XNAS:PEOP Peoples Federal Bancshares, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2012

 

Commission File No. 001-34801

 

Peoples Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

27-2814821

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

435 Market Street, Brighton,
Massachusetts

 

02135

(Address of principal executive offices)

 

(Zip Code)

 

(617) 254-0707

(Registrant’s telephone number,
including area code)

 

N/A

(Former name or former address,
if changed since last report)

 

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 requirements for the past 90 days.  Yes x  No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

The number of shares outstanding of registrant’s common stock; $0.01 par value, at July 31, 2012: 6,726,904

 

 

 



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and September 30, 2011

3

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2012 and 2011 (Unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2012 and 2011 (Unaudited)

5

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2012 and 2011 (Unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011 (Unaudited)

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

Item 1A.

Risk Factors

50

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 3.

Defaults Upon Senior Securities

51

 

 

 

Item 4.

Mine Safety Disclosures

51

 

 

 

Item 5.

Other Information

51

 

 

 

Item 6.

Exhibits

52

 

 

 

 

Signature Page

53

 

2



Table of Contents

 

Part I.  FINANCIAL INFORMATION

 

Item 1.   Consolidated Financial Statements

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

8,883

 

$

9,462

 

Interest-bearing demand deposits with other banks and money market mutual funds

 

23,151

 

44,255

 

Federal funds sold

 

98

 

9

 

Federal Home Loan Bank - overnight deposit

 

4,001

 

8,003

 

Total cash and cash equivalents

 

36,133

 

61,729

 

Securities available-for-sale

 

24,739

 

28,452

 

Securities held-to-maturity (fair values of $29,188 and $19,925)

 

28,615

 

19,713

 

Federal Home Loan Bank stock (at cost)

 

4,014

 

4,339

 

Loans

 

436,881

 

410,794

 

Allowance for loan losses

 

(3,726

)

(3,371

)

Loans, net

 

433,155

 

407,423

 

 

 

 

 

 

 

Premises and equipment, net

 

3,624

 

3,818

 

Cash surrender value of life insurance policies

 

19,203

 

18,713

 

Accrued interest receivable

 

1,497

 

1,527

 

Deferred income tax asset, net

 

5,792

 

5,739

 

Other assets

 

2,892

 

2,736

 

Total assets

 

$

559,664

 

$

554,189

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest-bearing

 

$

44,868

 

$

38,483

 

Interest-bearing

 

370,247

 

374,162

 

Total deposits

 

415,115

 

412,645

 

Federal Home Loan Bank advances

 

24,000

 

18,000

 

Accrued expenses and other liabilities

 

9,102

 

7,842

 

Total liabilities

 

448,217

 

438,487

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 7,141,500 shares issued at June 30, 2012 and September 30, 2011

 

71

 

71

 

Additional paid-in capital

 

70,182

 

69,437

 

Retained earnings

 

55,657

 

53,677

 

Accumulated other comprehensive income

 

66

 

56

 

Unearned restricted shares; 258,225 shares at June 30, 2012

 

(3,995

)

 

Unearned compensation - ESOP

 

(4,999

)

(5,213

)

Treasury stock, at cost; 360,375 and 168,300 shares at June 30, 2012 and September 30, 2011, respectively

 

(5,535

)

(2,326

)

Total stockholders’ equity

 

111,447

 

115,702

 

Total liabilities and stockholders’ equity

 

$

559,664

 

$

554,189

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands, except share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

4,793

 

$

4,981

 

$

14,466

 

$

15,116

 

Interest on debt securities:

 

 

 

 

 

 

 

 

 

Taxable

 

210

 

93

 

723

 

236

 

Other interest

 

18

 

25

 

59

 

99

 

Dividends on equity securities

 

5

 

4

 

14

 

7

 

Total interest and dividend income

 

5,026

 

5,103

 

15,262

 

15,458

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

673

 

875

 

2,128

 

2,601

 

Interest on Federal Home Loan Bank advances

 

147

 

183

 

409

 

611

 

Total interest expense

 

820

 

1,058

 

2,537

 

3,212

 

