also may be adversely affected in a high interest rate environment.

Commercial real estate loans are secured by commercial real estate and residential investment real estate and generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Risks in commercial real estate and residential investment lending are borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on 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.

Commercial and residential construction loans are 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 and the estimated cost (including interest) of construction.

Commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s 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 and home equity loans may entail greater risk than do 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 further substantial 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 that can be recovered on such loans.

The Company does not disaggregate its portfolio segments into loan classes.

Allocated Component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for residential real estate, commercial real estate and 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 if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The Company recognizes the change in present value attributable to the passage of time as provision for loan losses. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment, and the resulting allowance is reported as the general component, as described above.
 
Loans considered for impairment include all loan segments of commercial and residential, as well as home equity loans. The segments are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company 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 restructuring ("TDR"). All TDR’s are classified as impaired.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, except for home equity loans.


16



During the nine months ended September 30, 2013 the Company modified the allowance methodology related to the qualitative factors. No quantitative factors were changed in the modification. The charge off trends are a separate factor in the allowance methodology and are no longer included in the qualitative factors. In addition, the Company reviews the dollar amount of total delinquencies and adjusts for the amounts and trends in the 30-89 day category. The amount over 90 day delinquencies is then compared to the charge-off history. Trends in volume are analyzed to determine any significant changes and the risk associated with each sector and trend. These changes resulted in a reallocation of the allowance and did not have a material effect on the allowance for loan losses.

The following table presents the allowance for loan losses and select loan information as of and for the three months ended September 30, 2013:
 
 
Residential
Real Estate
 
Residential
Construction
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial and Industrial
 
Consumer
Loans
 
Home
Equity
 
Total
Allowance for loan losses
(In Thousands)
Balance as of June 30, 2013
$
561

 
$
52

 
$
1,921

 
$
373

 
$
1,251

 
$
38

 
$
140

 
$
4,336

Provision for (reduction of) loan losses
113

 
23

 
39

 
43

 
(15
)
 
13

 
(4
)
 
212

Recoveries

 

 
2

 

 
1

 
3

 

 
6

Loans charged off
(52
)
 

 

 

 
(47
)
 
(16
)
 

 
(115
)
Balance as of September 30, 2013
$
622

 
$
75

 
$
1,962

 
$
416

 
$
1,190

 
$
38

 
$
136

 
$
4,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The following table presents the allowance for loan losses and select loan information as of and for the nine months ended September 30, 2013:

 
Residential
Real Estate
 
Residential
Construction
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial and Industrial
 
Consumer
Loans
 
Home
Equity
 
Total
Allowance for loan losses
(In Thousands)
Balance as of December 31, 2012
$
536

 
$
93

 
$
1,966

 
$
502

 
$
1,099

 
$
44

 
$
124

 
$
4,364

Provision for (reduction of) loan losses
198

 
44

 
(15
)
 
(86
)
 
101

 
16

 
12

 
270

Recoveries
1

 

 
11

 

 
37

 
11

 

 
60

Loans charged off
(113
)
 
(62
)
 

 

 
(47
)
 
(33
)
 

 
(255
)
Balance as of September 30, 2013
$
622

 
$
75

 
$
1,962

 
$
416

 
$
1,190

 
$
38

 
$
136

 
$
4,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses ending balance
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
391

 
$
75

 
$
1,858

 
$
416

 
$
1,134

 
$
38

 
$
122

 
$
4,034

Individually evaluated for impairment
231

 

 
104

 

 
56

 

 
14

 
405

 
$
622

 
$
75

 
$
1,962

 
$
416

 
$
1,190

 
$
38

 
$
136

 
$
4,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans ending balance
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
111,645

 
$
5,192

 
$
180,396

 
$
30,331

 
$
88,587

 
$
2,419

 
$
32,061

 
$
450,631

Individually evaluated for impairment
2,397

 

 
6,140

 
3,823

 
1,567

 

 
281

 
14,208

 
$
114,042

 
$
5,192

 
$
186,536

 
$
34,154

 
$
90,154

 
$
2,419

 
$
32,342

 
$
464,839








17



The following table presents the allowance for loan losses and select loan information as of and for the year ended December 31, 2012:
 
 
Residential
Real Estate
 
Residential
Construction
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial and Industrial
 
Consumer
Loans
 
Home
Equity
 
Total
Allowance for loan losses
(In Thousands)
Balance as of December 31, 2011
$
549

 
$
89

 
$
1,891

 
$
526

 
$
1,343

 
$
47

 
$
131

 
$
4,576

Provision for (reduction of) loan losses
84

 
4

 
140

 
(24
)
 
158

 
52

 
28

 
442

Recoveries
1

 

 

 

 
4

 
19

 

 
24

Loans charged off
(98
)
 

 
(65
)
 

 
(406
)
 
(74
)
 
(35
)
 
(678
)
Balance as of December 31, 2012
$
536

 
$
93

 
$
1,966

 
$
502

 
$
1,099

 
$
44

 
$
124

 
$
4,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses ending balance
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
353

 
$
62

 
$
1,919

 
$
502

 
$
1,099

 
$
44

 
$
124

 
$
4,103

Individually evaluated for impairment
183

 
31

 
47

 

 

 

 

 
261

 
$
536

 
$
93

 
$
1,966

 
$
502

 
$
1,099

 
$
44

 
$
124

 
$
4,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans ending balance
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
117,611

 
$
4,003

 
$
186,293

 
$
31,378

 
$
83,917

 
$
2,492

 
$
31,635

 
$
457,329

Individually evaluated for impairment
2,654

 
331

 
3,179

 
4,403

 
666

 

 
96

 
11,329

 
$
120,265

 
$
4,334

 
$
189,472

 
$
35,781

 
$
84,583

 
$
2,492

 
$
31,731

 
$
468,658

 
The following table presents the allowance for loan losses and select loan information as of and for three months ended September 30, 2012:
 
 
Residential
Real Estate
 
Residential
Construction
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial and Industrial
 
Consumer
Loans
 
Home
Equity
 
Total
Allowance for loan losses
(In Thousands)
Balance as of June 30, 2012
$
369

 
$
94

 
$
1,852

 
$
589

 
$
1,352

 
$
46

 
$
180

 
$
4,482

Provision for (reduction of) loan losses
54

 
3

 
134

 
(39
)
 
52

 
10

 
(45
)
 
169

Recoveries

 

 

 

 
2

 
3

 

 
5

Loans charged off

 

 
(65
)
 

 
(177
)
 
(13
)
 

 
(255
)
Balance as of September 30, 2012
$
423

 
$
97

 
$
1,921

 
$
550

 
$
1,229

 
$
46

 
$
135

 
$
4,401

















18



The following table presents the allowance for loan losses and select loan information as of and for the nine months ended September 30, 2012:

 
Residential
Real Estate
 
Residential
Construction
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial and Industrial
 
Consumer
Loans
 
Home
Equity
 
Total
Allowance for loan losses
(In Thousands)
Balance as of December 31, 2011
$
549

 
$
89

 
$
1,891

 
$
526

 
$
1,343

 
$
47

 
$
131

 
$
4,576

(Reduction of) provision for loan losses
(47
)
 
8

 
95

 
24

 
109

 
47

 
4

 
240

Recoveries
1

 

 

 

 
2

 
13

 

 
16

Loans charged off
(80
)
 

 
(65
)
 

 
(225
)
 
(61
)
 

 
(431
)
Balance as of September 30, 2012
$
423

 
$
97

 
$
1,921

 
$
550

 
$
1,229

 
$
46

 
$
135

 
$
4,401

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses ending balance
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
325

 
$
82

 
$
1,874

 
$
550

 
$
1,107

 
$
46

 
$
122

 
$
4,106

Individually evaluated for impairment
98

 
15

 
47

 

 
122

 

 
13

 
295

 
$
423

 
$
97

 
$
1,921

 
$
550

 
$
1,229

 
$
46

 
$
135

 
$
4,401

Total loans ending balance
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
120,340

 
$
5,199

 
$
181,954

 
$
34,369

 
$
84,514

 
$
2,598

 
$
31,370

 
$
460,344

Individually evaluated for impairment
1,684

 
331

 
3,701

 
4,490

 
1,167

 

 
223

 
11,596

 
$
122,024

 
$
5,530

 
$
185,655

 
$
38,859

 
$
85,681

 
$
2,598

 
$
31,593

 
$
471,940

































19



Impairment
 
The following table presents a summary of information pertaining to impaired loans by segment as of and for the three months ended September 30, 2013:
 
 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
Residential real estate
$
1,259

 
$
1,259

 
$
1,409

 
$

 
$
19

Residential construction

 

 

 

 

Commercial real estate
5,601

 
5,915

 
3,897

 

 
64

Commercial construction
3,823

 
3,823

 
4,016

 

 
46

Commercial and industrial
1,234

 
1,504

 
922

 

 
14

Consumer

 

 

 

 

Home equity
118

 
118

 
142

 

 
2

Total
$
12,035

 
$
12,619

 
$
10,386

 
$

 
$
145

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,138

 
$
1,138

 
$
1,006

 
$
231

 
$
11

Residential construction

 

 
110

 

 

Commercial real estate
539

 
604

 
475

 
104

 
11

Commercial construction

 

 

 

 

Commercial and industrial
333

 
333

 
183

 
56

 
2

Consumer

 

 

 

 

Home equity
163

 
163

 
125

 
14

 

Total
$
2,173

 
$
2,238

 
$
1,899

 
$
405

 
$
24

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,397

 
$
2,397

 
$
2,415

 
$
231

 
$
30

Residential construction

 

 
110

 

 

Commercial real estate
6,140

 
6,519

 
4,372

 
104

 
75

Commercial construction
3,823

 
3,823

 
4,016

 

 
46

Commercial and industrial
1,567

 
1,837

 
1,105

 
56

 
16

Consumer

 

 

 

 

Home equity
281

 
281

 
267

 
14

 
2

Total
$
14,208

 
$
14,857

 
$
12,285

 
$
405

 
$
169
















20



The following table presents a summary of information pertaining to impaired loans by segment as of and for the nine months ended September 30, 2013:

 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
Residential real estate
$
1,259

 
$
1,259

 
$
1,434

 
$

 
$
39

Residential construction

 

