CBNK-2015.3.31 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 March 31, 2015

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 May 4, 2015, there were 5,270,670 shares of the Registrant’s Common Stock outstanding.

1



CHICOPEE BANCORP, INC.
FORM 10-Q
INDEX
 
 
 
   Page
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Financial Condition at March 31, 2015 and December 31, 2014
 
 
 
 
 
 
Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
three months ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
for the three months ended March 31, 2015 and 2014
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
(Unaudited)
 
March 31,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and due from banks
$
9,588

 
$
8,794

Federal funds sold
2,563

 
2,915

Interest-bearing deposits with the Federal Reserve Bank of Boston
38,565

 
38,060

Total cash and cash equivalents
50,716

 
49,769

 
 
 
 
Securities available for sale, at fair value
399

 
414

Securities held to maturity, at cost (fair value of $34,208 at March 31, 2015 and
$34,229 at December 31, 2014)
33,424

 
33,747

Federal Home Loan Bank stock, at cost
4,292

 
3,914

Loans, net of allowance for loan losses of $5,184 at March 31, 2015 and $4,927 at December 31, 2014
540,327

 
519,757

Loans held for sale
217

 

Other real estate owned
865

 
1,050

Mortgage servicing rights
242

 
269

Bank owned life insurance
14,619

 
14,531

Premises and equipment, net
8,777

 
8,855

Accrued interest and dividends receivable
1,651

 
1,591

Deferred income tax asset
3,688

 
3,683

Other assets
1,615

 
1,642

Total assets
$
660,832

 
$
639,222

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Deposits
 

 
 

Demand deposits
$
96,185

 
$
97,922

NOW accounts
42,533

 
42,177

Savings accounts
53,049

 
50,716

Money market deposit accounts
114,678

 
121,106

Total core deposits
306,445

 
311,921

Certificates of deposit
182,261

 
171,637

Total deposits
488,706

 
483,558

 
 
 
 
Federal Home Loan Bank of Boston advances
83,537

 
67,039

Accrued expenses and other liabilities
374

 
491

Total liabilities
572,617

 
551,088

 
 
 
 
Stockholders' equity
 

 
 

Common stock (no par value, 20,000,000 shares authorized, 7,439,368 shares issued; 5,270,670 shares outstanding at March 31, 2015 and December 31, 2014)
72,479

 
72,479

Treasury stock, at cost (2,168,698 shares at March 31, 2015 and December 31, 2014)
(29,119
)
 
(29,119
)
Additional paid-in-capital
3,665

 
3,595

Unearned compensation (restricted stock awards)
(6
)
 
(7
)
Unearned compensation (Employee Stock Ownership Plan)
(3,198
)
 
(3,273
)
Retained earnings
44,374

 
44,430

Accumulated other comprehensive income
20

 
29

Total stockholders' equity
88,215

 
88,134

Total liabilities and stockholders' equity
$
660,832

 
$
639,222

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

1



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Number of Shares and Per Share Amounts)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
Interest and dividend income:
 
 
 
Loans, including fees
$
5,604

 
$
5,204

Interest and dividends on securities
376

 
411

Interest on other interest-earning assets
19

 
8

Total interest and dividend income
5,999

 
5,623

 
 
 
 
Interest expense:
 
 
 
Deposits
713

 
714

Federal Home Loan Bank of Boston advances
263

 
213

Total interest expense
976

 
927

 
 
 
 
Net interest income
5,023

 
4,696

Provision for loan losses
400

 
2,201

Net interest income, after provision for loan losses
4,623

 
2,495

 
 
 
 
Non-interest income:
 
 
 
Service charges, fees and commissions
515

 
496

Net loan sales and servicing
39

 
53

Net gain on sales of available-for-sale securities

 
34

Net loss on sale of other real estate owned

 
(82
)
Increase in cash surrender value of bank owned life insurance
88

 
88

Total non-interest income
642

 
589

 
 
 
 
Non-interest expenses:
 
 
 
Salaries and employee benefits
2,535

 
2,516

Occupancy expenses
475

 
448

Furniture and equipment
181

 
183

FDIC insurance and assessment
123

 
84

Data processing services
366

 
346

Professional fees
178

 
180

Advertising expense
145

 
169

Stationery, supplies and postage
75

 
60

Foreclosure expense
159

 
80

Other non-interest expense
633

 
552

Total non-interest expenses
4,870

 
4,618

 
 
 
 
Income (loss) before income taxes
395

 
(1,534
)
Income tax expense (benefit)
82

 
(175
)
Net income (loss)
$
313

 
$
(1,359
)
 
 
 
 
Earnings (loss) per share:
 
 
 
Basic
$
0.06

 
$
(0.27
)
Diluted
$
0.06

 
$
(0.27
)
 
 
 
 
Adjusted weighted average shares outstanding:
 
 
 
Basic
4,942,636

 
5,079,063

Diluted
5,012,777

 
5,176,226

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

2



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended
 
March 31,
 
2015
 
2014
Net income (loss)
$
313

 
$
(1,359
)
 
 
 
 
Other comprehensive loss, net of tax
 
 
 
Unrealized holding losses arising during period on available-for-sale securities
(15
)
 
(8
)
Reclassification adjustment for gains realized in net income (1)

 
(34
)
Tax effect
6

 
15

Total other comprehensive loss, net of tax
(9
)
 
(27
)
Total comprehensive income (loss)
$
304

 
$
(1,386
)
 
 
 
 
 
 (1) Reclassified into the consolidated statements of operations in net gain on sales of available-for-sale securities.

See accompanying notes to unaudited consolidated financial statements.

3



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2015 and 2014
(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
 
Total
Balance at December 31, 2013
$
72,479

 
$
(26,435
)
 
$
3,299

 
$
(12
)
 
$
(3,571
)
 
$
46,418

 
$
52

 
$
92,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net loss

 

 

 

 

 
(1,359
)
 

 
(1,359
)
Change in net unrealized gain on available-for-sale securities (net of deferred income taxes of $15)

 

 

 

 

 

 
(27
)
 
(27
)
Total comprehensive loss
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(1,386
)
Stock options exercised (2,200 shares)

 
41

 
(8
)
 

 

 

 

 
33

Stock option expense

 

 
30

 

 

 

 

 
30

Change in unearned compensation:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restricted stock award expense

 

 

 
1

 

 

 

 
1

Common stock held by ESOP committed to be released

 

 
56

 

 
75

 

 

 
131

Cash dividends declared ($0.07 per share)

 

 

 

 

 
(381
)
 

 
(381
)
Balance at March 31, 2014
$
72,479

 
$
(26,394
)
 
$
3,377

 
$
(11
)
 
$
(3,496
)
 
$
44,678

 
$
25

 
$
90,658

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
72,479

 
$
(29,119
)
 
$
3,595

 
$
(7
)
 
$
(3,273
)
 
$
44,430

 
$
29

 
$
88,134

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 

 
313

 

 
313

Change in net unrealized gain on available-for-sale securities (net of deferred income taxes of $6)

 

 

 

 

 

 
(9
)
 
(9
)
Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
304

Stock option expense

 

 
22

 

 

 

 

 
22

Change in unearned compensation:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Restricted stock award expense

 

 

 
1

 

 

 

 
1

Common stock held by ESOP committed to be released

 

 
48

 

 
75

 

 

 
123

Cash dividends declared ($0.07 per share)

 

 

 

 

 
(369
)
 

 
(369
)
Balance at March 31, 2015
$
72,479

 
$
(29,119
)
 
$
3,665

 
$
(6
)
 
$
(3,198
)
 
$
44,374

 
$
20

 
$
88,215

See accompanying notes to unaudited consolidated financial statements.

4



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
(In Thousands)
Net income (loss)
$
313

 
$
(1,359
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
183

 
172

Provision for loan losses
400

 
2,201

Increase in cash surrender value of bank owned life insurance
(88
)
 
(88
)
Net realized gain on sales of securities available for sale

 
(34
)
Change in mortgage servicing rights
27

 
29

Net loss on sale of other real estate owned

 
82

Loans originated for sale
(552
)
 
(1,925
)
Proceeds from loan sales
339

 
1,612

Realized gains on sales of mortgage loans
(5
)
 
(13
)
Decrease in other assets
27

 
42

(Increase) decrease in accrued interest and dividends receivable
(60
)
 
81

Decrease in other liabilities
(117
)
 
(412
)
Change in unearned compensation
124

 
132

Stock option expense
22

 
30

Net cash provided by operating activities
613

 
550

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of premises and equipment
(105
)
 
(35
)
Loan originations, net of principal payments
(20,970
)
 
(4,752
)
Proceeds from sales of other real estate owned
185

 
190

Proceeds from sales of securities available-for-sale

 
187

Maturities of held-to-maturity securities

 
7,325

Proceeds from principal paydowns of held-to-maturity securities
323

 
288

Purchase of Federal Home Loan Bank stock
(377
)
 

Net cash (used) provided by investing activities
(20,944
)
 
3,203

 
 
 
 
Cash flows from financing activities:
 

 
 

Net increase in deposits
5,149

 
6,919

Proceeds from long-term FHLB advances
23,500

 
5,000

Repayments of long-term FHLB advances
(7,002
)
 
(2,805
)
Proceeds from short-term FHLB advances

 
5,000

Cash dividends paid on common stock
(369
)
 
(381
)
Stock options exercised

 
33

Net cash provided by financing activities
21,278

 
13,766

 
 
 
 
Net increase in cash and cash equivalents
947

 
17,519

 
 
 
 
Cash and cash equivalents at beginning of period
49,769

 
18,915

 
 
 
 
Cash and cash equivalents at end of period
$
50,716

 
$
36,434

 
 
 
 
Supplemental cash flow information:
 

 
 

Interest paid on deposits
$
713

 
$
714

Interest paid on borrowings
246

 
200

Income taxes paid
4

 
7

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

5



CHICOPEE BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 2015 and 2014

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 March 31, 2015 and for the periods ended March 31, 2015 and 2014 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, 2014 included in the Company’s Annual Report on Form 10-K.