Net interest and dividend income

 

4,206

 

4,045

 

12,725

 

12,246

 

Provision for loan losses

 

125

 

120

 

375

 

340

 

Net interest and dividend income, after provision for loan losses

 

4,081

 

3,925

 

12,350

 

11,906

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Customer service fees

 

213

 

204

 

628

 

605

 

Loan servicing fees

 

20

 

25

 

7

 

77

 

Net gain on sales of mortgage loans

 

42

 

13

 

49

 

136

 

Increase in cash surrender value of life insurance

 

161

 

157

 

490

 

397

 

Other income

 

7

 

46

 

97

 

206

 

Total non-interest income

 

443

 

445

 

1,271

 

1,421

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,440

 

2,103

 

7,047

 

6,071

 

Occupancy expense

 

222

 

187

 

682

 

626

 

Equipment expense

 

109

 

107

 

333

 

320

 

Professional fees

 

131

 

114

 

355

 

444

 

Advertising expense

 

140

 

83

 

448

 

146

 

Data processing expense

 

200

 

172

 

600

 

548

 

Deposit insurance expense

 

66

 

96

 

176

 

338

 

Other expense

 

284

 

304

 

810

 

933

 

Total non-interest expense

 

3,592

 

3,166

 

10,451

 

9,426

 

Income before income taxes

 

932

 

1,204

 

3,170

 

3,901

 

Provision for income taxes

 

365

 

493

 

1,190

 

1,389

 

Net income

 

$

567

 

$

711

 

$

1,980

 

$

2,512

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

6,114,060

 

6,610,650

 

6,239,816

 

6,597,953

 

Diluted

 

6,144,309

 

6,610,650

 

6,251,384

 

6,597,953

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.11

 

$

0.31

 

$

0.38

 

Diluted

 

$

0.09

 

$

0.11

 

$

0.31

 

$

0.38

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

567

 

$

711

 

$

1,980

 

$

2,512

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

28

 

143

 

16

 

4

 

Reclassification adjustment for net securities gains

 

 

 

 

 

Net unrealized gains

 

28

 

143

 

16

 

4

 

Income tax expense

 

(11

)

(58

)

(6

)

(1

)

Other comprehensive income, net of tax

 

17

 

85

 

10

 

3

 

Total comprehensive income

 

$

584

 

$

796

 

$

1,990

 

$

2,515

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Nine Months Ended June 30, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Unearned

 

Unearned

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Restricted

 

Compensation -

 

Treasury

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Shares

 

ESOP

 

Stock

 

Equity

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2010

 

7,141,500

 

$

71

 

$

69,331

 

$

50,606

 

$

65

 

$

 

$

(5,713

)

$

 

$

114,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

2,512

 

 

 

 

 

2,512

 

Other comprehensive income

 

 

 

 

 

3

 

 

 

 

3

 

Common stock released by ESOP (28,566 shares)

 

 

 

 

 

 

 

286

 

 

286

 

Common stock held by ESOP committed to be released (14,283 shares)

 

 

 

78

 

 

 

 

142

 

 

220

 

Balance at June 30, 2011

 

7,141,500

 

$

71

 

$

69,409

 

$

53,118

 

$

68

 

$

 

$

(5,285

)

$

 

$

117,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

7,141,500

 

$

71

 

$

69,437

 

$

53,677

 

$

56

 

$

 

$

(5,213

)

$

(2,326

)

$

115,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

1,980

 

 

 

 

 

1,980

 

Other comprehensive income

 

 

 

 

 

10

 

 

 

 

10

 

Restricted stock awards (281,700 shares)

 

 

 

446

 

 

 

(4,358

)

 

3,912

 

 

Purchase of shares for Stock Repurchase plan (473,775 shares)

 

 

 

 

 

 

 

 

(7,121

)

(7,121

)

Equity incentive shares earned (23,475 shares)

 

 

 

193

 

 

 

363

 

 

 

556

 

Common stock released by ESOP (7,141 shares)

 

 

 

 

 

 

 

71

 

 

71

 

Common stock held by ESOP committed to be released (14,283 shares)