 

 

 

Commercial real estate
5,601

 
5,915

 
3,632

 

 
172

Commercial construction
3,823

 
3,823

 
4,113

 

 
147

Commercial and industrial
1,234

 
1,504

 
858

 

 
28

Consumer

 

 

 

 

Home equity
118

 
118

 
131

 

 
4

Total
$
12,035

 
$
12,619

 
$
10,168

 
$

 
$
390

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,138

 
$
1,138

 
$
1,040

 
$
231

 
$
21

Residential construction

 

 
165

 

 

Commercial real estate
539

 
604

 
442

 
104

 
20

Commercial construction

 

 

 

 

Commercial and industrial
333

 
333

 
137

 
56

 
2

Consumer

 

 

 

 

Home equity
163

 
163

 
94

 
14

 
1

Total
$
2,173

 
$
2,238

 
$
1,878

 
$
405

 
$
44

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,397

 
$
2,397

 
$
2,474

 
$
231

 
$
60

Residential construction

 

 
165

 

 

Commercial real estate
6,140

 
6,519

 
4,074

 
104

 
192

Commercial construction
3,823

 
3,823

 
4,113

 

 
147

Commercial and industrial
1,567

 
1,837

 
995

 
56

 
30

Consumer

 

 

 

 

Home equity
281

 
281

 
225

 
14

 
5

Total
$
14,208

 
$
14,857

 
$
12,046

 
$
405

 
$
434


















21



The following table presents a summary of information pertaining to impaired loans by segment as of and for the year ended December 31, 2012:
 
 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
Residential real estate
$
1,512

 
$
1,512

 
$
1,228

 
$

 
$
53

Residential construction

 

 

 

 

Commercial real estate
2,835

 
3,225

 
3,410

 

 
141

Commercial construction
4,403

 
4,403

 
2,691

 

 
131

Commercial and industrial
666

 
891

 
723

 

 
25

Consumer

 

 

 

 

Home equity
96

 
96

 
217

 

 
5

Total
$
9,512

 
$
10,127

 
$
8,269

 
$

 
$
355

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,142

 
$
1,142

 
$
722

 
$
183

 
$
48

Residential construction
331

 
331

 
265

 
31

 

Commercial real estate
344

 
344

 
422

 
47

 
20

Commercial construction

 

 
43

 

 

Commercial and industrial

 

 
623

 

 

Consumer

 

 

 

 

Home equity

 

 
34

 

 

Total
$
1,817

 
$
1,817

 
$
2,109

 
$
261

 
$
68

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,654

 
$
2,654

 
$
1,950

 
$
183

 
$
101

Residential construction
331

 
331

 
265

 
31

 

Commercial real estate
3,179

 
3,569

 
3,832

 
47

 
161

Commercial construction
4,403

 
4,403

 
2,734

 

 
131

Commercial and industrial
666

 
891

 
1,346

 

 
25

Consumer

 

 

 

 

Home equity
96

 
96

 
251

 

 
5

Total
$
11,329

 
$
11,944

 
$
10,378

 
$
261

 
$
423

 

















22



The following table presents a summary of information pertaining to impaired loans by segment as of and for the three months ended September 30, 2012:

 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
Residential real estate
$
1,050

 
$
1,050

 
$
967

 
$

 
$
11

Residential construction

 

 

 

 

Commercial real estate
3,356

 
3,756

 
3,402

 

 
41

Commercial construction
4,490

 
4,490

 
4,419

 

 
53

Commercial and industrial
871

 
871

 
889

 

 
9

Consumer

 

 

 

 

Home equity
188

 
188

 
205

 

 
1

Total
$
9,955

 
$
10,355

 
$
9,882

 
$

 
$
115

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
634

 
$
634

 
$
502

 
$
98

 
$
6

Residential construction
331

 
331

 
331

 
15

 

Commercial real estate
345

 
345

 
470

 
47

 
5

Commercial construction

 

 

 

 

Commercial and industrial
296

 
296

 
582

 
122

 

Consumer

 

 

 

 

Home equity
35

 
35

 
51

 
13

 

Total
$
1,641

 
$
1,641

 
$
1,936

 
$
295

 
$
11

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,684

 
$
1,684

 
$
1,469

 
$
98

 
$
17

Residential construction
331

 
331

 
331

 
15

 

Commercial real estate
3,701

 
4,101

 
3,872

 
47

 
46

Commercial construction
4,490

 
4,490

 
4,419

 

 
53

Commercial and industrial
1,167

 
1,167

 
1,471

 
122

 
9

Consumer

 

 

 

 

Home equity
223

 
223

 
256

 
13

 
1

Total
$
11,596

 
$
11,996

 
$
11,818

 
$
295

 
$
126

 

















23



The following table presents a summary of information pertaining to impaired loans by segment as of and for the nine months ended September 30, 2012:

 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
Residential real estate
$
1,050

 
$
1,050

 
$
1,157

 
$

 
$
29

Residential construction

 

 

 

 

Commercial real estate
3,356

 
3,756

 
3,555

 

 
146

Commercial construction
4,490

 
4,490

 
2,263

 

 
114

  Commercial and industrial
871

 
871

 
737

 

 
31

Consumer

 

 

 

 

Home equity
188

 
188

 
247

 

 
3

Total
$
9,955

 
$
10,355

 
$
7,959

 
$

 
$
323

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
634

 
$
634

 
$
617

 
$
98

 
$
16

Residential construction
331

 
331

 
248

 
15

 

Commercial real estate
345

 
345

 
441

 
47

 
17

Commercial construction

 

 
54

 

 

  Commercial and industrial
296

 
296

 
779

 
122

 
1

Consumer

 

 

 

 

Home equity
35

 
35

 
43

 
13

 

Total
$
1,641

 
$
1,641

 
$
2,182

 
$
295

 
$
34

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,684

 
$
1,684

 
$
1,774

 
$
98

 
$
45

Residential construction
331

 
331

 
248

 
15

 

Commercial real estate
3,701

 
4,101

 
3,996

 
47

 
163

Commercial construction
4,490

 
4,490

 
2,317

 

 
114

  Commercial and industrial
1,167

 
1,167

 
1,516

 
122

 
32

Consumer

 

 

 

 

Home equity
223

 
223

 
290

 
13

 
3

Total
$
11,596

 
$
11,996

 
$
10,141

 
$
295

 
$
357


Delinquency and Nonaccrual
 
All loan segments greater than 30 days past due are considered delinquent. The Company calculates the number of days past due based on a 30 day month. Management continuously monitors delinquency and nonaccrual levels and trends.
 
It is the Company’s policy to discontinue the accrual of interest on all loan classes when principal or interest payments are delinquent 90 days or more. The accrual of interest is also discontinued for impaired loans that are delinquent 90 days or more or at management’s discretion.
 
All interest accrued, but not collected, for all loan classes, including impaired loans that are placed on nonaccrual or charged off, is reversed against interest income. Interest recognized on these loans is limited to interest payments received until qualifying for return to accrual. All loan classes are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.




24



The following table presents an aging analysis of past due loans as of September 30, 2013:
 
 
31-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total
Loans
 
Nonaccrual
Loans
 
(In Thousands)
Residential real estate
$
2,673

 
$
77

 
$
740

 
$
3,490

 
$
110,552

 
$
114,042

 
$
2,152

Residential construction

 

 

 

 
5,192

 
5,192

 

Commercial real estate
3,093

 
200

 

 
3,293

 
183,243

 
186,536

 
3,364

Commercial construction

 

 

 

 
34,154

 
34,154

 

Commercial and industrial
293

 
90

 
959

 
1,342

 
88,812

 
90,154

 
1,417

Consumer
13

 
12

 
3

 
28

 
2,391

 
2,419

 
23

Home equity
117

 
15

 
172

 
304

 
32,038

 
32,342

 
231

Total
$
6,189

 
$
394


$
1,874


$
8,457


$
456,382


$
464,839


$
7,187

 
The following table presents an aging analysis of past due loans as of December 31, 2012:
 
 
31-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total
Loans
 
Nonaccrual
Loans
 
(In Thousands)
Residential real estate
$
2,568

 
$
160

 
$
1,575

 
$
4,303

 
$
115,962

 
$
120,265

 
$
2,587

Residential construction

 

 
331

 
331

 
4,003

 
4,334

 
331

Commercial real estate
526

 
293

 
609

 
1,428

 
188,044

 
189,472

 
902

Commercial construction

 

 

 

 
35,781

 
35,781

 

Commercial and industrial
491

 
61

 
47

 
599

 
83,984

 
84,583

 
47

Consumer
57

 

 
1

 
58

 
2,434

 
2,492

 
24

Home equity
128

 
18

 
60

 
206

 
31,525

 
31,731

 
96

Total
$
3,770

 
$
532

 
$
2,623

 
$
6,925

 
$
461,733

 
$
468,658

 
$
3,987


Troubled Debt Restructurings ("TDR")

TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that the Company would not otherwise consider. TDRs can take the form of a reduction in the stated interest rate, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date, or the reduction of either the interest or principal. Once a loan has been identified as a TDR, it will continue to be reported as a TDR until the loan is paid in full.

In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a TDR. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to existing underwriting standards which include review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance and projections to assess repayment ability going forward.

During the nine months ended September 30, 2013 and 2012, the Company had no TDRs that had been modified within the previous twelve month periods that had subsequently defaulted. TDR loans are considered defaulted at 90 days past due.

At September 30, 2013 and December 31, 2012, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.






25



The following tables are a summary of accruing and non-accruing TDR loans modified as TDRs by segment at the dates indicated:

For the Nine Months Ended September 30, 2013
 
Number of
Modifications
 
Recorded
Investment
Pre-Modification
 
Recorded
Investment
Post-Modification
 
Current
Balance
 
 
(In Thousands)
Residential real estate
 

 
$

 
$

 
$

Residential construction
 

 

 

 

Commercial real estate
 
1

 
249

 
249

 
249

Commercial construction
 

 

 

 

Commercial and industrial
 

 

 

 

Consumer
 

 

 

 

Home equity
 

 

 

 

    Total
 
1

 
$
249

 
$
249

 
$
249


During the nine months ended September 30, 2013, the Company had one TDR totaling $249,000 entered into with a borrower who was experiencing financial difficulty. There were no TDRs recorded during the three months ended September 30, 2013. The Company reviews TDRs on a loan by loan basis and applies specific reserves to loan balances in excess of collateral values if sufficient borrower cash flow cannot be identified. At September 30, 2013, the specific reserve related to the TDR was $12,000. The modification granted did not result in a reduction of the recorded investment. TDRs granted in 2013 were primarily the result of concessions to reduce the interest rate or extension of the maturity date. At September 30, 2013, the Company had one troubled debt restructuring totaling $249,000 included in nonperforming loans. The one restructured loan continues to be reported on nonaccrual but has been performing as modified. For the three months ended September 30, 2013, interest income recorded from the restructured loan amounted to approximately $3,000. For the nine months ended September 30, 2013, interest income recorded from the restructured loan amounted to approximately $11,000.

