As filed with the Securities and Exchange Commission on October 29, 2010
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Fraternity Community Bancorp, Inc.
Fraternity Federal Savings and Loan Association 401(k) Plan
(Exact name of registrant as specified in its charter)
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Maryland
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6035
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27-3683448 |
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State or other jurisdiction of
incorporation or organization
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(Primary Standard Industrial
Classification Code Number)
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(IRS Employer Identification Number) |
764 Washington Boulevard
Baltimore, Maryland 21230
(410) 539-1313
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
Thomas K. Sterner
Chairman of the Board, Chief Executive Officer
and Chief Financial Officer
Fraternity Community Bancorp, Inc.
764 Washington Boulevard
Baltimore, Maryland 21230
(410) 539-1313
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Gary R. Bronstein, Esq.
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Matthew Dyckman, Esq. |
Joel E. Rappoport, Esq.
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SNR Denton US LLP |
Kilpatrick Stockton LLP
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1301 K Street, NW |
607 14th Street, NW, Suite 900
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Suite 600, East Tower |
Washington, DC 20005
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Washington, DC 20005 |
(202) 508-5800
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(202) 408-6400 |
Approximate date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the following box: þ
If this Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. 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 o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Calculation of Registration Fee
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Amount to be |
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Proposed maximum |
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Proposed maximum |
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Amount of |
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Title of each class of securities to be registered |
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registered |
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offering price per unit |
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Aggregate offering price (1) |
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registration fee |
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Common Stock, $0.01 par value |
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1,587,000 shares |
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$10.00 |
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$15,870,000 |
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$1,132.00 |
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Participation Interests |
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(2) |
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(2) |
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(3) |
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(1) |
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Estimated solely for the purpose of calculating the registration fee pursuant to
Regulation 457(o) under the Securities Act. |
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(2) |
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In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement
also covers an indeterminate amount of interests to be offered or sold pursuant to the
employee benefit plan described herein. |
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The securities of Fraternity Community Bancorp, Inc. to be purchased by the Fraternity
Federal Savings and Loan Association 401(k) Plan are included in the common stock.
Accordingly, no separate fee is required for the participation interests pursuant to Rule
457(h)(2) of the Securities Act. |
The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
PARTICIPATION INTERESTS IN
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION
401(K) PLAN
AND
OFFERING OF 152,800 SHARES OF
FRATERNITY COMMUNITY BANCORP, INC.
COMMON STOCK ($.01 PAR VALUE)
This prospectus supplement relates to the offer and sale to participants in the
Fraternity Federal Savings and Loan Association 401(k) Plan (the 401(k) Plan) of participation
interests and shares of common stock of Fraternity Community Bancorp, Inc. (Fraternity Community
Bancorp) in connection with the Fraternity Community Bancorp initial public offering.
401(k) Plan participants may direct ______________ (collectively referred to herein as the
Fraternity Community Bancorp Stock Fund Trustee), to use their account balances to subscribe for
and purchase shares of Fraternity Community Bancorp common stock through the new Fraternity
Community Bancorp Stock Fund in the 401(k) Plan. Based upon the value of the 401(k) plan assets as
of September 30, 2010, the Fraternity Community Bancorp Stock Fund Trustee may purchase up to
152,800 shares of Fraternity Community Bancorp common stock at a purchase price of $10.00 per
share. This prospectus supplement relates to the election of 401(k) Plan participants to direct
the Fraternity Community Bancorp Stock Fund Trustee to invest all or a portion of their 401(k) Plan
account balances in Fraternity Community Bancorp common stock through the new Fraternity Community
Bancorp Stock Fund.
The Fraternity Community Bancorp prospectus dated ____________, 2010, which we have attached
to this prospectus supplement, includes detailed information regarding the offering of shares of
Fraternity Community Bancorp common stock and the financial condition, results of operations and
business of Fraternity Federal Savings and Loan Association (Fraternity Federal). This
prospectus supplement provides information regarding the 401(k) Plan. You should read this
prospectus supplement together with the prospectus and keep both for future reference.
Please refer to Risk Factors beginning on page ___ of the prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, nor any other state or federal agency or any state securities commission, has
approved or disapproved these securities. Any representation to the contrary is a criminal offense.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and sales by Fraternity
Community Bancorp of participation interests or shares of common stock under the 401(k) Plan in the
offering. No one may use this prospectus supplement to re-offer or resell interests or shares of
common stock acquired through the 401(k) Plan.
You should rely only on the information contained in this prospectus supplement and the
attached prospectus. Neither Fraternity Community Bancorp, Fraternity Federal nor the 401(k) Plan
have authorized anyone to provide you with different information.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer
or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the
prospectus nor any sale of common stock shall under any circumstances imply that there has been no
change in the affairs of Fraternity Federal or the 401(k) Plan since the date of this prospectus
supplement, or that the information contained in this prospectus supplement or incorporated by
reference is correct as of any time after the date of this prospectus supplement.
The date of this Prospectus Supplement is _____________, 2010.
TABLE OF CONTENTS
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401(k) Plan Investments |
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THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are participation
interests in the 401(k) Plan. At a purchase price of $10.00 per share, the Fraternity Community
Bancorp Stock Fund Trustee may acquire up to 152,800 shares of Fraternity Community Bancorp common
stock in the stock offering (the Stock Offering) through the new Fraternity Community Bancorp
Stock Fund. The interests offered through this prospectus supplement are conditioned on the close
of the Stock Offering. Certain subscription rights and purchase limitations also govern your
investment in the new Fraternity Community Bancorp Stock Fund in connection with the Stock
Offering. See The Conversion and Stock Offering Subscription Offering and Subscription
Rights and Limitations on Purchases of Shares in the prospectus attached to this prospectus
supplement for further discussion of these subscription rights and purchase limitations.
This prospectus supplement contains information regarding the 401(k) Plan. The attached
prospectus contains information regarding the Stock Offering and the financial condition, results
of operations and business of Fraternity Federal and its affiliates. The address of the principal
executive office of Fraternity Federal is 764 Washington Boulevard, Baltimore, Maryland 21230. The
telephone number of Fraternity Federal is (410) 539-1313.
Election to Purchase Fraternity Community Bancorp, Inc. Common Stock in the Stock Offering
In connection with the Stock Offering, Fraternity Federal Savings and Loan Association
withdrew from the Pentegra Multi-Employer Defined Contribution Plan for Financial Institutions
(Thrift Plan) and adopted a single employer 401(k) Plan which allows for the investment in
Fraternity Community Bancorp common stock through a new employer stock fund. If you wish to use
all or a portion of your 401(k) Plan funds to invest in Fraternity Community Bancorp common stock,
you may direct the Fraternity Community Bancorp Stock Fund Trustee to transfer all or a portion of
your 401(k) Plan account balance to the Fraternity Community Bancorp Stock Fund. The Fraternity
Community Bancorp Stock Fund Trustee will subscribe for Fraternity Community Bancorp common stock
offered for sale in the Stock Offering in accordance with your direction. If there is not enough
Fraternity Community Bancorp common stock available in the Stock Offering to fill all
subscriptions, the common stock will be apportioned and the Fraternity Community Bancorp Stock Fund
Trustee may not be able to purchase all of the common stock you requested. If the Stock Offering
is oversubscribed and your order is cut back, your 401(k) Plan funds (which are not invested in
Fraternity Community Bancorp common stock) will be reinvested in accordance with the investment
elections that you have in place for your elective deferrals.
All 401(k) Plan participants are permitted to direct a transfer of all or a portion of their
account balances in the 401(k) Plan into the Fraternity Community Bancorp Stock Fund. However,
transfer directions are subject to subscription rights and purchase priorities. See Summary
Persons Who Can Order Stock in the Offering in the attached prospectus. Fraternity Community
Bancorp has granted rights to subscribe for shares of Fraternity Community Bancorp common stock to
the following persons in the following order of priority: (1) persons with $50 or more on deposit
at Fraternity Federal Savings and Loan Association as of the close of business on June 30, 2009;
(2) the Fraternity Federal Savings and Loan Association Employee Stock Ownership Plan; (3) persons
with $50 or more on deposit at Fraternity Federal Savings and Loan Association as of the close of
business on ____________, 20__; and (4) except for persons eligible to subscribe for shares under
categories 1 and 3, Fraternity Federal Savings and Loan Associations depositors as of the close of
business on ___________, 20___, who were not able to subscribe for shares of Fraternity Community
Bancorp common stock under categories 1 and 3. If you fall into one of the above subscription
offering categories, you have subscription rights to purchase shares
1
of Fraternity Community Bancorp common stock in the Stock Offering and you may use your account
balance in the 401(k) Plan to subscribe for shares of Fraternity Community Bancorp common stock
through the Fraternity Community Bancorp Stock Fund.
The limitations on the total amount of Fraternity Community Bancorp common stock that you may
purchase in the Stock Offering, as described in the prospectus (see The Conversion and Stock
Offering Limitations on Purchases of Shares), will be calculated based on the aggregate amount
that you subscribed for: (a) through your 401(k) Plan account and (b) through your sources of
funds outside of the 401(k) Plan. Whether you place an order through the 401(k) Plan, outside the
401(k) Plan, or both, the number of shares of Fraternity Community Bancorp common stock, if any,
that you receive will be determined based on the total number of subscriptions, your purchase
priority and the allocation priorities described in the prospectus. If, as a result of the
calculation, you are allocated insufficient shares to fill all of your orders, available shares
will be allocated between orders on a pro rata basis.
Value of Participation Interests
As of September 30, 2010, the market value of the plan assets equaled approximately
$1,528,000. The Plan Administrator has distributed quarterly statements to each participant
reflecting the value of his or her beneficial interest in the plan as of September 30, 2010. The
value of the plan assets represents past contributions made to the plan on your behalf, plus or
minus earnings or losses on the contributions, less previous withdrawals.
Method of Directing Transfer
In order to facilitate your investment in the Fraternity Community Bancorp Stock Fund in
connection with the Stock Offering, you must complete, sign and submit the blue form included with
this prospectus supplement (the Investment Form). In order to invest in the Fraternity Community
Bancorp Stock Fund, you must direct the Fraternity Community Bancorp Stock Fund Trustee to transfer
a percentage of your beneficial interest in the assets of the 401(k) Plan to the Fraternity
Community Bancorp Stock Fund (in multiples of not less than 1%). If you do not wish to invest in
the Fraternity Community Bancorp Stock Fund at this time, you do not need to take any action. The
minimum investment in the Fraternity Community Bancorp Stock Fund during the Stock Offering is
$_______ and the maximum individual investment is $________. Your blue Investment Form must be
received by [_____________] by noon on _______________, 2010.
Time for Directing Transfer
The deadline to submit your Investment Form to [___________] is 12:00 noon, local time, on
_____________________, 2010, unless extended by Fraternity Federal. If you have any questions
regarding the Fraternity Community Bancorp Stock Fund, you can call [_____________] at (___)
__-___.
Irrevocability of Transfer Direction
Once you have submitted your Investment Form, you cannot change your direction to transfer
amounts credited to your account in the 401(k) Plan to the Fraternity Community Bancorp Stock Fund.
Following the closing of the Stock Offering and the initial purchase of shares in the Fraternity
Community Bancorp Stock Fund, you will again have complete access to any funds you directed towards
the purchase of shares of Fraternity Community Bancorp common stock in the Stock Offering. Special
restrictions may apply to transfers directed to and from the Fraternity Community Bancorp Stock
Fund by
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participants who are subject to Section 16(b) of the Securities Exchange Act of 1934, as amended.
See SEC Reporting and Short-Swing Profit Liability.
Purchase Price of Fraternity Community Bancorp, Inc. Common Stock
The Fraternity Community Bancorp Stock Fund Trustee will use the funds transferred to the
Fraternity Community Bancorp Stock Fund to purchase shares of Fraternity Community Bancorp common
stock in the Stock Offering. The Fraternity Community Bancorp Stock Fund Trustee will pay the same
price for shares of Fraternity Community Bancorp common stock as all other persons who purchase
shares of Fraternity Community Bancorp common stock in the Stock Offering. If there is not enough
common stock available in the Stock Offering to fill all subscriptions, the common stock will be
apportioned and the trustee may not be able to purchase all of the common stock you requested. If
the Stock Offering is oversubscribed and your order is cut back, your 401(k) Plan funds (which are
not invested in Fraternity Community Bancorp common stock) will be reinvested in accordance with
the investment elections that you have in place for your elective deferrals.
Nature of a Participants Interest in Fraternity Community Bancorp, Inc. Common Stock
All shares of Fraternity Community Bancorp common stock purchased through the Fraternity
Community Bancorp Stock Fund will be registered in the name of the 401(k) Plan. The Fraternity
Community Bancorp Stock Fund Trustee will credit the shares of Fraternity Community Bancorp common
stock acquired at your direction in the Stock Offering to your account in the 401(k) Plan.
Therefore, the investment designations of other 401(k) Plan participants should not affect earnings
on your 401(k) Plan account.
Voting and Tender Rights of Fraternity Community Bancorp, Inc. Common Stock
The Fraternity Community Bancorp Stock Fund Trustee will exercise voting and tender rights
attributable to all Fraternity Community Bancorp common stock held in the Fraternity Community
Bancorp Stock Fund, as directed by participants with interests in the Fraternity Community Bancorp
Stock Fund. With respect to each matter as to which holders of Fraternity Community Bancorp common
stock have a right to vote, you will have voting instruction rights that reflect your proportionate
interest in the Fraternity Community Bancorp Stock Fund. The number of shares of Fraternity
Community Bancorp common stock held in the Fraternity Community Bancorp Stock Fund voted for and
against each matter will be proportionate to the number of voting instruction rights exercised. If
there is a tender offer for Fraternity Community Bancorp common stock, the 401(k) Plan allots each
participant a number of tender instruction rights reflecting the participants proportionate
interest in the Fraternity Community Bancorp Stock Fund. The percentage of shares of Fraternity
Community Bancorp common stock held in the Fraternity Community Bancorp Stock Fund that will be
tendered will be the same as the percentage of the total number of tender instruction rights
exercised in favor of the tender offer. The remaining shares of Fraternity Community Bancorp
common stock held in the Fraternity Community Bancorp Stock Fund will not be tendered.
DESCRIPTION OF THE 401(k) PLAN
Introduction
Fraternity Federal originally adopted the Thrift Plan effective ________________. In
connection with the Stock Offering, Fraternity Federal withdrew from the Thrift Plan and adopted a
single employer plan that permits the establishment of an employer stock fund. Fraternity Federal
intends for the 401(k) Plan to comply, in form and in operation, with all applicable provisions of
the Internal
3
Revenue Code and the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Fraternity Federal may change the 401(k) Plan from time to time in the future to ensure continued
compliance with these laws. Fraternity Federal may also amend the 401(k) Plan from time to time in
the future to add, modify, or eliminate certain features of the plan, as it sees fit. Federal law
provides you with various rights and protections as a participant in the 401(k) Plan, which is
governed by ERISA. However, the Pension Benefit Guaranty Corporation does not guarantee your
benefits under the 401(k) Plan.
Reference to Full Text of the Plan. The following portions of this prospectus supplement
summarize the material provisions of the 401(k) Plan. Fraternity Federal qualifies this summary in
its entirety by reference to the full text of the 401(k) Plan. You may obtain copies of the 401(k)
Plan document, including any amendments to the plan and a summary plan description, by contacting
[_____________] at (___) __-___. You should carefully read the 401(k) Plan documents to understand
your rights and obligations under the 401(k) Plan.
Eligibility and Participation
Employees may begin participating in the 401(k) Plan on the first day of the month coinciding
with or next following the date the employee completes at least 1,000 hours of service in a 12
consecutive month period.
As of September 30, 2010, ____ of the ______ eligible employees of Fraternity Federal actively
participated in the Thrift Plan.
Contributions Under the 401(k) Plan
Employee Pre-Tax Salary Deferrals. Subject to certain Internal Revenue Service limitations,
the 401(k) Plan permits you to make pre-tax salary deferrals each
payroll period of up to 50% of
your compensation. Compensation is defined for purposes of the 401(k) Plan as each participants
Box 1, Form W-2 compensation. In addition to pre-tax salary deferrals, you may make catch up
contributions if you are currently age 50 or will be 50 before the end of the calendar year.
Fraternity Federal Matching Contributions. The 401(k) Plan provides that Fraternity Federal
will make matching contributions on behalf of each eligible participant with respect to each
eligible participants elective deferrals. If you elect to defer funds into the 401(k) Plan,
Fraternity Federal will match your contributions as follows:
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Employee |
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Employer |
Deferral Rate |
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Matching |
(% of Compensation) |
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Contribution |
1.0%
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1.0% |
2.0%
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2.0% |
3.0%
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3.0% |
4.0%
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4.0% |
5.0%
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4.5% |
6.0%
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5.0% |
4
Fraternity Federal will make matching contributions equal to 100% of the participants
deferrals, not to exceed 4% of the participants compensation, plus 50% of the next 2% of the
participants elective contributions.
Rollover Contributions. Fraternity Federal allows employees who receive a distribution from a
previous employers tax-qualified employee benefit plan to deposit that distribution into a
Rollover Contribution account under the 401(k) Plan, provided the rollover contribution satisfies
IRS requirements. For additional information on Rollover Contributions see the Summary Plan
Description for the 401(k) Plan.
Limitations on Contributions
Limitation on Employee Salary Deferrals. By law, your total deferrals under the 401(k) Plan,
together with similar plans, may not exceed $16,500 for 2010. Eligible employees who are age 50
and over may also make additional catch-up contributions to the plan, up to a maximum of $5,500
for 2010. The Internal Revenue Service periodically increases these limitations. An eligible
participant who exceeds these limitations must include any excess deferrals in gross income for
federal income tax purposes in the year of deferral. In addition, the participant must pay federal
income taxes on any excess deferrals when distributed by the 401(k) Plan to the participant, unless
the plan distributes the excess deferrals and any related income no later than the first April 15th
following the close of the taxable year in which the participant made the excess deferrals. Any
income on excess deferrals distributed before such date is treated, for federal income tax
purposes, as earned and received by the participant in the taxable year of the distribution.
Limitation on Annual Additions and Benefits. As required by the Internal Revenue Code, the
401(k) Plan provides that the total amount of contributions and forfeitures (annual additions)
credited to a participant during any year under all defined contribution plans of Fraternity
Federal (including the 401(k) Plan and the proposed Fraternity Federal Employee Stock Ownership
Plan) may not exceed the lesser of 100% of the participants annual compensation or $49,000 for
2010.
Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the
Internal Revenue Code limit the amount of pre-tax and matching contributions that may be made to
the 401(k) Plan in any year on behalf of highly compensated employees, in relation to the amount of
pre-tax and matching contributions made by or on behalf of all other employees eligible to
participate in the 401(k) Plan. If pre-tax and matching contributions exceed these limitations,
the plan must adjust the contribution levels for highly compensated employees.
In general, a highly compensated employee includes any employee who (1) was a 5% owner of the
sponsoring employer at any time during the year or the preceding year, or (2) had compensation for
the preceding year in excess of $110,000 and, if the sponsoring employer so elects, was in the top
20% of employees by compensation for such year.
Top-Heavy Plan Requirements. If the 401(k) Plan is a Top-Heavy Plan for any calendar year,
Fraternity Federal may be required to make certain minimum contributions to the 401(k) Plan on
behalf of non-key employees. In general, the 401(k) Plan will be treated as a Top-Heavy Plan for
any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of
the accounts of Key Employees exceeds 60% of the aggregate balance of the accounts of all
employees under the plan. A Key Employee is generally any employee who, at any time during the
calendar year or any of the four preceding years, is:
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an officer of Fraternity Federal whose annual compensation exceeds $165,000; |
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(2) |
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a 5% owner of the employer, meaning an employee who owns more than 5% of the
outstanding stock of Fraternity Community Bancorp, or who owns stock that possesses
more than 5% of the total combined voting power of all stock of Fraternity Community
Bancorp; or |
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(3) |
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a 1% owner of the employer, meaning an employee who owns more than 1% of the
outstanding stock of Fraternity Community Bancorp, or who owns stock that possesses
more than 1% of the total combined voting power of all stock of Fraternity Community
Bancorp, and whose annual compensation exceeds $150,000. |
The foregoing dollar amounts are for 2010.
Prior to January 1, 2011, participant retirement funds were invested in the following
investment vehicles through the Thrift Plan.
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Annual Rates of Return |
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as of December 31, |
Fund Name |
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2009 |
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2008 |
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2007 |
Target Retirement 2015 Fund |
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17.11 |
% |
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-22.80 |
% |
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6.20 |
% |
Target Retirement 2025 Fund |
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20.75 |
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-28.70 |
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6.60 |
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Target Retirement 2035 Fund |
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25.83 |
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-34.20 |
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6.80 |
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Target Retirement 2045 Fund |
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26.35 |
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-34.10 |
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7.50 |
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Income Plus |
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11.25 |
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-7.60 |
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6.00 |
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Growth & Income |
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18.22 |
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-20.90 |
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5.90 |
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Growth |
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25.13 |
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-33.20 |
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5.70 |
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Stable Value Fund |
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2.19 |
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2.90 |
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3.80 |
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Short Term Investment Fund (money market) |
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0.19 |
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2.30 |
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4.90 |
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Government Short Term Investment Fund |
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-0.09 |
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1.90 |
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4.80 |
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Treasury Inflation Protected Securities Fund |
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10.60 |
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Long Treasury Index Fund (government bond) |
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-13.14 |
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23.90 |
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9.20 |
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Aggregate Bond Index Fund |
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5.49 |
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4.90 |
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6.30 |
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S&P 500 Fund |
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26.01 |
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-37.30 |
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4.90 |
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S&P Value Stock Fund |
|
|
20.62 |
|
|
|
-39.60 |
|
|
|
1.40 |
|
S&P Growth Stock Fund |
|
|
31.92 |
|
|
|
-34.80 |
|
|
|
8.50 |
|
S&P Midcap Stock Fund |
|
|
36.58 |
|
|
|
-36.50 |
|
|
|
7.40 |
|
Russell 2000 Stock Fund |
|
|
26.85 |
|
|
|
-33.80 |
|
|
|
-2.10 |
|
Nasdaq 100 Stock Fund |
|
|
53.98 |
|
|
|
-42.00 |
|
|
|
18.20 |
|
US REIT Index Fund |
|
|
26.77 |
|
|
|
-39.30 |
|
|
|
-18.10 |
|
International Stock Fund |
|
|
31.33 |
|
|
|
-43.60 |
|
|
|
10.60 |
|
6
As of January 1, 2011, participant retirement funds were invested in the following
investment vehicles through the Fraternity Federal 401(k)Plan.
[INSERT FUND DESCRIPTIONS]
In connection with the Stock Offering, Fraternity Federal has implemented the Fraternity
Community Bancorp Stock Fund. Following the close of the Stock Offering, the Fraternity Community
Bancorp Stock Fund will consist of investments in the common stock of Fraternity Community Bancorp
made on the closing date of the Stock Offering. Your investment in the Fraternity Community
Bancorp Stock Fund will be recorded using the unit accounting method. If cash dividends are paid
on Fraternity Community Bancorp common stock, the trustee will, to the extent practicable, use the
dividends held in the Fraternity Community Bancorp Stock Fund to purchase shares of the common
stock. Pending investment in the common stock, assets held in the Fraternity Community Bancorp
Stock Fund will be placed in the short term investment component of the Fraternity Community
Bancorp Stock Fund earning a market rate of interest.
As of the date of this prospectus supplement, no shares of Fraternity Community Bancorp common
stock have been issued or are outstanding, and there is no established market for Fraternity
Community Bancorp common stock. Accordingly, there is no record of the historical performance of
the Fraternity Community Bancorp Stock Fund. Performance of the Fraternity Community Bancorp Stock
Fund depends on a number of factors, including the financial condition and profitability of
Fraternity Federal and general stock market conditions. See Risk Factors in the attached
prospectus.
Once you have submitted your Investment Form, you may not change your investment directions in
the Stock Offering.
Benefits Under the 401(k) Plan
Vesting. All participants are 100% vested in their pre-tax salary deferrals and
employer matching contribution. This means that participants have a non-forfeitable right to these
funds and any earnings on the funds at all times.
Withdrawals and Distributions from the 401(k) Plan
Withdrawals Before Termination of Employment. While in active service, participants may take
one non-hardship withdrawal from the 401(k) Plan per plan year (subject to the restrictions set
forth in the 401(k) Plan). A participant may also take one hardship withdrawal per plan year,
provided the participant has a hardship event as defined by the Internal Revenue Service
regulations and subject to approval by the Fraternity Federal Compensation Committee.
Distribution Upon Retirement, Death or Disability. If a participants accounts are $500 or
less upon termination of employment, payment will be in the form of a lump sum as of a valuation
date as soon thereafter as administratively possible. If a participants accounts exceed $500 and
are $5,000 or less upon termination of employment, and the participant does not elect to have
his/her distribution paid, payment will be in the form of a Direct Rollover to an individual
retirement plan designated by the Plan Administrator.
If termination of employment is due to Normal or Postponed Retirement, Death, or Total and
Permanent Disability (as defined in the 401(k) Plan), and a participants account exceeds $5,000,
distribution of the participants accounts will be in the form of a lump sum payment, upon the
7
participants attainment of Normal Retirement Date, unless the participant elects (within 30 days
of receipt of an election notice) to further defer distribution beyond Normal Retirement Date to a
Postponed Retirement Date (subject to an Internal Revenue Service minimum distribution of benefits
requirement following attainment of age 701/2), or unless the participant elects one of the following
optional forms of payment:
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Lump sum payment or in annual installments over a period not exceeding the
participants life expectancy or the joint and survivor life expectancy of the
participants and his/her designated beneficiary, as selected by the participant as of
any valuation date following the date of termination of employment. (Note: lump sums
are subject to a mandatory 20% income tax withholding and a statutory 10% additional
federal tax if paid before age 55). A participant Rollover within 60 days of
distribution to an Individual Retirement Account (IRA), or another employers plan (if
permitted by that plan). |
|
|
|
|
Direct Rollover from the 401(k) Plan to another employers plan (if permitted by
that plan) for accounts which are lesser or greater than $5,000. |
Distribution Upon Termination for Any Other Reason. If a participants accounts are $500 or
less upon termination of employment, payment will be in the form of a lump sum as of a valuation
date as soon thereafter as administratively possible. If a participants accounts exceed $500 and
are $5,000 or less upon termination of employment, and the participant does not elect to have
his/her distribution paid, payment will be in the form of a Direct Rollover to an individual
retirement plan designated by the Plan Administrator.