The results for the three months ended March 31, 2015 are not necessarily indicative of the operating results for a full year.

2. Earnings (Loss) Per Share

Basic earnings (loss) 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 (loss) per share have been computed based on the following:
 
 
Three Months Ended
 
March 31,
($ in thousands, except share data )
2015
 
2014
Net income (loss)
$
313

 
$
(1,359
)
 
 
 
 
Average number of shares issued
7,439,368

 
7,439,368

Less: average number of treasury shares
(2,168,698
)
 
(2,002,114
)
Less: average number of unallocated ESOP shares
(327,332
)
 
(357,089
)
Less: average number of dilutive restricted stock awards
(702
)
 
(1,102
)
 
 
 
 
Adjusted weighted average number of common shares outstanding
4,942,636

 
5,079,063

Plus: dilutive outstanding restricted stock awards
336

 
435

Plus: dilutive outstanding stock options
69,805

 
96,728

Weighted average number of diluted shares outstanding
5,012,777

 
5,176,226

 
 
 
 
Net income (loss) per share:
 

 
 

Basic-common stock
$
0.06

 
$
(0.27
)
Basic-unvested share-based payment awards
$
0.06

 
$
(0.27
)
 
 
 
 
Diluted-common stock
$
0.06

 
$
(0.27
)
Diluted-unvested share-based payment awards
$
0.06

 
$
(0.27
)
 
There were 92,000 stock options that were not included in the calculation of diluted earnings per share for the three months ended March 31, 2014 and March 31, 2015 because the effect was anti-dilutive. Given the loss for the three months ended March 31, 2014, diluted loss per share did not differ from basic loss per share as all potential shares were anti-dilutive.


6



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. There were no stock options granted during the three month periods ended March 31, 2015 or 2014.  
 
 
A summary of options under the Plan as of March 31, 2015 and changes during the three months ended March 31, 2015, 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, 2014
653,098

 
$
14.57

 
3.83
 
$
1,425

Forfeited or expired
(4,200
)
 
15.82

 
0.42
 

Outstanding at March 31, 2015
648,898

 
$
14.56

 
3.52
 
$
1,486

Exercisable at March 31, 2015
572,897

 
$
14.39

 
3.00
 
$
1,408

Exercisable at March 31, 2014
546,897

 
$
14.33

 
3.77
 
$
1,842

 
The weighted-average grant-date fair value of the options outstanding and exercisable at March 31, 2015 was $3.81 and $3.85, respectively. For the three months ended March 31, 2015, share based compensation expense applicable to options granted under the Plan was $22,000. For the three months ended March 31, 2014, share based compensation expense applicable to options granted under the Plan was $30,000. As of March 31, 2015, unrecognized stock-based compensation expense related to non-vested options amounted to $243,000. This amount is expected to be recognized over a period of 2.39 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 March 31, 2015 is $14.08. The Company recorded compensation cost related to stock awards of approximately $1,000 for each of the three month periods ended March 31, 2015 and 2014. There were no stock awards granted prior to July 1, 2007. There were no stock awards granted by the Company during the three months ended March 31, 2015. The Company granted 2,000 stock awards during the year ended December 31, 2011 with a grant price of $14.08. As of March 31, 2015, unrecognized stock-based compensation expense related to non-vested restricted stock awards amounted to $6,000. This amount is expected to be recognized over a period of 0.94 years.












7




A summary of the status of the Company’s stock awards as of March 31, 2015, and changes during the three months ended March 31, 2015, is as follows:
Nonvested Shares                                    
 
Number of
Shares
 
Weighted
Average
Grant-Date
Fair Value
 
 
 
 
 
Outstanding at December 31, 2014
 
800

 
$
14.08

Vested
 
400

 
14.08

Outstanding at March 31, 2015
 
400

 
$
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 are 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 March 31, 2015 and 2014, was $7,000 and $8,000, respectively. There were no phantom stock units granted during the three months ended March 31, 2015 and 2014. As of March 31, 2015 and December 31, 2014, 7,016 phantom stock units were outstanding.

8



5.      Recent Accounting Pronouncements (Applicable to the Company)

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Management has applied this ASU and it did not have a material effect on the Company’s consolidated financial statements.
 
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU was issued to clarify the principles for recognizing revenue and to develop a common revenue standard. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the potential impact of the ASU on its consolidated financial statements.
 
In June 2014, FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU was issued to respond to concerns about current accounting and disclosures for repurchase agreements and similar transactions. The concern was that under current accounting guidance there is an unnecessary distinction between the accounting for different types of repurchase agreements. Under current guidance, the repurchase-to-maturity transactions are accounted for as sales with forward agreements, whereas repurchase agreements that settle before the maturity of the transferred financial asset are accounted for as secured borrowings. The ASU amendments require new disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secure borrowings. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU does not have a material effect on the Company's consolidated financial statements.
 
In June 2014, FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU was issued because current U.S. generally accepted accounting principles (GAAP) does not contain explicit guidance on how to account for share-based payments when a performance target could be achieved after the requisite service period. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The ASU will 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:
 
 
March 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In Thousands)
Available-for-sale securities:
 
 
 
 
 
 
 
Marketable equity securities
$
369

 
$
30

 
$

 
$
399

Total available-for-sale securities
$
369

 
$
30

 
$

 
$
399

 
 
 
 
 
 
 
 
Held-to-maturity securities:
 

 
 

 
 

 
 

Corporate and industrial revenue bonds
$
33,077

 
$
772

 
$

 
$
33,849

Collateralized mortgage obligations
347

 
12

 

 
359

Total held-to-maturity securities
$
33,424

 
$
784

 
$

 
$
34,208

 
 
 
 
 
 
 
 
Non-marketable securities:
 

 
 

 
 

 
 

Federal Home Loan Bank stock
$
4,292

 
$

 
$

 
$
4,292

Banker's Bank Northeast stock
183

 

 

 
183

Total non-marketable securities
$
4,475

 
$

 
$

 
$
4,475

 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In Thousands)
Available-for-sale securities:
 
 
 
 
 
 
 
Marketable equity securities
$
369

 
$
45

 
$

 
$
414

Total available-for-sale securities
$
369

 
$
45

 
$

 
$
414

 
 
 
 
 
 
 
 
Held-to-maturity securities:
 

 
 

 
 

 
 

Corporate and industrial revenue bonds
$
33,344

 
$
467

 

 
$
33,811

Collateralized mortgage obligations
403

 
15

 

 
418

Total held-to-maturity securities
$
33,747

 
$
482

 
$

 
$
34,229

 
 
 
 
 
 
 
 
Non-marketable securities:
 

 
 

 
 

 
 

Federal Home Loan Bank stock
$
3,914

 
$

 
$

 
$
3,914

Banker's Bank Northeast stock
183

 

 

 
183

Total non-marketable securities
$
4,097

 
$

 
$

 
$
4,097

 









10



The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2015 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)
Due in one year or less
$

 
$

Due after one year through five years
8,194

 
8,564

Due after five years through ten years

 

Due after ten years
25,230

 
25,644

Total
$
33,424

 
$
34,208

 
There were no sales of available-for-sale securities during the three months ended March 31, 2015. During the three months ended March 31, 2014, proceeds from sales of available-for-sale securities amounted to $187,000 with gross realized gains of $34,000. The tax provision applicable to the net realized gain for the three months ended March 31, 2014 was $8,000.

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.

Unrealized Losses on Investment Securities
There were no continuous unrealized losses as of March 31, 2015 and December 31, 2014.
 
Non-Marketable Securities
The Company is a member of the Federal Home Loan Bank of Boston (“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. The Company’s investment in FHLB stock totaled $4.3 million and $3.9 million at March 31, 2015 and December 31, 2014, 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. For the three months ended March 31, 2015 and 2014, the Company received $17,000 and $15,000, respectively, in dividend income from its FHLB stock investment.

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. There have not been any impairment losses recorded through March 31, 2015 and the Company will continue to monitor its FHLB stock investment.