For the Three Months Ended September 30, 2012
 
Number of
Modifications
 
Recorded
Investment
Pre-Modification
 
Recorded
Investment
Post-Modification
 
Current
Balance
 
 
(In Thousands)
Residential real estate
 

 
$

 
$

 
$

Residential construction
 

 

 

 

Commercial real estate
 
1

 
264

 
204

 
204

Commercial construction
 

 

 

 

Commercial and industrial
 

 

 

 

Consumer
 

 

 

 

Home equity
 

 

 

 

    Total
 
1

 
$
264

 
$
204

 
$
204


During the three months ended September 30, 2012, the Company had one TDR totaling $204,000 entered into with borrowers who were experiencing financial difficulty. For the three months ended September 30, 2012, the interest income recorded from the restructured loans amounted to approximately $8,000. The Company reviews TDRs on a loan by loan basis and applies specific reserves to loan balances in excess of collateral values if sufficient borrower cash flow cannot be identified. The modifications granted did not result in a reduction of the recorded investment. TDRs granted in 2012 were primarily the result of concessions to reduce the interest rate or extension of the maturity date.


26



For the Nine Months Ended September 30, 2012
 
Number of
Modifications
 
Recorded
Investment
Pre-Modification
 
Recorded
Investment
Post-Modification
 
Current
Balance
 
 
(In Thousands)
Residential real estate
 
1

 
$
118

 
$
127

 
$
126

Residential construction
 

 

 

 

Commercial real estate
 
2

 
412

 
449

 
448

Commercial construction
 

 

 

 

Commercial and industrial
 
2

 
212

 
212

 
207

Consumer
 
1

 
27

 
27

 
24

Home equity
 
1

 
38

 
38

 
37

    Total
 
7

 
$
807

 
$
853

 
$
842


During the nine months ended September 30, 2012, the Company had seven TDRs totaling $853,000 entered into with borrowers who were experiencing financial difficulty. At September 30, 2012, the Company had six TDRs totaling $740,000 included in nonperforming loans. The six restructured loans continue to be reported on nonaccrual but have been performing as modified. For the nine months ended September 30, 2012, the interest income recorded from the restructured loans amounted to approximately $18,000. At September 30, 2012, the specific reserves related to TDRs granted in 2012 was $125,000.







































27



8.      Fair Value Measurements

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, available-for-sale securities are recorded at fair value on a recurring basis. Other assets, such as, mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Levels within the fair value hierarchy are based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.

Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.
      
The fair value methods and assumptions are set forth below.

Cash and cash equivalents. The carrying amounts of cash equivalents and due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.

Held-to-maturity and non-marketable securities. The fair values of held-to-maturity securities are estimated by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominately reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit 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. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of non-marketable securities approximate fair values. As such, the Company classifies held-to-maturity and non-marketable securities as Level 2.

Available-for-sale securities. Fair value of securities are primarily measured using unadjusted information from an independent pricing service. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. These securities include marketable equity securities.

Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as level 3. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral, less costs to sell.

Loans held for sale. Loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale as nonrecurring Level 2.

OREO. Real estate acquired through foreclosure is recorded at fair value. The fair value of OREO is based on property appraisals and an analysis of similar properties currently available. As such, the Company records OREO as nonrecurring Level 2.


28



Mortgage servicing rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method. In evaluating the carrying values of the mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as nonrecurring Level 2.

Accrued interest receivable. The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectable. Therefore, this financial instrument has been adjusted for estimated credit loss. As such, the Company classifies accrued interest receivable Level 2.

Deposits. The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase. As such, the Company classifies deposits as Level 2.
Borrowed funds. The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.
Accrued interest payable. The fair value estimate approximates the carrying amount as this financial instrument has a short maturity. As such, the Company classifies accrued interest payable as Level 2.

Off-balance-sheet instruments. Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

Limitations. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premise and equipment, and OREO. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Assets that were measured at fair value as of September 30, 2013 and December 31, 2012 on a recurring basis are summarized below:

29



 
Fair Value Measurements Using
 
September 30, 2013
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
Assets (market approach)
(Dollars In Thousands)
Available-for-sale securities
 
 
 
 
 
 
 
Equity securities by industry type:
 
 
 
 
 
 
 
Financial
$
631

 
$
631

 
$

 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements Using
 
December 31, 2012
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
Assets (market approach)
(Dollars In Thousands)
Available-for-sale securities
 

 
 

 
 

 
 

Equity securities by industry type:
 

 
 

 
 

 
 

Financial
$
621

 
$
621

 
$

 
$


Assets measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012 are summarized below:
 
Fair Value Measurements Using
 
September 30, 2013
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
(Dollars In Thousands)
Assets
 
 
 
 
 
 
 
Impaired loans with a valuation allowance, net
$
1,768

 
$

 
$

 
$
1,768

OREO
501

 

 
501

 

Loans held for sale
135

 

 
135

 

 
 
 
 
 
 
 
 
 
Fair Value Measurements Using
 
December 31, 2012
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
(Dollars In Thousands)
Assets
 

 
 

 
 

 
 

Impaired loans with a valuation allowance, net
$
1,556

 
$

 
$

 
$
1,556

OREO
572

 

 
572

 

Mortgage servicing rights
147

 

 
147

 

 
Impaired loans are presented net of their related specific reserve of $405,000 and $261,000 as of September 30, 2013 and December 31, 2012, respectively.
 






30



Fair Value of Financial Instruments.

FASB ASC Topic 825, "Financial Instruments", requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. 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 instrument's. In cases where quoted prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. 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. FASB ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 
 
 
Fair Value Measurements Using
 
Carrying Amount
at September 30, 2013
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
(Dollars In Thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
53,591

 
$
53,591

 
$

 
$

Available-for-sale securities
631

 
631

 

 

Held-to-maturity securities
55,119

 

 
60,977

 

FHLB stock
3,914

 

 
3,914

 

 
 
 
 
 
 
 
 
Residential real estate
113,420

 

 

 
110,242

Residential construction
5,117

 

 

 
5,077

Commercial real estate
184,574

 

 

 
183,873

Commercial construction
33,738

 

 

 
30,655

Commercial and industrial
88,964

 

 

 
87,541

Consumer
2,381

 

 

 
2,477

Home equity
32,206

 

 

 
32,306

   Net loans
460,400

 

 

 
452,171

 
 
 
 
 
 
 
 
Loans held for sale
135

 

 
135

 

Accrued interest and dividends receivable
1,613

 

 
1,613

 

Mortgage servicing rights
422

 

 
789

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Deposits
$
484,514

 
$

 
$
475,849

 
$

Securities sold under agreements to repurchase
1,793

 

 
1,793

 

Advances from FHLB
26,348

 

 
27,107

 

Accrued interest payable
51

 

 
51

 



31



 
 
 
Fair Value Measurements Using
 
Carrying Amount
at December 31, 2012
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
(Dollars In Thousands)
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
39,608

 
$
41,494

 
$

 
$

Available-for-sale securities
621

 
590

 

 

Held-to-maturity securities
59,568

 

 
69,834

 

FHLB stock
4,277

 

 
4,277

 

 
 
 
 
 
 
 
 
Residential real estate
119,729

 

 

 
115,593

Residential construction
4,241

 

 

 
4,217

Commercial real estate
187,506

 

 

 
185,687

Commercial construction
35,279

 

 

 
35,708

Commercial and industrial
83,484

 

 

 
83,670

Consumer
2,448

 

 

 
2,649

Home equity
31,607

 

 

 
31,832

   Net loans
464,294

 

 

 
459,356

 
 
 
 
 
 
 
 
Accrued interest and dividends receivable
1,567

 

 
1,567

 

Mortgage servicing rights
368

 

 
444

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Deposits
$
466,177

 
$

 
$
468,966

 
$

Securities sold under agreements to repurchase
9,763

 

 
9,763

 

Advances from FHLB
33,332

 

 
35,105

 

Accrued interest payable
60

 

 
60

 



























32



9.      Other Comprehensive Income

As of the balance sheet dates, accumulated other comprehensive income was entirely comprised of net unrealized gains on available-for-sale investment securities. The following table illustrates changes in the balances of each component of accumulated other comprehensive income for the dates indicated:

 
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
(Dollars in Thousands)
Beginning balance
 
$
14

 
$
(22
)
Current-period change
 
19

 
4

Ending balance
 
$
33

 
$
(18
)
 
 
 
 
 

 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
(Dollars in Thousands)
Beginning balance
 
$
26

 
$
(3
)
Current-period change
 
7

 
(15
)
Ending balance
 
$
33

 
$
(18
)
 
 
 
 
 

There were no sales of available-for-sale securities during 2013 or 2012.

10.   Common Stock

On June 1, 2012, the Company announced that the Board of Directors authorized a Seventh Stock Repurchase Program for the purchase of up to 272,000 shares, or approximately 5%, of the Company’s then outstanding common stock. During the three months ended September 30, 2013, the Company repurchased 13,700 shares of Company stock, at an average price per share of $17.60. As of September 30, 2013, a total of 235,646 shares may yet be repurchased under the current stock repurchase program. The Company intends to repurchase its shares from time to time at prevailing prices in the open market, in block transactions or in privately negotiated transactions. Repurchases will be made under rule 10b-5(1) repurchase plans. The repurchased shares will be held by the Company as treasury stock and will be available for general corporate purposes.

11.    Subsequent Events

Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued or are available to be issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Financial statements are considered “available to be issued” when they are complete in form and format that complies with GAAP and all approvals necessary for their issuance have been obtained.