If upon termination of employment, a participants accounts exceed $5,000, payment will be
deferred to Normal Retirement Date, unless the participant elects one of the following optional
forms of payment:
|
|
|
Lump sum payment as of any valuation date following the date of termination of
employment. (Note: lump sums are subject to a mandatory 20% income tax withholding and
a statutory 10% additional federal tax if paid before age 55). A participant
Rollover is permitted within 60 days of distribution to an Individual Retirement
Account (IRA), or another employers plan (if permitted by that plan). |
|
|
|
|
Direct Rollover from the 401(k) Plan to another employers plan (if permitted by
that plan) for accounts which are lesser or greater than $5,000. |
Nonalienation of Benefits. Except with respect to federal income tax withholding, and as
provided for under a qualified domestic relations order, benefits payable under the 401(k) Plan
will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary,
and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or
otherwise dispose of any rights to benefits payable under the 401(k) Plan will be void.
Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your
right to withdraw amounts held under the 401(k) Plan before your termination of employment with
Fraternity Federal. Federal law may also impose an excise tax on withdrawals from the 401(k) Plan
before you attain 591/2 years of age, regardless of whether the withdrawal occurs during your
employment with Fraternity Federal or after termination of employment.
8
ADMINISTRATION OF THE 401(k) PLAN
Trustees
The board of directors of Fraternity Federal has appointed [_____________] to serve as the
trustees for the Fraternity Community Bancorp Stock Fund. Reliance Trust Company will serve as the
custodian of the shares held in the Fraternity Community Bancorp Stock Fund and the trustee of all
the other plan assets. The trustees receive, hold and invest the contributions to the 401(k) Plan
in trust and distribute them to participants and beneficiaries in accordance with the terms of the
401(k) Plan and the directions of the Plan Administrator. The trustees are responsible for the
investment of the trust assets, as directed by the Plan Administrator and the participants.
Reports to 401(k) Plan Participants
The Plan Administrator furnishes participants quarterly statements that show the balance in
their accounts as of the statement date, contributions made to their accounts during that period
and any additional adjustments required to reflect earnings or losses.
Plan Administrator
Fraternity Federal currently serves as Plan Administrator for the 401(k) Plan. The Plan
Administrator handles the following administrative functions: interpreting the provisions of the
plan, prescribing procedures for filing applications for benefits, preparing and distributing
information explaining the plan, maintaining plan records, books of account and all other data
necessary for the proper administration of the plan, preparing and filing all returns and reports
required by the U.S. Department of Labor and the IRS and making all required disclosures to
participants, beneficiaries and others under ERISA.
Amendment and Termination
Fraternity Federal expects to continue the 401(k) Plan indefinitely. Nevertheless, Fraternity
Federal may terminate the 401(k) Plan at any time. If Fraternity Federal terminates the 401(k)
Plan in whole or in part, all affected participants become fully vested in their accounts,
regardless of other provisions of the 401(k) Plan. Fraternity Federal reserves the right to make,
from time to time, changes which do not cause any part of the trust to be used for, or diverted to,
any purpose other than the exclusive benefit of participants or their beneficiaries. Fraternity
Federal may amend the plan, however, as necessary or desirable, in order to comply with ERISA or
the Internal Revenue Code.
Merger, Consolidation or Transfer
If the 401(k) Plan merges or consolidates with another plan or transfers the trust assets to
another plan, and either the 401(k) Plan or the other plan is subsequently terminated, the 401(k)
Plan requires that you receive a benefit immediately after the merger, consolidation or transfer
that would equal or exceed the benefit you would have been entitled to receive immediately before
the merger, consolidation or transfer, if the 401(k) Plan had terminated at that time.
Federal Income Tax Consequences
The following briefly summarizes the material federal income tax aspects of the 401(k) Plan.
You should not rely on this summary as a complete or definitive description of the material federal
9
income tax consequences of the 401(k) Plan. Statutory provisions change, as do their
interpretation, and their application may vary in individual circumstances. Finally, applicable
state and local income tax laws may have different tax consequences than the federal income tax
laws. 401(k) Plan participants should consult a tax advisor with respect to any transaction
involving the 401(k) Plan, including any distribution from the 401(k) Plan.
As a tax-qualified retirement plan, the Internal Revenue Code affords the 401(k) Plan
certain tax advantages, including the following:
|
(1) |
|
the sponsoring employer may take an immediate tax deduction for the amount
contributed to the plan each year; |
|
|
(2) |
|
participants pay no current income tax on amounts contributed by the employer
on their behalf; and |
|
|
(3) |
|
earnings of the plan are tax-deferred, thereby permitting the tax-free
accumulation of income and gains on investments. |
Fraternity Federal administers the 401(k) Plan to comply in operation with the requirements of
the Internal Revenue Code as of the applicable effective date of any change in the law. If
Fraternity Federal should receive an adverse determination letter from the Internal Revenue Service
regarding the 401(k) Plans tax exempt status, all participants would generally recognize income
equal to their vested interests in the 401(k) Plan, the participants would not be permitted to
transfer amounts distributed from the 401(k) Plan to an Individual Retirement Account or to another
qualified retirement plan, and Fraternity Federal would be denied certain tax deductions taken in
connection with the 401(k) Plan.
Lump Sum Distribution. A distribution from the 401(k) Plan to a participant or the
beneficiary of a participant qualifies as a lump sum distribution if it is made within one taxable
year, on account of the participants death, disability or separation from service, or after the
participant attains age 591/2; and consists of the balance credited to the participant under this
plan and all other profit sharing plans, if any, maintained by Fraternity Federal. The portion of
any lump sum distribution included in taxable income for federal income tax purposes consists of
the entire amount of the lump sum distribution, less the amount of after-tax contributions, if any,
made to any other profit-sharing plans maintained by Fraternity Federal, if the distribution
includes those amounts.
Fraternity Community Bancorp Common Stock Included in Lump Sum Distribution. If a lump sum
distribution includes Fraternity Community Bancorp common stock, the distribution generally is
taxed in the manner described above. The total taxable amount is reduced, however, by the amount
of any net unrealized appreciation on Fraternity Community Bancorp common stock; that is, the
excess of the value of Fraternity Community Bancorp common stock at the time of the distribution
over the cost or other basis of the securities to the trust. The tax basis of Fraternity Community
Bancorp common stock, for purposes of computing gain or loss on a subsequent sale, equals the value
of Fraternity Community Bancorp common stock at the time of distribution, less the amount of net
unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Fraternity
Community Bancorp common stock, to the extent of the net unrealized appreciation at the time of
distribution, is long-term capital gain, regardless of how long you hold the Fraternity Community
Bancorp common stock, or the holding period. Any gain on a subsequent sale or other taxable
disposition of Fraternity Community Bancorp common stock that exceeds the amount of net unrealized
appreciation upon distribution is considered long-term capital gain, regardless of the holding
period. The recipient of a distribution may elect to include the amount of any net unrealized
appreciation in the total taxable amount of the distribution, to the extent allowed under IRS
regulations.
10
We have provided you with a brief description of the material federal income tax aspects of
the 401(k) Plan that are generally applicable under the Internal Revenue Code. We do not intend
this description to be a complete or definitive description of the federal income tax consequences
of participating in or receiving distributions from the 401(k) Plan. Accordingly, you should
consult a tax advisor concerning the federal, state and local tax consequences of participating in
and receiving distributions from the 401(k) Plan.
Restrictions on Resale
Any affiliate of Fraternity Community Bancorp under Rules 144 and 405 of the Securities Act
of 1933, as amended, who receives a distribution of common stock under the 401(k) Plan, may
re-offer or resell such shares only under a registration statement filed under the Securities Act
of 1933, as amended, assuming the availability of a registration statement, or under Rule 144 or
some other exemption from these registration requirements. An affiliate of Fraternity Community
Bancorp is someone who directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, Fraternity Community Bancorp. Generally, a
director, principal officer or major shareholder of a corporation is deemed to be an affiliate of
that corporation.
Any person who may be an affiliate of Fraternity Community Bancorp may wish to consult with
counsel before transferring any common stock they own. In addition, participants should consult
with counsel regarding the applicability to them of Section 16 of the Securities Exchange Act of
1934, as amended, which may restrict the sale of Fraternity Community Bancorp common stock acquired
under the 401(k) Plan or other sales of Fraternity Community Bancorp common stock.
Persons who are not deemed to be affiliates of Fraternity Community Bancorp at the time of
resale may resell freely any shares of Fraternity Community Bancorp common stock distributed to
them under the 401(k) Plan, either publicly or privately, without regard to the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended, or compliance with the
restrictions and conditions contained in the exemptions available under federal law. A person
deemed an affiliate of Fraternity Community Bancorp at the time of a proposed resale may publicly
resell common stock only under a re-offer prospectus or in accordance with the restrictions and
conditions contained in Rule 144 of the Securities Act of 1933, as amended, or some other exemption
from registration, and may not use this prospectus supplement or the accompanying prospectus in
connection with any such resale. In general, Rule 144 restricts the amount of common stock which
an affiliate may publicly resell in any three-month period to the greater of one percent of
Fraternity Community Bancorp common stock then outstanding or the average weekly trading volume
reported on the Nasdaq Capital Market during the four calendar weeks before the sale. Affiliates
may sell only through brokers without solicitation and only at a time when Fraternity Community
Bancorp is current in filing all required reports under the Securities Exchange Act of 1934, as
amended.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability
requirements on officers, directors and persons who beneficially own more than 10% of public
companies such as Fraternity Community Bancorp. Section 16(a) of the Securities Exchange Act of
1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of
becoming a person required to file reports under Section 16(a), such person must file a Form 3
reporting initial beneficial ownership with the Securities and Exchange Commission (SEC). Such
persons must also report periodically certain changes in beneficial ownership involving the
allocation or reallocation of assets held
11
in their 401(k) Plan accounts, either on a Form 4 within two business days after a transaction, or
annually on a Form 5 within 45 days after the close of a companys fiscal year.
In addition to the reporting requirements described above, Section 16(b) of the Securities
Exchange Act of 1934, as amended, provides for the recovery by Fraternity Community Bancorp of
profits realized from the purchase and sale or sale and purchase of its common stock within any
six-month period by any officer, director or person who beneficially owns more than 10% of the
common stock.
The SEC has adopted rules that exempt many transactions involving the 401(k) Plan from the
short-swing profit recovery provisions of Section 16(b). The exemptions generally involve
restrictions upon the timing of elections to buy or sell employer securities for the accounts of
any officer, director or person who beneficially owns more than 10% of the common stock of a
company.
Except for distributions of the common stock due to death, disability, retirement, termination
of employment or under a qualified domestic relations order, persons who are subject to Section
16(b) may be required, under limited circumstances involving the purchase of common stock within
six months of the distribution, to hold the shares of common stock distributed from the 401(k) Plan
for six months after the distribution date.
LEGAL OPINION
The validity of the issuance of the common stock of Fraternity Community Bancorp will be
passed upon by Kilpatrick Stockton LLP, Washington, DC. Kilpatrick Stockton LLP acted as special
counsel for Fraternity Community Bancorp in connection with the Stock Offering.
12
PROSPECTUS
[LOGO]
Fraternity Community Bancorp, Inc.
(Proposed Holding Company for Fraternity Federal Savings and Loan Association)
Minimum of 1,020,000 and Up to 1,380,000 Shares of Common Stock
Fraternity Community Bancorp, Inc. is offering shares of its common stock for sale in
connection with the conversion of Fraternity Federal Savings and Loan Association from the mutual
to the stock form of ownership. After the offering, Fraternity Community Bancorp will be the
holding company for Fraternity Federal Savings and Loan Association through its ownership of 100%
of Fraternity Federal Savings and Loan Associations outstanding common stock. We intend to have
our common stock quoted on the OTC Bulletin Board.
If you are or were a depositor of Fraternity Federal Savings and Loan Association:
|
|
|
You may have priority rights to purchase shares of common stock. |
If you do not fit into the category above, but are interested in purchasing shares of our
common stock:
|
|
|
You may have an opportunity to purchase shares of common stock after priority orders
are filled. |
We are offering up to 1,380,000 shares of common stock for sale on a best efforts basis,
subject to certain conditions. We must sell a minimum of 1,020,000 shares to complete the
offering. If, as a result of regulatory considerations, demand for the shares or changes in market
conditions, the independent appraiser determines that our pro forma market value has increased, we
may sell up to 1,587,000 shares without giving you further notice or the opportunity to change or
cancel your order. If our pro forma market value at the end of the stock offering period is either
below $10.2 million or above $15.87 million, then, after consulting with the Office of Thrift
Supervision, we may: (i) terminate the stock offering and promptly return all funds, with interest
and without deduction; (ii) set a new offering range and give all subscribers the opportunity to
confirm, modify or rescind their stock purchase orders; or (iii) take such other actions as may be
permitted by the Office of Thrift Supervision and the Securities and Exchange Commission.
The offering is expected to expire at 2:00 p.m., Eastern time, on [EXP DATE]. We may extend
this expiration date without notice to you until [DATE 1], unless the Office of Thrift Supervision
approves a later date, which will not be beyond [DATE 2].
Sandler ONeill + Partners, L.P. will use its best efforts to assist us in our selling
efforts, but is not required to purchase any of the common stock that is being offered for sale.
Purchasers will not pay a commission to purchase shares of common stock in the offering. All
shares offered for sale are offered at a price of $10.00 per share.
The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering
is terminated or extended beyond [DATE 1]. If the offering is extended beyond [DATE 1],
subscribers will have the right to modify or rescind their purchase orders. Funds received before
the completion of the offering will be maintained in a segregated account at Fraternity Federal
Savings and Loan Association. All funds received will bear interest at Fraternity Federal Savings
and Loan Associations passbook savings rate, which is subject to change at any time and is
currently _____% per annum. If we terminate the offering for any reason, or if we extend the
offering beyond [DATE 1], we will notify you and will promptly return your funds with interest if
you do not respond to the notice.
The Office of Thrift Supervision conditionally approved our plan of conversion on
_______________. However, such approval does not constitute a recommendation or endorsement of
this offering.
This investment involves a degree of risk, including the possible loss of principal.
Please read Risk Factors beginning on page __.
OFFERING SUMMARY
Price Per Share: $10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum, |
|
|
Minimum |
|
Maximum |
|
as Adjusted |
|
|
|
Number of shares |
|
|
1,020,000 |
|
|
|
1,380,000 |
|
|
|
1,587,000 |
|
Gross offering proceeds |
|
$ |
10,200,000 |
|
|
$ |
13,800,000 |
|
|
$ |
15,870,000 |
|
Estimated offering expenses, excluding selling agent fees and expenses |
|
$ |
550,000 |
|
|
$ |
550,000 |
|
|
$ |
550,000 |
|
Estimated selling agent fees and expenses |
|
$ |
250,000 |
|
|
$ |
250,000 |
|
|
$ |
250,000 |
|
Estimated net proceeds |
|
$ |
9,400,000 |
|
|
$ |
13,000,000 |
|
|
$ |
15,070,000 |
|
Estimated net proceeds per share |
|
$ |
9.22 |
|
|
$ |
9.42 |
|
|
$ |
9.50 |
|
These securities are not deposits or savings accounts and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state
securities commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
For assistance, please contact the stock information center at (___) ___-_____
SANDLER ONEILL + PARTNERS, L.P.
The date of this prospectus is _______________
[Map of Maryland showing office locations of Fraternity Federal Savings and Loan Association]
Summary
This summary highlights selected information from this document and may not contain all
the information that is important to you. To understand the stock offering fully, you should read
this entire document carefully. In certain instances where appropriate, the terms we, us and
our refer to Fraternity Community Bancorp and/or Fraternity Federal Savings and Loan Association,
as indicated by context. For assistance, please contact our conversion center at (___) ___-____.
The Companies
Fraternity Community Bancorp, Inc.
Fraternity Federal Savings and Loan Association
764 Washington Boulevard
Baltimore, Maryland 21230
(410) 539-1313
Fraternity Community Bancorp, Inc. This offering is made by Fraternity Community Bancorp, a
Maryland corporation incorporated in October 2010 by Fraternity Federal Savings and Loan
Association to be its holding company following the conversion. Currently, Fraternity Community
Bancorp has no assets. Following the conversion, Fraternity Community Bancorp will own all of
Fraternity Federal Savings and Loan Associations capital stock and will direct, plan and
coordinate Fraternity Federal Savings and Loan Associations business activities. In the future,
Fraternity Community Bancorp might also acquire or organize other operating subsidiaries, including
other financial institutions or financial services companies, although it currently has no specific
plans or agreements to do so.
Fraternity Federal Savings and Loan Association. Founded in 1913, Fraternity Federal Savings
and Loan Association is a community-oriented financial institution, dedicated to serving the
financial service needs of customers and businesses within its market area, which consists of
Baltimore City and Baltimore, Carroll and Howard Counties in Maryland. We offer a variety of
deposit products and provide loans secured by real estate located in our market area. Our real
estate loans consist primarily of one- to four-family mortgage loans, as well as commercial real
estate loans, land loans, home equity lines of credit and residential construction loans. We also
offer consumer loans and, to a limited extent, commercial business loans. We currently operate out
of our corporate headquarters and main office in Baltimore and full-service branch offices located
in Cockeysville, Ellicott City and Hampstead, Maryland. We are subject to extensive regulation,
examination and supervision by the Office of Thrift Supervision, our primary federal regulator, and
the Federal Deposit Insurance Corporation, our deposit insurer. At June 30, 2010, we had total
assets of $167.9 million, total deposits of $125.8 million and total equity of $16.6 million.
Recent Operating Results and Operating Strategy (page __)
We have identified the following strategic initiatives we will pursue in our efforts to
achieve our mission to operate and grow a profitable community-oriented financial institution:
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building on our strengths as a community-oriented financial institution; |
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improving our interest margin and earnings and reducing our interest rate risk by
increasing commercial real estate loans; |
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emphasizing lower cost core deposits to reduce funding costs; |
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generating higher non-interest income by selling loans in the secondary market; |
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adding a new branch in our existing market area or a contiguous county within the
next three years; and |
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expanding our market share within our primary market area. |
The Conversion
Description of the Conversion (page __)
Currently, we are a federally chartered mutual savings association with no shareholders.
Our depositors and borrowers currently have the right to vote on certain matters such as the
election of directors and this conversion transaction. The conversion transaction that we are
undertaking involves a change from our mutual form to a stock savings association charter that will
result in all of Fraternity Federal Savings and Loan Associations capital stock being owned by
Fraternity Community Bancorp. Voting rights in Fraternity Community Bancorp will belong to its
shareholders, including our employee stock ownership plan. For more information on the employee
stock ownership plan, see SummaryThe OfferingBenefits of the Offering to ManagementEmployee
Stock Ownership Plan.
We are conducting the conversion under the terms of our plan of conversion. The Office of
Thrift Supervision has conditionally approved the plan of conversion, including a condition that it
be approved by our members. We have called a special meeting of members for [MEETING DATE] to vote
on the plan of conversion.
The following diagram depicts our corporate structure after the conversion and offering,
including the number and percentage of shares of common stock that will be owned by public
shareholders at the minimum, maximum, and maximum, as adjusted, of the offering range upon
completion of the conversion and the offering:
Regulation and Supervision (page __)
We are, and Fraternity Community Bancorp will be upon completion of the conversion,
subject to regulation, supervision and examination by the Office of Thrift Supervision. We are
also subject to regulation by the Federal Deposit Insurance Corporation. The Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act), signed by the President on July
21, 2010, provides for the regulation and supervision of federal savings associations like
Fraternity Federal Savings and Loan Association to be transferred to the Office of the Comptroller
of the Currency, the agency that regulates national banks. The Office of the Comptroller of the
Currency will assume primary responsibility for implementing and enforcing many of the laws and
regulations applicable to federal savings associations. The transfer will occur over a transition
period of up to one year, subject to a possible six month extension. At the same time, the
responsibility for supervising savings and loan holding companies will be transferred to the
Federal Reserve Board.
2
The Offering
Purchase Price
The purchase price is $10.00 per share. You will not pay a commission to buy any shares
in the offering.
Number of Shares to be Sold
We are offering for sale between 1,020,000 and 1,380,000 shares of Fraternity Community
Bancorp common stock in a subscription offering, community offering and possibly a syndicated
offering. With regulatory approval, we may increase the number of shares to be sold to 1,587,000
shares without giving you further notice or the opportunity to change or cancel your order. In
considering whether to permit an increase in the offering size, the Office of Thrift Supervision
will consider such factors as the level of subscriptions, the views of our independent appraiser,
our financial condition and results of operations and changes in market conditions.
How We Determined the Offering Range (page ___)
We are offering between 1,020,000 and 1,380,000 shares, which is our offering range,
based on an independent appraisal of our pro forma market value prepared by Feldman Financial
Advisors, Inc., an independent appraisal firm experienced in appraisals of financial institutions.
Feldman Financial Advisors estimates that as of October 12, 2010, our pro forma market value was
between $10.2 million and $13.8 million, with a midpoint of $12.0 million.
In preparing its appraisal, Feldman Financial Advisors considered the information in this
prospectus, including our consolidated financial statements. Feldman Financial Advisors also
considered the following factors, among others:
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our historical, present and projected operating results and financial condition and
the economic and demographic characteristics of our primary market area; |
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a comparative evaluation of the operating and financial statistics of Fraternity
Federal Savings and Loan Association with those of other similarly situated, publicly
traded companies; |
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|
|
the effect of the capital raised in this offering on our net worth and earnings
potential; and |
|
|
|
|
the trading market for securities of comparable institutions and general conditions
in the market for such securities. |
Two measures that some investors use to analyze whether a stock might be a good investment are
the ratio of the offering price to the issuers book value and the ratio of the offering price
per share to the issuers income per share for the past twelve months. Feldman Financial Advisors
considered these ratios, among other factors, in preparing its appraisal. Book value is the same
as total equity and represents the difference between the issuers assets and liabilities. Feldman
Financial Advisors appraisal also incorporates an analysis of a peer group of publicly traded
companies that Feldman Financial Advisors considered to be comparable to us.
3
The following table presents a summary of selected pricing ratios for the peer group companies
and for us utilized by Feldman Financial Advisors in its appraisal. These ratios are based on book
value and tangible book value as of June 30, 2010 at the latest date for which complete financial
data was publicly available for the peer group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price to |
|
|
Price to |
|
Tangible |
|
|
Book Value |
|
Book Value |
|
|
Ratio |
|
Ratio |
Fraternity Community Bancorp (pro forma): |
|
|
|
|
|
|
|
|
Minimum |
|
|
41.4 |
% |
|
|
41.4 |
% |
Midpoint |
|
|
45.4 |
|
|
|
45.4 |
|
Maximum |
|
|
49.3 |
|
|
|
49.3 |
|
Maximum, as adjusted |
|
|
53.2 |
|
|
|
53.2 |
|
|
|
|
|
|
|
|
|
|
Peer group companies as of October 12, 2010: |
|
|
|
|
|
|
|
|
Average |
|
|
53.9 |
|
|
|
55.7 |
|
Median |
|
|
50.5 |
|
|
|
52.3 |
|
|
|
|
|
|
|
|
|
|
We reported negative earnings for the most recent twelve months ended June 30, 2010. Thus,
comparisons to peer group ratios related to earnings are not meaningful. Compared to the average
pricing ratios of the peer group at the maximum of the offering range, our stock would be priced at
a discount of 8.5% to the peer group on a price-to-book basis and a discount of 11.5% on a
price-to-tangible book basis. This means that, at the maximum of the offering rate, a share of our
common stock would be less expensive than the peer group based on a book value per share basis.
The independent appraisal does not indicate market value. You should not assume or expect
that the valuation described above means that our common stock will trade at or above the $10.00
purchase price after the offering.
Possible Change in Offering Range (page ___)
Feldman Financial Advisors will update its appraisal before we complete the stock
offering. If, as a result of regulatory considerations, demand for the shares or changes in market
conditions, Feldman Financial Advisors determines that our pro forma market value has increased,
with regulatory approval we may sell up to 1,587,000 shares without further notice to you. If our
pro forma market value at the end of the stock offering period is either below $10.2 million or
above $15.87 million, then, after consulting with the Office of Thrift Supervision, we may: (i)
terminate the stock offering and promptly return all funds, with interest and without deduction;
(ii) set a new offering range and give all subscribers the opportunity to confirm, modify or
rescind their purchase orders for shares of Fraternity Community Bancorps common stock; or (iii)
take such other actions as may be permitted by the Office of Thrift Supervision and the Securities
and Exchange Commission.
Possible Termination of the Offering
We must sell a minimum of 1,020,000 shares to complete the offering. If we do not sell
the minimum number of shares, or if we terminate the offering for any other reason, we will
promptly return all funds, with interest, at our current passbook rate, and without deduction.
After-Market Performance of Mutual to Stock Conversions
The appraisal prepared by Feldman Financial Advisors includes examples of after-market
stock price performance for standard mutual to stock conversion offerings (i.e., excluding second
step conversions by mutual holding companies) completed between January 1, 2009 and October 12,
2010. These companies did not constitute the group of ten comparable public companies utilized in
Feldman Financial Advisors valuation analysis.