 

 

 

106

 

 

 

 

143

 

 

249

 

Balance at June 30, 2012

 

7,141,500

 

$

71

 

$

70,182

 

$

55,657

 

$

66

 

$

(3,995

)

$

(4,999

)

$

(5,535

)

$

111,447

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,980

 

$

2,512

 

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

 

 

 

 

 

Amortization (accretion) of securities, net

 

200

 

(170

)

Provision for loan losses

 

375

 

340

 

Change in net deferred loan fees

 

(249

)

(134

)

Depreciation and amortization

 

330

 

268

 

Amortization of loan purchase premiums

 

41

 

 

Decrease in loans held for sale

 

 

260

 

Loss on sales of other real estate owned

 

 

30

 

Decrease in accrued interest receivable

 

30

 

65

 

Income on cash surrender value of life insurance

 

(490

)

(397

)

Increase in other assets

 

(45

)

(65

)

Increase (decrease) in accrued expenses and other liabilities

 

1,260

 

(120

)

Increase in prepaid income taxes

 

(111

)

(174

)

Deferred income tax (benefit) expense

 

(59

)

215

 

Share-based compensation expense

 

556

 

 

ESOP expense

 

320

 

281

 

Net cash provided by operating activities

 

4,138

 

2,911

 

Cash flows from investing activities:

 

 

 

 

 

Activity in securities available-for-sale:

 

 

 

 

 

Purchases

 

(22,413

)

(27,000

)

Maturities, prepayments and calls

 

26,139

 

25,229

 

Activity in securities held-to-maturity:

 

 

 

 

 

Purchases

 

(14,759

)

(6,775

)

Maturities, prepayments and calls

 

5,660

 

 

Redemptions of Federal Home Loan Bank stock

 

325

 

 

Loan originations and principal collections, net

 

13,238

 

(2,146

)

Purchased loans

 

(39,137

)

(22,293

)

Investments in life insurance policies

 

 

(6,500

)

Capital expenditures

 

(136

)

(691

)

Proceeds from sales of other real estate owned

 

 

758

 

Net cash used in investing activities

 

(31,083

)

(39,418

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

 

 

 

 

Nine Months Ended June 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

Demand deposits, NOW and savings accounts

 

14,352

 

(3,810

)

Term certificates

 

(11,882

)

3,060

 

Activity in long-term debt:

 

 

 

 

 

Proceeds from Federal Home Loan Bank advances

 

7,000

 

 

Payment of Federal Home Loan Bank advances

 

(1,000

)

(10,000

)

Common stock repurchased

 

(7,121

)

 

Net cash provided by (used in) financing activities

 

1,349

 

(10,750

)

Net decrease in cash and cash equivalents

 

(25,596

)

(47,257

)

Cash and cash equivalents at beginning of period

 

61,729

 

113,863

 

Cash and cash equivalents at end of period

 

$

36,133

 

$

66,606

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

2,522

 

$

3,212

 

Income taxes paid

 

1,360

 

1,348

 

Supplemental disclosures of non-cash financing and investing activities:

 

 

 

 

 

Transfers from loans to other real estate owned

 

 

164

 

Loans originated from sales of other real estate owned

 

 

171

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8



Table of Contents

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

 

The consolidated interim financial statements include the accounts of Peoples Federal Bancshares, Inc. (the “Company”), and its wholly-owned subsidiary, Peoples Federal Savings Bank (the “Bank”) as of June 30, 2012 (unaudited) and September 30, 2011.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

 

In the opinion of management, the unaudited consolidated interim financial statements include all significant adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company and the statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the interim periods presented.

 

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and income taxes.

 

Certain financial information, which is normally included in financial statements prepared in accordance with GAAP, but which is not required for interim reporting purposes, has been condensed or omitted.  The net income reported for the three and nine months ended June 30, 2012 (unaudited) is not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012 or any interim periods.  The accompanying condensed interim financial statements should be read in conjunction with the financial statements and notes thereto included in Peoples Federal Bancshares, Inc.’s Form 10-K for the fiscal year ended September 30, 2011 filed with the Securities and Exchange Commission (“SEC”) on December 13, 2011.