The Company is an SEC filer and management has evaluated subsequent events through the date that the financial statements were issued. On October 25, 2013, the Company announced a quarterly cash dividend of $0.05 per share of its common stock to stockholders of record as of the close of business on November 8, 2013, payable on or about November 20, 2013.

33



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

The following analysis discusses changes in the financial condition and results of operations of the Company at September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012, and should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part I, Item 1 of this document.

Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. Additional factors are discussed in the Company’s 2012 Annual Report on Form 10-K under “Item 1A-Risk Factors” and in “Part II. Item 1A. Risk Factors” of this 10-Q. 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 law, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
General
Chicopee Savings Bank is a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within its market area.  We attract deposits from the general public and use such funds to originate primarily one- to four-family residential real estate loans, commercial real estate loans, commercial loans, multi-family loans, construction loans and consumer loans.  At September 30, 2013, we operated out of our main office, lending and operations center, and eight branch offices located in Chicopee, Ludlow, South Hadley, Ware, and West Springfield. All of our offices are located in western Massachusetts.

CRITICAL ACCOUNTING POLICIES
 
Management’s discussion and analysis of the Company’s financial condition is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, other-than-temporary impairment of securities, the valuation of mortgage servicing rights, and the valuation of other real estate owned. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management’s estimates and assumptions under different assumptions or conditions. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2012 Annual Report on Form 10-K. A brief description of our current accounting policies involving significant management judgment follows.

Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management’s evaluation of the level of the allowance required in relation to the probable losses inherent in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as: levels and historical trends in delinquencies, impaired loans, non-accruing loans, charge-offs and recoveries, and classified assets; trends in the volume and terms of the loans; effects of any change in underwriting policies, procedures, and practices; experience, ability, and depth of management staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; and effects of changes in credit concentrations. The use of different estimates or assumptions could produce a different provision for loan losses.

34



Other-Than-Temporary Impairment of Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairment. The evaluation of securities for other-than- temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest due.

Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Company often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 1% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value. The Company uses the amortization method for financial reporting. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speeds result in lower valuations of mortgage servicing rights. Management evaluates for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.

Valuation of Other Real Estate Owned (“OREO”).  Periodically, the Company acquires property through foreclosure or acceptance of a deed in lieu-of-foreclosure as OREO. OREO is recorded at fair value less costs to sell. The valuation of this property is accounted for individually based on its net realizable value on the date of acquisition. At the acquisition date, if the net realizable value of the property is less than the book value of the loan, a charge or reduction in the allowance for loan losses is recorded. If the value of the property becomes subsequently impaired, as determined by an appraisal or an evaluation in accordance with the Company's appraisal policy, the decline is recorded by a charge against current earnings. Upon acquisition of a property, a current appraisal or broker’s opinion must substantiate market value for the property.

























35



Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Total assets increased $4.9 million, or 0.8%, from $600.0 million at December 31, 2012 to $604.9 million at September 30, 2013. The increase in total assets was primarily due to the increase in cash and cash equivalents of $14.0 million, or 35.3%. The increase was partially offset by a decrease of $3.9 million, or 0.8% in net loans from $465.2 million, or 77.5% of total assets at December 31, 2012, to $461.3 million, or 76.2% of total assets at September 30, 2013 and a decrease in held-to-maturity securities of $4.4 million, or 7.5%, to $55.1 million at September 30, 2013.
 
The significant components of the $3.9 million, or 0.8%, decrease in net loans was a $6.2 million, or 5.2%, decrease in one-to-four-family residential real estate loans, a $769,000, or 1.9%, decrease in construction loans and a decrease of $2.9 million, or 1.5%, in commercial real estate loans. These decreases were partially offset by an increase in commercial and industrial loans of $5.6 million, or 6.6%. The decrease in one-to-four-family residential real estate loans was primarily due to prepayments and refinancing activity attributed to the historically low interest rates. In accordance with the Company’s asset/liability management strategy and in an effort to reduce interest rate risk, the Company continues to sell fixed rate, low coupon residential real estate loans to the secondary market. During the first nine months of 2013, the Company sold $24.1 million in low coupon residential real estate loans and currently services $98.0 million in loans sold to the secondary market. In order to service our customers, the servicing rights will continue to be retained on all loans written and sold in the secondary market.
 
The investment securities portfolio, including held-to-maturity and available-for-sale securities, decreased $4.4 million, or 7.4%, to $55.8 million at September 30, 2013 from $60.2 million at December 31, 2012. The decrease in investments was primarily due to a $2.7 million, or 19.6%, decrease in U.S. Treasuries, a $668,000, or 7.3% decrease in certificates of deposit, a decrease of tax-exempt industrial revenue bonds of $622,000, or 1.7%, and a decrease in CMOs of $465,000, or 39.4%.
 
Total deposits increased $18.3 million, or 3.9%, from $466.2 million at December 31, 2012 to $484.5 million at September 30, 2013. Core deposits, which we consider to include all deposits except for certificates of deposit, increased $32.4 million, or 11.2%, from $288.7 million at December 31, 2012 to $321.1 million at September 30, 2013. Demand deposits decreased $27.4 million, or 36.4%, to $102.8 million, money market accounts decreased $52,000, or 0.04%, to $127.7 million, NOW accounts increased $3.2 million, or 8.8%, to $39.9 million, and savings accounts increased $1.8 million, or 3.7%, to $50.7 million. Certificates of deposit decreased $14.1 million, or 7.9%, from $177.4 million at December 31, 2012 to $163.4 million at September 30, 2013. The increase of 11.2% in core deposits was mostly due to fluctuations in commercial accounts related to business activity and the increase in retail checking accounts. We continue to focus on allowing high cost deposits to mature and be replaced with low cost relationship based core deposits.

Stockholders' equity was $91.3 million, or 15.1% of total assets, at September 30, 2013 compared to $90.0 million, or 15.0% of total assets, at December 31, 2012. The Company's stockholders' equity increased primarily as a result of $1.9 million in net income, an increase of $227,000, or 5.9%, related to stock-based compensation and an increase of $250,000, or 8.2%, in additional paid-in-capital, partially offset by the $814,000 cash dividends paid during the nine months ended September 30, 2013. The Company's book value per share increased $0.29, or 1.8%, from $16.57 at December 31, 2012 to $16.86 at September 30, 2013.






















36



Allowance for Loan Losses
 
At or for the Nine Months Ended September 30,
 
2013
 
2012
 
(Dollars In Thousands)
Allowance for loan losses at December 31
$
4,364

 
$
4,576

 
 
 
 
Charged-off loans:
 

 
 

Residential real estate
(113
)
 
(80
)
Residential construction
(62
)
 

Commercial real estate

 
(65
)
Commercial construction

 

Commercial and industrial
(47
)
 
(225
)
Home equity

 

Consumer
(33
)
 
(61
)
   Total charged-off loans
(255
)
 
(431
)
 
 
 
 
Recoveries on loans previously charged-off:
 

 
 

Residential real estate
1

 
1

Residential construction

 

Commercial real estate
11

 

Commercial construction

 

Commercial and industrial
37

 
2

Home equity

 

Consumer
11

 
13

   Total recoveries
60

 
16

Net loan charge-offs
(195
)
 
(415
)
Provision for loan losses
270

 
240

Allowance for loan losses, end of period
$
4,439

 
$
4,401

 
 
 
 
Ratios:
 

 
 

Net loan charge-offs to total average loans
0.04
%
 
0.09
%
Allowance for loan losses to total loans (1)
0.95
%
 
0.93
%
Allowance for loan losses to nonperforming loans  (2)
61.76
%
 
124.78
%
Recoveries to charge-offs
23.53
%
 
3.71
%
 
(1)
Total loans includes net loans plus the allowance for loan losses.
(2)
Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal. At September 30, 2013, the Company had one troubled debt restructuring totaling $249,000 included in nonperforming loans. The one restructured loan continues to be reported on nonaccrual but has been performing as modified. At September 30, 2012, the Company had six TDRs totaling $740,000 included in nonperforming loans. The six restructured loans continue to be reported on nonaccrual but have been performing as modified.

Analysis and determination of the allowance for loan losses. The allowance for loan losses is a valuation allowance for probable and estimable credit losses inherent in the loan portfolio. Management evaluates the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. The allowance for loan losses is maintained at an amount that management considers appropriate to cover inherent probable and estimable losses in the loan portfolio.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a specific allowance on identified problem loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount

37



of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Specific allowance required for identified problem loans. The Company establishes an allowance on certain identified problem loans based on such factors as: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency.

General valuation allowance on the remainder of the loan portfolio. The Company establishes a general allowance for loans that are not delinquent to recognize the probable losses associated with lending activities. This general valuation allowance is determined by segregating the loans by loan category and assigning percentages to each category. The percentages are adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include: levels and historical trends in delinquencies, impaired loans, nonaccrual loans, charge-offs, recoveries, and classified assets; trends in the volume and terms of loans; effects of any change in underwriting, policies, procedures, and practices; experience, ability, and depth of management and staff; national and local economic trends and conditions; trends and conditions in the industries in which borrowers operate; and effects of changes in credit concentrations. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.

The Company identifies loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans and other loans for which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan or a shortfall in the fair value of the collateral if the loan is collateral dependent would result in our allocating a portion of the allowance to the loan that was impaired.

The allowance for loan losses is based on management’s estimate of the amount required to reflect the potential inherent losses in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date.  There are inherent uncertainties with respect to the collectability of the Company’s loans and it is reasonably possible that actual loss experience in the near term may differ from the amounts reflected in this report.
 
At September 30, 2013, the allowance for loan losses represented 0.95% of total loans and 61.76% of nonperforming loans. The allowance for loan losses increased $75,000, or 1.7%, from $4.4 million at December 31, 2012 to $4.4 million at September 30, 2013, due to a provision for loan losses of $270,000 offset by net charge-offs of $195,000. The provision for loan losses was $270,000 for the nine months ended September 30, 2013 compared to a provision of $240,000 for the nine months ended September 30, 2012, an increase of $30,000. Non-performing loans increased $3.7 million, or 103.8%, from $3.5 million, or 0.75% of total loans, at September 30, 2012, to $7.2 million, or 1.55% of total loans, at September 30, 2013. Total non-performing assets increased $3.6 million, or 89.1%, from $4.1 million, or 0.67% of total assets, at September 30, 2012 to $7.7 million, or 1.27% of total assets, at September 30, 2013. The allowance for loan losses as a percentage of total loans increased from 0.93% at September 30, 2012 to 0.95% at September 30, 2013 and the allowance for loan losses as a percentage of non-performing loans decreased from 124.78% at September 30, 2012 to 61.76% at September 30, 2013.