Banker’s Bank Northeast (BBN) stock is reported under other assets in the consolidated statement of financial condition and is carried at cost. The BBN stock investment is evaluated for impairment based on an estimate of the ultimate recovery to par value. As of March 31, 2015 and December 31, 2014, the Company’s investment in BBN totaled $183,000. There have not been any impairment losses recorded through March 31, 2015 and the Company will continue to monitor its BBN stock investment.


11



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 total loan
portfolio at the dates indicated.
 
March 31, 2015
 
December 31, 2014
 
Amount
 
Percent
of Total
 
Amount
 
Percent
of Total
 
(Dollars In Thousands)
Real estate loans:
 
 
 
 
 
 
 
Residential
$
120,096

 
22.0
%
 
$
118,692

 
22.7
%
Home equity
34,329

 
6.3
%
 
34,508

 
6.6
%
Commercial
272,060

 
50.0
%
 
249,632

 
47.7
%
      Total
426,485

 
78.3
%
 
402,832

 
77.0
%
 
 
 
 
 
 
 
 
Construction-residential
7,545

 
1.4
%
 
8,129

 
1.6
%
Construction-commercial
36,968

 
6.8
%
 
35,786

 
6.8
%
      Total
44,513

 
8.2
%
 
43,915

 
8.4
%
 
 
 
 
 
 
 
 
Total real estate loans
470,998

 
86.5
%
 
446,747

 
85.4
%
 
 
 
 
 
 
 
 
Consumer loans
2,561

 
0.5
%
 
2,662

 
0.5
%
Commercial and industrial loans
71,093

 
13.0
%
 
74,331

 
14.1
%
      Total loans
544,652

 
100.0
%
 
523,740

 
100.0
%
 
 
 
 
 
 
 
 
Deferred loan origination costs, net
859

 
 

 
944

 
 

Allowance for loan losses
(5,184
)
 
 

 
(4,927
)
 
 

      Loans, net
$
540,327

 
 

 
$
519,757

 
 

 
 
 
 
 
 
 
 

 
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 that 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 March 31, 2015 and December 31, 2014, the Company was servicing loans for participating lenders totaling $17.0 million and $18.0 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 Company sold $334,000 and $1.6 million in residential real estate loans to the secondary market during the three month periods ended March 31, 2015 and 2014, respectively. The unpaid principal balance of residential real estate loans serviced for others was $89.0 million at March 31, 2015 and $91.3 million at December 31, 2014. Management expects to continue to retain servicing rights 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 classes: commercial real estate, commercial construction and commercial and industrial. The risks evaluated in determining an adequate credit risk rating include the financial strength of the borrower and the collateral securing the loan. Commercial loans, including commercial and industrial, commercial real estate and commercial construction 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 through 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.


12



Residential real estate and residential construction loans are categorized into performing and nonperforming risk ratings. They are considered nonperforming when they are 90 days past due or have not returned to accrual status. Nonperforming residential loans 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 describes the credit risk ratings for classified assets:

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 weaknesses 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.


The following table presents an analysis of total loans segregated by risk rating and segment as of March 31, 2015:
 
 
Commercial Credit Risk Exposure
 
Commercial and Industrial
 
Commercial
Construction
 
Commercial
Real Estate
 
Total
 
(In Thousands)
Pass
$
64,371

 
$
28,975

 
$
260,345

 
$
353,691

Special mention
3,775

 
5,826

 
8,535

 
18,136

Substandard
2,947

 
2,167

 
3,180

 
8,294

   Total commercial loans
$
71,093

 
$
36,968

 
$
272,060

 
$
380,121

 
 
 
 
 
 
 
 
 
Residential Credit Risk Exposure
 
Residential
Real Estate
 
Residential
Construction
 
 

 
Total
 
(In Thousands)
Performing
$
116,054

 
$
7,545

 
 
 
$
123,599

Nonperforming
4,042

 

 
 
 
4,042

   Total residential loans (1)
$
120,096

 
$
7,545

 
 

 
$
127,641

 
 
 
 
 
 
 
 
 
Consumer Credit Risk Exposure
 
Consumer
 
Home Equity
 
 

 
Total
 
(In Thousands)
Performing
$
2,529

 
$
33,983

 
 

 
$
36,512

Nonperforming
32

 
346

 
 
 
378

   Total consumer loans
$
2,561

 
$
34,329

 
 

 
$
36,890


(1) At March 31, 2015, the Company had a total of $481,000 in residential real estate loans in the process of foreclosure.





13



The following table presents an analysis of total loans segregated by risk rating and segment as of December 31, 2014
 
Commercial Credit Risk Exposure
 
Commercial and Industrial
 
Commercial
Construction
 
Commercial
Real Estate
 
Total
 
(In Thousands)
Pass
$
66,442

 
$
27,547

 
$
234,866

 
$
328,855

Special mention
4,991

 
5,843

 
10,034

 
20,868

Substandard
2,898

 
2,396

 
4,732

 
10,026

   Total commercial loans
$
74,331

 
$
35,786

 
$
249,632

 
$
359,749

 
 
 
 
 
 
 
 
 
Residential Credit Risk Exposure
 
Residential
Real Estate
 
Residential
Construction
 
 

 
Total
 
(In Thousands)
Performing
$
114,586

 
$
8,129

 
 

 
$
122,715

Nonperforming
4,106

 

 
 

 
4,106

   Total residential loans
$
118,692

 
$
8,129

 
 

 
$
126,821

 
 
 
 
 
 
 
 
 
Consumer Credit Risk Exposure
 
Consumer
 
Home Equity
 
 

 
Total
 
(In Thousands)
Performing
$
2,630

 
$
34,159

 
 

 
$
36,789

Nonperforming
32

 
349

 
 

 
381

   Total consumer loans
$
2,662

 
$
34,508

 
 

 
$
37,170



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.

Loans charged off

Commercial and industrial loans. Loans past due more than 120 days are considered for one of three options: charge off the balance of the loan, charge off any excess balance over the fair value of the collateral securing the loan, or continue collection efforts subject to a monthly review until either the balance is collected or a charge-off recommendation can be reasonably made.

Residential loans. In general, one-to-four family residential loans and home equity loans that are delinquent 90 days or more or are on nonaccrual status are classified nonperforming. An updated appraisal is obtained when the loan is 90 days or more delinquent. Any outstanding balance in excess of the fair value of the property, less cost to sell, is charged-off against the allowance for loan losses.

Consumer loans. Generally all loans are automatically considered for charge-off at 90 to 120 days from the contractual due date, unless there is liquid collateral in hand sufficient to repay principal and interest in full.








14



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 and industrial, 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 48 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:

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 management 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, home equity loans, 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.
 

15



Loans 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 TDRs 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.

During the three months ended March 31, 2015, there were no changes in the Company's allowance methodology related to the qualitative or quantitative factors.
 

The following table presents the allowance for loan losses and select loan information as of and for the three months ended March 31, 2015:
 
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, 2014
$
486

 
$
107

 
$
2,699

 
$
568

 
$
879

 
$
35

 
$
153

 
$
4,927

Provision for (reduction of) loan losses
145

 
(7
)
 
152

 
83

 
24

 
5

 
(2
)
 
400

Recoveries

 

 
1

 

 

 
7

 
1

 
9

Loans charged off
(85
)
 

 
(3
)
 

 
(53
)
 
(11
)
 

 
(152
)
Balance as of March 31, 2015
$
546

 
$
100

 
$
2,849

 
$
651

 
$
850

 
$
36

 
$
152

 
$
5,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
499

 
$
100

 
$
2,816

 
$
651

 
$
818

 
$
36

 
$
149

 
$
5,069

Individually evaluated for impairment
47

 

 
33

 

 
32

 

 
3

 
115

   Total ending balance
$
546

 
$
100

 
$
2,849

 
$
651

 
$
850

 
$
36

 
$
152

 
$
5,184

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
116,054

 
$
7,545

 
$
270,053

 
$
34,801

 
$
69,313

 
$
2,561

 
$
33,983

 
$
534,310

Individually evaluated for impairment
4,042

 

 
2,007

 
2,167

 
1,780

 

 
346

 
10,342

   Total ending balance
$
120,096

 
$
7,545

 
$
272,060

 
$
36,968

 
$
71,093

 
$
2,561

 
$
34,329

 
$
544,652




















16



The following table presents the allowance for loan losses and select loan information as of and for the year ended December 31, 2014:
 
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, 2013
$
650

 
$
94

 
$
2,121

 
$
435

 
$
1,110

 
$
35

 
$
151

 
$
4,596

Provision for loan losses
139

 
13

 
1,479

 
1,672

 
1,867

 
43

 
58

 
5,271

Recoveries

 

 
74

 

 
83

 
23

 
1

 
181

Loans charged off
(303
)
 

 
(975
)
 
(1,539
)
 
(2,181
)
 
(66
)
 
(57
)
 
(5,121
)
Balance as of December 31, 2014
$
486

 
$
107

 
$
2,699

 
$
568

 
$
879

 
$
35

 
$
153

 
$
4,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
481

 
$
107

 
$
2,634

 
$
568

 
$
879

 
$
35

 
$
150

 
$
4,854

Individually evaluated for impairment
5

 