4
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Change from Initial Offering Price |
|
|
|
|
|
|
Offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
Through |
|
|
|
|
|
|
Size (In |
|
After 1 |
|
After 1 |
|
After 1 |
|
October 12, |
Issuer (Market/Symbol) |
|
Date of IPO |
|
Millions) |
|
Day |
|
Week |
|
Month |
|
2010 |
|
Madison Bancorp, Inc. (OTCBB/MDSN) (1) |
|
|
10/07/10 |
|
|
$ |
6.1 |
|
|
|
0.0 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
0.0 |
% |
Standard Financial Corp. (NASDAQ/STND) |
|
|
10/07/10 |
|
|
|
34.8 |
|
|
|
19.0 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
18.5 |
|
Century Next Financial Corporation (OTCBB/CTUY) |
|
|
10/01/10 |
|
|
|
10.6 |
|
|
|
0.0 |
|
|
|
15.0 |
|
|
|
N/A |
|
|
|
15.0 |
|
United-American Savings Bank (OTCBB/UASB) |
|
|
08/06/10 |
|
|
|
3.0 |
|
|
|
0.0 |
|
|
|
(5.0 |
) |
|
|
5.0 |
|
|
|
2.5 |
|
Peoples Federal Bancshares, Inc. (NASDAQ/PEOP) |
|
|
07/07/10 |
|
|
|
66.1 |
|
|
|
4.0 |
|
|
|
7.5 |
|
|
|
4.2 |
|
|
|
7.9 |
|
Fairmount Bancorp, Inc. (OTCBB/FMTB) |
|
|
06/03/10 |
|
|
|
4.4 |
|
|
|
0.0 |
|
|
|
5.0 |
|
|
|
10.0 |
|
|
|
20.0 |
|
Harvard Illinois Bancorp, Inc. (OTCBB/HARI) |
|
|
04/09/10 |
|
|
|
7.8 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(1.0 |
) |
|
|
(30.0 |
) |
OBA Financial Services, Inc. (NASDAQ/OBAF) |
|
|
01/22/10 |
|
|
|
46.3 |
|
|
|
3.9 |
|
|
|
1.5 |
|
|
|
3.0 |
|
|
|
11.8 |
|
OmniAmerican Bancorp, Inc. (NASDAQ/OABC) |
|
|
01/21/10 |
|
|
|
119.0 |
|
|
|
18.5 |
|
|
|
14.0 |
|
|
|
9.9 |
|
|
|
16.6 |
|
Versailles Financial Corporation (OTCBB/VERF) (1) |
|
|
01/11/10 |
|
|
|
4.3 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Athens Bancshares Corporation (NASDAQ/AFCB) |
|
|
01/07/10 |
|
|
|
26.8 |
|
|
|
16.0 |
|
|
|
15.0 |
|
|
|
10.6 |
|
|
|
11.2 |
|
Territorial Bancorp, Inc. (NASDAQ/TBNK) |
|
|
07/13/09 |
|
|
|
122.3 |
|
|
|
49.9 |
|
|
|
47.2 |
|
|
|
48.0 |
|
|
|
70.5 |
|
St. Joseph Bancorp, Inc. (OTCBB/SJBA) (1) |
|
|
02/02/09 |
|
|
|
3.8 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Hibernia Homestead Bancorp, Inc. (OTCBB/HIBE) |
|
|
01/28/09 |
|
|
|
11.1 |
|
|
|
0.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
45.0 |
|
All Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
N/A |
|
|
|
33.3 |
|
|
|
8.0 |
|
|
|
8.8 |
|
|
|
8.6 |
|
|
|
13.5 |
|
Median |
|
|
N/A |
|
|
|
10.9 |
|
|
|
0.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
11.5 |
|
High |
|
|
N/A |
|
|
|
122.3 |
|
|
|
49.9 |
|
|
|
47.2 |
|
|
|
48.0 |
|
|
|
70.5 |
|
Low |
|
|
N/A |
|
|
|
3.0 |
|
|
|
0.0 |
|
|
|
(5.0 |
) |
|
|
(1.0 |
) |
|
|
(30.0 |
) |
OTCBBB Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
N/A |
|
|
|
6.8 |
|
|
|
0.0 |
|
|
|
3.3 |
|
|
|
3.8 |
|
|
|
7.5 |
|
Median |
|
|
N/A |
|
|
|
6.1 |
|
|
|
0.0 |
|
|
|
2.5 |
|
|
|
5.0 |
|
|
|
2.5 |
|
High |
|
|
N/A |
|
|
|
11.1 |
|
|
|
0.0 |
|
|
|
15.0 |
|
|
|
10.0 |
|
|
|
45.0 |
|
Low |
|
|
N/A |
|
|
|
3.0 |
|
|
|
0.0 |
|
|
|
(5.0 |
) |
|
|
(1.0 |
) |
|
|
(30.0 |
) |
|
|
|
(1) |
|
There were no reported trades of this common stock issue through October 12, 2010. |
This table is not intended to indicate how our stock may perform. Furthermore, this table
presents only short-term price performance with respect to a limited number of companies that have
only recently completed their initial public offerings and may not be indicative of the longer-term
stock price performance of these companies.
Stock price appreciation or depreciation is affected by many factors, including, but not
limited to: general market and economic conditions; the interest rate environment; the amount of
proceeds a company raises in its offering and its ability to successfully deploy those proceeds
through originating loans and making other investments; and numerous factors relating to the
specific company, including the experience and ability of management, historical and anticipated
operating results, the nature and quality of the companys assets, and the companys primary market
area. The companies listed in the table above may not be similar to Fraternity Community Bancorp,
the pricing ratios for their stock offerings were in some cases different from the pricing ratios
for Fraternity Community Bancorps common stock and the market conditions in which these offerings
were completed were, in some cases, different from current market conditions. Any or all of these
differences may cause our stock to perform differently from these other offerings. Before you make
an investment decision, we urge you to read carefully this prospectus, including, but not limited
to, the section entitled Risk Factors.
You also should be aware that, recently, stock prices of some thrift initial public offerings
have decreased once the stock has begun trading. We cannot assure you that our stock will not
trade below the $10.00 purchase price or that our stock will perform similarly to other recent
mutual to stock conversions.
Conditions to Completing the Conversion and Offering
We are conducting the conversion and offering under the terms of our plan of conversion.
We cannot complete the conversion and offering unless:
5
|
|
|
we sell at least the minimum number of shares offered; |
|
|
|
|
we receive the final approval of the Office of Thrift Supervision to complete the
offering; and |
|
|
|
|
our members approve the plan of conversion. |
Reasons for the Conversion and Offering (page __)
Our primary reasons for the conversion and offering are to:
|
|
|
increase the capital of Fraternity Federal Savings and Loan Association to support
future lending; |
|
|
|
|
enhance profitability and earnings through reinvesting and leveraging the proceeds,
primarily through traditional lending and investing activities; |
|
|
|
|
support future branching activities and/or the acquisition of other financial
institutions or financial services companies; and |
|
|
|
|
implement equity compensation plans to retain and attract qualified directors,
officers and staff to enhance our current incentive-based compensation programs. |
Benefits of the Offering to Management (page __)
We intend to adopt the following benefit plans and employment agreements:
Employee Stock Ownership Plan. We have adopted an employee stock ownership plan that we
anticipate will purchase in the conversion offering a number of shares of common stock equal to 8%
of the shares sold in the offering by means of a 12-year loan from Fraternity Community Bancorp.
As the loan is repaid and shares are released from collateral, the plan will allocate shares to the
accounts of participating employees. Participants will receive allocations based on their
individual compensation as a percentage of total plan compensation. Non-employee directors are not
eligible to participate in the employee stock ownership plan. The purchase of common stock by the
employee stock ownership plan in the offering will comply with all applicable Office of Thrift
Supervision regulations except to the extent waived by the Office of Thrift Supervision. We will
incur additional compensation expense as a result of this plan. See Pro Forma Data for an
illustration of the effects of this plan.
Future Equity Incentive Plan. We intend to implement an equity incentive plan no earlier than
six months after completion of the conversion. If we implement the plan within one year after the
conversion, the plan must be approved by a majority of the total votes eligible to be cast by our
shareholders. If we implement the plan more than one year after the conversion, it must be
approved only by a majority of the total votes cast. We currently expect to implement this plan
more than one year after the conversion, although no decision has been made. Under this plan, we
may award stock options and shares of restricted stock to key employees and directors. We will
award shares of restricted stock at no cost to the recipient. We will grant stock options at an
exercise price at least equal to 100% of the fair market value of our common stock on the option
grant date. We will incur additional compensation expense as a result of this plan. See Pro
Forma Data for an illustration of the effects of this plan. Under this plan, we may grant stock
options in an amount up to 10% of the number of shares sold in the offering, and we may grant
awards of restricted stock in an amount of up to 4% of the number of shares sold in the offering.
We expect to fund the plan with shares we purchase in the open market, but in determining whether
to do so, the board of directors will consider our financial condition and results of operations,
capital requirements, economic conditions and whether sufficient shares are available for purchase
in the open market. The equity incentive plan will comply with all applicable Office of Thrift
Supervision regulations except to the extent waived by the Office of Thrift Supervision.
6
The following table represents the total value of all shares to be available for restricted
stock awards under the equity incentive plan, based on a range of market prices from $8.00 per
share to $14.00 per share. The value of the grants will depend on the actual trading price of our
common stock at the time of grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,480 |
|
|
|
|
|
|
40,800 |
|
48,000 |
|
55,200 |
|
Shares |
|
|
|
|
|
|
Shares |
|
Shares |
|
Shares |
|
Awarded at |
|
|
|
|
|
|
Awarded at |
|
Awarded at |
|
Awarded at |
|
Maximum, as |
|
|
|
|
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
Adjusted, of |
Share Price |
|
|
|
Range |
|
Range |
|
Range |
|
Range |
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
$ |
8.00 |
|
|
|
|
$ |
326 |
|
|
$ |
384 |
|
|
$ |
442 |
|
|
$ |
508 |
|
|
10.00 |
|
|
|
|
|
408 |
|
|
|
480 |
|
|
|
552 |
|
|
|
635 |
|
|
12.00 |
|
|
|
|
|
490 |
|
|
|
576 |
|
|
|
662 |
|
|
|
762 |
|
|
14.00 |
|
|
|
|
|
571 |
|
|
|
672 |
|
|
|
773 |
|
|
|
889 |
|
|
The following table presents the total value of all stock options available for grant under
the equity incentive plan, based on a range of market prices at the date of grant from $8.00 per
share to $14.00 per share. For purposes of this table, the value of the stock options was
determined using the Black-Scholes option-pricing formula. See Pro Forma Data. Financial gains
can be realized on a stock option only if the market price of the common stock increases above the
exercise price at which the option is granted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,700 |
|
|
|
|
|
|
|
|
|
|
102,000 |
|
120,000 |
|
138,000 |
|
Options |
|
|
|
|
|
|
|
|
|
|
Options |
|
Options |
|
Options |
|
Granted at |
|
|
|
|
|
|
|
|
|
|
Granted at |
|
Granted at |
|
Granted at |
|
Maximum, as |
|
|
|
|
|
|
|
|
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
Adjusted, of |
Exercise Price |
|
|
|
Option Value |
|
Range |
|
Range |
|
Range |
|
Range |
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
$ |
8.00 |
|
|
|
|
$ |
3.07 |
|
|
$ |
313 |
|
|
$ |
368 |
|
|
$ |
424 |
|
|
$ |
487 |
|
|
10.00 |
|
|
|
|
|
3.84 |
|
|
|
392 |
|
|
|
461 |
|
|
|
530 |
|
|
|
609 |
|
|
12.00 |
|
|
|
|
|
4.61 |
|
|
|
470 |
|
|
|
553 |
|
|
|
636 |
|
|
|
732 |
|
|
14.00 |
|
|
|
|
|
5.38 |
|
|
|
549 |
|
|
|
646 |
|
|
|
742 |
|
|
|
854 |
|
|
The following tables summarize at the minimum and maximum of the offering range the total
number and value of the shares of common stock that the employee stock ownership plan expects to
acquire and the total value of all restricted stock awards and stock options that are expected to
be available under the equity incentive plan. At the minimum of the offering range we would sell
1,020,000 shares and have 1,020,000 shares outstanding, and at the maximum of the offering range,
we would sell 1,380,000 shares and have 1,380,000 shares outstanding. The number of shares
reflected for the benefit plans in the table below assumes that we grant a number of restricted
stock awards equal to 4% of the shares sold in the offering and the application of the net proceeds
as described under Use of Proceeds.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to be Granted or Purchased At |
|
|
Minimum of Offering Range |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
As a % of |
|
Estimated |
|
|
Number of |
|
Common Stock |
|
Value of |
|
|
Shares |
|
Sold |
|
Grants |
|
|
|
Employee stock ownership plan (1) |
|
|
81,600 |
|
|
|
8.00 |
% |
|
$ |
816,000 |
|
Restricted stock awards (1) |
|
|
40,800 |
|
|
|
4.00 |
|
|
|
408,000 |
|
Stock options (2) |
|
|
102,000 |
|
|
|
10.00 |
|
|
|
391,680 |
|
|
|
|
Total |
|
|
224,400 |
|
|
|
22.00 |
% |
|
$ |
1,615,680 |
|
|
|
|
|
|
|
(1) |
|
Assumes the value of Fraternity Community Bancorp common stock is $10.00 per share for
purposes of determining the total estimated value of the grants. |
|
(2) |
|
Assumes the value of a stock option is $3.84, which was determined using the Black-Scholes
option-pricing formula. See Pro Forma Data. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to be Granted or Purchased At |
|
|
Maximum of Offering Range |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
As a % of |
|
Estimated |
|
|
Number of |
|
Common Stock |
|
Value of |
|
|
Shares |
|
Sold |
|
Grants |
|
|
|
Employee stock ownership plan (1) |
|
|
110,400 |
|
|
|
8.00 |
% |
|
$ |
1,104,000 |
|
Restricted stock awards (1) |
|
|
55,200 |
|
|
|
4.00 |
|
|
|
552,000 |
|
Stock options (2) |
|
|
138,000 |
|
|
|
10.00 |
|
|
|
529,920 |
|
|
|
|
Total |
|
|
303,600 |
|
|
|
22.00 |
% |
|
$ |
2,185,920 |
|
|
|
|
|
|
|
(1) |
|
Assumes the value of Fraternity Community Bancorp common stock is $10.00 per share for
purposes of determining the total estimated value of the grants. |
|
(2) |
|
Assumes the value of a stock option is $3.84, which was determined using the Black-Scholes
option-pricing formula. See Pro Forma Data. |
Employment Agreements. Fraternity Federal Savings and Loan Association currently has
three-year employment agreements with Thomas K. Sterner, our Chairman of the Board, Chief Executive
Officer and Chief Financial Officer, and Richard C. Schultze, our President and Chief Operating
Officer. Fraternity Community Bancorp intends to enter into employment agreements with each of
Thomas K. Sterner and Richard C. Schultze on terms similar to the employment agreements with
Fraternity Federal Savings and Loan Association. Based solely on initial cash compensation payable
under the employment agreements and excluding any benefits that would be payable under any employee
benefit plan, if a change in control of Fraternity Community Bancorp occurred and we terminated the
executives, the total payment due under the employment agreements would be approximately $1.13
million.
Employee Severance Compensation Plan. In connection with the conversion, we intend to adopt
an employee severance compensation plan. This plan will provide severance benefits to eligible
employees if there is a change in control of Fraternity Community Bancorp or Fraternity Federal
Savings and Loan Association. Based solely on compensation levels as of June 30, 2010, if a change
in control occurred, and we terminated all employees covered by the severance compensation plan,
the total payment due under the plan would be approximately $388,000.
The Offering Is Not Expected to Be Taxable to Persons Receiving or Exercising Subscription
Rights (page __)
As a general matter, the offering is not expected to be a taxable transaction for
purposes of federal income taxes to persons who receive or exercise subscription rights. We have
received an opinion from our special counsel, Kilpatrick Stockton LLP, that, for federal income tax
purposes:
8
|
|
|
it is more likely than not that the members of Fraternity Federal Savings and Loan
Association will not realize any income upon the issuance or exercise of subscription
rights; |
|
|
|
|
it is more likely than not that the tax basis to the purchasers in the offering will
be the amount paid for our common stock, and that the holding period for shares of
common stock will begin on the date of completion of the subscription offering; and |
|
|
|
|
the holding period for shares of common stock purchased in the community offering or
syndicated offering will begin on the day after the date of completion of the purchase. |
Persons Who May Order Stock in the Offering (page __)
Note: Subscription rights are not transferable, and persons with subscription rights may
not subscribe for shares for the benefit of any other person. If you violate this prohibition, you
may lose your rights to purchase shares and may face criminal prosecution and/or other sanctions.
We have granted rights to subscribe for shares of Fraternity Community Bancorp common stock in
a subscription offering to the following persons in the following order of priority:
|
1. |
|
Persons with $50 or more on deposit at Fraternity Federal Savings and Loan
Association as of the close of business on June 30, 2009. |
|
|
2. |
|
Our employee stock ownership plan, which will provide retirement benefits to
our employees. |
|
|
3. |
|
Persons (other than our directors and officers) with $50 or more on deposit at
Fraternity Federal Savings and Loan Association as of the close of business on [SERD]. |
|
|
4. |
|
Fraternity Federal Savings and Loan Associations depositors and borrowers as
of the close of business on [RECORD DATE] who were not able to subscribe for shares
under categories 1 or 3. |
If we receive subscriptions for more shares than are to be sold in this offering, we may be
unable to fill or may only partially fill your order. Shares will be allocated in order of the
priorities described above under a formula outlined in the plan of conversion. Generally, shares
first will be allocated so as to permit each eligible subscriber, if possible, to purchase a number
of shares sufficient to make the subscribers total allocation equal to 100 shares or the number of
shares actually subscribed for, whichever is less. After that, unallocated shares will be
allocated among the remaining eligible subscribers whose subscriptions remain unfilled in
proportion to the amounts that their respective qualifying deposits bear to the total qualifying
deposits of all remaining eligible subscribers whose subscriptions remain unfilled. If we increase
the number of shares to be sold above 1,380,000, the employee stock ownership plan will have the
first priority right to purchase any shares exceeding that amount to the extent that its
subscription has not previously been filled. Any shares remaining will be allocated in the order
of priorities described above. See The Conversion and Stock Offering Subscription Offering and
Subscription Rights for a description of the allocation procedure.
We may offer shares not sold in the subscription offering, if any, to the general public in a
community offering. People, and trusts for the benefit of people, who are residents of Baltimore,
Howard and Carroll Counties and Baltimore City in Maryland will be given a first preference to
purchase shares in the community offering. We may, in our sole discretion, reject orders received
in the community offering either in whole or in part. For example, we would reject an order
submitted by a person whom we believe is making false representations or whom we believe is
attempting to violate, evade or circumvent the terms and conditions of the plan of conversion. If
your order is rejected in part, you cannot cancel the remainder of your order. The community
offering may commence concurrently with the subscription offering or at any time thereafter and may
terminate at any time without notice until [DATE 1], unless the Office of Thrift Supervision
approves a later date, which will not be beyond [DATE 2].
Shares of our common stock not purchased in the subscription offering or the community
offering may be offered for sale to the general public in a syndicated offering through a syndicate
of selected dealers. We may begin the syndicated offering at any time following the commencement
of the subscription offering. Sandler ONeill +
9
Partners, L.P. will act as sole book-running manager for any syndicated offering, which will also
be conducted on a best efforts basis. Neither Sandler ONeill + Partners, L.P. nor any other
member of the syndicate will be required to purchase any shares in the syndicated offering.
Deadline for Ordering Stock (page ___)
The subscription offering will expire at 2:00 p.m., Eastern time, on [EXP DATE]. We
expect that the community offering will expire at the same time, although it may continue for up to
45 days after the end of the subscription offering, or longer if the Office of Thrift Supervision
approves a later date. No single extension may be for more than 90 days. If we extend the
offering beyond [DATE 1], or if we intend to sell fewer than 1,020,000 shares or more than
1,587,000 shares, all subscribers will be notified and given the opportunity to confirm, change or
cancel their orders. If you do not respond to this notice, we will return your funds promptly with
interest at our passbook rate and without deduction.
Purchase Limitations (page ___)
Our plan of conversion establishes limitations on the purchase of stock in the offering.
These limitations include the following:
|
|
|
The minimum purchase is 25 shares. |
|
|
|
|
No individual (or individuals on a single deposit account) may purchase more than
$250,000 of common stock (which equals 25,000 shares) in the subscription offering. |
|
|
|
|
No individual may purchase more than $250,000 of common stock (which equals 25,000
shares) in the community offering. |
|
|
|
|
No individual, no individual together with any associates, and no group of persons
acting in concert may purchase more than $400,000 of common stock (which equals 40,000
shares) in all offering categories. |
Subject to the Office of Thrift Supervisions approval, we may increase or decrease the
purchase limitations at any time.
How to Purchase Common Stock (page ___)
If you want to place an order for shares in the offering, you must complete an original
stock order and certification form and send it to us together with full payment, or deliver it in
person to the stock information center located at Fraternity Federal Savings and Loan Associations
main office, 764 Washington Boulevard, Baltimore, Maryland 21230. We must receive your stock
order and certification form before the end of the subscription offering or the end of the
community offering, as appropriate, regardless of the postmark date. Once we receive your order,
you cannot cancel or change it without our consent.
To ensure that we properly identify your subscription rights, you must list all of your
deposit accounts as of the applicable eligibility date on the stock order form. If you fail to do
so, your subscription may be reduced or rejected if the offering is oversubscribed. To preserve
your purchase priority, only the name(s) of person(s) listed on your deposit account at the
applicable date of eligibility may be listed on your order form. You may not add the names of
others who were not eligible to purchase common stock in the offering on the applicable date of
eligibility.
You may pay for shares in the subscription offering or the community offering in either of the
following ways:
|
|
|
By check or money order made payable to Fraternity Community Bancorp, Inc.; or |
10
|
|
|
By authorizing withdrawal from an account at Fraternity Federal Savings and Loan
Association. |
Depositors interested in using funds in an individual retirement account with us to purchase
common stock should contact the stock information center as soon as possible so that the necessary
forms may be forwarded for execution and returned before the subscription offering ends. To use
funds in an individual retirement account at Fraternity Federal Savings and Loan Association, you
must transfer your account to an unaffiliated institution or broker and open a self-directed
individual retirement account. Individual retirement accounts at Fraternity Federal Savings and
Loan Association are not self-directed and common stock may only be purchased using a self-directed
individual retirement account. Please contact your broker or financial institution as quickly as
possible to determine if you may transfer your individual retirement account from Fraternity
Federal Savings and Loan Association because the transfer may take several days. You may use funds
currently in an independent, self-directed individual retirement account to purchase stock by
having your trustee complete and return the subscription form together with a check payable to
Fraternity Community Bancorp, Inc. before the expiration of the subscription offering.
We will pay interest on your subscription funds at the rate we pay on passbook accounts, which
is subject to change at any time and is currently ____% per annum, from the date we receive your
funds until the offering is completed or terminated. All funds authorized for withdrawal from
deposit accounts with us will earn interest at the applicable account rate until the offering is
completed or terminated. If, as a result of a withdrawal from a certificate of deposit, the
balance falls below the minimum balance requirement, the remaining funds will earn interest at our
passbook rate. There will be no early withdrawal penalty for withdrawals from certificates of
deposit used to pay for stock.
How We Will Use the Proceeds of this Offering (page __)
The following table summarizes how we will use the proceeds of this offering, based on
the sale of shares at the minimum and maximum of the offering range. We expect to contribute 50%
of the net proceeds of the offering to Fraternity Federal Savings and Loan Association.
|
|
|
|
|
|
|
|
|
|
|
Minimum 1,020,000 |
|
Maximum 1,380,000 |
(In thousands) |
|
Shares at $10.00 Per Share |
|
Shares at $10.00 Per Share |
|
Offering proceeds |
|
$ |
10,200 |
|
|
$ |
13,800 |
|
Less estimated offering expenses |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
|
Net offering proceeds |
|
|
9,400 |
|
|
|
13,000 |
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Proceeds contributed to Fraternity Federal Savings and
Loan Association |
|
|
4,700 |
|
|
|
6,500 |
|
Proceeds used for loan to employee stock ownership plan |
|
|
816 |
|
|
|
1,104 |
|
|
|
|
Proceeds remaining for Fraternity Community Bancorp |
|
$ |
3,884 |
|
|
$ |
5,396 |
|
|
|
|
Fraternity Community Bancorp may use the portion of the proceeds that it retains to, among
other things, invest in securities, pay cash dividends or repurchase shares of common stock,
subject to regulatory restrictions. Fraternity Federal Savings and Loan Association may use the
portion of the proceeds that it receives to fund new loans, open new branches, invest in securities
and expand its business activities. Fraternity Community Bancorp and Fraternity Federal Savings
and Loan Association may also use the proceeds of the offering to diversify their businesses and
acquire other companies, although we have no specific plans, arrangements or understandings to do
so at this time. Except as described above, neither Fraternity Community Bancorp nor Fraternity
Federal Savings and Loan Association has any specific plans for the investment of the proceeds of
this offering and has not allocated a specific portion of the proceeds to any particular use. For
a discussion of our business reasons for undertaking this offering, see The Conversion and Stock
Offering Reasons for the Conversion.
11
Purchases by Directors and Executive Officers (page __)
We expect that our directors and executive officers, together with their associates, will
subscribe for 45,000 shares, which equals 4.4% of the shares that would be sold at the minimum of
the offering range. Our directors and executive officers, together with their associates, will pay
the same $10.00 price per share as everyone else who purchases shares in the offering. Like all of
our depositors, our directors and executive officers and their associates have subscription rights
based on their deposits and, if there is an oversubscription, their orders will be subject to the
allocation provisions set forth in our plan of conversion, unless waived by the Office of Thrift
Supervision. Purchases by our directors and executive officers and their associates will count
towards the minimum number of shares we must sell to close the offering.
Market for Fraternity Community Bancorp, Inc.s Common Stock (page __)
We intend to list the common stock of Fraternity Community Bancorp for trading on the OTC
Bulletin Board. Sandler ONeill + Partners, L.P. currently intends to become a market maker in the
common stock, but it is under no obligation to do so. In addition, if needed, Sandler ONeill +
Partners, L.P. will assist us in obtaining additional market makers. We cannot assure you that
other market makers will be obtained or that an active and liquid trading market for our common
stock will develop or, if developed, will be maintained. After shares of the common stock begin
trading, you may contact a stock broker to buy or sell shares.
Fraternity Community Bancorp, Inc.s Dividend Policy (page __)
After the offering, we initially do not intend to pay cash dividends. Our ability to pay
dividends will depend on a number of factors, including capital requirements, regulatory
limitations and our operating results and financial condition.
Delivery of Prospectus
To ensure that each person receives a prospectus at least 48 hours before the offering
deadline, we may not mail prospectuses any later than five days before such date or hand-deliver
prospectuses later than two days before that date. Stock order forms may only be delivered if
accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order
form by means other than U.S. mail.
We will make reasonable attempts to provide a prospectus and offering materials to holders of
subscription rights. The subscription offering and all subscription rights will expire at 2:00
p.m., Eastern time, on [EXP DATE] whether or not we have been able to locate each person entitled
to subscription rights.
Delivery of Stock Certificates (page ___)
Certificates representing shares of common stock issued in the subscription and community
offerings will be mailed to purchasers at the address provided by them on the order form as soon as
practicable following completion of the offering. Shares of common stock issued in any syndicated
offering will be issued in book entry form. Until certificates for common stock are available and
delivered to subscribers, subscribers may not be able to sell their shares, even though trading of
the common stock will have commenced.
Stock Information Center
If you have any questions regarding the offering, please call the stock information
center at (___) ___-____ to speak to a registered representative of Sandler ONeill + Partners,
L.P. The stock information center will be open Monday through Friday, 10:00 a.m. to 4:00 p.m.,
Eastern time. The stock information center will be closed on weekends and bank holidays.
12
Risk Factors
You should consider carefully the following risk factors before purchasing Fraternity
Community Bancorp common stock.
Risks Related to Our Business
We have had losses and low earnings in recent periods. If we cannot increase our income to
competitive levels, our stock price may be adversely affected.