38



Nonperforming Assets

The following table sets forth information regarding nonaccrual loans and OREO at the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
 
(Dollars In Thousands)
Nonaccrual loans (3):
 
 
 
Residential real estate
$
2,152

 
$
2,587

Residential construction

 
331

Commercial real estate
3,364

 
902

Commercial construction

 

Commercial and industrial
1,417

 
47

Home equity
231

 
96

Consumer
23

 
24

   Total nonaccrual loans
7,187

 
3,987

OREO
501

 
572

   Total nonperforming assets
$
7,688

 
$
4,559

 
 
 
 
Ratios:
 

 
 

   Total nonperforming loans as a percentage of total loans (1)
1.55
%
 
0.85
%
 
 

 
 

   Total nonperforming assets as a percentage of total assets (2)
1.27
%
 
0.76
%
 
(1)
Total loans equals net loans plus the allowance for loan losses.
(2)
Nonperforming assets consist of nonperforming loans including nonperforming TDRs and OREO. Nonperforming loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting uncertainty with respect to the collectability of interest or principal.
(3)
Loans are placed on nonaccrual status either when reasonable doubt exists as to the timely collection of principal and interest or when a loan becomes 90 days past due unless an evaluation clearly indicates that the loan is well-secured and in the process of collection. At September 30, 2013, there were no loans that were over 90 days delinquent and still accruing interest.

As of September 30, 2013, nonperforming loans increased $3.2 million, or 80.3%, to $7.2 million compared to $4.0 million as of December 31, 2012. The increase in nonperforming loans is primarily due to the increase of $1.4 million, in nonperforming commercial and industrial loans, a $2.5 million, or 272.9%, increase in nonperforming commercial real estate loans, a $135,000, or 140.6%, increase in nonperforming home equity loans and a $1,000, or 4.2%, increase in nonperforming consumer loans. These increases were partially offset by a decrease of $435,000, or 16.8%, in residential real estate loans and a $331,000, or 100.0%, decrease in nonperforming construction loans. Loans that are less than 90 days past due and were previously on nonaccrual continue to be on nonaccrual status until the borrower can demonstrate their ability to make payments according to their loan terms. The current level of non-performing loans is concentrated with one commercial relationship in the amount of $3.0 million. At September 30, 2013, the relationship was 30 days delinquent, placed on non-accrual and classified as impaired. Based on the current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. The $3.0 million non-performing loan is secured by all assets of the borrower, including commercial real estate. Management will continue to proactively manage the credit to protect the collateral and minimize the risk to the Company.

The following loan segments were not accruing interest as of September 30, 2013: 19 residential real estate loans with an outstanding balance of $2.2 million, seven commercial real estate loans with an outstanding balance of $3.4 million, 24 commercial and industrial loans with an outstanding balance of $1.4 million, three consumer loans with an outstanding balance of $23,000 and three home equity loans with an outstanding balance of $231,000.





39



Deposits

The following table sets forth the Company’s deposit accounts at the dates indicated:
 
 
September 30, 2013
 
December 31, 2012
 
Balance
 
Percent
of Total
Deposits
 
Balance
 
Percent
of Total
Deposits
 
 
 
(Dollars In Thousands)
 
 
Demand deposits
$
102,818

 
21.2
%
 
$
75,407

 
61.1
%
NOW accounts
39,932

 
8.2
%
 
36,711

 
7.9
%
Savings accounts
50,696

 
10.5
%
 
48,882

 
10.5
%
Money market deposit accounts
127,678

 
26.4
%
 
127,730

 
27.4
%
Total transaction accounts
321,124

 
66.3
%
 
288,730

 
61.9
%
Certificates of deposit
163,390

 
33.7
%
 
177,447

 
38.1
%
Total deposits
$
484,514

 
100.0
%
 
$
466,177

 
100.0
%
 
Total deposits increased $18.3 million, or 3.9%, from $466.2 million at December 31, 2012 to $484.5 million at September 30, 2013. Core deposits, which we consider to include all deposits except for certificates of deposit, increased $32.4 million, or 11.2%, from $288.7 million at December 31, 2012 to $321.1 million at September 30, 2013. Demand deposits decreased $27.4 million, or 36.4%, to $102.8 million, money market accounts decreased $52,000, or 0.04%, to $127.7 million, NOW accounts increased $3.2 million, or 8.8%, to $39.9 million, and savings accounts increased $1.8 million, or 3.7%, to $50.7 million. Certificates of deposit decreased $14.1 million, or 7.9%, from $177.4 million at December 31, 2012 to $163.4 million at September 30, 2013. The increase of 11.2% in core deposits was mostly due to fluctuations in commercial accounts related to business activity and the increase in retail checking accounts. We continue to focus on allowing high cost deposits to mature and be replaced with low cost relationship based core deposits.
 
Borrowings

The following sets forth information concerning the Company's borrowings for the periods indicated:
 
 
September 30, 2013
 
December 31, 2012
 
(In Thousands)
Maximum amount of borrowings outstanding at any month-end during the period:
 
 
 
FHLB advances
$
32,561

 
$
58,308

Securities sold under agreements to repurchase
15,312

 
12,982

Average borrowings outstanding during the period:
 

 
 

FHLB advances
$
29,460

 
$
46,907

Securities sold under agreements to repurchase
9,684

 
9,027

Weighted average interest rate during the period:
 

 
 

FHLB advances
2.44
%
 
2.56
%
Securities sold under agreements to repurchase
0.12
%
 
0.14
%
Balance outstanding at end of period:
 

 
 

FHLB advances
$
26,348

 
$
33,332

Securities sold under agreements to repurchase
1,793

 
9,763

Weighted average interest rate at end of period:
 

 
 

FHLB advances
2.42
%
 
2.39
%
Securities sold under agreements to repurchase
0.05
%
 
0.12
%
 



40



The Company utilizes borrowings from a variety of sources to supplement our supply of funds for loans and investments. FHLB advances decreased $7.0 million, or 21.0%, from $33.3 million at December 31, 2012 to $26.3 million at September 30, 2013 due to payments on long-term advances of $7.0 million. Securities sold under agreements to repurchase decreased $8.0 million, or 81.6%, to $1.8 million at September 30, 2013 due do this product no longer being offered.

Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General

The Company reported pre-tax income of $688,000 for the three months ended September 30, 2013, compared to $816,000 for the three months ended September 30, 2012. Net income after taxes for the three months ended September 30, 2013 was $573,000, or $0.11 earnings per share, as compared to $623,000, or $0.12 earnings per share, for the three months ended September 30, 2012. The $50,000, or 8.0%, decrease in net income for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, was primarily due to the increase in non-interest expense of $143,000, or 3.3%, a decrease in net interest income of $86,000, or 1.8%, and an increase in the provision for loan losses of $43,000, or 25.4%, partially offset by the $144,000, or 23.2%, increase in non-interest income and a decrease of $78,000, or 40.4%, in income tax expense.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth average balances, interest income and expense and yields earned or rates paid on the major categories of assets and liabilities for the periods indicated.  The average yields and costs are derived by dividing interest income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively.  The yields and costs are annualized.  Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields.  Loan interest and yield data does not include any accrued interest from non-accruing loans.

41



 
For the Three Months Ended September 30,
 
2013
 
2012
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Investments (1)
$
67,593

 
$
691

 
4.06
%
 
$
65,681

 
$
695

 
4.21
%
Loans:
 

 
 

 
 

 
 

 
 

 
 

Residential real estate loans
139,412

 
1,487

 
4.23
%
 
148,118

 
1,752

 
4.71
%
Commercial real estate loans
197,082

 
2,501

 
5.03
%
 
198,414

 
2,675

 
5.36
%
Consumer loans
34,401

 
328

 
3.78
%
 
33,818

 
340

 
4.00
%
Commercial and industrial loans
91,157

 
956

 
4.16
%
 
84,262

 
893

 
4.22
%
Loans, net (2)
462,052

 
5,272

 
4.53
%
 
464,612

 
5,660

 
4.85
%
Other
21,798

 
14

 
0.25
%
 
23,587

 
15

 
0.25
%
        Total interest-earning assets
551,443

 
5,977

 
4.30
%
 
553,880

 
6,370

 
4.58
%
Noninterest-earning assets
37,965

 
 

 
 

 
42,122

 
 

 
 

Total assets
$
589,408

 
 

 
 

 
$
596,002

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

Money market accounts
$
127,065

 
$
100

 
0.31
%
 
$
116,318

 
$
93

 
0.32
%
Savings accounts (3)
50,174

 
13

 
0.10
%
 
49,185

 
13

 
0.11
%
NOW accounts
40,109

 
90

 
0.89
%
 
33,411

 
93

 
1.11
%
Certificates of deposit
168,253

 
696

 
1.64
%
 
193,539

 
908

 
1.87
%
Total interest-bearing deposits
385,601

 
899

 
0.92
%
 
392,453

 
1,107

 
1.12
%
FHLB advances
27,153

 
168

 
2.45
%
 
41,285

 
264

 
2.54
%
Securities sold under agreement to repurchase
8,155

 
2

 
0.10
%
 
7,182

 
2

 
0.11
%
Total interest-bearing borrowings
35,308

 
170

 
1.91
%
 
48,467

 
266

 
2.18
%
Total interest-bearing liabilities
420,909

 
1,069

 
1.01
%
 
440,920

 
1,373

 
1.24
%
Demand deposits
76,059

 
 

 
 

 
65,208

 
 

 
 

Other noninterest-bearing liabilities
861

 
 

 
 

 
541

 
 

 
 

Total liabilities
497,829

 
 

 
 

 
506,669

 
 

 
 

Total stockholders' equity
91,579

 
 

 
 

 
89,333

 
 

 
 

Total liabilities and stockholders' equity
$
589,408

 
 

 
 

 
$
596,002

 
 

 
 

Net interest-earning assets
$
130,534

 
 

 
 

 
$
112,960

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent net interest income/
 

 
 

 
 

 
 

 
 

 
 

interest rate spread (4)
 

 
4,908

 
3.29
%
 
 

 
4,997

 
3.34
%
Tax equivalent net interest margin
 (net interest income as a percentage of
 interest-earning assets)
 
3.53
%
 
 

 
 

 
3.59
%
Ratio of interest-earning assets
 

 
 

 
 

 
 

 
 

 
 

to interest-bearing liabilities
 

 
 

 
131.01
%
 
 

 
 

 
125.62
%
Less: tax equivalent adjustment (1)
 

 
(267
)
 
 

 
 

 
(270
)
 
 

Net interest income as reported on income statement
 
$
4,641

 
 

 
 

 
$
4,727

 
 


(1)
Municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 41%. The tax equivalent adjustment is deducted from the tax equivalent net interest income to agree to the amount reported on the statement of income. See 'Explanation of Use of Non-GAAP Financial Measurements'.
(2)
Loans, net excludes loans held for sale and the allowance for loan losses and includes nonperforming loans.
(3)
Savings accounts include mortgagors' escrow deposits.
(4)
Tax equivalent interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See 'Explanation of Use of Non-GAAP Financial Measurements'.