 
65

 

 

 

 
3

 
73

Total ending balance
$
486

 
$
107

 
$
2,699

 
$
568

 
$
879

 
$
35

 
$
153

 
$
4,927

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
114,586

 
$
8,129

 
$
246,123

 
$
33,391

 
$
73,286

 
$
2,662

 
$
34,160

 
$
512,337

Individually evaluated for impairment
4,106

 

 
3,509

 
2,395

 
1,045

 

 
348

 
11,403

Total ending balance
$
118,692

 
$
8,129

 
$
249,632

 
$
35,786

 
$
74,331

 
$
2,662

 
$
34,508

 
$
523,740

 

The following table presents the allowance for loan losses and select loan information as of and for the three months ended March 31, 2014:
 
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, 2013
$
650

 
$
94

 
$
2,121

 
$
435

 
$
1,110

 
$
35

 
$
151

 
$
4,596

Provision for (reduction of) loan losses
(6
)
 
16

 
148

 
61

 
1,929

 
13

 
40

 
2,201

Recoveries

 

 

 

 
1

 
5

 

 
6

Loans charged off
(233
)
 

 

 

 
(2,033
)
 
(19
)
 
(56
)
 
(2,341
)
Balance as of March 31, 2014
$
411

 
$
110

 
$
2,269

 
$
496

 
$
1,007

 
$
34

 
$
135

 
$
4,462

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 

 
 

 
 

 
 

 
 

 
 

 
 

  Collectively evaluated for impairment
$
407

 
$
110

 
$
2,129

 
$
496

 
$
997

 
$
34

 
$
135

 
$
4,308

  Individually evaluated for impairment
4

 

 
140

 

 
10

 

 

 
154

Total ending balance
$
411

 
$
110

 
$
2,269

 
$
496

 
$
1,007

 
$
34

 
$
135

 
$
4,462

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

  Collectively evaluated for impairment
$
110,092

 
$
7,109

 
$
208,845

 
$
39,341

 
$
77,238

 
$
2,358

 
$
31,196

 
$
476,179

  Individually evaluated for impairment
3,165

 

 
6,358

 
4,098

 
1,674

 

 
240

 
15,535

Total ending balance
$
113,257

 
$
7,109

 
$
215,203

 
$
43,439

 
$
78,912

 
$
2,358

 
$
31,436

 
$
491,714












17



Impairment

The following table presents a summary of information pertaining to impaired loans by segment as of and for the three months ended March 31, 2015:
 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
Residential real estate
$
3,182

 
$
3,389

 
$
3,338

 
$

 
$
34

Residential construction

 

 

 

 

Commercial real estate
1,454

 
1,491

 
2,077

 

 
29

Commercial construction
2,167

 
3,706

 
2,281

 

 
4

Commercial and industrial
1,343

 
1,375

 
1,194

 

 
7

Consumer

 

 

 

 

Home equity
299

 
362

 
300

 

 
1

Total
$
8,445

 
$
10,323

 
$
9,190

 
$

 
$
75

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
860

 
$
860

 
$
736

 
$
47

 
$
12

Residential construction

 

 

 

 

Commercial real estate
553

 
599

 
681

 
33

 
6

Commercial construction

 

 

 

 

Commercial and industrial
437

 
437

 
219

 
32

 
2

Consumer

 

 

 

 

Home equity
47

 
47

 
47

 
3

 

Total
$
1,897

 
$
1,943

 
$
1,683

 
$
115

 
$
20

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
4,042

 
$
4,249

 
$
4,074

 
$
47

 
$
46

Residential construction

 

 

 

 

Commercial real estate
2,007

 
2,090

 
2,758

 
33

 
35

Commercial construction
2,167

 
3,706

 
2,281

 

 
4

Commercial and industrial
1,780

 
1,812

 
1,413

 
32

 
9

Consumer

 

 

 

 

Home equity
346

 
409

 
347

 
3

 
1

Total
$
10,342

 
$
12,266

 
$
10,873

 
$
115

 
$
95

 
The $10.3 million of impaired loans include $8.8 million of non-accrual loans. The remaining impaired loans are TDRs or loans for which the Company believes, 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.













18



The following table presents a summary of information pertaining to impaired loans by segment as of and for the year ended December 31, 2014:
 
 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
Residential real estate
$
3,495

 
$
3,617

 
$
2,634

 
$

 
$
105

Residential construction

 

 

 

 

Commercial real estate
2,700

 
3,317

 
3,535

 

 
55

Commercial construction
2,395

 
3,934

 
3,270

 

 
111

Commercial and industrial
1,045

 
1,057

 
1,300

 

 
43

Consumer

 

 

 

 

Home equity
301

 
366

 
238

 

 
10

Total
$
9,936

 
$
12,291

 
$
10,977

 
$

 
$
324

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
611

 
$
611

 
$
859

 
$
5

 
$
32

Residential construction

 

 

 

 

Commercial real estate
809

 
809

 
694

 
65

 
23

Commercial construction

 

 

 

 

Commercial and industrial

 

 
47

 

 
1

Consumer

 

 

 

 

Home equity
47

 
47

 
65

 
3

 
1

Total
$
1,467

 
$
1,467

 
$
1,665

 
$
73

 
$
57

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
4,106

 
$
4,228

 
$
3,493

 
$
5

 
$
137

Residential construction

 

 

 

 

Commercial real estate
3,509

 
4,126

 
4,229

 
65

 
78

Commercial construction
2,395

 
3,934

 
3,270

 

 
111

Commercial and industrial
1,045

 
1,057

 
1,347

 

 
44

Consumer

 

 

 

 

Home equity
348

 
413

 
303

 
3

 
11

Total
$
11,403

 
$
13,758

 
$
12,642

 
$
73

 
$
381

 
The $11.4 million of impaired loans include $11.2 million of non-accrual loans. The remaining impaired loans are TDRs or loans for which the Company believes, 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.













19



The following table presents a summary of information pertaining to impaired loans by segment as of and for the three months ended March 31, 2014:

 
Recorded
Investment
 
Unpaid
Balance
 
Average
Recorded
Investment
 
Related
Allowance
 
Interest Income
Recognized
 
(In Thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
Residential real estate
$
2,640

 
$
2,870

 
$
2,088

 
$

 
$
28

Residential construction

 

 

 

 

Commercial real estate
4,914

 
5,036

 
4,506

 

 
17

Commercial construction
4,098

 
4,098

 
3,993

 

 
46

Commercial and industrial
1,560

 
3,593

 
1,407

 

 
16

Consumer

 

 

 

 

Home equity
240

 
296

 
185

 

 
3

Total
$
13,452

 
$
15,893

 
$
12,179

 
$

 
$
110

 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 

 
 

 
 

 
 

 
 

Residential real estate
$
525

 
$
525

 
$
824

 
$
4

 
$
7

Residential construction

 

 

 

 

Commercial real estate
1,444

 
1,444

 
846

 
140

 
3

Commercial construction

 

 

 

 

Commercial and industrial
114

 
114

 
116

 
10

 
1

Consumer

 

 

 

 

Home equity

 

 
81

 

 

Total
$
2,083

 
$
2,083

 
$
1,867

 
$
154

 
$
11

 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 

 
 

 
 

 
 

 
 

Residential real estate
$
3,165

 
$
3,395

 
$
2,912

 
$
4

 
$
35

Residential construction

 

 

 

 

Commercial real estate
6,358

 
6,480

 
5,352

 
140

 
20

Commercial construction
4,098

 
4,098

 
3,993

 

 
46

Commercial and industrial
1,674

 
3,707

 
1,523

 
10

 
17

Consumer

 

 

 

 

Home equity
240

 
296

 
266

 

 
3

Total
$
15,535

 
$
17,976

 
$
14,046

 
$
154

 
$
121


The $15.5 million of impaired loans include $10.3 million of non-accrual loans. The remaining impaired loans are TDRs or loans for which the Company believes, 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.
 














20



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.