 

The allowance for loan losses is a significant accounting policy and is presented in the Company’s Form 10-K for the fiscal year ended September 30, 2011 which provides information on how significant assets are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

 

NOTE 2 — NATURE OF OPERATIONS

 

The Company is headquartered in Brighton, Massachusetts and operates its business from seven banking offices located in Brighton, Allston, West Roxbury, Jamaica Plain, Brookline, West Newton and Norwood.  The Company is engaged principally in the business of providing a variety of financial services to individuals and small businesses primarily in the form of various deposit products and residential and commercial mortgage lending products.

 

9



Table of Contents

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update, (“ASU”) 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.  The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

 

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards.”  The amendments in this ASU explain how to measure fair value.  They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.  The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  The adoption of this guidance did not have an impact on the Company’s results of operations or financial position and the required disclosures are reflected in the Company’s accompanying notes to the financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  An entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  An entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

 

In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05,” which defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments.  This ASU will allow the FASB to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  All other requirements of ASU 2011-05 are not affected by this ASU.

 

The amendments in both ASU 2011-05 and 2011-12 should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The required disclosures to the Company’s financial statements have been reflected in the accompanying financial statements and footnotes.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other,” an update to ASC 350, “Intangibles — Goodwill and Other.”  ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment.  The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step

 

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goodwill impairment test described in ASC 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  For public and nonpublic entities, the amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

 

In September 2011, the FASB issued ASU 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan,” which amends ASC 715-80, “Compensation — Retirement Benefits — Multiemployer Plans,” and requires additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans.  The objective of this ASU is to help users of financial statements assess the potential future cash flow implications relating to an employer’s participation in multiemployer pension plans.  The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements.  For public entities, the amendments in this ASU are effective for fiscal years ending after December 15, 2011, with early adoption permitted.  The amendments should be applied retrospectively for all prior periods presented.  The adoption of this ASU will require additional disclosures in the footnotes to the Company’s consolidated financial statements for the year ended September 30, 2012.

 

In December 2011, the FASB issued ASU 2011-10, “Derecognition of in Substance Real Estate,” an update to Topic 360, “Property, Plant and Equipment.”  The objective of the amendments in this ASU is to resolve the diversity in practice about whether the guidance in Subtopic 360-20, “Property, Plant, and Equipment—Real Estate Sales”, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, “Consolidation—Overall”) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt.  This ASU does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate.  Under the amendments of this ASU, when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate.  Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness.  That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.  The amendments in this ASU are effective for fiscal years and interim periods beginning on or after June 15, 2012 and should be applied on a prospective basis to deconsolidating events occurring after the effective date.  Early adoption is permitted.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” an update to Topic 210, “Balance Sheet.”  The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  The amendments in this ASU are effective for annual and interim periods beginning on or after January 1, 2013 and should be applied retrospectively for all comparable periods presented.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

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NOTE 4 - SECURITIES

 

Debt securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost and fair value of securities with gross unrealized gains and losses follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Debt securities issued by U.S. Government corporations and agencies

 

$

19,999

 

$

52

 

$

2

 

$

20,049

 

Mortgage-backed securities

 

4,630

 

61

 

1

 

4,690

 

Total securities available-for-sale

 

$

24,629

 

$

113

 

$

3

 

$

24,739

 

 

 

 

 

 

 

 

 

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

28,615

 

$

573

 

$

 

$

29,188

 

Total securities held-to-maturity

 

$

28,615

 

$

573

 

$

 

$

29,188

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

September 30, 2011:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Debt securities issued by U.S. Government corporations and agencies

 

$

27,999

 

$

69

 

$

13

 

$

28,055

 

Mortgage-backed securities

 

359

 

38

 

 

397

 

Total securities available-for-sale

 

$

28,358

 

$

107

 

$

13

 

$

28,452

 

 

 

 

 

 

 

 

 

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

19,713

 

$

240

 

$

28

 

$

19,925

 

Total securities held-to-maturity

 

$

19,713

 

$

240

 

$

28

 

$

19,925

 

 

As of June 30, 2012 and September 30, 2011, all mortgage-backed securities held by the Company were issued by FHLMC, GNMA or FNMA.