We have had losses and low earnings in recent periods, including a net loss of $411,000 for
the six months ended June 30, 2010 and net income of $343,000 and $8,000 for the years ended
December 31, 2009 and 2008, respectively. Our return on average assets was (0.49)% for the six
months ended June 30, 2010 and 0.20% and 0% for the years ended December 31, 2009 and 2008,
respectively, and our return on average equity was (4.83)% and 2.03% and 0.05% for the years ended
December 31, 2009 and 2008, respectively. These returns compared to a median return on average
assets of (0.09)% and a median return on average equity of (0.78)% for the most recent 12-month
period for the peer group of comparable institutions utilized by Feldman Financial Advisors, Inc.
in preparing our appraisal. We have identified various strategic initiatives we will pursue in our
efforts to overcome these challenges and improve earnings. These strategic initiatives include
the following:
|
|
|
building on our strengths as a community-oriented financial institution; |
|
|
|
|
improving our net interest margin and reducing our interest rate risk by increasing
commercial real estate loans; |
|
|
|
|
emphasizing lower cost core deposits to reduce funding costs; |
|
|
|
|
generating higher non-interest income by selling loans in the secondary market; |
|
|
|
|
adding a new branch in our existing market area or a contiguous county within the
next three years; and |
|
|
|
|
expanding our market share within our primary market. |
For a detailed description of our strategic initiatives to improve earnings, see Managements
Discussion and Analysis of Financial Condition and Results of OperationsOperating Strategy.
However, our strategic initiatives may not succeed in generating or increasing income. If we are
unable to generate or increase income, our stock price may be adversely affected. Moreover, even
if we are successful in generating net income, our earnings may be low for some time. In such
event, our return on equity, which equals net income divided by average equity, may be below
returns on equity achieved by peer institutions, which also could adversely affect our stock price.
Our increased emphasis on commercial real estate lending may expose us to increased lending risks.
At June 30, 2010, our loan portfolio consisted of $4.0 million, or 3.35%, of commercial real
estate loans. As part of our strategy to increase earnings, we will seek to increase commercial
real estate lending, and intend to add commercial lending personnel to assist us in these efforts.
These types of loans generally expose a lender to greater risk of non-payment and loss than one- to
four-family mortgage loans because repayment of the loans often depends on the successful operation
of the property and the income stream of the borrowers. Such loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to one- to four-family
mortgage loans. In addition, since such loans generally entail greater risk than one- to
four-family mortgage loans, we may need to increase our allowance for loan losses in the future
associated with the growth of such loans. Also, commercial real estate borrowers often have more
than one loan outstanding with their lender. Consequently, if we increase our commercial real
estate lending, an adverse development with respect to one loan or one credit
13
relationship could expose us to a significantly greater risk of loss compared to an adverse
development with respect to a one- to four-family mortgage loan.
Significant loan losses could require us to increase our allowance for loan losses through a charge
to earnings.
When we loan money, we incur the risk that our borrowers will not repay their loans. We
provide for loan losses by establishing an allowance through a charge to earnings. The amount of
this allowance is based on our assessment of loan losses inherent in our loan portfolio. The
process for determining the amount of the allowance is critical to our financial condition and
results of operations. It requires subjective and complex judgments about the future, including
forecasts of economic or market conditions that might impair the ability of our borrowers to repay
their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan
losses in excess of the amount recorded in our allowance for loan losses. We might increase the
allowance because of changing economic conditions. For example, in a rising interest rate
environment, borrowers with adjustable-rate loans could see their payments increase. There may be
a significant increase in the number of borrowers who are unable or unwilling to repay their loans,
resulting in our charging off more loans and increasing our allowance. In addition, when real
estate values decline, the potential severity of loss on a real estate-secured loan can increase
significantly, especially in the case of loans with high combined loan-to-value ratios. The recent
decline in the national economy and the local economies of the areas in which the loans are
concentrated could result in an increase in loan delinquencies, foreclosures or repossessions
resulting in increased charge-off amounts and the need for additional loan loss allowances in
future periods. In addition, our determination as to the amount of our allowance for loan losses is
subject to review by our primary regulator, the Office of Thrift Supervision, as part of its
examination process, which may result in the establishment of an additional allowance based upon
the judgment of the Office of Thrift Supervision after a review of the information available at the
time of its examination. Our allowance for loan losses amounted to $805,000, or 0.67% of total
loans outstanding and 24.68% of nonperforming loans, at June 30, 2010. Our allowance for loan
losses at June 30, 2010 may not be sufficient to cover future loan losses. A large loss could
deplete the allowance and require increased provisions to replenish the allowance, which would
decrease our earnings. In addition, at June 30, 2010, we had 18 loan relationships with
outstanding balances, net of participation interests sold, that exceeded $1.0 million, all of which
were performing according to their original terms. However, the deterioration of one or more of
these loans could result in a significant increase in our nonperforming loans and our provision for
loan losses, which would negatively impact our results of operations.
Our speculative construction loan portfolio may expose us to increased credit risk.
During 2007 and 2008, we determined to offer a limited number of speculative construction
loans to builders who have not identified a buyer for the completed property at the time of
origination (known as speculative construction loans). Such loans were for the building of
luxury residences. We determined to make these speculative construction loans because of the
higher yields on such loans compared to conforming loans for the construction of owner-occupied,
one- to four-family residences and to reduce our interest rate risk. As a result of the
deterioration in local economic conditions in 2009 and 2010, certain of our speculative
construction borrowers experienced difficulties selling the completed residences. At June 30,
2010, we had two speculative construction loans totaling $1.8 million that were nonperforming.
Subsequent to June 30, 2010, we foreclosed on the collateral securing those loans. At June 30,
2010, all three remaining speculative construction loans, totaling $3.9 million, were performing in
accordance with their terms, although we have extended the terms of two of these loans. Of our
three remaining speculative construction loans, one was classified as substandard, and the other
two were classified as special mention in accordance with a policy we adopted in 2009 of
classifying all speculative construction loans as special mention. If difficult economic
conditions continue, we could experience difficulty selling the two properties we acquired in
foreclosure, and other speculative construction loan borrowers could have difficulty selling their
properties. If a borrower has insufficient liquidity to pay interest on such projects, the loan
could become impaired and require an increase in the allowance for loan losses which would
adversely impact our results of operations. In light of current market conditions, we have
discontinued speculative construction lending.
14
The loss of senior management could hurt our operations.
We rely heavily on our two senior executive officers, Thomas K. Sterner, our Chairman of the
Board, Chief Executive Officer and Chief Financial Officer, and Richard C. Schultze, our President
and Chief Operating Officer. The loss of either or both of our senior executive officers could
have an adverse effect on us because, as a small community bank, our senior executive officers have
more responsibility than would be typical at a larger financial institution with more employees.
In addition, as a small community bank, we have fewer management-level personnel who are in a
position to assume the responsibilities of our senior executive officers. We have not purchased key
man life insurance on our senior executive officers.
If we conclude that the decline in value of any of our investment securities is other than
temporary, we are required to write down the value of that security through a charge to earnings.
We review our investment securities portfolio at each quarter-end reporting period to
determine whether the fair value is below the current carrying value. When the fair value of any of
our investment securities has declined below its carrying value, we are required to assess whether
the decline is other-than-temporary. If we conclude that the decline is other-than-temporary, we
are required to write down the value of that security through a charge to earnings. As of June 30,
2010, our investment securities portfolio available-for-sale included approximately two nonagency
mortgage-backed securities with a book value of $1,130,081 and an estimated fair value of
$1,070,049. Changes in the expected cash flows of these securities and/or prolonged price declines
may result in our concluding in future periods that the impairment of these securities is
other-than-temporary, which would require a charge to earnings to write down theses securities to
their fair value. Any charges for other-than-temporary impairment would not impact cash flow,
tangible capital or liquidity.
If in the future we determined to buy nonagency mortgage-backed securities, we would be exposed to
increased risk of losses related to our investment portfolio.
Under applicable laws and regulations, banks like Fraternity Federal Savings and Loan
Association have authority to invest in mortgage-backed securities, including mortgage-backed
securities that are not guaranteed by the U.S. government or an agency thereof, which could include
mortgage-backed securities where the underlying loans are subprime loans, interest only loans,
option adjustable-rate loans, Alt-A loans or other similar mortgage loans that have higher risk
characteristics. In recent years, many banks and other investors have recorded impairment charges
related to their investments in these nonagency mortgage-backed securities. If in the future we
determined to buy nonagency mortgage-backed securities, we would be exposed to increased risk of
losses related to our investment portfolio.
Our stock price may decline when trading commences.
If you purchase shares in the offering, you may not be able to sell them at or above the
$10.00 purchase price. After the shares of our common stock begin trading, the trading price of
the common stock will be determined by the marketplace, and will be influenced by many factors
outside of our control, including prevailing interest rates, investor perceptions, securities
analyst research reports and general industry, geopolitical and economic conditions. Publicly
traded stocks, including stocks of financial institutions, often experience substantial market
price volatility. These market fluctuations might not be related to the operating performance of
particular companies whose shares are traded. Additionally, the stock prices of some recently
converted thrift institutions have declined below, and remain below, their initial offering prices.
Continued turmoil in the financial markets could have an adverse effect on our financial position
or results of operations.
Beginning in 2008, United States and global financial markets experienced severe disruption
and volatility, and general economic conditions have declined significantly. Adverse developments
in credit quality, asset values and revenue opportunities throughout the financial services
industry, as well as general uncertainty regarding the economic, industry and regulatory
environment, have had a negative impact on the industry. The United States and the governments of
other countries have taken steps to try to stabilize the financial system, including investing in
financial institutions, and have implemented programs intended to improve general economic
conditions. The U.S.
15
Department of the Treasury created the Capital Purchase Program under the Troubled Asset
Relief Program, pursuant to which the U.S. Department of the Treasury provided additional capital
to participating financial institutions through the purchase of preferred stock or other
securities. Other measures include homeowner relief that encourages loan restructuring and
modification; the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate; regulatory action
against short selling practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in
the banking sector. Notwithstanding the actions of the United States and other governments, there
can be no assurance that these efforts will be successful in restoring industry, economic or market
conditions to their previous levels and that they will not result in adverse unintended
consequences. Factors that could continue to pressure financial services companies, including
Fraternity Community Bancorp, are numerous and include:
|
|
|
worsening credit quality, leading among other things to increases in loan losses
and reserves, |
|
|
|
|
continued or worsening disruption and volatility in financial markets, leading
among other things to continuing reductions in asset values, |
|
|
|
|
capital and liquidity concerns regarding financial institutions generally, |
|
|
|
|
limitations resulting from or imposed in connection with governmental actions
intended to stabilize or provide additional regulation of the financial system, or |
|
|
|
|
recessionary conditions that are deeper or last longer than currently
anticipated. |
The recent economic downturn could result in increases in our level of nonperforming loans and/or
reduce demand for our products and services, which would lead to lower revenue, higher loan losses
and lower earnings.
Our business activities and earnings are affected by general business conditions in the United
States and in our primary market area. These conditions include short-term and long-term interest
rates, inflation, unemployment levels, monetary supply, consumer confidence and spending,
fluctuations in both debt and equity capital markets and the strength of the economy in the United
States generally and in our primary market area in particular. Recently, the national economy has
experienced a general downturn, with rising unemployment levels, declines in real estate values and
an erosion in consumer confidence. These economic conditions also had a negative impact on our
primary market area. In addition, our primary market area has experienced a softening of the local
real estate market, including reductions in local property values, and a decline in the local
manufacturing industry, which employs many of our borrowers. A prolonged or more severe economic
downturn, continued elevated levels of unemployment, further declines in the values of real estate,
or other events that affect household and/or corporate incomes could impair the ability of our
borrowers to repay their loans in accordance with their terms. Nearly all of our loans are secured
by real estate or made to businesses in our primary market area, which consists of Baltimore,
Carroll, Howard, Harford and Anne Arundel Counties and Baltimore City in Maryland and the
surrounding areas. As a result of this concentration, a prolonged or more severe downturn in the
local economy could result in significant increases in nonperforming loans, which would negatively
impact our interest income and result in higher provisions for loan losses, which would decrease
our earnings. The economic downturn could also result in reduced demand for credit or fee-based
products and services, which also would decrease our revenues.
Increased and/or special Federal Deposit Insurance Corporation assessments will hurt our earnings.
The recent economic downturn has caused a high level of bank failures, which has dramatically
increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction
in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance
Corporation has significantly increased the initial base assessment rates paid by financial
institutions for deposit insurance. Increases in the base assessment rate have increased our
deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the
16
Federal Deposit Insurance Corporation imposed a special assessment on all insured
institutions. Our special assessment, which was reflected in earnings for the quarter ended June
30, 2009, was $76,000. In lieu of imposing an additional special assessment, the Federal Deposit
Insurance Corporation required all institutions to prepay their assessments for all of 2010, 2011
and 2012, which for us totaled $629,000. Additional increases in the base assessment rate or
additional special assessments would negatively impact our earnings.
Changing interest rates may decrease our earnings and asset value.
Our net interest income is the interest we earn on loans and investments less the interest we
pay on our deposits and borrowings. Our interest rate spread is the difference between the yield we
earn on our assets and the interest rate we pay for deposits and our other sources of funding.
Changes in interest ratesup or downcould adversely affect our interest rate spread and, as a
result, our net interest income. Although the yield we earn on our assets and our funding costs
tend to move in the same direction in response to changes in interest rates, one can rise or fall
faster than the other, causing our interest rate spread to expand or contract. Our liabilities
tend to be shorter in duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding costs may rise faster than the
yield we earn on our assets, causing our interest rate spread to contract until the yield catches
up. This contraction could be more severe following a prolonged period of lower interest rates, as
a larger proportion of our fixed-rate one- to four-family loan portfolio will have been originated
at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher
interest rate environment. Changes in the slope of the yield curveor the spread between
short-term and long-term interest ratescould also reduce our net interest margin. Normally, the
yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our
liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even
inverts, we could experience pressure on our interest rate spread as our cost of funds increases
relative to the yield we can earn on our assets. For further discussion of how changes in interest
rates could impact us, see Managements Discussion and Analysis of Financial Condition and Results
of Operations Risk Management Interest Rate Risk Management.
Our strategies to modify our interest rate risk profile may be difficult to implement.
Our asset/liability management strategies are designed to decrease our interest rate risk
sensitivity. One such strategy is increasing the amount of adjustable-rate and/or short-term
assets. We offer ten-year fixed rate and adjustable rate loan products as a means to achieve this
strategy. However, the currently prevailing low long-term interest rates have created a decrease
in borrower demand for these types of loans. Additionally, there is no guarantee that any
adjustable-rate assets obtained will not prepay. At June 30, 2010, 43% of our loan portfolio
consisted of adjustable-rate loans, compared to 44% and 43% at December 31, 2009 and 2008,
respectively, and 6% of our loan portfolio consisted of ten-year fixed-rate loans, compared to 8%
at December 31, 2009 and 2008.
We are also managing our liabilities to moderate our interest rate risk
sensitivity. Customer demand is primarily for short-term maturity certificates of deposit. Using
short-term liabilities to fund long-term, fixed-rate assets will increase the interest rate
sensitivity of any financial institution. We have utilized Federal Home Loan Bank advances to
mitigate the impact of customer demand by lengthening the maturities of our liabilities.
Federal Home Loan Bank advances are entered into as liquidity is needed or to fund assets
that provide for a spread considered sufficient by management. If we are unable to originate
short-term or adjustable-rate loans at favorable rates or fund loan originations or securities
purchases with long-term advances, we may have difficulty executing this asset/liability management
strategy and/or it may result in a reduction in profitability.
Strong competition within our primary market area could negatively impact our profits and slow
growth.
We face intense competition both in making loans and attracting deposits. This competition
has made it more difficult for us to make new loans and attract deposits. Price competition for
loans and deposits might result in us earning less on our loans and paying more on our deposits,
which would reduce net interest income. Competition also makes it more difficult to grow loans and
deposits. At June 30, 2010, which is the most recent date for which data is available from the
Federal Deposit Insurance Corporation, we held approximately 0.28% of the deposits in
17
Baltimore County, Maryland, 1.21% of the deposits in Howard County, Maryland and 0.13% of the
deposits in Carroll County, Maryland. Most of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer services that we do
not provide. We expect competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation in the financial
services industry. Our profitability depends upon our continued ability to compete successfully in
our primary market area. See Our Business Market Area and Our Business Competition for
more information about our primary market area and the competition we face.
We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift
Supervision, our primary federal regulator, and the Federal Deposit Insurance Corporation, as
insurer of our deposits. Such regulation and supervision governs the activities in which an
institution and its holding company may engage, and are intended primarily for the protection of
the insurance fund and the depositors and borrowers of Fraternity Federal Savings and Loan
Association rather than for holders of our common stock. Regulatory authorities have extensive
discretion in their supervisory and enforcement activities, including the imposition of
restrictions on our operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in such regulation and oversight, whether in the form of
regulatory policy, regulations, legislation or supervisory action, may have a material impact on
our operations.
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act
restructures the regulation of depository institutions. The Dodd-Frank Act contains various
provisions designed to enhance the regulation of depository institutions and prevent the recurrence
of a financial crisis such as occurred in 2008-2009. Under the Dodd-Frank Act, the Office of
Thrift Supervision will be eliminated and its duties and powers transferred to the Office of the
Comptroller of the Currency, which regulates national banks. Savings and loan holding companies,
such as Fraternity Community Bancorp, will be regulated by the Federal Reserve Board. Because
Fraternity Federal Savings and Loan Association will be regulated by the Office of the Comptroller
of the Currency and Fraternity Community Bancorp will be regulated by the Federal Reserve Board, we
will have two new federal banking regulators instead of only being regulated by the Office of
Thrift Supervision, as is currently the case. Also included in the Dodd-Frank Act is the creation
of a new federal agency to administer consumer and fair lending laws, a function that is now
performed by the depository institution regulators. The federal preemption of state laws currently
accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act
also will impose consolidated capital requirements on savings and loan holding companies effective
in five years, which will limit our ability to borrow at the holding company and invest the
proceeds from such borrowings as capital in Fraternity Federal Savings and Loan Association that
could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our
business and operations will not be known for years until regulations implementing the statute are
written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly
through increased regulatory burden and compliance costs resulting from possible future consumer
and fair lending regulations as well as the change in primary federal banking regulators.
Risks Related to This Offering
We may sell up to 1,587,000 shares of stock in the offering without providing you with an
opportunity to change or cancel your order.
Pursuant to the Office of Thrift Supervision conversion regulations, we are permitted to close
the offering if we obtain orders for shares within the range of a minimum of 1,020,000 shares to a
maximum, as adjusted, of 1,587,000 shares, without giving you further notice or the opportunity to
change or cancel your order. Should we receive orders for the maximum, as adjusted, of 1,587,000
shares, this will result in higher pro forma pricing ratios in terms of the price to book value
ratio and the price to tangible book value ratio (see Pro Forma Data). This may negatively
affect our post-conversion trading price.
18
There likely will be a limited market for our common stock, which may adversely affect our stock
price.
Although we intend to list our shares of common stock for trading on the OTC Bulletin Board,
our shares of common stock are not likely to be actively traded. If an active trading market for
our common stock does not develop, you may not be able to sell all of your shares of common stock
and the sale of a large number of shares at one time could temporarily depress the market price.
There also may be a wide spread between the bid and asked price for our common stock. When there
is a wide spread between the bid and asked price, the price at which you may be able to sell our
common stock may be significantly lower than the price at which you could buy it at that time.
Additional expenses following the offering from operating as a public company will adversely affect
our profitability.
Following the offering, our noninterest expenses will increase as a result of the financial
accounting, legal and various other expenses usually associated with operating as a public company
and complying with public company disclosure obligations, particularly those obligations imposed by
the Sarbanes-Oxley Act of 2002. Compliance with the Sarbanes-Oxley Act of 2002 will require us to
upgrade our accounting systems, which will increase our operating expenses and adversely affect our
profitability.
We will incur additional expenses following the conversion relating to our plan to hire additional
lending personnel in furtherance of our strategy to expand our lending activity.
Part of our strategic plan is to improve our net interest margin and income and reduce our
interest rate risk by increasing commercial real estate loans. To accomplish this, we anticipate
that following the conversion we will add additional lending personnel. We anticipate that this
initiative will enhance long-term shareholder value. However, upon the addition of new lending
personnel, we will be required to make increased expenditures for salaries and employee benefits,
and it may take some period of time for the new personnel to generate sufficient loan volume to
offset these expenditures. Accordingly, we anticipate that, in the short term, net income will be
negatively affected.
Additional expenses following the offering from the implementation of new equity benefit plans will
adversely affect our profitability.
We will recognize additional annual employee compensation and benefit expenses stemming from
options and shares of common stock granted to employees, directors and executives under new benefit
plans. These additional expenses will adversely affect our profitability. We cannot determine the
actual amount of these new stock-related compensation and benefit expenses at this time because
applicable accounting practices generally require that they be based on the fair market value of
the options or shares of common stock at the date of the grant; however, we expect them to be
material. We will recognize expenses for our employee stock ownership plan when shares are
committed to be released to participants accounts and will recognize expenses for restricted stock
awards and stock options generally over the vesting period of awards made to recipients. These
benefit expenses in the first year following the offering have been estimated to be approximately
$308,000 on a pre-tax basis at the maximum of the offering range assuming the $10.00 per share
purchase price as fair market value. Actual expenses, however, may be higher or lower, depending
on the price of our common stock. See Pro Forma Data and Our Management Executive
Compensation Benefit Plans.
We have broad discretion in allocating the proceeds of the offering. Our failure to effectively
utilize such proceeds would reduce our profitability.
We intend to contribute 50% of the net proceeds of the offering to Fraternity Federal Savings
and Loan Association. Fraternity Community Bancorp may use the portion of the proceeds that it
retains to, among other things, invest in securities, pay cash dividends or repurchase shares of
common stock, subject to regulatory restrictions. Fraternity Federal Savings and Loan Association
may use the portion of the proceeds that it receives to fund new loans, open new branches, invest
in securities and expand its business activities. Fraternity Community Bancorp and Fraternity
Federal Savings and Loan Association may also use the proceeds of the offering to diversify
19
their businesses and acquire other companies, although we have no specific plans to do so at this
time. We have not allocated specific amounts of proceeds for any of these purposes, and we will
have significant flexibility in determining how much of the net proceeds we apply to different uses
and the timing of such applications. Our failure to utilize these funds effectively would reduce
our profitability.
A significant percentage of our common stock will be held by our directors and executive officers
and benefit plans.
We expect that our directors and executive officers, together with their associates, will
subscribe for 45,000 shares in the offering. In addition, we intend to establish an employee stock
ownership plan that will purchase an amount of shares equal to 8% of the shares sold in the
offering. As a result, upon consummation of the offering, a total of up to 126,600, or 12.4%, and
155,400, or 11.3%, of our outstanding shares will be held by our directors and executive officers
and our employee stock ownership plan at the minimum and maximum of the offering range,
respectively. Further, shares will be held by management following the implementation of an equity
incentive plan, which we intend to implement no earlier than six months following the completion of
the offering. Assuming the equity incentive plan is implemented, under the plan options are
granted to and exercised by directors and executive officers for 10% of the shares sold in the
conversion and restricted stock awards are made to directors and executive officers for 4% of the
shares sold in the conversion and the plan is funded with shares purchased in the open market, a
total of up to 269,400, or 26.4%, and 348,600, or 25.3%, of our outstanding shares will be held by
our directors and executive officers and our employee stock ownership plan at the minimum and
maximum of the offering range, respectively. The articles of incorporation of Fraternity Community
Bancorp contain supermajority voting provisions that require that the holders of at least 75% of
Fraternity Community Bancorps outstanding shares of voting stock approve certain actions
including, but not limited to, the amendment of certain provisions of Fraternity Community
Bancorps articles of incorporation and bylaws. If our directors and executive officers and
benefit plans were to hold more than 25% of our outstanding common stock following the completion
of the offering, the shares held by these individuals and benefit plans could be voted in a manner
that would ensure that the 75% supermajority needed to approve such actions could not be attained.
For more information on the restrictions included in the articles of incorporation and bylaws of
Fraternity Community Bancorp, see Restrictions on the Acquisition of Fraternity Community Bancorp
and Fraternity Federal Savings and Loan Association.
Issuance of shares for benefit programs may dilute your ownership interest.
We intend to adopt an equity incentive plan following the offering. If shareholders approve
the new equity incentive plan, we intend to issue shares to our officers, employees and directors
through this plan. If the restricted stock awards under the equity incentive plan are funded from
authorized but unissued stock, your ownership interest in the shares could be diluted by up to
approximately 3.85%, assuming awards of common stock equal to 4% of the shares sold in the offering
are awarded under the plan. If we adopt the equity incentive plan more than one year after
completion of the offering, we may elect to increase the awards of restricted stock we may grant.
In such event, your ownership interest in the shares could be further diluted. If the shares
issued upon the exercise of stock options under the equity incentive plan are issued from
authorized but unissued stock, your ownership interest in the shares could be diluted by up to
approximately 9.09%, assuming stock option grants equal to 10% of the shares sold in the offering
are granted under the plan. See Pro Forma Data and Our Management Executive Compensation
Benefit Plans.
The articles of incorporation and bylaws of Fraternity Community Bancorp and certain laws and
regulations may prevent or make more difficult certain transactions, including a sale or merger of
Fraternity Community Bancorp
Provisions of the articles of incorporation and bylaws of Fraternity Community Bancorp, state
corporate law and federal banking regulations may make it more difficult for companies or persons
to acquire control of Fraternity Community Bancorp. As a result, our shareholders may not have the
opportunity to participate in such a transaction and the trading price of our common stock may not
rise to the level of other institutions that are more vulnerable to hostile takeovers. The factors
that may discourage takeover attempts or make them more difficult include:
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Articles of incorporation and bylaws. Provisions of the articles of incorporation
and bylaws of Fraternity Community Bancorp may make it more difficult and expensive to
pursue a takeover attempt |
20
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that the board of directors opposes. These provisions also make more difficult the
removal of current directors or management, or the election of new directors. These
provisions include: |
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limitation on the right to vote shares; |
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the election of directors to staggered terms of three years; |
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provisions regarding the timing and content of shareholder proposals
and nominations; |
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provisions restricting the calling of special meetings of shareholders; |
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the absence of cumulative voting by shareholders in the election of
directors; |
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the removal of directors only for cause; and |
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supermajority voting requirements for changes to some provisions of the
articles of incorporation and bylaws. |
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Maryland anti-takeover statute. Under Maryland law, any person who acquires more
than 10% of a Maryland corporation without prior approval of its board of directors is
prohibited from engaging in any type of business combination with the corporation for a
five-year period. Any business combination after the five-year period would be subject
to supermajority shareholder approval or minimum price requirements. |
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Office of Thrift Supervision regulations. Office of Thrift Supervision regulations
prohibit, for three years following the completion of a mutual to stock conversion, the
offer to acquire or the acquisition of more than 10% of any class of equity security of a
converted institution without the prior approval of the Office of Thrift Supervision. See
Restrictions on Acquisition of Fraternity Community Bancorp and Fraternity Federal
Savings and Loan Association. |
21
A Warning About Forward-Looking Statements
This prospectus contains forward-looking statements, which can be identified by the use
of words such as believes, expects, anticipates, estimates or similar expressions.