42



The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's tax equivalent interest income and interest expense during the periods indicated.  Information is provided in each category with respect to:  (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
 
 
Three Months Ended September 30,
2013 compared to 2012
 
Increase (Decrease)
Due to
 
Volume
 
Rate
 
Net
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
Investment securities (1)
$
65

 
$
(69
)
 
$
(4
)
Loans:
 

 
 

 
 

Residential real estate loans
(98
)
 
(167
)
 
(265
)
Commercial real estate loans
(17
)
 
(157
)
 
(174
)
Consumer loans
6

 
(18
)
 
(12
)
Commercial and industrial loans
75

 
(12
)
 
63

Total loans
(34
)
 
(354
)
 
(388
)
Other
(1
)
 

 
(1
)
Total interest-earning assets (2)
$
30

 
$
(423
)
 
$
(393
)
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Deposits:
 

 
 

 
 

Money market accounts
$
9

 
$
(2
)
 
$
7

Savings accounts (2)

 

 

NOW accounts
17

 
(20
)
 
(3
)
Certificates of deposit
(110
)
 
(102
)
 
(212
)
Total interest-bearing deposits
(84
)
 
(124
)
 
(208
)
FHLB advances
(87
)
 
(9
)
 
(96
)
Securities sold under agreement to repurchase

 

 

Total interest-bearing borrowings
(87
)
 
(9
)
 
(96
)
Total interest-bearing liabilities
(171
)
 
(133
)
 
(304
)
Increase in net interest income (3)
$
201

 
$
(290
)
 
$
(89
)
 
(1)
The changes in state and municipal income are reflected on a tax equivalent basis using a tax rate of 41%.
(2)
Includes interest on mortgagors’ escrow deposits.
(3)
The changes in interest income and net interest income are reflected on a tax equivalent basis and thus do not correspond to the statement of operations.

Net interest income, on a tax equivalent basis, decreased $89,000, or 1.8%, to $4.9 million for the three months ended September 30, 2013, mainly driven by the decreasing interest rate environment. Net interest margin, on a tax equivalent basis, decreased six basis points from 3.59% for the three months ended September 30, 2012 to 3.53% for the three months ended September 30, 2013.

Interest and dividend income, on a tax equivalent basis, decreased $393,000, or 6.2%, to $6.0 million for the three months ended September 30, 2013. Average interest-earning assets decreased $2.4 million, or 0.4%, from $553.9 million at September 30, 2012 to $551.4 million at September 30, 2013. Average loans decreased $2.6 million, or 0.6%, primarily due to the decrease in average residential real estate loans of $8.7 million, or 5.9%, partially offset by the strong commercial real estate and commercial and industrial loan originations.

Average investment securities increased $1.9 million, or 2.9%, for the period due to the purchase of certificates of deposit. Other interest earning assets, consisting of overnight fed funds, decreased $1.8 million, or 7.6%. The tax equivalent yield on average

43



interest-earning assets decreased 28 basis point to 4.30% for the three months ended September 30, 2013, primarily as a result of lower market rates of interest.

Total interest expense decreased $304,000, or 22.1%, to $1.1 million for the three months ended September 30, 2013 from $1.4 million for the three months ended September 30, 2012, due to the $208,000, or 18.8%, decrease in deposit costs and a decrease in cost of borrowings of $96,000, or 36.1%. Average interest-bearing liabilities decreased $20.0 million, or 4.5%, to $420.9 million for the three months ended September 30, 2013 from $440.9 million for the three months ended September 30, 2012. Rates paid on average interest-bearing liabilities declined 23 basis points from 1.24% for the three months ended September 30, 2012 to 1.01% for the three months ended September 30, 2013. The lower interest rate environment and management’s decision not to renew higher cost short term time deposits led to a decrease in rates paid for certificates of deposit of 23 basis points from 1.87% at September 30, 2012 to 1.64% at September 30, 2013.

Provision for Loan Losses

The provision for loan losses increased $43,000, or 25.4%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Non-performing loans increased $3.6 million, or 103.1%, from $3.6 million, or 0.75% of total loans, at September 30, 2012, to $7.2 million, or 1.55% of total loans, at September 30, 2013. Total non-performing assets increased $3.6 million, or 88.6%, from $4.1 million, or 0.67% of total assets, at September 30, 2012 to $7.7 million, or 1.27% of total assets, at September 30, 2013. The allowance for loan losses as a percentage of total loans increased from 0.93% at September 30, 2012 to 0.95% at September 30, 2013. The allowance for loan losses as a percentage of non-performing loans decreased from 124.78% at September 30, 2012 to 61.76% at September 30, 2013.

Non-Interest Income

Non-interest income increased $144,000, or 23.2%, from $620,000 for the three months ended September 30, 2012 to $764,000 for the three months ended September 30, 2013. This increase was due to a $74,000, or 11.9%, increase in service charges, fees and commissions, primarily due to seasonal activity in commercial deposit accounts, and a $52,000, or 288.9%, increase in loan sales and servicing, net for the three months ended September 30, 2012 to $70,000, for the three months ended September 30, 2013.These increases were partially offset by a $19,000, or 17.0%, decrease in the net loss on the sale of OREO.

Non-Interest Expenses

Non-interest expense increased $143,000, or 3.3%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Non-interest expense increased primarily due to the increase in salaries and benefits of $117,000, or 4.8%, an increase in furniture and equipment of $15,000, or 8.4%, an increase in data processing of $31,000, or 10.9%, an increase in professional fees of $23,000, or 16.9%, and an increase in advertising expense of $23,000, or 16.3%. These increases were partially offset by a decrease in FDIC insurance expense of $36,000, or 40.4%, a decrease of $8,000, or 11.4%, in stationery, supplies and postage, and a decrease of $45,000, or 6.9%, in other non-interest expense.






















44



Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General

The Company reported pre-tax income of $2.4 million for the nine months ended September 30, 2013, compared to $1.8 million for the nine months ended September 30, 2012. Net income after taxes increased $412,000, or 28.0%, from $1.5 million, or $0.29 earnings per share, for the nine months ended September 30, 2012 to $1.9 million, or $0.37 earnings per share, for the nine months ended September 30, 2013. The 28.0% increase in net income for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, was primarily due to the $220,000, or 1.6%, decrease in non-interest expense, an increase of $314,000, or 15.1%, in non-interest income, and an increase of $84,000, or 0.6%, in net interest income. These improvements were partially offset by the increase in income tax expense of $176,000, or 58.7%, and an increase in the provision for loan losses of $30,000, or 12.5%.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth average balances, interest income and expense and yields earned or rates paid on the major categories of assets and liabilities for the periods indicated.  The average yields and costs are derived by dividing interest income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively.  The yields and costs are annualized.  Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields.  Loan interest and yield data does not include any accrued interest from non-accruing loans.

45



 
For the Nine Months Ended September 30,
 
2013
 
2012
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Investments (1)
$
66,826

 
$
2,074

 
4.15
%
 
$
69,001

 
$
2,014

 
3.90
%
Loans:
 

 
 

 
 

 
 

 
 

 
 

Residential real estate loans
141,268

 
4,584

 
4.34
%
 
148,912

 
5,444

 
4.88
%
Commercial real estate loans
199,547

 
7,726

 
5.18
%
 
194,422

 
7,957

 
5.47
%
Consumer loans
34,096

 
980

 
3.84
%
 
33,012

 
1,016

 
4.11
%
Commercial and industrial loans
86,856

 
2,790

 
4.29
%
 
80,507

 
2,600

 
4.31
%
Loans, net (2)
461,767

 
16,080

 
4.66
%
 
456,853

 
17,017

 
4.98
%
Other
22,722

 
44

 
0.26
%
 
33,395

 
54

 
0.22
%
        Total interest-earning assets
551,315

 
18,198

 
4.41
%
 
559,249

 
19,085

 
4.56
%
Noninterest-earning assets
37,311

 
 

 
 

 
40,551

 
 

 
 

Total assets
$
588,626

 
 

 
 

 
$
599,800

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

Money market accounts
$
121,786

 
$
287

 
0.32
%
 
$
104,030

 
$
261

 
0.34
%
Savings accounts (3)
49,665

 
38

 
0.10
%
 
48,497

 
38

 
0.10
%
NOW accounts
39,186

 
280

 
0.96
%
 
30,472

 
229

 
1.00
%
Certificates of deposit
173,700

 
2,218

 
1.71
%
 
201,782

 
2,852

 
1.89
%
Total interest-bearing deposits
384,337

 
2,823

 
0.98
%
 
384,781

 
3,380

 
1.17
%
FHLB advances
29,460

 
537

 
2.44
%
 
51,202

 
982

 
2.56
%
Securities sold under agreement to repurchase
9,684

 
9

 
0.12
%
 
9,283

 
11

 
0.16
%
Total interest-bearing borrowings
39,144

 
546

 
1.86
%
 
60,485

 
993

 
2.19
%
Total interest-bearing liabilities
423,481

 
3,369

 
1.06
%
 
445,266

 
4,373

 
1.31
%
Demand deposits
73,072

 
 