 

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The scheduled maturities of debt securities were as follows as of June 30, 2012. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due in 1 year or less

 

$

2,000

 

$

2,005

 

$

 

$

 

Due after 1 year through 5 years

 

17,999

 

18,044

 

 

 

 

 

19,999

 

20,049

 

 

 

Mortgage-backed securities

 

4,630

 

4,690

 

28,615

 

29,188

 

 

 

$

24,629

 

$

24,739

 

$

28,615

 

$

29,188

 

 

During the three and nine-months ended June 30, 2012 and 2011, there were no sales of securities available-for-sale or held-to-maturity.

 

As of June 30, 2012 and September 30, 2011, securities with carrying amounts totaling $53,354,000 and $48,165,000, respectively, were pledged to secure Federal Home Loan Bank borrowings.

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer, and are not other than temporarily impaired, are as follows:

 

 

 

Less Than Twelve Months

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

 

 

Losses

 

Value

 

Losses

 

Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Debt securities issued by U.S. Government corporations and agencies

 

$

2

 

$

1,998

 

$

 

$

 

Mortgage-backed securities

 

1

 

1,545

 

 

 

 

 

$

3

 

$

3,543

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

 

$

 

$

 

$

 

 

 

$

 

$

 

$

 

$

 

 

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Table of Contents

 

 

 

Less Than Twelve Months

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

 

 

Losses

 

Value

 

Losses

 

Value

 

 

 

(In thousands)

 

September 30, 2011:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Debt securities issued by U.S. Government corporations and agencies

 

$

13

 

$

7,986

 

$

 

$

 

 

 

$

13

 

$

7,986

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

$

28

 

$

9,056

 

$

 

$

 

 

 

$

28

 

$

9,056

 

$

 

$

 

 

Gross unrealized losses on securities available-for-sale decreased $10,000, or 76.9%, and gross unrealized losses on securities held-to-maturity decreased $28,000, or 100.0%, during the nine-month period ended June 30, 2012.  The unrealized losses are due to changes in market interest rates.  The Company continues to ladder the securities portfolio to fund loan growth, balance duration risk and improve yield, as appropriate.

 

Each reporting period, the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).  OTTI is required to be recognized if (1) the Company intends to sell the security or (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis.  For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the impairment is recognized as OTTI through earnings.  For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.

 

The unrealized losses on the Company’s investments in debt securities issued by U.S. Government corporations and agencies and mortgage-backed securities were caused by changes in market interest rates.  These securities are guaranteed by the U.S. Government or a government-sponsored enterprise.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because declines in the market value are attributable to changes in market interest rates and not to credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

 

NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans

 

Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.  Interest on loans is recognized on a simple interest basis.  Loan origination and commitment fees and certain direct origination costs are deferred and the net amount amortized as an adjustment of the related loan’s yield.  The Company is amortizing these amounts over the contractual life of the related loans.

 

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Table of Contents

 

The following table sets forth the composition of the Company’s loan portfolio at the dates indicated:

 

 

 

June 30, 2012

 

September 30, 2011

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

279,088

 

63.9

%

$

253,872

 

61.8

%

Multi-family

 

66,246

 

15.2

 

61,881

 

15.1

 

Commercial real estate

 

65,015

 

14.9

 

71,668

 

17.4

 

Construction loans

 

11,532

 

2.6

 

14,297

 

3.5

 

Total mortgage loans

 

421,881

 

96.6

 

401,718

 

97.8

 

Consumer loans

 

7,280

 

1.7

 

4,583

 

1.1

 

Commercial loans

 

7,426

 

1.7

 

4,448

 

1.1

 

Total loans

 

436,587

 

100.0

%

410,749

 

100.0

%

Deferred loan origination costs, net

 

294

 

 

 

45

 

 

 

Allowance for loan losses

 

(3,726

)

 

 

(3,371

)

 

 

Loans, net

 

$

433,155

 

 

 

$

407,423

 

 

 

 

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 and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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 loan segments: residential real estate, commercial real estate, construction, consumer and commercial.  Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.