The following table presents an aging analysis of past due loans and non-accrual loans at March 31, 2015:
 
31-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total
Loans
 
Loans on Nonaccrual
 
(In Thousands)
Residential real estate
$
2,078

 
$
176

 
$
807

 
$
3,061

 
$
117,035

 
$
120,096

 
$
4,239

Residential construction

 

 

 

 
7,545

 
7,545

 

Commercial real estate
423

 
68

 
81

 
572

 
271,488

 
272,060

 
907

Commercial construction
396

 

 
1,483

 
1,879

 
35,089

 
36,968

 
2,167

Commercial and industrial
374

 
537

 
547

 
1,458

 
69,635

 
71,093

 
1,150

Consumer
20

 
32

 

 
52

 
2,509

 
2,561

 
32

Home equity
108

 

 
260

 
368

 
33,961

 
34,329

 
261

Total
$
3,399

 
$
813


$
3,178


$
7,390


$
537,262


$
544,652


$
8,756

 

The following table presents an aging analysis of past due loans and non-accrual loans at December 31, 2014:
 
31-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total
Loans
 
Loans on Nonaccrual
 
(In Thousands)
Residential real estate
$
3,396

 
$
542

 
$
1,212

 
$
5,150

 
$
113,542

 
$
118,692

 
$
4,308

Residential construction

 

 

 

 
8,129

 
8,129

 

Commercial real estate
913

 

 
2,385

 
3,298

 
246,334

 
249,632

 
3,000

Commercial construction
550

 

 
1,558

 
2,108

 
33,678

 
35,786

 
2,396

Commercial and industrial
218

 
434

 
513

 
1,165

 
73,166

 
74,331

 
1,196

Consumer
28

 

 
13

 
41

 
2,621

 
2,662

 
32

Home equity
77

 
30

 
263

 
370

 
34,138

 
34,508

 
261

Total
$
5,182

 
$
1,006

 
$
5,944

 
$
12,132

 
$
511,608

 
$
523,740

 
$
11,193



Troubled Debt Restructuring (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. TDR loans 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 is classified as impaired and will continue to be reported as a TDR until the loan is paid in full.


21



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, and an analysis of the borrower’s performance and projections to assess repayment ability going forward.

During the three months ended March 31, 2015, the Company had no TDRs that had defaulted and had been modified within the previous twelve month period. During the three months ended March 31, 2014, the Company had one TDR totaling $201,000 that had defaulted and had been modified within the previous twelve month period. TDR loans are considered defaulted at 90 days past due.

The Company did not have any new TDR activity during the three months ended March 31, 2015 and 2014.
 
 
 

The following is a summary of TDR loans by segment as of the dates indicated:
 
 
As of March 31, 2015
 
As of December 31, 2014
 
 
Number of
Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
 
 
(Dollars In Thousands)
Residential real estate
 
4

 
$
862

 
4

 
$
865

Residential construction
 

 

 

 

Commercial real estate
 
4

 
572

 
4

 
575

Commercial construction
 
2

 
1,879

 
2

 
2,108

Commercial and industrial
 
4

 
128

 
4

 
141

Consumer
 

 

 

 

Home equity
 
1

 
33

 
1

 
33

    Total
 
15

 
$
3,474

 
15

 
$
3,722



8.      Fair Value Measurements and Disclosures

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, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.


22



Held-to-maturity and non-marketable securities. The fair values of held-to-maturity securities are estimated by independent providers using matrix pricing and quoted market prices for similar securities. 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 below that 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 fair 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.

Other real estate owned ("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.

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 and compared to fair value for impairment. In evaluating the fair 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 Level 2.

Accrued interest and dividends 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 and dividends receivable as 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.


23



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, premises 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 measured at fair value as of March 31, 2015 and December 31, 2014 on a recurring basis are summarized below:
 
Fair Value Measurements Using
 
March 31, 2015
 
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
$
399

 
$
399

 
$

 
$

       Total equity securities
$
399

 
$
399

 
$

 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements Using
 
December 31, 2014
 
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
$
414

 
$
414

 
$

 
$

       Total equity securities
$
414

 
$
414

 
$

 
$























24



Assets measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014 are summarized below:
 
Fair Value Measurements Using
 
 
March 31, 2015
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
 
(Dollars In Thousands)
 
Assets
 
 
 
 
 
 
 
 
Impaired loans
$
5,454

 
$

 
$

 
$
5,454

 
Other real estate owned
865

 

 
865

 

 
Loans held for sale
217

 

 
217

 

 
Impaired loans are presented net of their related specific reserves of $115,000 and charge offs of $1.9 million as of March 31, 2015.
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using
 
 
December 31, 2014
 
Readily Available
Market Prices
(Level 1)
 
Observable
Market Data
(Level 2)
 
Determined
Fair Value
(Level 3)
 
 
(Dollars In Thousands)
 
Assets
 

 
 

 
 

 
 

 
Impaired loans
$
5,184

 
$

 
$

 
$
5,184

 
Other real estate owned
1,050

 

 
1,050

 

 

Impaired loans are presented net of their related specific reserves of $73,000 and charge offs of $2.3 million as of December 31, 2014.


Fair Value of Financial Instruments

Accounting Standards Codification ("ASC") Topic 825, "Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the statement of financial condition, 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.

















25



The carrying amounts and estimated fair values for financial instruments as of March 31, 2015 and December 31, 2014 were as follows:
 
 
 
Fair Value Using
 
Carrying Amount
at March 31, 2015
 
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
$
50,716

 
$
50,716

 
$

 
$

Available-for-sale securities
399

 
399

 

 

Held-to-maturity securities
33,424

 

 
34,208

 

FHLB stock
4,292

 

 
4,292

 

 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
Residential real estate
120,172

 

 

 
122,858

Residential construction
7,445

 

 

 
7,432

Commercial real estate
269,448

 

 

 
271,356

Commercial construction
36,317

 

 

 
36,565

Commercial and industrial
70,243

 

 

 
70,480

Consumer
2,525

 

 

 
2,720

Home equity
34,177

 

 

 
34,269

   Net loans
540,327

 

 

 
545,680

 
 
 
 
 
 
 
 
Loans held for sale
217

 

 
217

 

Accrued interest and dividends receivable
1,651

 

 
1,651

 

Mortgage servicing rights
242

 

 
521

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Deposits
$
488,706

 
$

 
$
489,725

 
$

FHLB advances
83,537

 

 
84,454

 

Accrued interest payable
98

 

 
98

 



26



 
 
 
Fair Value Using
 
Carrying Amount
at December 31, 2014
 
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
$
49,769

 
$
49,769

 
$

 
$

Available-for-sale securities
414

 
414

 

 

Held-to-maturity securities
33,747

 

 
34,229

 

FHLB stock
3,914

 

 
3,914

 

 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
Residential real estate
118,837

 

 

 
121,296

Residential construction
8,022

 

 

 
8,008

Commercial real estate
247,246

 

 

 
248,316

Commercial construction
35,218

 

 

 
35,463

Commercial and industrial
73,452

 

 

 
73,668

Consumer
2,627

 

 

 
2,804

Home equity
34,355

 

 

 
34,453

   Net loans
519,757

 

 

 
524,008

 
 
 
 
 
 
 
 
Loans held for sale

 

 

 

Accrued interest and dividends receivable
1,591

 

 
1,591

 

Mortgage servicing rights
269

 

 
622

 

 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

Deposits
$
483,558

 
$

 
$
484,423

 
$

FHLB advances
67,039

 

 
67,644

 

Accrued interest payable
82

 

 
82

 



9.   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. As of March 31, 2015, a total of 60,731 shares may be repurchased under the current stock repurchase program. The Company may repurchase its shares from time to time at prevailing prices in the open market, in block transactions or in privately negotiated transactions. Repurchases are made under rule 10b-5(1) repurchase plans. The repurchased shares are held by the Company as treasury stock and are available for general corporate purposes.


10.    Subsequent Events

Subsequent events represent events or transactions occurring after the statements of financial condition 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 a Securities and Exchange Commission filer and management has evaluated subsequent events through the date that the financial statements were issued. On April 24, 2015, the Company announced a quarterly cash dividend of $0.07 per share of its common stock to stockholders of record as of the close of business on May 8, 2015, payable on or about May 22, 2015.

27



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 Chicopee Bancorp Inc. ("the, Company") at March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014, 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 2014 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 ("the Bank"), a subsidiary of the Company, 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 March 31, 2015, 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. Our accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2014 Annual Report on Form 10-K. A brief description of our current accounting policies involving significant management judgment are discussed in the Company's 2014 Annual Report on Form 10-K under "Critical Accounting Policies."

Comparison of Financial Condition at March 31, 2015 and December 31, 2014

Total assets increased $21.6 million, or 3.4%, from $639.2 million at December 31, 2014 to $660.8 million at March 31, 2015. The increase in total assets was primarily due to the increase in cash and cash equivalents of $947,000, or 1.9%, and an increase in net loans of $20.6 million, or 4.0%, from $519.8 million, or 81.3% of total assets at December 31, 2014, to $540.3 million, or 81.8% of total assets at March 31, 2015, partially offset by a decrease in held-to-maturity securities of $323,000, or 1.0%, to $33.4 million at March 31, 2015.
 

28



The significant components of the $20.6 million, or 4.0%, increase in net loans were an increase of $22.4 million, or 9.0%, in commercial real estate loans, an increase of $1.4 million, or 1.2%, in one-to-four-family residential real estate loans, and an increase of $598,000, or 1.4%, in construction loans. These increases were partially offset by a decrease in commercial and industrial loans of $3.2 million, or 4.4%, a decrease of $101,000, or 3.8%, in consumer loans and a decrease of $179,000, or 0.5%, in home equity loans. The increase in commercial real estate loans was due to the funding of outstanding loan commitments. 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 Company currently services $89.0 million in loans sold to the secondary market. In order to service our customers management intends to continue to retain the servicing rights on all loans written and sold in the secondary market.
 