Forward-looking statements include:
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statements of our goals, intentions and expectations; |
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statements regarding our business plans, prospects, growth and operating strategies; |
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statements regarding the quality of our loan and investment portfolios; and |
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estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks and uncertainties. Actual
results may differ materially from those contemplated by the forward-looking statements due to,
among others, the following factors:
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general economic conditions, either nationally or in our primary market area, that
are worse than expected; |
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a continued decline in real estate values; |
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changes in the interest rate environment that reduce our interest margins or reduce
the fair value of financial instruments; |
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increased competitive pressures among financial services companies; |
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changes in consumer spending, borrowing and savings habits; |
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legislative, regulatory or supervisory changes that adversely affect our business; |
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adverse changes in the securities markets; and |
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changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board or the Public Company
Accounting Oversight Board. |
Any of the forward-looking statements that we make in this prospectus and in other public
statements we make may later prove incorrect because of inaccurate assumptions, the factors
illustrated above or other factors that we cannot foresee. Consequently, no forward-looking
statement can be guaranteed.
22
Selected Consolidated Financial and Other Data
The summary consolidated financial information presented below is derived in part from
our consolidated financial statements. The following is only a summary and you should read it in
conjunction with the consolidated financial statements and notes beginning on page F-1. The
information at December 31, 2009 and 2008 and for the years then ended is derived in part from the
audited consolidated financial statements of Fraternity Federal Savings and Loan Association that
appear elsewhere in this prospectus. The selected data at June 30, 2010 and for the six months
ended June 30, 2010 and 2009 was not audited, but in the opinion of management, represents all
adjustments necessary for a fair presentation. All of these adjustments are normal and recurring.
The results of operations for the six months ended June 30, 2010 are not necessarily indicative of
the results of operations that may be expected for the entire year.
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At June 30, |
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At December 31, |
(In thousands) |
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2010 |
|
2009 |
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2008 |
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(Unaudited) |
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Financial Condition Data: |
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Total assets |
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$ |
167,928 |
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$ |
166,976 |
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$ |
170,688 |
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Cash and cash equivalents |
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20,135 |
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13,908 |
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11,439 |
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Investment securities available-for-sale |
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19,650 |
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24,116 |
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8,526 |
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Investment and securities held-to-maturity |
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7,447 |
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Loans receivable, net |
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118,770 |
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120,092 |
|
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|
136,547 |
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Deposits |
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125,770 |
|
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125,960 |
|
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124,913 |
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Federal Home Loan Bank advances |
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22,750 |
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22,917 |
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28,417 |
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Total equity |
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16,647 |
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|
16,992 |
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|
16,475 |
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For the Six Months Ended |
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For the Year Ended |
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June 30, |
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December 31, |
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(In thousands) |
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2010 |
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2009 |
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2009 |
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2008 |
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(Unaudited)
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Operating Data: |
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Interest income |
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$ |
3,848 |
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$ |
4,287 |
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$ |
8,272 |
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$ |
8,993 |
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Interest expense |
|
|
1,957 |
|
|
|
2,500 |
|
|
|
4,805 |
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|
5,856 |
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Net interest income |
|
|
1,891 |
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|
1,787 |
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|
|
3,467 |
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|
|
3,137 |
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Provision for loan losses |
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|
865 |
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|
|
51 |
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|
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51 |
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5 |
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|
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Net interest income after provision for loan losses |
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|
1,026 |
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|
|
1,736 |
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|
|
3,416 |
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|
|
3,132 |
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Noninterest income |
|
|
311 |
|
|
|
378 |
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|
|
692 |
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|
|
323 |
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Noninterest expenses |
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|
2,065 |
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|
1,805 |
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|
|
3,646 |
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|
3,600 |
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Income (loss) before income tax expense (benefit) |
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|
(728 |
) |
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|
309 |
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|
462 |
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|
|
(145 |
) |
Income tax expense (benefit) |
|
|
317 |
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|
|
95 |
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|
119 |
|
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|
(153 |
) |
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Net income |
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$ |
(411 |
) |
|
$ |
214 |
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|
$ |
343 |
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$ |
8 |
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23
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At or for the Six Months |
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At of For the Year |
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Ended June 30, |
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Ended December 31, |
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2010 |
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2009 |
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2009 |
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2008 |
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(Unaudited) |
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Performance Ratios (1)(2): |
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Return on average assets |
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(0.49 |
)% |
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0.25 |
% |
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0.20 |
% |
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% |
Return on average equity |
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(4.83 |
) |
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|
2.55 |
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2.03 |
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0.05 |
|
Interest rate spread (3) |
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|
1.98 |
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|
1.79 |
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|
|
1.74 |
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|
|
1.48 |
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Net interest margin (4) |
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2.27 |
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|
2.14 |
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|
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2.08 |
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|
|
1.86 |
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Noninterest expenses to average assets |
|
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2.45 |
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|
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2.15 |
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|
|
2.17 |
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|
|
2.12 |
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Average interest-earning assets to average interest-bearing
liabilities |
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|
112.28 |
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|
|
111.80 |
|
|
|
111.71 |
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|
|
111.22 |
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Average equity to average assets |
|
|
10.08 |
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|
|
9.98 |
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10.04 |
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9.71 |
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|
|
|
|
|
|
|
|
Regulatory Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to adjusted total assets) |
|
|
9.87 |
|
|
|
10.05 |
|
|
|
10.19 |
|
|
|
9.75 |
|
Tier 1 capital (to risk-weighted assets) |
|
|
17.87 |
|
|
|
19.22 |
|
|
|
18.34 |
|
|
|
18.01 |
|
Total risk-based capital (to risk-weighted assets) |
|
|
18.79 |
|
|
|
19.58 |
|
|
|
18.69 |
|
|
|
18.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of total loans |
|
|
0.67 |
|
|
|
0.26 |
|
|
|
0.23 |
|
|
|
0.20 |
|
Allowance for loan losses as a percent of nonperforming loans |
|
|
24.68 |
|
|
|
119.08 |
|
|
|
15.91 |
|
|
|
145.52 |
|
Net charge-offs to average outstanding loans during the period |
|
|
0.28 |
|
|
|
|
|
|
|
0.04 |
|
|
|
|
|
Nonperforming loans as a percent of total loans |
|
|
2.73 |
|
|
|
0.22 |
|
|
|
1.45 |
|
|
|
0.14 |
|
Nonperforming assets as a percent of total assets |
|
|
1.94 |
|
|
|
0.16 |
|
|
|
0.62 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of offices |
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
Number of deposit accounts |
|
|
6,469 |
|
|
|
6,858 |
|
|
|
6,677 |
|
|
|
6,969 |
|
Number of loans |
|
|
1,186 |
|
|
|
1,222 |
|
|
|
1,208 |
|
|
|
1,252 |
|
|
|
|
(1) |
|
With the exception of end of period ratios, all ratios are based on average monthly
balances during the periods. |
|
(2) |
|
Performance ratios for the six-month periods have been annualized. |
|
(3) |
|
Represents the difference between the average yield on average interest-earning assets and
the average cost on average interest-bearing liabilities. |
|
(4) |
|
Represents net interest income as a percent of average interest-earning assets. |
24
Use of Proceeds
The following table shows how we intend to use the net proceeds of the offering. The
actual net proceeds will depend on the number of shares of common stock sold in the offering and
the actual expenses incurred in connection with the offering. Payments for shares made through
withdrawals from deposit accounts at Fraternity Federal Savings and Loan Association will reduce
deposits and will not result in the receipt of new funds for investment. See Pro Forma Data for
the assumptions used to arrive at these amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum, |
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
as Adjusted, |
|
|
Offering Range |
|
Offering Range |
|
Offering Range |
|
of Offering Range |
|
|
1,020,000 |
|
Percent |
|
1,200,000 |
|
Percent |
|
1,380,000 |
|
Percent |
|
1,587,000 |
|
Percent |
|
|
Shares at |
|
of |
|
Shares at |
|
of |
|
Shares at |
|
of |
|
Shares at |
|
of |
|
|
$10.00 |
|
Net |
|
$10.00 |
|
Net |
|
$10.00 |
|
Net |
|
$10.00 |
|
Net |
(Dollars in thousands) |
|
Per Share |
|
Proceeds |
|
Per Share |
|
Proceeds |
|
Per Share |
|
Proceeds |
|
Per Share |
|
Proceeds |
|
Offering proceeds |
|
$ |
10,200 |
|
|
|
|
|
|
$ |
12,000 |
|
|
|
|
|
|
$ |
13,800 |
|
|
|
|
|
|
$ |
15,870 |
|
|
|
|
|
Less: estimated offering expenses |
|
|
(800 |
) |
|
|
|
|
|
|
(800 |
) |
|
|
|
|
|
|
(800 |
) |
|
|
|
|
|
|
(800 |
) |
|
|
|
|
|
|
|
Net offering proceeds |
|
$ |
9,400 |
|
|
|
100.00 |
% |
|
$ |
11,200 |
|
|
|
100.00 |
% |
|
$ |
13,000 |
|
|
|
100.00 |
% |
|
$ |
15,070 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds contributed to Fraternity
Federal Savings and Loan
Association |
|
|
4,700 |
|
|
|
50.0 |
|
|
|
5,600 |
|
|
|
50.0 |
|
|
|
6,500 |
|
|
|
50.0 |
|
|
|
7,535 |
|
|
|
50.0 |
|
Proceeds used for loan to employee
stock ownership plan |
|
|
816 |
|
|
|
8.7 |
|
|
|
960 |
|
|
|
8.6 |
|
|
|
1,104 |
|
|
|
8.5 |
|
|
|
1,270 |
|
|
|
8.4 |
|
|
|
|
Proceeds remaining for Fraternity
Community Bancorp (1) |
|
$ |
3,884 |
|
|
|
41.3 |
% |
|
$ |
4,640 |
|
|
|
41.4 |
% |
|
$ |
5,396 |
|
|
|
41.5 |
% |
|
$ |
6,265 |
|
|
|
41.6 |
% |
|
|
|
(1) |
|
Following the completion of the stock offering and in accordance with applicable regulations,
Fraternity Community Bancorp may purchase shares of its common stock in the open market in
order to grant awards of restricted stock under its proposed equity incentive plan. Assuming
a market price of $10.00 per share at the time of purchase, the cost of acquiring the shares
would be approximately $408,000 (40,800 shares) at the minimum of the offering range, $480,000
(48,000 shares) at the midpoint of the offering range, $552,000 (55,200 shares) at the maximum
of the offering range and $634,800 (63,480 shares) at the maximum, as adjusted, of the
offering range and assuming we grant a number of restricted stock awards equal to 4%
of the shares sold in the offering. See Pro Forma Data and Our Management Executive
Compensation Nonqualified Deferred Compensation Future Equity Incentive Plan. |
Fraternity Community Bancorp intends to invest the proceeds it retains from the offering
initially in short-term, liquid investments. Over time, Fraternity Community Bancorp may use the
proceeds it retains from the offering:
|
|
|
to invest in securities; |
|
|
|
|
to pay dividends to shareholders; |
|
|
|
|
to repurchase shares of its common stock, subject to regulatory restrictions; |
|
|
|
|
for possible future investment in Fraternity Federal Savings and Loan Association if
needed to support future growth or expansion; and |
|
|
|
|
for general corporate purposes. |
The specific amounts of net proceeds to be allocated in the future to each of the uses
described above have not been determined, is subject to change and will depend on capital
requirements, regulatory limitations, future expansion opportunities and our operating results and
financial condition.
Under current Office of Thrift Supervision regulations, Fraternity Community Bancorp may not
repurchase shares of its common stock during the first year following the offering, except to fund
shareholder-approved equity benefit plans or, with prior regulatory approval, when extraordinary
circumstances exist.
25
We expect to contribute 50% of the net proceeds of the offering to Fraternity Federal Savings
and Loan Association. Fraternity Federal Savings and Loan Association may use the proceeds that it
receives from the offering, which is shown in the table above as the amount contributed to
Fraternity Federal Savings and Loan Association:
|
|
|
to fund new loans; |
|
|
|
|
to invest in securities; |
|
|
|
|
subject to the receipt of regulatory approval, to finance the possible expansion of
its business activities through the establishment of new branch offices and/or the
acquisition of other financial institutions or financial services companies; while we
intend to open a new branch office in our current market area or a contiguous county in
the next three years, we currently have no definitive plans, arrangements,
understandings or commitments regarding potential branch office expansion or
acquisition opportunities; and |
|
|
|
|
for general corporate purposes. |
Except as described above, neither Fraternity Community Bancorp nor Fraternity Federal Savings
and Loan Association has any specific plans, arrangements or understandings for the investment of
the proceeds of this offering and has not allocated a specific portion of the proceeds to any
particular use. The specific amounts of net proceeds to be allocated in the future to each of the
uses described above have not been determined, is subject to change and will depend on capital
requirements, regulatory limitations, future expansion opportunities and our operating results and
financial condition. For a discussion of our business reasons for undertaking the offering, see
The Conversion and Stock Offering Reasons for the Conversion.
Our Dividend Policy
Following the offering, our board of directors initially does not intend to pay cash
dividends.
In the future, the board of directors may declare and pay regular cash dividends and/or
periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In
determining whether to declare or pay any dividends, whether regular or special, the board of
directors will take into account our financial condition and results of operations, tax
considerations, capital requirements, industry standards, and economic conditions. We will also
consider the regulatory restrictions that affect the payment of dividends by Fraternity Federal
Savings and Loan Association to us, as discussed below.
Fraternity Community Bancorp is subject to Maryland law, which generally permits a corporation
to pay dividends on its common stock unless, after giving effect to the dividend, the corporation
would be unable to pay its debts as they become due in the usual course of its business or the
total assets of the corporation would be less than its total liabilities.
Fraternity Community Bancorp will not be subject to Office of Thrift Supervision regulatory
restrictions on the payment of dividends. However, our ability to pay dividends may depend, in
part, upon dividends we receive from Fraternity Federal Savings and Loan Association because we
initially will have no source of income other than dividends from Fraternity Federal Savings and
Loan Association and earnings from the investment of the net proceeds from the offering that we
retain. Office of Thrift Supervision regulations limit dividends and other distributions from
Fraternity Federal Savings and Loan Association to us. Fraternity Federal Savings and Loan
Association may not declare or pay a cash dividend on its capital stock if its effect would be to
reduce the regulatory capital of Fraternity Federal Savings and Loan Association below the amount
required for the liquidation account to be established as required by our plan of conversion. No
insured depository institution may make a capital distribution if, after making the distribution,
the institution would be undercapitalized. See Regulation and Supervision Regulation of Federal
Savings Associations Limitation on Capital Distributions and The Conversion and Stock Offering
Effects of Conversion to Stock Form Liquidation Account.
26
Any payment of dividends by Fraternity Federal Savings and Loan Association to us that would
be deemed to be drawn out of Fraternity Federal Savings and Loan Associations bad debt reserves
would require Fraternity Federal Savings and Loan Association to pay federal income taxes at the
then current income tax rate on the amount deemed distributed. See Federal and State Taxation
Federal Income Taxation. We do not contemplate any distribution by Fraternity Federal Savings
and Loan Association that would result in this type of tax liability.
In addition, Fraternity Community Bancorp may not make a distribution that would constitute a
return of capital during the three-year term of the business plan submitted in connection with the
offering.
Market for the Common Stock
We have not previously issued common stock and there is currently no established market
for the common stock. We intend to list our common stock for trading on the OTC Bulletin Board
upon completion of the offering. Sandler ONeill + Partners, L.P. intends to become a market maker
in our common stock following the offering, but it is under no obligation to do so. We cannot
assure you that an active and liquid trading market for the common stock will develop or, if
developed, will be maintained.
The development of a public market having the desirable characteristics of depth, liquidity
and orderliness depends on the existence of willing buyers and sellers, the presence of which is
not within our control or that of any market maker. The number of active buyers and sellers of our
common stock at any particular time may be limited, which may have an adverse effect on the price
at which our common stock can be sold. There can be no assurance that persons purchasing the
common stock will be able to sell their shares at or above the $10.00 price per share in the
offering. Purchasers of our common stock should recognize that there likely will be a limited
trading market in the common stock and, therefore, should have the financial ability to withstand a
longer-term investment horizon.
27
Capitalization
The following table presents the historical capitalization of Fraternity Federal Savings
and Loan Association at June 30, 2010 and the capitalization of Fraternity Community Bancorp
reflecting the offering (referred to as pro forma information). The pro forma capitalization
gives effect to the assumptions listed under Pro Forma Data, based on the sale of the number of
shares of common stock indicated in the table. This table does not reflect the issuance of
additional shares as a result of the exercise of options granted under the proposed equity
incentive plan. A change in the number of shares to be issued in the offering may materially affect
pro forma capitalization. We are offering our common stock on a best efforts basis. We must sell a
minimum of 1,020,000 shares to complete the offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
Capitalization Based Upon the Sale of |
|
|
|
|
|
|
1,020,000 |
|
1,200,000 |
|
1,380,000 |
|
1,587,000 |
|
|
Capitalization |
|
Shares at |
|
Shares at |
|
Shares at |
|
Shares at |
|
|
as of |
|
$10.00 |
|
$10.00 |
|
$10.00 |
|
$10.00 |
(Dollars in thousands) |
|
June 30, 2010 |
|
Per Share |
|
Per Share |
|
Per Share |
|
Per Share |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1) |
|
$ |
125,760 |
|
|
$ |
125,760 |
|
|
$ |
125,760 |
|
|
$ |
125,760 |
|
|
$ |
125,760 |
|
Borrowings |
|
|
22,750 |
|
|
|
22,750 |
|
|
|
22,750 |
|
|
|
22,750 |
|
|
|
22,750 |
|
|
|
|
Total deposits and borrowed funds |
|
$ |
148,510 |
|
|
$ |
148,510 |
|
|
$ |
148,510 |
|
|
$ |
148,510 |
|
|
$ |
148,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 shares, $0.01 par value per
share, authorized; none issued or
outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000,000 shares, $0.01 par value per
share, authorized; specified number of
shares assumed to be issued and
outstanding (2) |
|
|
|
|
|
|
10 |
|
|
|
12 |
|
|
|
14 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
9,390 |
|
|
|
11,188 |
|
|
|
12,986 |
|
|
|
15,054 |
|
Retained earnings (3) |
|
|
16,592 |
|
|
|
16,592 |
|
|
|
16,592 |
|
|
|
16,592 |
|
|
|
16,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
Less : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock acquired by employee
stock ownership plan (4) |
|
|
|
|
|
|
(816 |
) |
|
|
(960 |
) |
|
|
(1,104 |
) |
|
|
(1,270 |
) |
Common stock to be acquired by
equity
incentive plan (5) |
|
|
|
|
|
|
(408 |
) |
|
|
(480 |
) |
|
|
(552 |
) |
|
|
(635 |
) |
|
|
|
Total shareholders equity |
|
$ |
16,647 |
|
|
$ |
24,823 |
|
|
$ |
26,407 |
|
|
$ |
27,991 |
|
|
$ |
29,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity to assets (1) |
|
|
9.91 |
% |
|
|
14.10 |
% |
|
|
14.86 |
% |
|
|
15.61 |
% |
|
|
16.46 |
% |
|
|
|
|
|
|
(1) |
|
Does not reflect withdrawals from deposit accounts for the purchase of common stock in the
offering. Withdrawals to purchase common stock will reduce pro forma deposits and assets by
the amounts of the withdrawals. |
|
(2) |
|
Reflects total issued and outstanding shares of 1,020,000, 1,200,000, 1,380,000, and
1,587,000 at the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively. |
|
(3) |
|
Retained earnings are restricted by applicable regulatory capital requirements. |
|
(4) |
|
Assumes that 8% of the common stock sold in the offering will be acquired by the employee
stock ownership plan in the offering with funds borrowed from Fraternity Community Bancorp.
Under generally accepted accounting principles, the amount of common stock to be purchased by
the employee stock ownership plan represents unearned compensation and is, accordingly,
reflected as a reduction of capital and a liability to the employee stock ownership plan. As
shares are released to plan participants accounts, a compensation expense will be charged,
along with related tax benefit, and a reduction in the charge against capital will occur in
the amount of the compensation expense recognized. Since the funds are borrowed from
Fraternity Community Bancorp, the borrowing will be eliminated in consolidation and no
liability or interest expense will be reflected in the financial statements of Fraternity
Community Bancorp. The loan will be repaid principally through Fraternity Federal Savings and
Loan Associations contributions to the employee stock ownership plan and dividends |
28
|
|
|
|
|
payable on common stock, if any, held by the plan over the anticipated 12-year term of the loan.
See Our Management Executive Compensation Benefit Plans Employee Stock Ownership Plan. |
|
(5) |
|
Assumes the purchase in the open market at $10.00 per share, for restricted stock awards
under the proposed equity incentive plan, of a number of shares equal to 4% of the shares of
common stock sold in the offering. The shares are reflected as a reduction of shareholders
equity. The equity incentive plan will be submitted to shareholders for approval at a meeting
following the offering. See Risk Factors Issuance of shares for benefit programs may
dilute your ownership interest, Pro Forma Data and Our Management Executive Compensation
Nonqualified Deferred Compensation Future Equity Incentive Plan. |
29
Regulatory Capital Compliance
At June 30, 2010, Fraternity Federal Savings and Loan Association exceeded all regulatory
capital requirements. The following table presents Fraternity Federal Savings and Loan
Associations capital position relative to its regulatory capital requirements at June 30, 2010, on
a historical and a pro forma basis. The table reflects receipt by Fraternity Federal Savings and
Loan Association of 50% of the net proceeds of the offering. For purposes of the table, the amount
expected to be borrowed by the employee stock ownership plan is deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital calculations
presented below, see Use of Proceeds, Capitalization and Pro Forma Data. The definitions of
the terms used in the table are those provided in the capital regulations issued by the Office of
Thrift Supervision. For a discussion of the capital standards applicable to Fraternity Federal
Savings and Loan Association, see Regulation and Supervision Regulation of Federal Savings
Associations Capital Requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma at June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum, as Adjusted, |
|
|
|
|
|
|
|
|
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
of |
|
|
|
|
|
|
|
|
|
|
Offering Range |
|
Offering Range |
|
Offering Range |
|
Offering Range |
|
|
Historical at |
|
1,020,000 Shares |
|
1,200,000 Shares |
|
1,380,000 Shares |
|
1,587,000 Shares |
|
|
June 30, 2010 |
|
At $10.00 Per Share |
|
At $10.00 Per Share |
|
At $10.00 Per Share |
|
At $10.00 Per Share |
|
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
|
of |
|
|
|
|
|
of |
|
|
|
|
|
of |
|
|
|
|
|
of |
|
|
|
|
|
of |
|
|
Amount |
|
Assets (1) |
|
Amount |
|
Assets |
|
Amount |
|
Assets |
|
Amount |
|
Assets |
|
Amount |
|
Assets |
|
|
|
(Dollars in thousands)
|
Total capital under generally
accepted accounting
principles |
|
$ |
16,647 |
|
|
|
9.91 |
% |
|
$ |
20,531 |
|
|
|
11.89 |
% |
|
$ |
21,287 |
|
|
|
12.27 |
% |
|
$ |
22,043 |
|
|
|
12.64 |
% |
|
$ |
22,912 |
|
|
|
13.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital level (2) |
|
$ |
16,555 |
|
|
|
9.87 |
% |
|
$ |
20,476 |
|
|
|
11.87 |
% |
|
$ |
21,232 |
|
|
|
12.25 |
% |
|
$ |
21,988 |
|
|
|
12.62 |
% |
|
$ |
22,857 |
|
|
|
13.04 |
% |
Requirement |
|
|
2,516 |
|
|
|
1.50 |
|
|
|
2,587 |
|
|
|
1.50 |
|
|
|
2,600 |
|
|
|
1.50 |
|
|
|
2,614 |
|
|
|
1.50 |
|
|
|
2,630 |
|
|
|
1.50 |
|
|
|
|
Excess |
|
$ |
14,039 |
|
|
|
8.37 |
% |
|
$ |
17,889 |
|
|
|
10.37 |
% |
|
$ |
18,632 |
|
|
|
10.75 |
% |
|
$ |
19,374 |
|
|
|
11.12 |
% |
|
$ |
20,228 |
|
|
|
11.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital level (2) |
|
$ |
16,555 |
|
|
|
9.87 |
% |
|
$ |
20,476 |
|
|
|
11.87 |
% |
|
$ |
21,232 |
|
|
|
12.25 |
% |
|
$ |
21,988 |
|
|
|
12.62 |
% |
|
$ |
22,857 |
|
|
|
13.04 |
% |
Requirement |
|
|
5,033 |
|
|
|
3.00 |
|
|
|
5,174 |
|
|
|
3.00 |
|
|
|
5,201 |
|
|
|
3.00 |
|
|
|
5,228 |
|
|
|
3.00 |
|
|
|
5,259 |
|
|
|
3.00 |
|
|
|
|
Excess |
|
$ |
11,522 |
|
|
|
6.87 |
% |
|
$ |
15,302 |
|
|
|
8.87 |
% |
|
$ |
16,031 |
|
|
|
9.25 |
% |
|
$ |
16,760 |
|
|
|
9.62 |
% |
|
$ |
17,598 |
|
|
|
10.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital level |
|
$ |
16,555 |
|
|
|
17.87 |
% |
|
$ |
20,476 |
|
|
|
21.88 |
% |
|
$ |
21,232 |
|
|
|
22.65 |
% |
|
$ |
21,988 |
|
|
|
23.41 |
% |
|
$ |
22,857 |
|
|
|
24.28 |
|
Requirement |
|
|
3,706 |
|
|
|
4.00 |
|
|
|
3,743 |
|
|
|
4.00 |
|
|
|
3,750 |
|
|
|
4.00 |
|
|
|
3,757 |
|
|
|
4.00 |
|
|
|
3,765 |
|
|
|
4.00 |
|
|
|
|
Excess |
|
$ |
12,849 |
|
|
|
13.87 |
% |
|
$ |
16,733 |
|
|
|
17.88 |
% |
|
$ |
17,482 |
|
|
|
18.65 |
% |
|
$ |
18,231 |
|
|
|
19.41 |
% |
|
$ |
19,092 |
|
|
|
20.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (3) |
|
$ |
17,405 |
|
|
|
18.79 |
% |
|
$ |
21,326 |
|
|
|
22.79 |
% |
|
$ |
22,082 |
|
|
|
23.55 |
% |
|
$ |
22,838 |
|
|
|
24.31 |
% |
|
$ |
23,707 |
|
|
|
25.18 |
% |
Requirement |
|
|
7,411 |
|
|
|
8.00 |
|
|
|
7,486 |
|
|
|
8.00 |
|
|
|
7,500 |
|
|
|
8.00 |
|
|
|
7,514 |
|
|
|
8.00 |
|
|
|
7,531 |
|
|
|
8.00 |
|
|
|
|
Excess |
|
$ |
9,994 |
|
|
|
10.79 |
% |
|
$ |
13,840 |
|
|
|
14.79 |
% |
|
$ |
14,582 |
|
|
|
15.55 |
% |
|
$ |
15,324 |
|
|
|
16.31 |
% |
|
$ |
16,176 |
|
|
|
16.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital
infusion to Fraternity Federal
Savings and Loan Association: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds of offering |
|
|
|
|
|
|
|
|
|
$ |
9,400 |
|
|
|
|
|
|
$ |
11,200 |
|
|
|
|
|
|
$ |
13,800 |
|
|
|
|
|
|
$ |
15,870 |
|
|
|
|
|
|
|
|
Proceeds to Fraternity Federal
Savings and Loan Association |
|
|
|
|
|
|
|
|
|
$ |
4,700 |
|
|
|
|
|
|
$ |
5,600 |
|
|
|
|
|
|
$ |
6,500 |
|
|
|
|
|
|
$ |
7,535 |
|
|
|
|
|
Less: stock acquired by
employee stock ownership
plan |
|
|
|
|
|
|
|
|
|
|
(816 |
) |
|
|
|
|
|
|
(960 |
) |
|
|
|
|
|
|
(1,104 |
) |
|
|
|
|
|
|
(1,270 |
) |
|
|
|
|
|
|
|
Pro forma increase in
GAAP and regulatory
capital |
|
|
|
|
|
|
|
|
|
$ |
3,884 |
|
|
|
|
|
|
$ |
4,640 |
|
|
|
|
|
|
$ |
5,396 |
|
|
|
|
|
|
$ |
6,265 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Tangible capital and core capital levels are shown as a percentage of adjusted total assets
of $167.8 million. Risk-based capital levels are shown as a percentage of risk-weighted
assets of $92.6 million. |
|
(2) |
|
See note 13 of the notes to consolidated financial statements for further information
regarding our tangible capital, core capital, Tier 1 risk-based capital and total risk-based
capital ratios. |
|
(3) |
|
Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20%
risk-weighting. |
30
Pro Forma Data
The following tables show information about our net income and shareholders equity
reflecting the sale of common stock in the offering. The information provided illustrates our pro
forma net income and shareholders equity based on the sale of common stock at the minimum of the
offering range, the midpoint of the offering range, the maximum of the offering range and the
maximum, as adjusted, of the offering range. The actual net proceeds from the sale of the common
stock cannot be determined until the offering is completed. Net proceeds indicated in the
following tables are based upon the following assumptions:
|
|
|
All shares of stock will be sold in the subscription and community offerings; |
|
|
|
|
Our employee stock ownership plan will purchase a number of shares equal to 8% of
the shares sold in the offering with a loan from Fraternity Community Bancorp that will
be repaid in equal installments over 12 years; |
|
|
|
|
Sandler ONeill + Partners, L.P. will receive a success fee equal to $160,000; and |
|
|
|
|
Total expenses of the offering, excluding fees paid to Sandler ONeill + Partners,
L.P., will be approximately $640,000. |
Actual expenses may vary from this estimate.