 
 

 
64,220

 
 

 
 

Other noninterest-bearing liabilities
843

 
 

 
 

 
383

 
 

 
 

Total liabilities
497,396

 
 

 
 

 
509,869

 
 

 
 

Total stockholders' equity
91,230

 
 

 
 

 
89,931

 
 

 
 

Total liabilities and stockholders' equity
$
588,626

 
 

 
 

 
$
599,800

 
 

 
 

Net interest-earning assets
$
127,834

 
 

 
 

 
$
113,983

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Tax equivalent net interest income/
 

 
 

 
 

 
 

 
 

 
 

interest rate spread (4)
 

 
14,829

 
3.35
%
 
 

 
14,712

 
3.25
%
Tax equivalent net interest margin
 (net interest income as a percentage of
 interest-earning assets)
 
3.60
%
 
 

 
 

 
3.51
%
Ratio of interest-earning assets
 

 
 

 
 

 
 

 
 

 
 

to interest-bearing liabilities
 

 
 

 
130.19
%
 
 

 
 

 
125.60
%
Less: tax equivalent adjustment (1)
 

 
(799
)
 
 

 
 

 
(766
)
 
 

Net interest income as reported on income statement
 
$
14,030

 
 

 
 

 
$
13,946

 
 


(1)
Municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 41%. The tax equivalent adjustment is deducted from the tax equivalent net interest income to agree to the amount reported on the statement of income. See 'Explanation of Use of Non-GAAP Financial Measurements'.
(2)
Loans, net excludes loans held for sale and the allowance for loan losses and includes nonperforming loans.
(3)
Savings accounts include mortgagors' escrow deposits.
(4)
Tax equivalent interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. See 'Explanation of Use of Non-GAAP Financial Measurements'.


46



The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's tax equivalent interest income and interest expense during the periods indicated.  Information is provided in each category with respect to:  (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change.  The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
 
 
Nine Months Ended September 30,
2013 compared to 2012
 
Increase (Decrease)
Due to
 
Volume
 
Rate
 
Net
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
Investment securities (1)
$
(66
)
 
$
126

 
$
60

Loans:
 

 
 
 
 

Residential real estate loans
(271
)
 
(589
)
 
(860
)
Commercial real estate loans
204

 
(435
)
 
(231
)
Consumer loans
32

 
(68
)
 
(36
)
Commercial and industrial loans
202

 
(12
)
 
190

Total loans
167

 
(1,104
)
 
(937
)
Other
(19
)
 
9

 
(10
)
Total interest-earning assets (2)
$
82

 
$
(969
)
 
$
(887
)
 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Deposits:
 

 
 

 
 

Money market accounts
$
43

 
$
(17
)
 
$
26

Savings accounts (2)

 

 

NOW accounts
62

 
(11
)
 
51

Certificates of deposit
(376
)
 
(258
)
 
(634
)
Total interest-bearing deposits
(271
)
 
(286
)
 
(557
)
FHLB advances
(400
)
 
(45
)
 
(445
)
Securities sold under agreement to repurchase

 
(2
)
 
(2
)
Total interest-bearing borrowings
(400
)
 
(47
)
 
(447
)
Total interest-bearing liabilities
(671
)
 
(333
)
 
(1,004
)
Increase in net interest income (3)
$
753

 
$
(636
)
 
$
117

 
(1)
The changes in state and municipal income are reflected on a tax equivalent basis using a tax rate of 41%.
(2)
Includes interest on mortgagors’ escrow deposits.
(3)
The changes in interest income and net interest income are reflected on a tax equivalent basis and thus do not correspond to the statement of operations.

Net interest income, on a tax equivalent basis, increased $117,000, or 0.8%, to $14.8 million for the nine months ended September 30, 2013, primarily due to the decrease in the cost of interest bearing liabilities outweighing the decrease in the yield on average interesting-earning assets, and an increase in net interest earning assets. Net interest margin, on a tax equivalent basis, increased nine basis points from 3.51% for the nine months ended September 30, 2012 to 3.60% for the nine months ended September 30, 2013.

Interest and dividend income, on a tax equivalent basis, decreased $887,000, or 4.6%, to $18.2 million for the nine months ended September 30, 2013. Average interest-earning assets decreased $7.9 million, or 1.4%, from $559.2 million at September 30, 2012 to $551.3 million at September 30, 2013. Average loans increased $4.9 million, or 1.1%, primarily due to strong commercial real estate and commercial and industrial loan originations offset by the decrease in residential real estate loans of $7.6 million, or 5.1%.


47




Average investment securities decreased $2.1 million, or 3.2%, for the period due to maturities of U.S. Treasury securities and pay downs of collateralized mortgage obligations. Other interest earning assets decreased $10.7 million, or 32.0%. The tax equivalent yield on average interest-earning assets decreased 15 basis point to 4.41% for the nine months ended September 30, 2013, primarily as a result of lower market rates of interest.

Total interest expense decreased $1.0 million, or 23.0%, to $3.4 million for the nine months ended September 30, 2013 from $4.4 million for the nine months ended September 30, 2012, due to a $557,000, or 16.5%, decrease in deposit costs and a decrease in cost of borrowings of $447,000 or 45.0%. Average interest-bearing liabilities decreased $21.8 million, or 4.9%, to $423.5 million for the nine months ended September 30, 2013 from $445.3 million for the nine months ended September 30, 2012. Rates paid on average interest-bearing liabilities declined 25 basis points from 1.31% for the nine months ended September 30, 2012 to 1.06% for the nine months ended September 30, 2013. The lower interest rate environment and management’s decision not to renew higher cost short term time deposits led to a decrease in rates paid for certificates of deposit of 18 basis points from 1.89% at September 30, 2012 to 1.71% at September 30, 2013.

Provision for Loan Losses

The provision for loan losses increased $30,000, or 12.5%, from $240,000 for the nine months ended September 30, 2012 compared to $270,000 for the nine months ended September 30, 2013. Non-performing loans increased $3.2 million, or 79.7%, from $4.0 million, or 0.85% of total loans, at December 31, 2012 to $7.2 million, or 1.55% of total loans, at September 30, 2013.

Non-Interest Income

Non-interest income increased $314,000, or 15.1%, from $2.1 million for the nine months ended September 30, 2012 to $2.4 million for the nine months ended September 30, 2013. Income from net loan sales and servicing increased $273,000, or 95.5%, and net loss on the sale of OREO decreased $66,000, or 30.0%. These improvements were partially offset by a $10,000, or 3.5%, decrease in income from bank owned life insurance, a $10,000, or 29.4%, decrease in other non-interest income and a decrease of $5,000, or 0.3%, in income from customer service fees and commissions.

Non-Interest Expenses

Non-interest expense decreased $220,000, or 1.6%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Non-interest expense decreased primarily due to the decrease in salaries and benefits of $408,000, or 5.1%, a decrease in FDIC insurance expense of $93,000, or 34.2%, and a decrease in stationery, supplies and postage of $37,000, or 14.9%. These decreases were partially offset by an increase in data processing of $111,000, or 13.6%, an increase in professional fees of $81,000, or 18.1%, an increase in occupancy expense of $77,000, or 6.8%, an increase in furniture and equipment of $4,000, or 0.7%, an increase in advertising expense of $16,000, or 3.6%, and an increase in other non-interest income of $29,000, or 1.4%. The increase in non-interest income includes $141,000 in software conversion expense due to the termination of a contract.






















48




Explanation of Use of Non-GAAP Financial Measurements

We believe that it is common practice in the banking industry to present interest income and related yield information on tax exempt securities on a tax-equivalent basis and that such information is useful to investors because it facilitates comparisons among financial institutions.  However, the adjustment of interest income and yields on tax exempt securities to a tax equivalent amount may be considered to include financial information that is not in compliance with GAAP. A reconciliation from GAAP to non-GAAP is provided below.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in Thousands)
 
(Dollars in Thousands)
 
Interest
 
Average
Yield
 
Interest
 
Average
Yield
 
Interest
 
Average
Yield
 
Interest
 
Average
Yield
Investment securities (no tax adjustment)
$
424

 
2.49
%
 
$
425

 
2.57
%
 
$
1,275

 
2.55
%
 
$
1,248

 
2.42
%
Tax equivalent adjustment (1)
267

 
 
 
270

 
 
 
799

 
 

 
766

 
 

Investment securities (tax equivalent basis)
$
691

 
4.06
%
 
$
695

 
4.21
%
 
$
2,074

 
4.15
%
 
$
2,014

 
3.90
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (no tax adjustment)
$
4,641

 
 
 
$
4,727

 
 
 
$
14,030

 
 

 
$
13,946

 
 

Tax equivalent adjustment (1)
267

 
 
 
270

 
 
 
799

 
 

 
766

 
 

Net interest income (tax equivalent basis)
$
4,908

 
 
 
$
4,997

 
 
 
$
14,829

 
 

 
$
14,712

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread (no tax adjustment)
 
 
3.10
%
 
 
 
3.14
%
 
 

 
3.16
%
 
 

 
3.07
%
Net interest margin (no tax adjustment)
 
 
3.34
%
 
 
 
3.40
%
 
 

 
3.40
%
 
 

 
3.33
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The tax equivalent adjustment is based on a combined federal and state tax rate of 41% for all periods presented.
 
Liquidity Management
  
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, borrowings from the FHLB and securities sold under agreements to repurchase.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Prepayment rates can have a significant impact on interest income.  Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual loan repayment activity. Our short-term securities are primarily consisted of U.S. Treasury and government agencies, which we use primarily for the collateral purposes for sweep accounts maintained by commercial customers. The balances of these securities fluctuate as the aggregate balance of our sweep accounts fluctuate.

We regularly adjust our investments in liquid assets based upon our assessment of:  (1) expected loan demands; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy.

Our most liquid assets are cash and cash equivalents.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2013, total cash and cash equivalents totaled $48.3 million, net of reserve requirements. Securities classified as available-for-sale whose market value exceeds our cost, which provides additional sources of liquidity, totaled $419,000 at September 30, 2013. Other liquid assets as of September 30, 2013 included: U.S. Treasury securities and collateralized mortgage obligations, net of pledged securities, totaling $369,000, and certificates of deposit of $8.4 million. At September 30, 2013, the Company had an over collateralized securities pledging position of $9.6 million.