The held-to-maturity investment portfolio decreased $323,000, or 1.0%, from $33.7 million at December 31, 2014 to $33.4 million at March 31, 2015. The fair value of available-for-sale securities decreased $15,000, or 3.6%, from $414,000, at December 31, 2014 to $399,000, at March 31, 2015.

Total deposits increased $5.1 million, or 1.1%, from $483.6 million at December 31, 2014 to $488.7 million at March 31, 2015. Core deposits, which we consider to include all deposits except for certificates of deposit, decreased $5.5 million, or 1.8%, from $311.9 million at December 31, 2014 to $306.4 million at March 31, 2015. Demand deposits decreased $1.7 million, or 1.8%, to $96.2 million, money market accounts decreased $6.4 million, or 5.3%, to $114.7 million, NOW accounts increased $356,000, or 0.8%, to $42.5 million, and savings accounts increased $2.3 million, or 4.6%, to $53.0 million. Certificates of deposit increased $10.6 million, or 6.2%, from $171.6 million at December 31, 2014 to $182.3 million at March 31, 2015. The decrease of 1.8% in core deposits was mostly due to fluctuations in commercial accounts related to seasonal business activity and the decrease in money market accounts.

The Company utilizes borrowings from a variety of sources to supplement its supply of funds for loans and investments. FHLB advances increased $16.5 million, or 24.6%, from $67.0 million at December 31, 2014 to $83.5 million at March 31, 2015. The increase in FHLB advances was due to the $23.5 million increase in long-term advances, partially offset by paydowns of $7.0 million on long-term advances.

Stockholders’ equity was $88.2 million, or 13.3% of total assets, at March 31, 2015, compared to $88.1 million, or 13.8% of total assets, at December 31, 2014. The Company’s stockholders’ equity increased due to net income of $313,000 for the three months ended March 31, 2015, $146,000 in additional paid-in capital and earned compensation related to stock-based compensation, partially offset by the $369,000 cash dividend paid on February 19, 2015. The Company’s book value per share increased $0.02, or 0.1%, from $16.72 at December 31, 2014 to $16.74 at March 31, 2015.




























29



Allowance for Loan Losses

Following is the activity in the allowance for loan losses and related ratios as of and for the periods indicated:
 
At or for the Three Months Ended March 31,
 
2015
 
2014
 
(Dollars In Thousands)
Allowance for loan losses, beginning of period:
$
4,927

 
$
4,596

Charged off loans:
 

 
 

Residential real estate
(85
)
 
(233
)
Construction

 

Commercial real estate
(3
)
 

Commercial
(53
)
 
(2,033
)
Home equity

 
(56
)
Consumer
(11
)
 
(19
)
   Total charged off loans
(152
)
 
(2,341
)
 
 
 
 
Recoveries on loans previously charged off:
 

 
 

Residential real estate

 

Construction

 

Commercial real estate
1

 

Commercial

 
1

Home equity
1

 

Consumer
7

 
5

   Total recoveries
9

 
6

Net loan charge offs
(143
)
 
(2,335
)
Provision for loan losses
400

 
2,201

Allowance for loan losses, end of period
$
5,184

 
$
4,462

 
 
 
 
Ratios:
 

 
 

Net loan charge offs to total average loans
0.03
%
 
0.48
%
 
 
 
 
Allowance for loan losses to total loans (1)
0.95
%
 
0.91
%
 
 
 
 
Allowance for loan losses to nonperforming loans  (2)
59.21
%
 
43.18
%
 
 
 
 
Recoveries to charge offs
5.92
%
 
0.26
%
 
 
 
 
Net loans charged off to allowance for loan losses
2.76
%
 
52.33
%
 
(1)
Total loans includes net loans plus the allowance for loan losses, excludes deferred loan origination costs.
(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 March 31, 2015, the Company had fifteen troubled debt restructured loans totaling $3.5 million, of which ten totaling $3.0 million were included in nonperforming loans. Five of the fifteen restructured loans totaling $490,000 were performing as modified. At March 31, 2014, the Company had twelve troubled debt restructured loans totaling $1.3 million, of which eight totaling $832,000 were included in nonperforming loans. Four of the twelve restructured loans totaling $496,000 were 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.

30



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 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 allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for residential real estate, home equity loans, 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.

General valuation allowance on the remainder of the loan portfolio. The Company establishes a general allowance for loans that are not delinquent. If not all delinquent loans are impaired, then some delinquent loans are in the general pool. This general valuation allowance is determined by segregating the loans by loan segment and assigning percentages to each segment. 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 March 31, 2015, the allowance for loan losses represented 0.95% of total loans and 59.2% of nonperforming loans. The allowance for loan losses increased $257,000, or 5.2%, from $4.9 million at December 31, 2014 to $5.2 million at March 31, 2015. The increase of $257,000 was due to the $400,000 provision for loan losses, offset by net charge-offs of $143,000.

For the three months ended March 31, 2015, the provision for loan losses decreased $1.8 million from $2.2 million, for the three months ended March 31, 2014 to $400,000. The provision for loan losses of $2.2 million for the three months ended March 31, 2014 was due to the $2.0 million loan charge-off previously disclosed. Of the $400,000 provision for loan losses for the three months ended March 31, 2015, $215,000, or 53.8%, was due to the $20.9 million, or 4.0%, increase in total loans from $523.7 million at December 31, 2014 to $544.7 million at March 31, 2015, $42,000 was due to the increase in specific reserves and $143,000 was due to net charge-offs.


















31



Nonperforming Assets

The following table sets forth information regarding nonaccrual loans and other real estate owned at the dates indicated:
 
March 31, 2015
 
December 31, 2014
 
(Dollars In Thousands)
Nonaccrual loans (3):
 
 
 
Residential real estate
$
4,239

 
$
4,308

Commercial real estate
907

 
3,000

Commercial construction
2,167

 
2,396

Commercial and industrial
1,150

 
1,196

Home equity
261

 
261

Consumer
32

 
32

Total nonaccrual loans
8,756

 
11,193

Other real estate owned
865

 
1,050

Total nonperforming assets
$
9,621

 
$
12,243

 
 
 
 
Ratios:
 

 
 

   Total nonperforming loans as a percentage of total loans (1)
1.61
%
 
2.14
%
 
 

 
 

   Total nonperforming assets as a percentage of total assets (2)
1.46
%
 
1.92
%
 
(1)
Total loans equals net loans plus the allowance for loan losses, excludes deferred loan origination costs.
(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 March 31, 2015, there were no loans that were over 90 days delinquent and still accruing interest.

At March 31, 2015, nonperforming loans decreased $2.4 million, or 21.8%, to $8.8 million compared to $11.2 million at December 31, 2014. The decrease in nonperforming loans is primarily due to the decrease of $2.1 million, or 69.8% in commercial real estate loans, a decrease of $229,000, or 9.6%, in commercial construction loans, a decrease of $69,000, or 1.6%, in residential real estate loans, and a decrease of $46,000, or 3.8% in commercial and industrial loans. The decrease in nonperforming commercial real estate loans was due to the sale of the underlying collateral of a $2.5 million commercial loan relationship previously disclosed. Proceeds from the sale of collateral were used to pay off the loan without any additional write-downs. Loans that are less than 90 days past due and were previously on nonaccrual continue to be on nonaccrual status until all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. At March 31, 2015, other real estate owned decreased $185,000, or 17.6%, to $865,000 compared to $1.1 million at December 31, 2014.

Asset quality continues to be the top focus for management and we continue to proactively work to resolve problem loans as they arise. Management continues to monitor the loan portfolio to minimize any further deterioration in the collateral that could result in future losses.












32



Deposits

The following table sets forth the Company’s deposit accounts at the dates indicated:
 
March 31, 2015
 
December 31, 2014
 
Balance
 
Percent
of Total
Deposits
 
Balance
 
Percent
of Total
Deposits
Deposit Type:
 
 
(Dollars In Thousands)
 
 
Demand deposits
$
96,185

 
19.7
%
 
$
97,922

 
20.3
%
NOW accounts
42,533

 
8.7
%
 
42,177

 
8.7
%
Savings accounts
53,049

 
10.8
%
 
50,716

 
10.5
%
Money market deposit accounts
114,678

 
23.5
%
 
121,106

 
25.0
%
Total core deposits
306,445

 
62.7
%
 
311,921

 
64.5
%
Certificates of deposit
182,261

 
37.3
%
 
171,637

 
35.5
%
Total deposits
$
488,706

 
100.0
%
 
$
483,558

 
100.0
%
 
Total deposits increased $5.1 million, or 1.1%, from $483.6 million at December 31, 2014 to $488.7 million at March 31, 2015. Core deposits, which we consider to include all deposits except for certificates of deposit, decreased $5.5 million, or 1.8%, from $311.9 million at December 31, 2014 to $306.4 million at March 31, 2015. Demand deposits decreased $1.7 million, or 1.8%, to $96.2 million, money market accounts decreased $6.4 million, or 5.3%, to $114.7 million, NOW accounts increased $356,000, or 0.8%, to $42.5 million, and savings accounts increased $2.3 million, or 4.6%, to $53.0 million. Certificates of deposit increased $10.6 million, or 6.2%, from $171.6 million at December 31, 2014 to $182.3 million at March 31, 2015. The decrease of 1.8% in core deposits was mostly due to fluctuations in commercial accounts related to seasonal business activity and the decrease in money market accounts.
 