 

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Table of Contents

 

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

 

Residential real estate:  The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent.  All loans in this segment are collateralized by residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate:  Loans in this segment are primarily income-producing properties throughout Eastern Massachusetts.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

 

Construction loans:  Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

 

Consumer loans:  Loans in this segment are primarily secured automobile loans and repayment is dependent on the credit quality of the individual borrower.

 

Commercial loans:  Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Allocated Component

 

The allocated component relates to loans that are classified as impaired.  Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction 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.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment evaluation, unless such loans are subject to a troubled debt restructuring agreement or have been identified as impaired as part of a larger customer relationship.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  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.

 

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Table of Contents

 

Unallocated Component

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

 

The following tables set forth information pertaining to the allowance for loan losses and principal balance of loans by portfolio segment:

 

 

 

Three and Nine Months Ended June 30, 2012

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial
Loans

 

Unallocated

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,689

 

$

696

 

$

668

 

$

173

 

$

162

 

$

103

 

$

75

 

$

3,566

 

Provision (benefit) for loan losses

 

64

 

38

 

37

 

(35

)

(44

)

17

 

48

 

125

 

Recoveries of loans previously charged-off

 

 

 

 

 

36

 

 

 

36

 

 

 

1,753

 

734

 

705

 

138

 

154

 

120

 

123

 

3,727

 

Loans charged off

 

 

 

 

 

 

(1

)

 

(1

)

Balance at end of period

 

$

1,753

 

$

734

 

$

705

 

$

138

 

$

154

 

$

119

 

$

123

 

$

3,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,550

 

$

601

 

$

670

 

$

292

 

$

91

 

$

40

 

$

127

 

$

3,371

 

Provision (benefit) for loan losses

 

203

 

133

 

35

 

(154

)

63

 

99

 

(4

)

375

 

Recoveries of loans previously charged-off

 

 

 

 

 

36

 

3

 

 

39

 

 

 

1,753

 

734

 

705

 

138

 

190

 

142

 

123

 

3,785

 

Loans charged off

 

 

 

 

 

(36

)

(23

)

 

(59

)

Balance at end of period

 

$

1,753

 

$

734

 

$

705

 

$

138

 

$

154

 

$

119

 

$

123

 

$

3,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,753

 

734

 

705

 

138

 

154

 

119

 

123

 

3,726

 

 

 

$

1,753

 

$

734

 

$

705

 

$

138

 

$

154

 

$

119

 

$

123

 

$

3,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

1,979

 

$

1,868

 

$

 

$

 

$

 

 

 

$

3,847

 

Collectively evaluated for impairment

 

279,088

 

64,267

 

63,147

 

11,532

 

7,280

 

7,426

 

 

 

432,740

 

 

 

$

279,088

 

$

66,246

 

$

65,015

 

$

11,532

 

$

7,280

 

$

7,426

 

 

 

$

436,587

 

 

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Table of Contents

 

 

 

Three and Nine Months Ended June 30, 2011

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial
Loans

 

Unallocated

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,274

 

$

689

 

$

674

 

$

503

 

$

21

 

$

43

 

$

114

 

$

3,318

 

Provision (benefit) for loan losses

 

144

 

9

 

59

 

(137

)

39

 

6

 

 

120

 

Recoveries of loans previously charged-off

 

 

 

3

 

 

3

 

1

 

 

7

 

 

 

1,418

 

698

 

736

 

366

 

63

 

50

 

114

 

3,445

 

Loans charged off

 

(27

)

 

(11

)

 

(31

)

 

 

(69

)

Balance at end of period

 

$

1,391

 

$

698

 

$

725

 

$

366

 

$

32

 

$

50

 

$

114

 

$

3,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,481

 

$

502

 

$

684

 

$

340

 

$

42

 

$

40

 

$

114

 

$

3,203

 

Provision (benefit) for loan losses

 

(21

)