In addition, at September 30, 2013, we had the ability to borrow a total of approximately $56.8 million from the FHLB, subject to pledging requirements. On September 30, 2013, we had $26.3 million of such borrowings outstanding. The Company’s unused borrowing capacity with the Federal Reserve Bank of Boston was approximately $52.2 million at September 30, 2013. In addition,

49



we had the following available lines of credit to use as contingency funding sources: $4.0 million with Banker's Bank Northeast and available Fed Funds to purchase of $3.0 million.

Certificates of deposit due within one year of September 30, 2013 totaled $93.2 million, or 57.1%, of our certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2014. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Capital Management

We are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2013, the Company exceeded all of its regulatory capital requirements. The Company is considered “well capitalized” under regulatory guidelines.  The Company is subject to the Federal Reserve Board’s capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC. The Company exceeded these requirements at September 30, 2013.

The Company’s and Bank’s actual capital amounts and ratios as of September 30, 2013 and December 31, 2012 are presented in the following tables:
 
 
 
 
 
 
 
 
 
 
Minimum
to be Well
Capitalized Under
 
 
 
 
 
Minimum for Capital
 
Prompt Corrective
 
Actual
 
Adequacy Purposes
 
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars In Thousands)
As of September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
Company
$
94,828

 
19.3
%
 
$
39,392

 
8.0
%
 
N/A

 
N/A

Bank
$
84,236

 
17.1
%
 
$
39,329

 
8.0
%
 
$
49,161

 
10.0
%
Tier 1 Capital to Risk Weighted Assets
 

 
 
 
 

 
 

 
 

 
 

Company
$
90,366

 
18.4
%
 
$
19,696

 
4.0
%
 
N/A

 
N/A

Bank
$
79,774

 
16.2
%
 
$
19,664

 
4.0
%
 
$
29,497

 
6.0
%
Tier 1 Capital to Average Assets
 
 
 

 
 

 
 

 
 

 
 

Company
$
90,366

 
15.3
%
 
$
23,609

 
4.0
%
 
N/A

 
N/A

Bank
$
79,774

 
13.6
%
 
$
23,524

 
4.0
%
 
$
29,405

 
5.0
%
 

50



 
 
 
 
 
 
 
 
 
Minimum
to be Well
Capitalized Under
 
 
 
 
 
Minimum for Capital
 
Prompt Corrective
 
Actual
 
Adequacy Purposes
 
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars In Thousands)
As of December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
Company
$
94,030

 
19.3
%
 
$
38,990

 
8.0
%
 
N/A

 
N/A

Bank
$
84,728

 
17.4
%
 
$
38,932

 
8.0
%
 
$
48,665

 
10.0
%
Tier 1 Capital to Risk Weighted Assets
 

 
 

 
 

 
 

 
 

 
 

Company
$
89,648

 
18.4
%
 
$
19,495

 
4.0
%
 
N/A

 
N/A

Bank
$
80,346

 
16.5
%
 
$
19,466

 
4.0
%
 
$
29,199

 
6.0
%
Tier 1 Capital to Average Assets
 

 
 

 
 

 
 

 
 

 
 

Company
$
89,648

 
15.0
%
 
$
23,839

 
4.0
%
 
N/A

 
N/A

Bank
$
80,346

 
13.5
%
 
$
23,800

 
4.0
%
 
$
29,749

 
5.0
%

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
Restrictions on Dividends

Dividends from Chicopee Bancorp, Inc. may depend, in part, upon receipt of dividends from the Bank. The subsidiary may pay dividends to its parent out of so much of its net income as the Bank’s directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net income of that year combined with its retained net income of the preceding two years and subject to minimum regulatory capital requirements. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any and all federal and state taxes.

On July 25, 2013 the Company declared a cash dividend of $0.05 per share payable on August 21, 2013. No other dividends have been paid from the Company as of September 30, 2013.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit.  We currently have no plans to engage in hedging activities in the future.



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Credit-Related Financial Instruments

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and various financial instruments with off-balance-sheet risk. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
 
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
 
The following financial instruments were outstanding whose contract amounts represent credit risk:
 
 
September 30, 2013
 
December 31, 2012
Commitments to grant loans
$
33,698

 
$
18,081

Unfunded commitments for construction loans
26,490

 
8,831

Unfunded commitments under lines of credit
75,461

 
76,760

Standby letters of credit
1,371

 
1,449

 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant and equipment, and real estate.
 
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized, usually do not contain a specified maturity date, and may not be drawn upon to the total extent to which the Company is committed.

“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, requires certain disclosures and liability recognition for the fair value at issuance of guarantees that fall within its scope. The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $1.4 million at September 30, 2013 and December 31, 2012, respectively, and represent the maximum potential future payments the Company could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. The Company’s policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of the Company’s standby letters of credit at September 30, 2013 and December 31, 2012 was not significant.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Qualitative Aspects of Market Risk

We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.  Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.  As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.  To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread.  Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; increasing our focus on shorter-term, adjustable-rate commercial and multi-

52



family lending; selling fixed-rate mortgage loans; and periodically selling available-for-sale securities.  We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Committee, which includes members of management, to communicate, coordinate and control all aspects involving asset/liability management.  The committee reports to the Board of Directors of the Bank quarterly and establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk

We analyze our interest rate sensitivity to manage the risk associated with interest rate movements through the use of interest income simulation.  The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.”  An asset or liability is said to be “interest rate sensitive” within a specific time period if it will mature or reprice within that time period.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income.  Interest income simulations are completed quarterly and presented to the Asset/Liability Committee and Board of Directors of the Bank.  The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions.  The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee and the Board of Directors of the Bank on a quarterly basis.  Changes to these assumptions can significantly affect the results of the simulation.  The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.  The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time.  We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income simulation.  The simulation uses projected repricing of assets and liabilities at September 30, 2012 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments.  Prepayment rates can have a significant impact on interest income simulation.  Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position.  When interest rates rise, prepayments tend to slow.  When interest rates fall, prepayments tend to rise.  Our asset sensitivity would be reduced if prepayments slow and vice versa.  While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate future mortgage-backed security and loan repayment activity.

The following table reflects changes in estimated net interest income for the Company at September 30, 2013 through September 30, 2014 under varying assumptions:
 
Changes in Interest Rates
(Basis Points)
Percentage Change in
Estimated Net Interest
Income over Twelve Months
Up 500 - 24 months
6.6%
Up 400 - 24 months
5.3%
Up 300 - 12 months
7.9%
Up 200 - 12 months
14.1%
Up 100 - 12 months
6.4%
Base
—%
Down 100 - 12 months
(1.1)%

As indicted in the table above, the results of a 100 and 200 basis instantaneous increase in interest rates is estimated to increase net interest income over a 12-month time horizon by 6.4% and 14.1%, respectively. A 300 basis point gradual increase over 12-months is estimated to increase net interest income by 7.9%. A 400 and 500 basis point increase in market interest rates over a

53



24-month time horizon is estimated to increase net interest income by 5.3% and 6.6% in the first twelve months. A 100 basis point gradual decrease over a 12-month time horizon is estimated to decrease net interest income by 1.1%.

Item 4.  Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings.

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

Item 1A.  Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. At September 30, 2013, the risk factors for the Company have not changed materially from those reported in our 2012 Annual Report on Form 10-K. However, the risks described in our 2012 Annual Report on Form 10-K are not the only risks that we face.


Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

On June 1, 2012, the Company announced that the Board of Directors authorized a Seventh Stock Repurchase Program (the “Seventh Stock Repurchase Program”) for the purchase of up to 272,000 shares of the Company's stock, or 5% of the Company’s then outstanding common stock. During the nine months ended September 30, 2013, the Company repurchased 13,700 shares of Company stock for $242,000, at an average price per share of $17.60. The repurchases made in the third quarter of 2013 were as follows:


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Period
 
(a)
Total Number
of Shares
(or Units)
Purchased
 
(b)
Average Price
Paid Per
Share
(or Unit)
 
(c)
Total Number of
Shares
(or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs
 
(d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be
Purchased Under the
Plans or Programs
July 1-31, 2013
 

 
$

 
22,654

 
249,346

August 1-31, 2013
 
13,200

 
17.60

 
35,854

 
236,146

September 1-30, 2013
 
500

 
17.50

 
36,354

 
235,646

Total
 
13,700

 
$
17.60

 
 

 
 

 The Company intends to repurchase its shares under the Seventh Repurchase Program from time to time at prevailing prices in the open market, in block transactions or in privately negotiated transactions. Repurchases will be made under rule 10b-5(1) repurchase plans. The repurchased shares will be held by the Company as treasury stock and will be available for general corporate purposes.


Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

None.


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Item 6.   Exhibits.
3.1
Articles of Incorporation of Chicopee Bancorp, Inc. (1)
3.2
Bylaws of Chicopee Bancorp, Inc. (2)
4.0
Stock Certificate of Chicopee Bancorp, Inc. (1)
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0
Section 1350 Certification
101.0
The following financial information from Chicopee Bancorp Inc.'s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Income for each of the three and nine month periods ended September 30, 2013 and 2012,  (iii) the Consolidated Statement of Comprehensive Income for each of the three and nine month periods ended September 30, 2013 and 2012, (iv) the Consolidated Changes in Stockholders' Equity for each of the nine month periods ended September 30, 2013 and 2012, (v) the Consolidated Statements of Cash Flows for each of the nine month periods ended September 30, 2013 and 2012, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.
____________________

(1)
Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-132512), as amended, initially filed with the Securities and Exchange Commission on March 17, 2006.
(2)
Incorporated herein by reference to Exhibit 3.2 to the Company’s 8-K (File No. 000-51996) filed with the Securities and Exchange Commission on August 1, 2007.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CHICOPEE BANCORP, INC.
 
 
 
 
 
 
 
 
 
Dated:  November 8, 2013
By:
/s/ William J. Wagner
 
 
 
William J. Wagner
 
 
 
Chairman of the Board, President and
 
 
 
Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
 
Dated:  November 8, 2013
 
/s/ Guida R. Sajdak
 
 
By:
Guida R. Sajdak
 
 
 
Senior Vice President,
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(principal financial and chief accounting officer)
 


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