Pro forma net income for the six months ended June 30, 2010 and the year ended December 31,
2009 has been calculated as if the offering were completed at the beginning of the period, and the
net proceeds had been invested at 0.61% for the six months ended June 30, 2010 and 1.14% for the
year ended December 31, 2009, which represents the two-year treasury rate at June 30, 2010. We
believe that the two-year treasury rate at June 30, 2010 represents a more realistic yield on the
investment of the offering proceeds than the arithmetic average of the weighted average yield
earned on our interest-earning assets and the weighted average rate paid on our deposits, which is
the reinvestment rate required to be assumed by Office of Thrift Supervision regulations.
A pro forma after-tax return of 0.40% is used for the six months ended June 30, 2010 and 0.75%
is used for the year ended December 31, 2009, after giving effect to a combined federal and state
income tax rate of 34% for the period. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the number of shares of common stock
indicated in the tables.
When reviewing the following tables you should consider the following:
|
|
|
The final column gives effect to a 15% increase in the offering range, which may
occur without any further notice if Feldman Financial Advisors increases its appraisal
to reflect the results of this offering, changes in our financial condition or results
of operations or changes in market conditions after the offering begins. See The
Conversion and Stock Offering How We Determined the Offering Range and the $10.00 Per
Share Purchase Price. |
|
|
|
|
Since funds on deposit at Fraternity Federal Savings and Loan Association may be
withdrawn to purchase shares of common stock, the amount of funds available for
investment will be reduced by the amount of withdrawals for stock purchases. The pro
forma tables do not reflect withdrawals from deposit accounts. |
|
|
|
|
Historical per share amounts have been computed as if the shares of common stock
expected to be issued in the offering had been outstanding at the beginning of the
period covered by the table. However, neither historical nor pro forma shareholders
equity has been adjusted to reflect the investment of the estimated net proceeds from
the sale of the shares in the offering, the additional employee stock ownership plan
expense or the proposed equity incentive plan. |
31
|
|
|
Pro forma shareholders equity (book value) represents the difference between the
stated amounts of our assets and liabilities. Book value amounts do not represent fair
market values or amounts available for distribution to shareholders in the unlikely
event of liquidation. The amounts shown do not reflect the federal income tax
consequences of the restoration to income of Fraternity Federal Savings and Loan
Associations special bad debt reserves for income tax purposes or give effect to the
liquidation account in the unlikely event of liquidation. See Federal and State
Taxation and The Conversion and Stock Offering Effects of Conversion to Stock Form
Liquidation Account. |
|
|
|
|
The amounts shown as pro forma shareholders equity per share do not represent
possible future price appreciation of our common stock. |
The following pro forma data may not represent the actual financial effects of the offering or
our operating results after the offering. The pro forma data relies exclusively on the assumptions
outlined above and in the notes to the pro forma tables. The pro forma data does not represent the
fair market value of our common stock, the current fair market value of our assets or liabilities,
or the amount of money that would be available for distribution to shareholders if we are
liquidated after the offering.
32
We are offering our common stock on a best efforts basis. We must sell a minimum of 1,020,000
shares to complete the offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum, as |
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
Adjusted, of |
|
|
Offering |
|
Offering |
|
Offering |
|
Offering |
|
|
Range |
|
Range |
|
Range |
|
Range |
|
|
1,020,000 |
|
1,200,000 |
|
1,380,000 |
|
1,587,000 |
|
|
Shares |
|
Shares |
|
Shares |
|
Shares |
|
|
at $10.00 |
|
at $10.00 |
|
at $10.00 |
|
at $10.00 |
|
|
Per Share |
|
Per Share |
|
Per Share |
|
Per Share |
|
|
|
|
|
(Dollars in thousands)
|
Gross proceeds |
|
$ |
10,200 |
|
|
$ |
12,000 |
|
|
$ |
13,800 |
|
|
$ |
15,870 |
|
Less: estimated offering expenses |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
|
Estimated net conversion proceeds |
|
|
9,400 |
|
|
|
11,200 |
|
|
|
13,000 |
|
|
|
15,070 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(816 |
) |
|
|
(960 |
) |
|
|
(1,104 |
) |
|
|
(1,270 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(408 |
) |
|
|
(480 |
) |
|
|
(552 |
) |
|
|
(635 |
) |
|
|
|
Net investable proceeds |
|
$ |
8,176 |
|
|
$ |
9,760 |
|
|
$ |
11,344 |
|
|
$ |
13,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
(411 |
) |
|
$ |
(411 |
) |
|
$ |
(411 |
) |
|
$ |
(411 |
) |
Pro forma income on net investable proceeds |
|
|
16 |
|
|
|
20 |
|
|
|
23 |
|
|
|
26 |
|
Less: pro forma employee stock ownership plan adjustments (1) |
|
|
(22 |
) |
|
|
(26 |
) |
|
|
(30 |
) |
|
|
(35 |
) |
Less: pro forma restricted stock award expense (2) |
|
|
(27 |
) |
|
|
(32 |
) |
|
|
(36 |
) |
|
|
(42 |
) |
Less: pro forma stock option expense (3) |
|
|
(36 |
) |
|
|
(42 |
) |
|
|
(48 |
) |
|
|
(56 |
) |
|
|
|
Pro forma net income (loss) |
|
$ |
(480 |
) |
|
$ |
(491 |
) |
|
$ |
(502 |
) |
|
$ |
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
(0.44 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.28 |
) |
Pro forma income on net investable proceeds |
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.02 |
|
Less: pro forma employee stock ownership plan adjustments (1) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
Less: pro forma restricted stock award expense (2) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
Less: pro forma stock option expense (3) |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
|
Pro forma net income (loss) per share |
|
$ |
(0.51 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of annualized pro forma net income per share |
|
|
N/M |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate pro forma annualized net income per
share (4) |
|
|
941,800 |
|
|
|
1,108,000 |
|
|
|
1,274,200 |
|
|
|
1,465,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shareholders equity (book value) (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
16,647 |
|
|
$ |
16,647 |
|
|
$ |
16,647 |
|
|
$ |
16,647 |
|
Estimated net proceeds |
|
|
9,400 |
|
|
|
11,200 |
|
|
|
13,000 |
|
|
|
15,070 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(816 |
) |
|
|
(960 |
) |
|
|
(1,104 |
) |
|
|
(1,270 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(406 |
) |
|
|
(480 |
) |
|
|
(552 |
) |
|
|
(635 |
) |
|
|
|
Pro forma shareholders equity |
|
$ |
24,823 |
|
|
$ |
26,407 |
|
|
$ |
27,991 |
|
|
$ |
29,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shareholders equity per share (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
16.32 |
|
|
$ |
13.87 |
|
|
$ |
12.06 |
|
|
$ |
10.49 |
|
Estimated net proceeds |
|
|
9.22 |
|
|
|
9.34 |
|
|
|
9.42 |
|
|
|
9.50 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
|
Pro forma shareholders equity per share |
|
$ |
24.34 |
|
|
$ |
22.01 |
|
|
$ |
20.28 |
|
|
$ |
18.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a percentage of pro forma shareholders equity per share |
|
|
41.1 |
% |
|
|
45.4 |
% |
|
|
49.3 |
% |
|
|
53.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate pro forma shareholders equity
per share (4) |
|
|
1,020,000 |
|
|
|
1,200,000 |
|
|
|
1,380,000 |
|
|
|
1,587,000 |
|
|
|
|
(footnotes on page __)
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum, as |
|
|
Minimum of |
|
Midpoint of |
|
Maximum of |
|
Adjusted, of |
|
|
Offering |
|
Offering |
|
Offering |
|
Offering |
|
|
Range |
|
Range |
|
Range |
|
Range |
|
|
1,020,000 |
|
1,200,000 |
|
1,380,000 |
|
1,587,000 |
|
|
Shares |
|
Shares |
|
Shares |
|
Shares |
|
|
at $10.00 |
|
at $10.00 |
|
at $10.00 |
|
at $10.00 |
|
|
Per Share |
|
Per Share |
|
Per Share |
|
Per Share |
|
|
|
|
|
(Dollars in thousands)
|
Gross proceeds |
|
$ |
10,200 |
|
|
$ |
12,000 |
|
|
$ |
13,800 |
|
|
$ |
15,870 |
|
Less: estimated offering expenses |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
(800 |
) |
|
|
|
Estimated net conversion proceeds |
|
|
9,400 |
|
|
|
11,200 |
|
|
|
13,000 |
|
|
|
15,070 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(816 |
) |
|
|
(960 |
) |
|
|
(1,104 |
) |
|
|
(1,270 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(408 |
) |
|
|
(480 |
) |
|
|
(552 |
) |
|
|
(635 |
) |
|
|
|
Net investable proceeds |
|
$ |
8,176 |
|
|
$ |
9,760 |
|
|
$ |
11,344 |
|
|
$ |
13,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
343 |
|
|
$ |
343 |
|
|
$ |
343 |
|
|
$ |
343 |
|
Pro forma income on net investable proceeds |
|
|
61 |
|
|
|
73 |
|
|
|
85 |
|
|
|
99 |
|
Less: pro forma employee stock ownership plan adjustments (1) |
|
|
(45 |
) |
|
|
(53 |
) |
|
|
(61 |
) |
|
|
(70 |
) |
Less: pro forma restricted stock award expense (2) |
|
|
(54 |
) |
|
|
(63 |
) |
|
|
(73 |
) |
|
|
(84 |
) |
Less: pro forma stock option expense (3) |
|
|
(72 |
) |
|
|
(84 |
) |
|
|
(97 |
) |
|
|
(112 |
) |
|
|
|
Pro forma net income (loss) |
|
$ |
233 |
|
|
$ |
216 |
|
|
$ |
197 |
|
|
$ |
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
0.36 |
|
|
$ |
0.31 |
|
|
$ |
0.27 |
|
|
$ |
0.23 |
|
Pro forma income on net investable proceeds |
|
|
0.07 |
|
|
|
0.07 |
|
|
|
0.07 |
|
|
|
0.07 |
|
Less: pro forma employee stock ownership plan adjustments (1) |
|
|
(0.05 |
) |
|
|
(0.05 |
) |
|
|
(0.05 |
) |
|
|
(0.05 |
) |
Less: pro forma restricted stock award expense (2) |
|
|
(0.06 |
) |
|
|
(0.06 |
) |
|
|
(0.06 |
) |
|
|
(0.06 |
) |
Less: pro forma stock option expense (3) |
|
|
(0.07 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
|
|
|
Pro forma net income (loss) per share |
|
$ |
0.25 |
|
|
$ |
0.19 |
|
|
$ |
0.15 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of pro forma net income per share |
|
|
40.0 |
x |
|
|
52.6 |
x |
|
|
66.7 |
x |
|
|
83.3 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate pro forma net income per share (4) |
|
|
945,200 |
|
|
|
1,112,000 |
|
|
|
1,278,800 |
|
|
|
1,470,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shareholders equity (book value) (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
16,992 |
|
|
$ |
16,992 |
|
|
$ |
16,992 |
|
|
$ |
16,992 |
|
Estimated net proceeds |
|
|
9,400 |
|
|
|
11,200 |
|
|
|
13,000 |
|
|
|
15,070 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(816 |
) |
|
|
(960 |
) |
|
|
(1,104 |
) |
|
|
(1,270 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(408 |
) |
|
|
(480 |
) |
|
|
(552 |
) |
|
|
(635 |
) |
|
|
|
Pro forma shareholders equity |
|
$ |
25,168 |
|
|
$ |
26,752 |
|
|
$ |
28,336 |
|
|
$ |
30,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shareholders equity per share (4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
$ |
16.66 |
|
|
$ |
14.16 |
|
|
$ |
12.31 |
|
|
$ |
10.71 |
|
Estimated net proceeds |
|
|
9.21 |
|
|
|
9.33 |
|
|
|
9.42 |
|
|
|
9.49 |
|
Less: common stock acquired by employee stock ownership plan (1) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
|
|
(0.80 |
) |
Less: common stock to be acquired by equity incentive plan (2) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
(0.40 |
) |
|
|
|
Pro forma shareholders equity per share |
|
$ |
24.67 |
|
|
$ |
22.29 |
|
|
$ |
20.53 |
|
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a percentage of pro forma shareholders equity per share |
|
|
40.5 |
% |
|
|
44.9 |
% |
|
|
48.7 |
% |
|
|
52.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate pro forma shareholders equity
per share (4) |
|
|
1,020,000 |
|
|
|
1,200,000 |
|
|
|
1,380,000 |
|
|
|
1,587,000 |
|
|
|
|
(footnotes on page __)
34
|
|
|
(1) |
|
Assumes that the employee stock ownership plan will acquire a number of shares of stock
equal to 8% of the shares sold in the offering (81,600, 96,000,
110,400 and 126,960) shares at
the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively). The
employee stock ownership plan will borrow the funds to acquire these shares from the net
offering proceeds retained by Fraternity Community Bancorp. The amount of this borrowing has
been reflected as a reduction from gross proceeds to determine estimated net investable
proceeds. This borrowing will have an interest rate equal to the prime rate as published in
The Wall Street Journal, which is currently 3.25%, and a term of 12 years. Fraternity Federal
Savings and Loan Association intends to make contributions to the employee stock ownership
plan in amounts at least equal to the principal and interest requirement of the debt.
Interest income that Fraternity Community Bancorp will earn on the loan will offset the
interest expense paid on the loan by Fraternity Federal Savings and Loan Association. As the
debt is paid down, shares will be released for allocation to participants accounts and
shareholders equity will be increased. The adjustment to pro forma net income for the
employee stock ownership plan reflects the after-tax compensation expense associated with the
plan. Applicable accounting principles require that compensation expense for the employee
stock ownership plan be based upon the market value of shares committed to be released and
that unallocated shares be excluded from earnings per share computations. An equal number of
shares (1/15 of the total, based on a 12-year loan) will be released each year over the term
of the loan. The valuation of shares committed to be released would be based upon the average
market value of the shares during the year, which, for purposes of this calculation, was
assumed to be equal to the $10.00 per share purchase price. If the average market value per
share is greater than $10.00 per share, total employee stock ownership plan expense would be
greater. See Our Management Executive Compensation Benefit Plans Employee Stock
Ownership Plan. |
|
(2) |
|
Assumes that Fraternity Community Bancorp will purchase in the open market a number of shares
of stock equal to 4% of the shares sold in the offering (40,800, 48,000, 55,200 and 63,480
shares at the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively), that will be reissued as restricted stock awards under an equity incentive plan
to be adopted following the offering. Purchases will be funded with cash on hand at
Fraternity Community Bancorp or with dividends paid to Fraternity Community Bancorp by
Fraternity Federal Savings and Loan Association. The cost of these shares has been reflected
as a reduction from gross proceeds to determine estimated net investable proceeds. In
calculating the pro forma effect of the restricted stock awards, it is assumed that the
required shareholder approval has been received, that the shares used to fund the awards were
acquired at the beginning of the respective period and that the shares were acquired at the
$10.00 per share purchase price. The issuance of authorized but unissued shares of the common
stock instead of shares repurchased in the open market would dilute the ownership interests of
existing shareholders by approximately 3.85%. The adjustment to pro forma net income for the
restricted stock awards reflects the after-tax compensation expense associated with the
awards. It is assumed that the fair market value of a share of Fraternity Community Bancorp
common stock was $10.00 at the time the awards were made, that shares of restricted stock
issued under the equity incentive plan vest 20% per year, that compensation expense is
recognized on a straight-line basis over each vesting period so that 20% of the value of the
shares awarded was an amortized expense during each year, and that the combined federal and
state income tax rate was 34%. If the fair market value per share is greater than $10.00 per
share on the date shares are awarded under the equity incentive plan, total equity incentive
plan expense would be greater. |
|
(3) |
|
The adjustment to pro forma net income for stock options reflects the after-tax compensation
expense associated with the stock options that may be granted under the equity incentive plan
expected to be adopted following the offering. If the equity incentive plan is approved by
shareholders, a number of shares equal to 10% of the number of shares sold in the offering
(102,000, 120,000, 138,000 and 158,700 shares at the minimum, midpoint, maximum and adjusted
maximum of the offering range, respectively) will be reserved for future issuance upon the
exercise of stock options that may be granted under the plan. Using the Black-Scholes
option-pricing formula, the options are assumed to have a value of $3.84 for each option,
based on the following assumptions: exercise price, $10.00; trading price on date of grant,
$10.00; dividend yield, 0%; expected life, 10 years; expected volatility, 21.83%; and
risk-free interest rate, 2.97%. Because there currently is no market for Fraternity Community
Bancorp common stock, the assumed expected volatility is based on the SNL Index for all
publicly-traded thrifts. The dividend yield is assumed to be 0% because there is no history
of dividend payments and the board of directors has not expressed an intention to commence
dividend payments upon completion of the offering. It is assumed that stock options granted
under the equity incentive plan vest 20% per year, that compensation expense is recognized on
a straight-line basis over each vesting period so that 20% of the value of the options awarded
is an amortized expense during each year, that 25% of the options awarded are non-qualified
options and that the combined federal and state income tax rate is 34%. If the fair market
value per share is different than $10.00 per share on the date options are awarded under the
equity incentive plan, or if the assumptions used in the option-pricing formula are different
from those used in preparing this pro forma data, the value of the stock options and the
related expense would be different. Applicable accounting standards do not prescribe a
specific valuation technique to be used to estimate the fair value of employee stock options.
Fraternity Community Bancorp may use a valuation technique other than the Black-Scholes
option-pricing formula and that technique may produce a different value. The issuance of
authorized but unissued shares of common stock to satisfy option exercises instead of shares
repurchased in the open market would dilute the ownership interests of existing shareholders
by approximately 9.09%. |
|
(4) |
|
The number of shares used to calculate pro forma net income per share is equal to the total
number of shares to be outstanding upon completion of the offering, less the number of shares
purchased by the employee stock ownership plan not committed to be released within six months
or one year following the offering. The number of shares used to calculate pro forma
shareholders equity per share equals the total number of shares to be outstanding upon
completion of the offering. |
35
Our Business
General
Fraternity Community Bancorp, a Maryland corporation, was incorporated in October 2010 to
become the holding company for Fraternity Federal Savings and Loan Association upon completion of
the conversion. Before the completion of the conversion, Fraternity Community Bancorp has not
engaged in any significant activities other than organizational activities. Following completion
of the conversion, Fraternity Community Bancorps business activity will be the ownership of the
outstanding capital stock of Fraternity Federal Savings and Loan Association. Fraternity Community
Bancorp will not own or lease any property but will instead use the premises, equipment and other
property of Fraternity Federal Savings and Loan Association with the payment of appropriate rental
fees, as required by applicable law and regulations, under the terms of an expense allocation
agreement that Fraternity Community Bancorp and Fraternity Federal Savings and Loan Association
will enter into upon completion of the conversion. The expense allocation agreement generally
provides that Fraternity Community Bancorp will pay to Fraternity Federal Savings and Loan
Association, on a quarterly basis, fees for its use of Fraternity Federal Savings and Loan
Associations premises, furniture, equipment and employees in an amount to be determined by the
board of directors of Fraternity Community Bancorp and Fraternity Federal Savings and Loan
Association. Such fees shall not be less than the fair market value received for such goods or
services. In addition, Fraternity Community Bancorp and Fraternity Federal Savings and Loan
Association will also enter into a tax allocation agreement upon completion of the conversion as a
result of their status as members of an affiliated group under the Internal Revenue Code. The tax
allocation agreement generally provides that Fraternity Community Bancorp will file consolidated
federal tax income returns with Fraternity Federal Savings and Loan Association and its
subsidiaries. The tax allocation agreement also formalizes procedures for allocating the
consolidated tax liability of the group among its members and establishes procedures for the future
payments by Fraternity Federal Savings and Loan Association to Fraternity Community Bancorp for tax
liabilities attributable to Fraternity Federal Savings and Loan Association and its subsidiaries.
In the future, Fraternity Community Bancorp may acquire or organize other operating subsidiaries;
however, there are no current plans, arrangements, agreements or understandings, written or oral,
to do so.
Founded in 1913, Fraternity Federal Savings and Loan Association is a community-oriented
financial institution, dedicated to serving the financial service needs of customers and businesses
within its market area, which consists of the Greater Baltimore area. We offer a variety of
deposit products and provide loans secured by real estate located in our market area. Our real
estate loans consist primarily of one- to four-family mortgage loans, as well as commercial real
estate loans, land loans, home equity lines of credit and residential construction loans. We also
offer consumer loans, and to a much lesser extent, commercial business loans. We currently operate
out of our corporate headquarters and main office in the Baltimore and full-service branch offices
located in Ellicott City, Cockeysville and Hampstead, Maryland. We are subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, our primary federal
regulator, and the Federal Deposit Insurance Corporation, our deposit insurer. At June 30, 2010,
we had total assets of $167.9 million, total deposits of $125.8 million and total equity of $16.6
million.
Our website address is www.fraternityfed.com. Information on our website should not be
considered a part of this prospectus.
Market Area
We are headquartered in Baltimore, Maryland. We consider our lending market to consist
of the Greater Baltimore area, which consists of Baltimore City and the surrounding Counties of
Baltimore, Carroll, Howard, Harford and Anne Arundel in Maryland, although almost all of our
deposits come from our branch office locations in Baltimore City and Baltimore, Carroll and Howard
Counties. The economy of our market area is a diverse cross section of employment sectors, with a
mix of services, manufacturing, wholesale/retail trade, federal and local government, health care
facilities and finance related employment. This diversification helped to mitigate the impact of
the economic recession experienced over the last two years, as Marylands seasonable adjusted
unemployment rose from 4.6% in August of 2008 to 7.3% by September of 2010, which remained well
below the national seasonably adjusted unemployment rate which rose from 6.2% in August of 2008 to
9.6% by August of
36
2010 (Source: Maryland Department of Labor, Licensing and Regulation). Select employers in
the Baltimore metropolitan area include Johns Hopkins University, Johns Hopkins Hospital and Health
System, University of Maryland Health System, University of Maryland, Baltimore, and LifeBridge
Health. Other large employers in Baltimore City include Constellation Energy, Legg Mason, Verizon,
and the U.S. Social Security Administration. In Howard County, the largest employers include the
Johns Hopkins Applied Physics Laboratory, Northrop Grumman, Verizon Wireless and SAIC while Carroll
Countys largest employers include the Carroll County Hospital, Springfield Hospital Center, Random
House, EMA/Fairhaven Retirement Communities and McDaniel College.
Demographic and economic growth trends provide key insight into the health of our market area.