 
 
 
Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014

General

The Company reported net income of $313,000, or $0.06 earnings per share, for the three months ended March 31, 2015, compared to a net loss of $1.4 million, or $0.27 loss per share, for the same period in 2014. The increase in net income for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, was the result of a $1.8 million, or 81.8%, decrease in the provision for loan losses, an increase of $327,000, or 7.0% in net interest income and an increase of $53,000, or 9.0%, in non-interest income, partially offset by an increase of $252,000, or 5.5%, in non-interest expense and an increase of $257,000, or 146.9%, in income tax expense due to the higher level of taxable income during the three months ended March 31, 2015.

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.

33



 
For the Three Months Ended March 31,
 
2015
 
2014
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
 
Average
Yield/
Rate
 
(Dollars in Thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Investments (1)
$
37,948

 
$
619

 
6.62
%
 
$
48,000

 
$
669

 
5.65
%
Loans:
 

 
 

 
 

 
 
 
 

 
 

Residential real estate loans
121,230

 
1,149

 
3.84
%
 
113,173

 
1,112

 
3.98
%
Home equity
34,269

 
272

 
3.22
%
 
31,691

 
276

 
3.53
%
Commercial real estate loans
260,929

 
2,972

 
4.62
%
 
212,198

 
2,512

 
4.80
%
Residential construction
7,590

 
73

 
3.90
%
 
6,747

 
69

 
4.15
%
Commercial construction
35,796

 
370

 
4.19
%
 
40,771

 
432

 
4.30
%
Consumer loans
2,615

 
42

 
6.51
%
 
2,368

 
37

 
6.34
%
Commercial and industrial loans
73,303

 
726

 
4.02
%
 
82,034

 
766

 
3.79
%
Total loans (2)
535,732

 
5,604

 
4.24
%
 
488,982

 
5,204

 
4.32
%
Other interest-earning assets
33,673

 
19

 
0.23
%
 
15,519

 
8

 
0.21
%
        Total interest-earning assets
607,353

 
6,242

 
4.17
%
 
552,501

 
5,881

 
4.32
%
Non-interest earning assets
41,749

 
 

 
 

 
40,573

 
 

 
 

Less: Allowance for loan losses
(5,007
)
 
 
 
 
 
(4,488
)
 
 
 
 
Total assets
$
644,095

 
 

 
 

 
$
588,586

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

 
 

 
 

Money market accounts
$
116,553

 
$
79

 
0.27
%
 
$
111,113

 
$
85

 
0.31
%
Savings accounts (3)
51,662

 
13

 
0.10
%
 
50,054

 
13

 
0.11
%
NOW accounts
42,293

 
71

 
0.68
%
 
41,093

 
88

 
0.87
%
Certificates of deposit
178,753

 
550

 
1.25
%
 
154,635

 
528

 
1.38
%
Total interest-bearing deposits
389,261

 
713

 
0.74
%
 
356,895

 
714

 
0.81
%
Federal Home Loan Bank advances
70,355

 
263

 
1.52
%
 
48,695

 
213

 
1.77
%
Total interest-bearing liabilities
459,616

 
976

 
0.86
%
 
405,590

 
927

 
0.93
%
Demand deposits
95,307

 
 

 
 

 
89,581

 
 

 
 

Other non-interest bearing liabilities
515

 
 

 
 

 
673

 
 

 
 

Total liabilities
555,438

 
 

 
 

 
495,844

 
 

 
 

Total stockholders' equity
88,657

 
 

 
 

 
92,742

 
 

 
 

Total liabilities and stockholders' equity
$
644,095

 
 

 
 

 
$
588,586

 
 

 
 

Net interest-earning assets
$
147,737

 
 

 
 

 
$
146,911

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net interest income (fully-taxable equivalent)
 

 
5,266

 


 
 

 
4,954

 


Less: tax equivalent adjustment (1)
 
 
(243
)
 
 
 
 
 
(258
)
 
 
          Net interest income
 
 
5,023

 
 
 
 
 
4,696

 
 
Net interest rate spread (fully-taxable equivalent) (4)
 
 
 
 
3.31
%
 
 

 
 

 
3.39
%
 
 
 
 
 
 
 
 
 
 
 
Net interest margin (fully-taxable equivalent) (5)
 
 

 
3.52
%
 
 

 
 

 
3.64
%
 
 

 
 
 


 
 

 
 
 
 

Ratio of interest earning assets to interest-earning liabilities
 
 


 
132.14
%
 
 

 


 
136.22
%

(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 operations. See 'Explanation of Use of Non-GAAP Financial Measurements'.
(2)
Total loans excludes loans held for sale 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'.
(5)
Tax equivalent net interest margin represents tax equivalent net interest income divided by total average interest-earning assets.

34




Net interest income, on a tax equivalent basis, increased $312,000, or 6.3%, to $5.3 million for the three months ended March 31, 2015, compared to the three months ended March 31, 2014. Net interest margin, on a tax equivalent basis, decreased 12 basis points from 3.64% for the three months ended March 31, 2014 to 3.52% for the three months ended March 31, 2015.

Interest and dividend income, on a tax equivalent basis, increased $361,000, or 6.1%, from $5.9 million for the three months ended March 31, 2014 to $6.2 million for the three months ended March 31, 2015. Average interest-earning assets increased $54.9 million, or 9.9%, from $552.5 million at March 31, 2014 to $607.4 million at March 31, 2015. Average loans increased $46.8 million, or 9.6%, primarily due to the increase in average commercial real estate loans of $48.7 million, or 23.0%. Average investment securities decreased $10.1 million, or 20.9%, for the period due to the maturities in the U.S. Treasury and certificate of deposit investment portfolio. Other interest earning assets, consisting of overnight fed funds, increased $18.2 million, or 117.0%. The tax equivalent yield on average interest-earning assets decreased 15 basis points to 4.17% for the three months ended March 31, 2015, primarily as a result of lower market rates of interest.

Total interest expense increased $49,000, or 5.3%, to $976,000 for the three months ended March 31, 2015 from $927,000 for the three months ended March 31, 2014, due to the $50,000, or 23.5%, increase in other borrowed funds. Average interest-bearing liabilities decreased $54.0 million, or 13.3%, to $459.6 million for the three months ended March 31, 2015 from $405.6 million for the three months ended March 31, 2014. Rates paid on average interest-bearing liabilities declined seven basis points from 0.93% for the three months ended March 31, 2014 to 0.86% for the three months ended March 31, 2015. The lower interest rate environment led to a decrease in rates paid for certificates of deposit of 13 basis points from 1.38% at March 31, 2014 to 1.25% for the three months ended March 31, 2015. The cost of FHLB advances decreased 25 basis points from 1.77% for the three months ended March 31, 2014 to 1.52% for the three months ended March 31, 2015.

Provision for Loan Losses

The provision for loan losses decreased $1.8 million, or 81.8%, from $2.2 million for the three months ended March 31, 2014 to $400,000 for the three months ended March 31, 2015. For the three months ended March 31, 2015, net charge-offs decreased $2.2 million from $2.3 million, or 0.48% of total average loans, for the three months ended March 31, 2014, to $143,000, or 0.03% of total average loans. Nonperforming loans decreased $1.6 million, or 15.3%, from $10.3 million, or 2.14% of total loans, at March 31, 2014, to $8.8 million, or 1.61% of total loans, at March 31, 2015. The allowance for loan losses as a percentage of total loans increased from 0.91% at March 31, 2014 to 0.95% at March 31, 2015. The allowance for loan losses as a percentage of nonperforming loans increased from 43.2% at March 31, 2014 to 59.2% at March 31, 2015.

Non-Interest Income

Non-interest income increased $53,000, or 9.0%, from $589,000 for the three months ended March 31, 2014 to $642,000 for the three months ended March 31, 2015. The increase was due to the $82,000, or 100.0%, decrease in net losses on the sale of OREO and an increase of $19,000, or 3.8%, in income from service charges, fees and commissions, partially offset by a decrease of $34,000, or 100.0%, in gain on the sale of available-for-sale securities and a decrease of $14,000, or 26.4%, in income from loan sales and servicing.