The following table sets forth information regarding the distribution of our loans and deposits
and demographic information for the counties in our market area, including Baltimore City, and the
State of Maryland. The demographic information is based on published statistics of the U.S. Census
Bureau.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltimore |
|
Baltimore |
|
Carroll |
|
Howard |
|
|
|
|
City |
|
County |
|
County |
|
County |
|
Maryland |
|
|
|
Loans by County (in millions) (1) |
|
$ |
24.7 |
|
|
$ |
64.9 |
|
|
$ |
4.3 |
|
|
$ |
6.6 |
|
|
$ |
115.6 |
|
Deposits by County (in millions) (1) |
|
|
20.8 |
|
|
|
46.6 |
|
|
|
4.0 |
|
|
|
56.1 |
|
|
|
127.6 |
|
Unemployment rate (2) |
|
|
11.5 |
|
|
|
8.1 |
|
|
|
6.8 |
|
|
|
5.7 |
|
|
|
7.6 |
|
Median household income (3) |
|
$ |
40,087 |
|
|
$ |
63,078 |
|
|
$ |
78,348 |
|
|
$ |
76,620 |
|
|
$ |
70,482 |
|
Population growth (decline) (4) |
|
|
(2.1 |
)% |
|
|
4.7 |
% |
|
|
12.7 |
% |
|
|
10.9 |
% |
|
|
7.6 |
% |
|
|
|
(1) |
|
At June 30, 2010 |
|
(2) |
|
June 2010 |
|
(3) |
|
For 2010 |
|
(4) |
|
From April 2000 to July 2009 |
If the population of Baltimore City continues to decline, it could negatively affect our
deposit and loan volumes. However, we maintain only a single branch in Baltimore City, and
Baltimore City accounted for only 16.3% of our total deposits and 20.7% of our total loans at June
30, 2010. As a result, we expect the adverse effect on our loan and deposit volumes of any future
population declines in Baltimore City to be limited.
Competition
We face significant competition for the attraction of deposits and origination of loans.
Our most direct competition for deposits has historically come from the many financial institutions
operating in our primary market area and from other financial service companies such as securities
brokerage firms, credit unions and insurance companies. We also face competition for investors
funds from money market funds, mutual funds and other corporate and government securities. At June
30, 2010, which is the most recent date for which data is available from the Federal Deposit
Insurance Corporation, we held approximately 0.28% of the deposits in Baltimore County, Maryland,
0.13% of the deposits in Carroll County, Maryland, 1.21% of the deposits in Howard County and 0.10%
of the deposits in Baltimore City. This data does not reflect deposits held by credit unions with
which we also compete. In addition, banks owned by large national and regional holding companies
and other community-based banks also operate in our primary market area. Most of these
institutions are larger than us and, therefore, may have greater resources.
Our competition for loans comes primarily from financial institutions, including credit
unions, in our primary market area and from other financial service providers, such as mortgage
companies and mortgage brokers. Competition for loans also comes from non-depository financial
services companies entering the mortgage market, such as insurance companies, securities companies
and specialty finance companies.
We expect competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial services industry.
Technological advances, for example, have lowered barriers to entry, allowed banks to expand their
geographic reach by providing services over the Internet, and made it possible for non-depository
institutions to offer products and services that traditionally have been provided by banks.
Changes in federal law now permit affiliation among banks, securities firms and insurance
37
companies, which promotes a competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit our growth in the future.
Lending Activities
General. The largest segment of our loan portfolio is real estate mortgage loans,
consisting primarily of one- to four-family mortgage loans, and, to a lesser extent, commercial
real estate loans, land loans, home equity lines of credit and residential construction loans. We
also offer consumer loans and, to a limited extent, commercial business loans. We originate one-
to four-family mortgage loans primarily for sale in the secondary market, with servicing released.
We generally retain in our portfolio all adjustable-rate loans we originate, as well as
shorter-term, fixed-rate one- to four-family loans. Loans we sell consist primarily of
longer-term, fixed-rate one- to four-family mortgage loans.
We intend to continue to emphasize one- to four-family lending, while also seeking to expand
our commercial real estate lending activities with a focus on serving small businesses and
emphasizing relationship banking in our primary market area. We do not offer, and have not
offered, sub-prime or no-documentation mortgage loans. While we have originated a limited amount
of Alt-A mortgage loans in the past, we no longer offer Alt-A mortgage loans.
The following is a description of the loans we offer and our lending policies. On occasion,
as described below, we may choose to originate a loan that does not conform in every particular
with our loan policies. However, such exceptions are extremely rare and immaterial. Any
exceptions to our loan policies must be approved by the individuals or committee having authority
to approve a comparable loan that conformed fully with our lending policies. For information
regarding loan approval procedures and authority, see
Loan Underwriting Loan Approval
Procedures and Authority.
One- to Four-Family Mortgage Loans. At June 30, 2010, we had $89.6 million in one- to
four-family mortgage loans, which represented 75.0% of our total loan portfolio. Our origination
of one- to four-family mortgage loans enables borrowers to purchase or refinance existing homes
located in our primary market area.
Our one- to four-family mortgage lending policies and procedures generally conform to
secondary market guidelines. We offer a mix of adjustable-rate mortgage loans and fixed-rate
mortgage loans with terms of up to 40 years, although we have never originated any such loans with
a term exceeding 30 years. Borrower demand for adjustable-rate loans compared to fixed-rate loans
is a function of the level of interest rates, the expectations of changes in the level of interest
rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage
loans as compared to an initially discounted interest rate and loan fees for multi-year
adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans and adjustable-rate
mortgage loans that can be originated at any time is largely determined by the demand for each in a
competitive environment. We determine the loan fees, interest rates and other provisions of
mortgage loans based on our own pricing criteria and competitive market conditions.
While one- to four-family real estate loans are normally originated with 15- or 30-year terms,
such loans typically remain outstanding for substantially shorter periods because borrowers often
prepay their loans in full either upon sale of the property pledged as security or upon refinancing
the original loan. Therefore, average loan maturity is a function of, among other factors, the
level of purchase and sale activity in the real estate market, prevailing interest rates and the
interest rates payable on outstanding loans on a regular basis. We do not offer one- to
four-family mortgage loans with negative amortization, and we have made a very limited number of
interest only one- to four-family mortgage loans in cases where the borrower had unusually
favorable income or collateral characteristics.
Interest rates and payments on our adjustable-rate mortgage loans adjust for periods ranging
from one year to up to 10 years, with most adjusting annually after an initial fixed period that,
in most cases, is five or seven years. Interest rates and payments on our adjustable-rate loans
are indexed to the one-year U.S. Treasury Bill rate or LIBOR.
38
We make owner occupied one- to four-family real estate loans with loan-to-value ratios of up
to 95%. Loans with loan-to-value ratios in excess of 80% require private mortgage insurance. In
addition, under current lending policies, non-owner occupied one- to four-family real estate
loan-to-value ratios may not exceed 80%. We require all properties securing mortgage loans to be
appraised by a board-approved independent appraiser. We also require title insurance on all first
mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for all
loans located in flood hazard areas. We generally do not make loans known as subprime loans, and
we have made only a limited amount of Alt-A loans.
Included in one- to four-family mortgage loans are second mortgage loans. Second mortgage
loans are made at fixed rates for terms of up to 15 years. We do not offer second mortgage loans
with loan-to-value ratios exceeding 80%, including any first mortgage loan balance, except when
there are exceptional income or credit characteristics on the loan. Second mortgage loans totaled
$2.8 million at June 30, 2010 and represented 2.5% of one- to four-family mortgage loans at such
date.
In order to provide financing for low- and moderate-income and first-time homebuyers, we
participate in the Healthy Neighborhoods program under which a consortium of local financial
institutions that make loans to low- and moderate-income individuals for home purchases and
improvements. Our commitment under this program is $1 million in loans.
Home Equity Lines of Credit. We offer home equity lines of credit, all of which are
adjustable-rate loans with terms up to 15 years, although in the past we offered terms of up to 30
years. We do not originate home equity loans with loan-to-value ratios exceeding 80%, including
any first mortgage loan balance, although in the past we originated home equity lines of credit
with loan-to-value ratios of up to 85% where there were exceptional income or credit
characteristics on the loan. At June 30, 2010, home equity lines of credit totaled $13.0 million,
or 10.9% of our total loan portfolio.
Residential Construction Loans. We originate construction loans for one- to four-family
homes. At June 30, 2010, residential construction loans totaled $8.9 million, which represented
7.4% of our total loan portfolio. We originate fixed- and adjustable-rate loans to individuals and
to builders to finance the construction of residential dwellings. Our construction loans generally
are interest-only loans that provide for the payment of only interest during the construction
phase, which is usually up to 12 months. At the end of the construction phase, the loan generally
converts to a permanent mortgage loan. Loans generally can be made with a maximum loan to value
ratio of 80% on residential construction, based on appraised value as if complete. Before making a
commitment to fund a construction loan, we require an appraisal of the property by an independent
licensed appraiser. We also will generally require an inspection of the property before
disbursement of funds during the term of the construction loan.
Included in our residential construction loan portfolio are speculative construction loans.
At June 30, 2010, we had $5.8 million in speculative construction loans outstanding. Such loans
were for the building of luxury residences. We determined to make these speculative construction
loans because of the higher yields on such loans compared to conforming loans for the construction
of owner-occupied, one- to four-family residences and to reduce our interest rate risk. As a
result of the deterioration in local economic conditions in 2009 and 2010, certain of our
speculative construction borrowers experienced difficulties selling the completed residences. At
June 30, 2010, we had two speculative construction loans totaling $1.8 million that were
nonperforming. Subsequent to June 30, 2010, we foreclosed on the collateral securing those loans.
At June 30, 2010, all three remaining speculative construction loans, totaling $3.9 million, were
performing in accordance with their terms, although we have extended the terms of two of these
loans. Of our three remaining speculative construction loans, one was classified as substandard,
and the other two were classified as special mention in accordance with a policy we adopted in 2009
of classifying all speculative construction loans as special mention. In light of current market
conditions, we have discontinued speculative construction lending.
At June 30, 2010, our largest residential construction loan was a $1.6 million speculative
construction loan secured by a custom built luxury home. The home is substantially completed and
is listed for sale. This loan was performing at June 30, 2010, although we have extended the term
of the loan.
39
Commercial Real Estate Loans. We offer fixed- and adjustable-rate mortgage loans secured by a
variety of commercial real estate, such as small office buildings, warehouses and retail
properties. We originate a variety of fixed- and adjustable-rate commercial real estate loans
generally with rates fixed for 10 years and which amortize over terms of from ten to 25 years. Our
commercial real estate loans are callable after an initial ten year term. Adjustable-rate loans
are typically based on the one-year U.S. Treasury Bill or Prime Rate as published in The Wall
Street Journal plus a specified percentage over the initial rate of interest. Loans are secured by
first mortgages, and amounts generally do not exceed 75% of the propertys appraised value. We
require all properties securing commercial real estate loans to be appraised by a board-approved
independent licensed appraiser. Commercial real estate loans also are supported by personal
guarantees.
As of June 30, 2010, our largest commercial real estate loan was $700,000 and was secured by a
mixed commercial use building. This loan was performing in accordance with its terms at June 30,
2010.
Land Loans. We originate loans to individuals and developers for the purpose of building one-
to four-family properties. At June 30, 2010, land loans totaled $3.9 million, which represented
3.2% of our total loan portfolio. Land loans, which generally are offered for terms of up to 15
years with rates that adjust annually after an initial period of up to five years, are indexed to
the prime rate as reported in The Wall Street Journal or a U.S. Treasury bill rate plus a
negotiated margin. We limit the loan-to-value ratio to a maximum of 80%, except where there are
exceptional credit circumstances on the loan. At June 30, 2010, our largest land loan had an
outstanding balance of $495,000. This loan was a nonaccrual loan at June 30, 2010.
Consumer Loans. We offer consumer loans as an accommodation to our customers and do not
emphasize this type of lending. We have made a variety of consumer loans, including automobile
loans and unsecured lines of credit. At June 30, 2010, consumer loans totaled $54,000, or less
than 0.1% of our total loan portfolio. The procedures for underwriting consumer loans include an
assessment of the applicants payment history on other debts and ability to meet existing
obligations and payments on the proposed loan.
Loan Underwriting
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset
the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an
increased monthly mortgage payment 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. In
addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in
interest rates, the extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits.
Non-Owner Occupied One- to Four-Family Real Estate Loans. Loans secured by investment
properties represent a unique credit risk to us and, as a result, we adhere to special underwriting
guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of
rental income of the property. Payments on loans secured by rental properties often depend on the
maintenance of the property and the payment of rent by its tenants. Payments on loans secured by
rental properties often depend on successful operation and management of the properties. As a
result, repayment of such loans may be subject to adverse conditions in the real estate market or
the economy. We generally require collateral on these loans to be a first mortgage along with an
assignment of rents and leases, although we might accept a second mortgage where the combined
loan-to-value ratio is low.
Commercial Real Estate Loans. Loans secured by commercial real estate generally have larger
balances and involve a greater degree of risk than one- to four-family mortgage loans. Of primary
concern in commercial real estate lending is the borrowers 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 adverse conditions in the real estate market or the economy. We apply what
we believe to be conservative underwriting standards when originating commercial loans and seek to
limit our exposure to lending concentrations to related borrowers, types of business and
geographies, as well as seeking to participate with other banks in both buying and selling larger
loans of this nature. To monitor cash flows on income properties, we normally require borrowers
and loan guarantors, if any, to provide
40
annual financial statements on commercial real estate loans. In reaching a decision on whether to
make a commercial real estate loan, we consider and review a global cash flow analysis of the
borrower and consider the net operating income of the property, the borrowers expertise, credit
history and profitability, and the value of the underlying property. An environmental survey or
environmental risk insurance is obtained when the possibility exists that hazardous materials may
have existed on the site, or the site may have been impacted by adjoining properties that handled
hazardous materials.
Construction and Land Loans. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan depends largely upon the accuracy of the initial estimate of the
propertys value at completion of construction and the estimated cost of construction. During the
construction phase, a number of factors could result in delays and cost overruns. If the estimate
of construction costs proves to be inaccurate, we may be required to advance funds beyond the
amount originally committed to permit completion of the building. If the estimate of value proves
to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building
having a value which is insufficient to assure full repayment if liquidation is required. If we
are forced to foreclose on a building before or at completion due to a default, we may be unable to
recover all of the unpaid balance of, and accrued interest on, the loan as well as related
foreclosure and holding costs. In addition, speculative construction loans, which are loans made
to home builders who, at the time of loan origination, have not yet secured an end buyer for the
home under construction, typically carry higher risks than those associated with traditional
construction loans. These increased risks arise because of the risk that there will be inadequate
demand to ensure the sale of the property within an acceptable time. As a result, in addition to
the risks associated with traditional construction loans, speculative construction loans carry the
added risk that the builder will have to pay the property taxes and other carrying costs of the
property until an end buyer is found. Land and land development loans have substantially similar
risks to speculative construction loans. To monitor cash flows on speculative construction
properties, we require borrowers and loan guarantors, if any, to provide annual financial
statements and, in reaching a decision on whether to make a speculative construction loan, we
consider and review a global cash flow analysis of the borrower and consider the borrowers
expertise, credit history and profitability. We also disburse funds on a percentage-of-completion
basis following an inspection by a third party inspector or qualified bank personnel.
Consumer Loans and Home Equity Lines of Credit. Consumer loans may entail greater risk than
do one- to four-family mortgage loans, particularly in the case of consumer loans that are secured
by assets that depreciate rapidly, such as motor vehicles. In such cases, repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding
loan and a small remaining deficiency often does not warrant further substantial collection efforts
against the borrower. In the case of home equity loans, real estate values may be reduced to a
level that is insufficient to cover the outstanding loan balance after accounting for the first
mortgage loan balance. Consumer loan collections depend on the borrowers continuing financial
stability, and therefore are likely to be adversely affected by various factors, including job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that
can be recovered on such loans.
Loan Approval Procedures and Authority. Our lending activities follow written,
non-discriminatory underwriting standards and loan origination procedures established by our board
of directors and management. Certain of our executive officers have been granted individual
lending limits, which vary depending on the type of loan. All loans secured by one- to four-family
residences that conform with secondary market guidelines may be approved by either of our Chairman,
Chief Executive Officer and Chief Financial Officer or our President and Chief Operating Officer.
All other loans must be approved by the full Board of Directors prior to a commitment being made.
All loan originations are reviewed for quality control and oversight purposes by our Loan
Committee, which consists of any two of our directors and typically is comprised of two
non-management directors.
Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrowers
related entities is limited, by regulation, to 15% of our unimpaired capital and surplus. At June
30, 2010, our regulatory limit on loans-to-one-borrower was $2.5 million. This limit will increase
upon completion of this offering and the contribution of 50% of the net offering proceeds to
Fraternity Federal Savings and Loan Association. At June 30, 2010, our largest lending
relationship was $2.5 million, and all loans in that relationship were performing according to
their original terms at that date. The loans are secured by various properties,
41
including one- to four-family investment properties and commercial properties, including office
buildings and mixed-use properties, as well as the borrowers principal residence.
Loan Commitments. We issue commitments for one- to four-family mortgage and commercial
mortgage loans conditioned upon the occurrence of certain events. Commitments to originate
mortgage loans are legally binding agreements to lend to our customers. Most of our loan
commitments expire after 30 days. See note 11 to notes to consolidated financial statements
appearing elsewhere in this prospectus.
Investment Activities
We have legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various government-sponsored agencies and of state and
municipal governments, mortgage-backed securities and certificates of deposit of federally insured
institutions. Within certain regulatory limits, we also may invest a portion of our assets in
other permissible securities. As a member of the Federal Home Loan Bank of Atlanta, we also are
required to maintain an investment in Federal Home Loan Bank of Atlanta stock.
At June 30, 2010, our investment portfolio consisted primarily of U.S. government agency
securities and mortgage-backed securities available-for-sale. We also had $1.1 million in private
label mortgage-backed securities. In addition to our investment portfolio, at June 30, 2010, we
maintained a $1.6 million investment, at cost, in Federal Home Loan Bank of Atlanta common stock.
Our primary investment objectives are: (i) to provide and maintain liquidity within the
guidelines of the Office of Thrift Supervisions regulations, (ii) to fully employ the available
funds of Fraternity Federal Savings and Loan Association; (iii) to earn an average rate of return
on invested funds competitive with comparable institutions; (iv) to manage interest rate risk; and
(v) to limit risk. Our board of directors has the overall responsibility for the investment
portfolio, including approval of the investment policy. Our President and Chief Executive Officer
are responsible for the implementation policy and monitoring our investment performance. Our board
of directors reviews the status of our investment portfolio on an annual basis, or more frequently
if warranted.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for
lending and other investment purposes. Scheduled loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are significantly influenced by
general interest rates and money market conditions.
Deposit Accounts. Deposits are attracted from within our primary market area through the
offering of a broad selection of deposit instruments, including noninterest-bearing demand deposits
(such as checking accounts), interest-bearing demand accounts (such as NOW and money market
accounts), passbook accounts and certificates of deposit. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of our deposit accounts, we consider the rates
offered by our competition, our liquidity needs, profitability to us, matching deposit and loan
products and customer preferences and concerns. We generally review our deposit mix and pricing
weekly. Our deposit pricing strategy has typically been to offer competitive rates on all types of
deposit products, and to periodically offer special rates in order to attract deposits of a
specific type or term.
Borrowings. We had $22.8 million in borrowings at June 30, 2010, consisting of advances from
the Federal Home Loan Bank of Atlanta to supplement our investable funds. The Federal Home Loan
Bank functions as a central reserve bank providing credit for member financial institutions. As a
member, we are required to own capital stock in the Federal Home Loan Bank of Atlanta and are
authorized to apply for advances on the security of such stock and certain of our mortgage loans
and other assets (principally securities which are obligations of, or guaranteed by, the United
States), provided certain standards related to creditworthiness have been met. Advances are made
under several different programs, each having its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either on a fixed
percentage of an institutions net worth, the Federal Home Loan Banks assessment of the
institutions creditworthiness, collateral value and level of Federal Home Loan Bank stock
ownership. We may also utilize securities sold under agreements to repurchase and
42
overnight repurchase agreements to supplement our supply of investable funds and to meet deposit
withdrawal requirements. We had unused borrowing capacity of approximately $27.5 million with the
Federal Home Loan Bank of Atlanta as of June 30, 2010.
43
Properties
We conduct our business through our main office and branch offices. The following table
sets forth certain information relating to these facilities as of June 30, 2010.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value |
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
Lease |
|
at |
|
Deposits at |
|
|
Year |
|
Square |
|
Owned/ |
|
Expiration |
|
June 30, 2010 |
|
June 30, 2010 |
Location |
|
Opened |
|
Footage |
|
Leased |
|
Date |
|
(in thousands) |
|
(in thousands) |
|
Main Office: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
764 Washington Boulevard |
|
|
1913 |
|
|
|
10,663 |
|
|
Owned |
|
|
N/A |
|
|
$ |
279 |
|
|
$ |
20,820 |
|
Baltimore, Maryland 21230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch Offices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scotts Corner Shopping Center |
|
|
1995 |
|
|
|
3,000 |
|
|
Leased |
|
|
1/31/2015 |
|
|
|
N/A |
|
|
|
46,642 |
|
10283 York Road |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cockeysville, Maryland 21030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Normandy Shopping Center |
|
|
1964 |
|
|
|
3,388 |
|
|
Leased |
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4/30/2016 |
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N/A |
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56,083 |
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8460 Baltimore National Pike |
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Ellicott City, Maryland 21403 |
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Green Mount Station |
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2009 |
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2,400 |
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Leased |
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9/30/2024 |
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N/A |
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4,025 |
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1631 N. Main Street |
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Hampstead, Maryland 21074 |
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Personnel
As of June 30, 2010, we had 33 full-time employees and one part-time employees, none of
whom is represented by a collective bargaining unit. We believe our relationship with our
employees is good.
Legal Proceedings
Periodically, there may be various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security interests, claims
involving the making and servicing of real property loans and other issues incident to our
business. We are not a party to any pending legal proceedings that we believe would have a
material adverse effect on our financial condition, results of operations or cash flows.
Subsidiaries
Fraternity Federal Savings and Loan Association has one active subsidiary, 764 Washington
Boulevard, LLC (the LLC). The LLC was established in order to hold and manage real estate owned.
The LLC had no assets at June 30, 2010. In addition, Fraternity Federal Savings and Loan
Association has an inactive subsidiary, Fraternity Insurance Agency Incorporated, which had been
licensed to sell insurance products on an agency basis.
44
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The objective of this section is to help potential investors understand our views on our
results of operations and financial condition. You should read this discussion in conjunction with
the consolidated financial statements and the notes to consolidated financial statements that
appear at the end of this prospectus.
Operating Strategy
Historically, we have operated as a traditional savings and loan association, attracting
deposits and investing those funds primarily in one- to four-family mortgage loans and investment
securities. Our objective is to build on our historic strengths of customer loyalty and high
asset quality, and gradually grow our balance sheet with assets and liabilities that allow us to
increase our net interest margin while reducing our exposure to risk from interest rate
fluctuations. Our operating strategy includes the following:
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building on our strengths as a community-oriented financial institution; |
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|
improving our net interest margin and earnings and reducing our interest rate risk
by increasing commercial real estate loans; |
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emphasizing lower cost core deposits to reduce funding costs; |
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generating higher non-interest income by selling loans in the secondary market; |
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adding a new branch in our existing market area or a contiguous county within the
next three years; and |
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expanding our market share within our primary market area. |
Building on our strengths as a community-oriented financial institution
We have operated continuously as a community-oriented financial institution since we were
established in 1913. We are committed to meeting the financial needs of the communities in which
we operate, and we are dedicated to providing quality personal service to our customers. We
provide a broad range of consumer and business financial services through our network of branches
and will continually seek out ways to improve convenience, safety and service through our product
offerings.
Over the years, we have developed a core of loyal customers, and our product mix concentrating
on time, savings and checking deposits and one- to four-family mortgage loans have allowed us to
maintain strong asset quality. We intend to continue to retain these strengths while gradually
growing our balance sheet with assets and liabilities that allow us to increase our net interest
margin while reducing our exposure to risk from interest rate fluctuations.
Improving our net interest margin and earnings and reducing our interest rate risk by
increasing commercial real estate loans
Our strategic plan calls for us to grow our balance sheet by emphasizing assets and
liabilities that allow us to increase our net interest margin while reducing our exposure to risk
from interest rate fluctuations.
With respect to our assets, our strategy has been, and continues to be, to increase the
percentage of assets invested in commercial real estate loans, which tend to have higher yields
than traditional one- to four-family mortgage loans and which have shorter terms to maturity or
adjustable interest rates. We intend to continue to emphasize one- to four-family mortgage
lending, while also seeking to expand our commercial real estate lending activities with a focus on
serving small businesses and emphasizing relationship banking in our primary market area.
45
See
Risk FactorsRisks Related to Our BusinessOur increased focus on commercial real estate
lending may expose us to increased lending risks.
Commercial real estate loans provide us with the opportunity to earn more income because they
tend to have higher interest rates than one- to four-family mortgage loans. In addition, these
loans are beneficial for interest rate risk management because they typically have shorter terms
and adjustable interest rates. There are many commercial properties and businesses located in our
market area, and with the additional capital raised in the offering we intend to pursue the larger
lending relationships associated with these opportunities. Though our current staff is sufficient
to facilitate growth, we may seek to add additional expertise in our commercial loan department.
With respect to liabilities, our strategy is to seek to increase transaction and money market
accounts, as well as certificates of deposit of various terms. We value these types of deposits
because they represent longer-term customer relationships and a lower cost of funding compared to
longer-term certificates of deposit. We seek transaction and money market deposits through
competitive products and pricing and targeted advertising. In addition, we offer business checking
accounts for our commercial customers, and we will seek to leverage the relationships we build as
we expand our commercial real estate lending to generate low cost business checking deposits from
these customers.
Emphasizing lower cost core deposits to reduce funding costs
We seek to increase net interest income by controlling costs of funding rather than maximizing
asset yields because originating loans with high yields often involves greater credit risk.
Historically, a high percentage of our deposit accounts have been higher balance, higher costing
certificates of deposits. We will continue to seek to reduce our dependence on high cost deposits
in favor of stable low cost demand deposits. We have utilized additional product offerings,
technology and a focus on customer service in working toward this goal. Over time, we will also
seek to replace maturing, high cost, long-term Federal Home Loan Bank advances with core deposits.
Generating higher noninterest income by selling loans in the secondary market
Currently, we sell most of our one- to four-family fixed-rate loan originations in the
secondary market, and we earned $32,000, $224,000 and $28,000 from such sales during the six months
ended June 30, 2010 and the years ended December 31, 2009 and 2008, respectively. We will seek to
increase our originations of one- to four-family loans to generate further income from loan sales.