Non-Interest Expenses

Non-interest expense increased $252,000, or 5.5%, to $4.9 million for the three months ended March 31, 2015 compared to $4.6 million the three months ended March 31, 2014. The increase in non-interest expense was a result of the $79,000, or 98.8%, increase in foreclosure related expenses, an increase in occupancy expense of $27,000, or 6.0%, due to the increased cost of snow removal during the three months ended March 31, 2015, an increase in FDIC insurance expense of $39,000, or 46.4%, an increase in data processing of $20,000, or 5.8%, an increase in salaries and benefits of $19,000, or 0.8%, an increase in other non-interest expense of $81,000, or 14.7%, and an increase in stationary, supplies and postage of $15,000, or 25.0%. These increases were partially offset by the decrease in advertising expense of $24,000, or 14.2%, a decrease of $2,000, or 1.1%, in professional fees and a decrease in furniture and equipment of $2,000, or 1.1%,

Income Taxes

Income tax expense increased from a tax benefit of $175,000 for the three months ended March 31, 2014 to a tax expense of $82,000 for the three months ended March 31, 2015. The tax expense was the result of a higher level of taxable income during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.




35



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 March 31,
 
2015
 
2014
 
(Dollars in Thousands)
 
Interest
 
Average
Yield
 
Interest
 
Average
Yield
Investment securities (no tax adjustment)
$
376

 
4.02
%
 
$
411

 
3.47
%
Tax equivalent adjustment (1)
243

 
 

 
258

 
 

Investment securities (tax equivalent basis)
$
619

 
6.62
%
 
$
669

 
5.65
%
 
 
 
 
 
 
 
 
Net interest income (no tax adjustment)
$
5,023

 
 

 
$
4,696

 
 

Tax equivalent adjustment (1)
243

 
 

 
258

 
 

Net interest income (tax equivalent basis)
$
5,266

 
 

 
$
4,954

 
 

 
 
 
 
 
 
 
 
Interest rate spread (no tax adjustment)
 

 
3.15
%
 
 

 
3.20
%
Net interest margin (no tax adjustment)
 

 
3.35
%
 
 

 
3.45
%
(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 primarily consist of U.S. Treasury and government agencies, which we use primarily for 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 March 31, 2015, total cash and cash equivalents totaled $50.7 million, net of reserve requirements.

In addition, at March 31, 2015, the Company had the ability to borrow a total of approximately $138.1 million from the FHLB. On March 31, 2015, we had $83.5 million of such borrowings outstanding. The Company's unused borrowing capacity with the Federal Reserve Bank of Boston was approximately $52.6 million at March 31, 2015. In addition, 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.


36



Certificates of deposit due within one year of March 31, 2015 totaled $114.0 million, or 62.64%, 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 March 31, 2016. 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 (FDIC), 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 March 31, 2015, 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 March 31, 2015.

The Company’s and Bank’s actual capital amounts and ratios as of March 31, 2015 and December 31, 2014 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 March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
Company
$
90,955

 
17.0
%
 
$
42,865

 
8.0
%
 
N/A

 
N/A

Bank
$
78,350

 
14.7
%
 
$
42,733

 
8.0
%
 
$
53,416

 
10.0
%
Tier 1 Capital to Risk Weighted Assets
 

 
 
 
 

 
 

 
 

 
 

Company
$
85,767

 
16.0
%
 
$
32,149

 
6.0
%
 
N/A

 
N/A

Bank
$
73,162

 
13.7
%
 
$
32,050

 
6.0
%
 
$
42,733

 
8.0
%
Tier 1 Capital to Average Assets
 
 
 

 
 

 
 

 
 

 
 

Company
$
85,767

 
13.4
%
 
$
25,667

 
4.0
%
 
N/A

 
N/A

Bank
$
73,162

 
11.4
%
 
$
25,600

 
4.0
%
 
$
32,000

 
5.0
%
Common Equity Tier 1 Capital to Risk Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
Company
$
85,767

 
16.0
%
 
$
24,112

 
4.5
%
 
N/A

 
N/A

Bank
$
73,162

 
13.7
%
 
$
24,037

 
4.5
%
 
$
41,600

 
6.5
%

37



 
 
 
 
 
 
 
 
 
 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
Company
$
91,331

 
17.5
%
 
$
41,808

 
8.0
%
 
N/A

 
N/A

Bank
$
78,337

 
15.0
%
 
$
41,677

 
8.0
%
 
$
52,096

 
10.0
%
Tier 1 Capital to Risk Weighted Assets
 

 
 

 
 

 
 

 
 

 
 

Company
$
86,384

 
16.5
%
 
$
20,904

 
4.0
%
 
N/A

 
N/A

Bank
$
73,390

 
14.1
%
 
$
20,838

 
4.0
%
 
$
31,257

 
6.0
%
Tier 1 Capital to Average Assets
 

 
 

 
 

 
 

 
 

 
 

Company
$
86,384

 
13.8
%
 
$
24,956

 
4.0
%
 
N/A

 
N/A

Bank
$
73,390

 
11.8
%
 
$
24,871

 
4.0
%
 
$
31,088

 
5.0
%

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that revised 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 became 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.
The following is a reconciliation of the Company's stockholders' equity as disclosed in the consolidated balance sheet under GAAP to regulatory capital as disclosed in the table above.
 
March 31,
 
2015
 
2014
 
(In Thousands)
Total equity determined under GAAP
$
88,215

 
$
90,658

Accumulated other comprehensive income
(20
)
 
(25
)
Disallowed mortgage servicing assets

 
(35
)
Disallowed deferred tax assets
(2,428
)
 

     Tier 1 Capital
85,767

 
90,598

Allowable allowance for loan losses
5,184

 
4,462

Unrealized gain on available-for-sale equity securities, net of tax
4

 
17

Total regulatory capital
$
90,955

 
$
95,077






38



Restrictions on Dividends and Stock Repurchases

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.

A Massachusetts stock bank may declare cash dividends from net profits not more frequently than quarterly. Non-cash dividends may be declared at any time. No dividends may be declared, credited or paid if the Bank’s capital stock is impaired. 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. Dividends from Chicopee Bancorp, Inc. may depend, in part, upon receipt of dividends from Chicopee Savings Bank. The payment of dividends from Chicopee Savings Bank would be restricted by federal law if the payment of such dividends resulted in Chicopee Savings Bank failing to meet regulatory capital requirements.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Chicopee Bancorp, Inc. to pay dividends, repurchase shares of its stock or otherwise engage in capital distributions.

On January 26, 2015, the Company declared a cash dividend of $0.07 per share payable on February 20, 2015.

On April 24, 2015, the Company declared a cash dividend of $0.07 per share payable on May 22, 2015.

See Item 2. Unregistered Sales of Equity Securities and Use of Proceeds regarding stock repurchases.


Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, 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.


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.
 


39



The following financial instruments were outstanding whose contract amounts represent credit risk:
 
 
March 31, 2015
 
December 31, 2014
Commitments to grant loans
$
34,695

 
$
35,418

Unfunded commitments for construction loans
16,033

 
17,210

Unfunded commitments under lines of credit
81,075

 
79,092

Standby letters of credit
1,046

 
904

 
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.

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 $1.0 million and $904,000 at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 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-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.






40



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 March 31, 2015 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 March 31, 2015 through March 31, 2016 under varying assumptions: 
Changes in Interest Rates
(Basis Points)
Percentage Change in
Estimated Net Interest
Income over Twelve Months
Up 500 - 24 months
(0.9)%
Up 400 - 24 months
(0.3)%
Up 300 - 12 months shock
0.3%
Up 200 - 12 months
(0.3)%
Up 100 - 12 months shock
0.5%
Base
 
Down 100 - 12 months
(1.0)%

As indicated in the table above, the results of a 100 and 300 basis point shock increase in interest rates is estimated to increase net interest income over a 12-month time horizon by 0.5% and 0.3%, respectively. A 200 basis point increase over 12-months is estimated to decrease net interest income by 0.3%. A 400 and 500 basis point increase in market interest rates over a 24-month time horizon is estimated to decrease net interest income by 0.3% and 0.9% in the first twelve months, respectively. A 100 basis point gradual decrease over a 12-month time horizon is estimated to decrease net interest income by 1.0%.


41



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 three months ended March 31, 2015 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, 2014, 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 March 31, 2015, the risk factors for the Company have not changed materially from those reported in our 2014 Annual Report on Form 10-K. However, the risks described in our 2014 Annual Report on Form 10-K are not the only risks that we face.



42



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 three months ended March 31, 2015, the Company did not repurchase any shares of Company stock. The following table provides information regarding the Company's purchase of its equity securities during the three months ended March 31, 2015:

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
January1-31, 2015
 

 
$

 
211,269

 
60,731

February 1-28, 2015
 

 

 
211,269

 
60,731

March 1-31, 2015
 

 

 
211,269

 
60,731

Total
 

 
$

 
 

 
 

 The Company may want 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.


43



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 months ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014,  (iii) the Consolidated Statement of Comprehensive Income (Loss) for each of the three months ended March 31, 2015 and 2014, (iv) the Consolidated Changes in Stockholders' Equity for each of the three months ended March 31, 2015 and 2014, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, 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.



44



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:  May 8, 2015
By:
/s/ William J. Wagner
 
 
 
William J. Wagner
 
 
 
Chairman of the Board, President and
 
 
 
Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
 
Dated:  May 8, 2015
 
/s/ Guida R. Sajdak
 
 
By:
Guida R. Sajdak
 
 
 
Senior Vice President,
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(principal financial and chief accounting officer)
 


45