Adding a new branch in our existing market area or a contiguous county within the next three
years
We intend to add a new branch in our existing market area within the next three years,
although we have no current plans or commitments regarding a specific additional branch office.
Expanding our market share within our primary market area
We intend to expand our market share in our primary market area through enhancing the efforts
of our staff in marketing additional products and services to our customers. We believe that we
have a solid infrastructure in place that will allow us to grow assets and liabilities without
adding materially to our noninterest expenses.
Overview
Income. Our primary source of pre-tax income is net interest income. Net interest
income is the difference between interest income, which is the income that we earn on our loans and
investment securities, and interest expense, which is the interest that we pay on our deposits.
Other significant sources of pre-tax income are service charges (mostly from service charges on
deposit accounts). We also recognize income from the sale of securities.
46
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for
probable losses inherent in the loan portfolio. We evaluate the need to establish allowances
against losses on loans on a monthly basis. When additional allowances are necessary, a provision
for loan losses is charged to earnings.
Expenses. The noninterest expenses we incur in operating our business consists of salaries
and employee benefits expenses, occupancy expenses, advertising expenses, data processing expenses,
directors fees and other general and administrative expenses including, among others, federal
deposit insurance premiums and Office of Thrift Supervision assessments, stationery and postage
expenses and other miscellaneous expenses. Following the offering, our noninterest expenses are
likely to increase as a result of expenses of shareholder communications and meetings and expenses
related to additional accounting services.
Salaries and employee benefits expenses consist primarily of salaries, wages and bonuses paid
to our employees, payroll taxes and expenses for health insurance, retirement plans and other
employee benefits. Following the offering, we will recognize additional annual employee
compensation expenses stemming from the adoption of new equity benefit plans. We cannot determine
the actual amount of these new stock-related compensation and benefit expenses at this time because
applicable accounting practices require that they be based on the fair market value of the shares
of common stock at specific points in the future. For an illustration of these expenses, see Pro
Forma Data.
Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist
primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance,
real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using
a combination of accelerated and straight-line methods based on the useful lives of the related
assets, which range from three to 40 years.
Data processing expenses are the fees we pay to third parties for processing customer
information, deposits and loans.
Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance
Corporation for insurance of our deposit accounts, and Office of Thrift Supervision assessments are
semi-annual assessments we pay to our primary regulator.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of certain assets or
on income to be critical accounting policies. The following represent our critical accounting
policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by
management as necessary to cover losses inherent in the loan portfolio at the balance sheet date.
The allowance is established through the provision for loan losses, which is charged to income.
Determining the amount of the allowance for loan losses necessarily involves a high degree of
judgment. Among the material estimates required to establish the allowance are: loss exposure at
default; the amount and timing of future cash flows on impaired loans; value of collateral; and
determination of loss factors to be applied to the various elements of the portfolio. All of these
estimates are susceptible to significant change. Management reviews the level of the allowance
monthly and establishes the provision for loan losses based upon an evaluation of the portfolio,
past loss experience, current economic conditions and other factors related to the collectability
of the loan portfolio. Although we believe that we use the best information available to establish
the allowance for loan losses, future adjustments to the allowance may be necessary if economic or
other conditions differ substantially from the assumptions used in making the evaluation. In
addition, the Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses and may require us to recognize adjustments to
the allowance based on its judgments about information available to it at the time of its
examination. A large loss could deplete the allowance and require increased provisions to
replenish the allowance, which would adversely affect earnings. See note 3 of the notes to the
consolidated financial statements included in this prospectus.
Other-Than-Temporary Impairment. Management evaluates securities for other-than-temporary
impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions
warrant such
47
an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the
portfolio into two general segments and applying the appropriate OTTI model. Investment securities
classified as available for sale or held-to-maturity are generally evaluated for OTTI under
Statement of Financial Accounting Standards ASC 320, Accounting for Certain Investments in Debt and
Equity Securities.
In determining OTTI under the ASC 320 model, management considers many factors, including: (1)
the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, (3) whether the market decline was
affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt
security or more likely than not will be required to sell the debt security before its anticipated
recovery. The assessment of whether an other-than-temporary decline exists involves a high degree
of subjectivity and judgment and is based on the information available to management at a point in
time.
When OTTI occurs the amount of the OTTI recognized in earnings depends on whether we intend to
sell the security or it is more likely than not we will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to
sell or it is more likely than not it will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings
equal to the entire difference between the investments amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security and it is not more
likely than not that the entity will be required to sell the security before recovery of its
amortized cost basis less any current-period loss, the OTTI shall be separated into the amount
representing the credit loss and the amount related to all other factors. The amount of the total
OTTI related to the credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings. The amount of the total OTTI related to other factors
is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
Balance Sheet Analysis
Assets. At June 30, 2010, our assets totaled $167.9 million, an increase of $900,000, or
0.5%, from total assets of $167.0 million at December 31, 2009. The increase in assets during the
six-month period was primarily due to a $6.2 million, or 45%, increase in total cash and cash
equivalents. These increases were offset, in part, by a $4.5 million, or 18.5%, decrease in
investment securities and a $1.3 million, or 7.8%, decrease in net loans.
At December 31, 2009, our assets totaled $167.0 million, a decrease of $3.7 million, or 2.2%,
from total assets of $170.7 million at December 31, 2008. The decrease in assets during the year
ended December 31, 2009 was primarily due to a $16.7 million, or 12%, decrease in net loans. This
decrease was offset, in part, by an $8.1 million, or 5%, increase in investment securities and a
$2.5 million, or 2%, increase in cash and cash equivalents.
Loans. Our primary lending activity is the origination of loans secured by real estate. Our
loans secured by real estate consist primarily of one- to four-family mortgage loans. We also
originate lines of credit, residential construction loans, commercial real estate loans and land
loans. Our non-real estate loans consist of consumer loans, and, to a very limited extent,
commercial business loans.
The largest portion of the loan portfolio consists of one- to-four family mortgage loans.
Most of our one- to four-family mortgage loans are owner occupied, but this category also includes
loans secured by single-family investment properties. One- to four-family mortgage loans totaled
$89.6 million, or 74.5%, $89.3 million, or 73.8%, and $108.7 million, or 79.5%, of the total loan
portfolio, at June 30, 2010 and December 31, 2009 and 2008, respectively. The $19.1 million, or
17%, decrease in one- to four-family mortgage loans during the year ended December 31, 2009 was
primarily a result of our decision to sell most newly originated fixed-rate one- to four-family
loans due to the low rates prevailing on such loans in 2009.
Lines of credit, all of which are secured by one- to four-family residential properties,
totaled $13.0 million, and represented 10.8% of total loans, at June 30, 2010, compared to $12.3
million, or 10.2% of total loans, at December 31, 2009, and $13.2 million, or 9.6% of total loans,
at December 31, 2008.
48
Residential construction loans totaled $8.9 million, and represented 7.45% of total loans, at
June 30, 2010, compared to $10.4 million, or 8.64% of total loans, at December 31, 2009 and $7.7
million, or 5.62% of total loans, at December 31, 2008. We increased our residential construction
loans by $2.7 million, or 35%, during the year ended December 31, 2009 as we made disbursements on
several larger loans for the construction of custom built luxury homes, including speculative
construction loans to builders. During the six months ended June 30, 2010, we reduced residential
construction loans by $1.6 million, or 14%, as we determined in light of market conditions to
discontinue originations of speculative construction loans.
Commercial real estate loans totaled $4.0 million and represented 3.37% of total loans at June
30, 2010, compared to $4.2 million, or 3.49% of total loans, at December 31, 2009 and $3.6 million,
or 2.63% of total loans, at December 31, 2008. We offer a variety of commercial real estate loans
to owner occupants and investors. Our commercial real estate loans include loans secured by office
buildings, dental offices, small retail buildings and warehouses.
Land loans totaled $3.8 million, or 3.26% of total loans, at June 30, 2010, compared to $3.9
million, or 3.23% of total loans, at December 31, 2009 and $3.5 million, or 2.63% of total loans,
at December 31, 2008. Most of our land loans represent loans for the purchase of land that
eventually will be used for the construction of owner-occupied residential property.
Our non-real estate loans consist of consumer loans and, to a very limited extent, commercial
loans. While we offer a variety of consumer loans, we do not emphasize this type of lending and
generally make consumer loans as an accommodation to our existing customers. Consumer loans
totaled $54,000 at June 30, 2010, representing less than 0.1% of the loan portfolio, and consisted
of automobile loans, unsecured loans and miscellaneous other loans.
At June 30, 2010, our commercial loans consisted of two unsecured operating lines of credit.
We generally do not originate loans secured by equipment and receivables. Commercial loans totaled
$28,000, representing less than 0.1% of total loans, at June 30, 2010.
The following table sets forth the composition of our loan portfolio at the dates indicated.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
At June 30, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
89,616,716 |
|
|
|
75.45 |
% |
|
$ |
89,312,560 |
|
|
|
74.37 |
% |
|
$ |
108,696,059 |
|
|
|
79.60 |
% |
Lines of credit |
|
|
13,043,637 |
|
|
|
10.98 |
|
|
|
12,305,473 |
|
|
|
10.25 |
|
|
|
13,154,109 |
|
|
|
9.63 |
|
Commercial |
|
|
4,001,867 |
|
|
|
3.37 |
|
|
|
4,197,266 |
|
|
|
3.50 |
|
|
|
3,594,160 |
|
|
|
2.63 |
|
Residential construction |
|
|
8,864,409 |
|
|
|
7.46 |
|
|
|
10,437,002 |
|
|
|
8.69 |
|
|
|
7,723,822 |
|
|
|
5.66 |
|
Land |
|
|
3,822,076 |
|
|
|
3.22 |
|
|
|
3,939,295 |
|
|
|
3.28 |
|
|
|
3,535,871 |
|
|
|
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
119,348,705 |
|
|
|
100.49 |
% |
|
|
120,191,596 |
|
|
|
100.09 |
% |
|
|
136,704,021 |
|
|
|
100.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
53,966 |
|
|
|
0.05 |
% |
|
|
33,511 |
|
|
|
0.03 |
% |
|
|
42,456 |
|
|
|
0.03 |
% |
Commercial loans |
|
|
27,794 |
|
|
|
0.02 |
|
|
|
26,688 |
|
|
|
0.02 |
|
|
|
28,794 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
81,760 |
|
|
|
0.07 |
% |
|
|
60,199 |
|
|
|
0.05 |
% |
|
|
71,250 |
|
|
|
0.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan origination costs (fees), net |
|
|
144,355 |
|
|
|
0.12 |
% |
|
|
116,718 |
|
|
|
0.10 |
% |
|
|
44,049 |
|
|
|
0.03 |
% |
Allowance for loan losses |
|
|
(804,500 |
) |
|
|
(0.68 |
) |
|
|
(276,621 |
) |
|
|
(0.23 |
) |
|
|
(272,121 |
) |
|
|
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
118,770,320 |
|
|
|
100.00 |
% |
|
$ |
120,091,892 |
|
|
|
100.00 |
% |
|
$ |
136,547,199 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Loan Maturity
The following table sets forth certain information at December 31, 2009 regarding the
dollar amount of loan principal repayments becoming due during the periods indicated. The table
does not include any estimate of prepayments which significantly shorten the average life of all
loans and may cause our actual repayment experience to differ from that shown below. Demand loans
having no stated schedule of repayments and no stated maturity are reported as due in one year or
less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
One- to |
|
Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four-Family |
|
of |
|
|
|
|
|
Residential |
|
Land |
|
Consumer |
|
Commercial |
|
Total |
|
|
Loans |
|
Credit |
|
Commercial |
|
Construction |
|
Loans |
|
Loans |
|
Loans |
|
Loans |
|
|
|
Amounts due in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
6,140,936 |
|
|
$ |
12,305,473 |
|
|
$ |
1,773,481 |
|
|
$ |
9,074,718 |
|
|
$ |
3,509,177 |
|
|
$ |
9,750 |
|
|
$ |
26,688 |
|
|
$ |
32,840,223 |
|
More than one year to two years |
|
|
5,689,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,962 |
|
|
|
14,054 |
|
|
|
|
|
|
|
5,814,129 |
|
More than two years to three years |
|
|
4,509,865 |
|
|
|
|
|
|
|
629,061 |
|
|
|
|
|
|
|
319,156 |
|
|
|
2,788 |
|
|
|
|
|
|
|
5,460,870 |
|
More than three years to five years |
|
|
12,559,380 |
|
|
|
|
|
|
|
456,665 |
|
|
|
|
|
|
|
|
|
|
|
4,193 |
|
|
|
|
|
|
|
13,020,238 |
|
More than five years to ten years |
|
|
19,528,105 |
|
|
|
|
|
|
|
1,056,198 |
|
|
|
313,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,898,103 |
|
More than ten years to fifteen years |
|
|
9,142,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,142,930 |
|
More than fifteen years |
|
|
31,742,232 |
|
|
|
|
|
|
|
281,861 |
|
|
|
1,048,484 |
|
|
|
|
|
|
|
2,725 |
|
|
|
|
|
|
|
33,075,302 |
|
|
|
|
Total |
|
$ |
89,312,561 |
|
|
$ |
12,305,473 |
|
|
$ |
4,197,266 |
|
|
$ |
10,437,002 |
|
|
$ |
3,939,295 |
|
|
$ |
33,510 |
|
|
$ |
26,688 |
|
|
$ |
120,251,795 |
|
|
|
|
Fixed vs. Adjustable Rate Loans
The following table sets forth the dollar amount of all loans at December 31, 2009 that
are due after December 31, 2010, and that have either fixed interest rates or floating or
adjustable interest rates. The amounts shown below exclude unearned loan origination fees and
deferred loan costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating or |
|
|
|
|
|
|
|
|
|
|
Adjustable |
|
|
|
|
|
|
Fixed Rates |
|
|
Rates |
|
|
Total |
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family |
|
$ |
62,933,635 |
|
|
$ |
20,237,990 |
|
|
$ |
83,171,625 |
|
Lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
1,474,177 |
|
|
|
949,608 |
|
|
|
2,423,785 |
|
Residential construction |
|
|
1,362,284 |
|
|
|
|
|
|
|
1,362,284 |
|
Land |
|
|
|
|
|
|
430,118 |
|
|
|
430,118 |
|
Consumer loans |
|
|
23,760 |
|
|
|
|
|
|
|
23,760 |
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
65,793,856 |
|
|
$ |
21,617,716 |
|
|
$ |
87,411,572 |
|
|
|
|
|
|
|
|
|
|
|
Scheduled contractual principal repayments of loans do not reflect the actual life of
such assets. The average life of loans is substantially less than their contractual terms because
of prepayments. In addition, due-on-sale clauses on loans generally give us the right to declare a
loan immediately due and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
50
Loan Activity
The following table shows loans originated, purchased and sold during the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Total loans at beginning of period |
|
$ |
120,251,795 |
|
|
$ |
136,775,271 |
|
|
$ |
136,775,271 |
|
|
$ |
131,311,060 |
|
Loans originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four-family |
|
|
6,207,500 |
|
|
|
20,872,300 |
|
|
|
29,531,000 |
|
|
|
16,363,345 |
|
Lines of credit |
|
|
3,298,567 |
|
|
|
2,931,034 |
|
|
|
4,566,336 |
|
|
|
7,771,292 |
|
Commercial real estate |
|
|
535,000 |
|
|
|
700,000 |
|
|
|
700,000 |
|
|
|
1,537,500 |
|
Residential construction |
|
|
2,627,900 |
|
|
|
1,870,300 |
|
|
|
5,602,300 |
|
|
|
6,083,950 |
|
Land |
|
|
196,000 |
|
|
|
428,000 |
|
|
|
428,000 |
|
|
|
1,416,250 |
|
Commercial |
|
|
16,025 |
|
|
|
5,684 |
|
|
|
16,918 |
|
|
|
29,945 |
|
Consumer |
|
|
39,650 |
|
|
|
15,200 |
|
|
|
31,700 |
|
|
|
27,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans originated |
|
|
12,920,642 |
|
|
|
26,822,518 |
|
|
|
40,876,254 |
|
|
|
33,229,332 |
|
Loans purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
|
8,782 |
|
|
|
120,095 |
|
|
|
248,161 |
|
|
|
223,849 |
|
Lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans purchased |
|
|
8,782 |
|
|
|
120,095 |
|
|
|
248,161 |
|
|
|
223,849 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan principal repayments |
|
|
(10,920,707 |
) |
|
|
(22,416,097 |
) |
|
|
(36,422,227 |
) |
|
|
(19,634,615 |
) |
Loan sales |
|
|
(2,493,207 |
) |
|
|
(17,167,706 |
) |
|
|
(21,179,204 |
) |
|
|
(8,354,355 |
) |
Charge-offs |
|
|
(336,840 |
) |
|
|
(3,960 |
) |
|
|
(46,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan activity |
|
|
(821,330 |
) |
|
|
(12,645,150 |
) |
|
|
(16,523,476 |
) |
|
|
5,464,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of period |
|
$ |
119,430,465 |
|
|
$ |
124,130,121 |
|
|
$ |
120,251,795 |
|
|
$ |
136,775,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations come from a number of sources. In addition to leads generated by our
loan officer, our primary sources of loan originations are realtor relationships, existing
customers, walk-in traffic, advertising and referrals from customers.
Based on market conditions, we may chose to sell newly originated one- to four-family mortgage
loans. In recent periods we have elected to sell almost all newly originated conforming fixed-rate
one- to four-family real estate loans and to hold in our portfolio shorter-term fixed-rate loans
and adjustable-rate loans. Generally, loans are sold to investors on a servicing released basis.
During the year ended December 31, 2009, the amount of loans sold increased by $17.1 million,
or 558.6%, primarily as the result of our decision to sell most newly originated fixed-rate, one-to
four-family loans due to low rates prevailing on such loans in 2009. Loan sales decreased by $14.5
million, or 598.7%, during the six months ended June 30, 2010 as compared to the six months ended
June 30, 2009, due to the decline in loan originations during the 2010 period.
We have not purchased loan participation interests in recent years and purchased minimal
amounts of one-to four-family real estate loans since 2008. All such loans purchased were
originated through a community development program called the Healthy Neighborhood Program.
51
Securities
At June 30, 2010, we had $19.6 million of securities available-for-sale, as compared to
$24.1 million at December 31, 2009 and $8.8 million at December 31, 2008. Securities available for
sale at June 30, 2010 consisted of U.S. government agency securities and mortgage-backed
securities. Most of our U.S. government agency securities and mortgage-backed securities are
mortgage-backed securities issued by Freddie Mac or Fannie Mae or guaranteed by Ginnie Mae,
although at June 30, 2010 we held two private label mortgage-backed securities with an amortized
cost of $1.1 million. We had unrealized losses on those two mortgage-backed securities totaling
$59,000 at June 30, 2010, although the securities continue to perform as expected and at June 30,
2010 we had the intent and ability to hold these securities to maturity.
At December 31, 2008 , we had $7.4 million of securities held-to-maturity, consisting of
mortgage-backed securities issued by Freddie Mac or Fannie Mae or guaranteed by Ginnie Mae. During
the year ended December 31, 2009, we reclassified all held-to-maturity securities as
available-for-sale. We held no securities classified as held-to-maturity at December 31, 2009 or
June 30, 2010.
Our securities portfolio is used to invest excess funds for increased yield and manage
interest rate risk. At June 30, 2010, we also held a $1.6 million investment in the common stock
of the Federal Home Loan Bank of Atlanta. A portion of this investment is required in order to
collateralize borrowings from the Federal Home Loan Bank of Atlanta, and the investment is
periodically increased by stock dividends paid by the Federal Home Loan Bank of Atlanta. At June
30, 2010, we held no stock in Fannie Mae and Freddie Mac, nor have we held stock in these entities
throughout the periods presented.
Our securities available-for-sale decreased by $4.5 million, or 19%, from $24.1 million at
December 31, 2009 to $19.6 million at June 30, 2010, as we invested cash flow resulting from
payments on and maturities of mortgage-backed and U.S. government agency securities into liquid
assets due to the historically low yields available on mortgage-backed securities.
The following table sets forth the amortized costs and fair values of our investment
securities at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
At June 30, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government
agencies |
|
$ |
13,775,389 |
|
|
$ |
13,866,373 |
|
|
$ |
12,310,007 |
|
|
$ |
12,197,840 |
|
|
$ |
3,616,516 |
|
|
$ |
3,653,401 |
|
Mortgage-backed securities |
|
|
4,308,003 |
|
|
|
4,320,191 |
|
|
|
10,399,230 |
|
|
|
10,485,170 |
|
|
|
5,210,762 |
|
|
|
4,872,214 |
|
Bank notes |
|
|
1,476,669 |
|
|
|
1,462,940 |
|
|
|
1,425,882 |
|
|
|
1,443,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,446,849 |
|
|
|
7,566,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
19,560,061 |
|
|
$ |
19,649,504 |
|
|
$ |
24,135,119 |
|
|
$ |
24,116,110 |
|
|
$ |
16,274,127 |
|
|
$ |
16,092,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The following table sets forth the stated maturities and weighted average yields of
investment securities at June 30, 2010. Certain mortgage-backed securities have adjustable interest
rates and will reprice annually within the various maturity ranges. These repricing schedules are
not reflected in the table below. Weighted average yield calculations on investments available for
sale do not give effect to changes in fair value that are reflected as a component of equity. At
June 30, 2010, we did not have any security (other than U.S. government agency securities) that
exceeded 10% of our total equity at that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than One Year |
|
More than Five Year |
|
More Than |
|
|
|
|
One Year or Less |
|
To Five Years |
|
To Tem Years |
|
Ten Years |
|
Total |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Carrying |
|
Average |
|
Carrying |
|
Average |
|
Carrying |
|
Average |
|
Carrying |
|
Average |
|
Carrying |
|
Average |
|
|
Value |
|
Yield |
|
Value |
|
Yield |
|
Value |
|
Yield |
|
Value |
|
Yield |
|
Value |
|
Yield |
|
|
|
Investments (available-for-sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies |
|
$ |
|
|
|
|
|
% |
|
$ |
2,000,000 |
|
|
|
2.63 |
% |
|
$ |
10,487,582 |
|
|
|
2.75 |
% |
|
$ |
1,287,807 |
|
|
|
4.08 |
% |
|
$ |
13,775,389 |
|
|
|
2.86 |
% |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
16,891 |
|
|
|
4.88 |
|
|
|
328,221 |
|
|
|
4.91 |
|
|
|
3,962,891 |
|
|
|
4.37 |
|
|
|
4,308,003 |
|
|
|
4.41 |
|
Bank notes |
|
|
485,880 |
|
|
|
7.25 |
|
|
|
990,789 |
|
|
|
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,476,669 |
|
|
|
4.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (held-to-maturity) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
$ |
485,880 |
|
|
|
7.25 |
% |
|
$ |
3,007,680 |
|
|
|
2.94 |
% |
|
$ |
10,815,803 |
|
|
|
2.81 |
% |
|
$ |
5,250,698 |
|
|
|
4.30 |
% |
|
$ |
19,560,061 |
|
|
|
3.34 |
% |
|
|
|
53
Bank Owned Life Insurance. We invest in bank owned life insurance to provide us with a
funding source for our benefit plan obligations. Bank owned life insurance also generally provides
us non-interest income that is non-taxable. Federal regulations generally limit our investment in
bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses at the
time of investment. This investment is accounted for using the cash surrender value method and is
recorded at the amount that can be realized under the insurance policies at the balance sheet date.
At June 30, 2010, December 31, 2009 and December 31, 2008, the aggregate cash surrender value of
these policies was $4.1 million, $4.0 million and $2.3 million, respectively.
Ground Rents. Ground rents represent the value of long-term leases with respect to land we
own underlying residential properties. Ground leases amounted to $864,000, $864,000 and $885,000
at June 30, 2010 and at December 31, 2009 and 2008, respectively. We intend to let our portfolio
of ground leases run off over time as the homeowners redeem leases.
Deposits. We accept deposits primarily from individuals and businesses who are located in our
primary market area. We rely on competitive pricing, customer service, account features and the
location of our branch offices to attract and retain deposits. Deposits serve as the primary
source of funds for our lending and investment activities. Interest-bearing deposit accounts
offered include time deposits, which are certificates of deposit, passbook accounts, individual NOW
accounts and money market accounts. Noninterest-bearing accounts consist of free checking and
commercial checking accounts. To a limited extent, we also have utilized brokered deposits.
The following table sets forth average balances and average rates of our deposit products for
the periods indicated. For purposes of this table, average balances have been calculated using
daily balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
For the Six Months Ended |
|
|
2009 |
|
|
2008 |
|
|
|
June 30, 2010 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Average |
|
|
Weighted |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
Balance |
|
|
Average Rate |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand
deposits |
|
$ |
1,666,506 |
|
|
|
|
% |
|
$ |
793,257 |
|
|
|
|
% |
|
$ |
872,334 |
|
|
|
|
% |
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
104,089,795 |
|
|
|
2.62 |
|
|
|
106,430,744 |
|
|
|
2.91 |
|
|
|
107,753,532 |
|
|
|
3.95 |
|
NOW and money market |
|
|
4,833,988 |
|
|
|
0.25 |
|
|
|
4,382,658 |
|
|
|
0.25 |
|
|
|
4,058,549 |
|
|
|
0.35 |
|
Passbook |
|
|
12,496,837 |
|
|
|
0.56 |
|
|
|
12,472,224 |
|
|
|
0.54 |
|
|
|
13,682,034 |
|
|
|
0.90 |
|
Brokered deposits |
|
|
2,308,853 |
|
|
|
4.28 |
|
|
|
2,324,574 |
|
|
|
4.28 |
|
|
|
383,841 |
|
|
|
4.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
125,395,979 |
|
|
|
2.33 |
|
|
$ |
126,403,457 |
|
|
|
2.58 |
|
|
$ |
126,750,290 |
|
|
|
3.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the balances of our deposit accounts at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
At June 30, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
948,381 |
|
|
|
0.75 |
% |
|
$ |
759,607 |
|
|
|
0.60 |
% |
|
$ |
684,761 |
|
|
|
0.55 |
% |
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
104,835,829 |
|
|
|
83.36 |
|
|
|
105,705,790 |
|
|
|
83.93 |
|
|
|
104,679,251 |
|
|
|
83.80 |
|
NOW and money market |
|
|
4,951,701 |
|
|
|
3.94 |
|
|
|
4,637,116 |
|
|
|
3.68 |
|
|
|
4,489,967 |
|
|
|
3.59 |
|
Passbook |
|
|
12,735,858 |
|
|
|
10.13 |
|
|
|
12,500,646 |
|
|
|
9.92 |
|
|
|
12,753,294 |
|
|
|
10.21 |
|
Brokered deposits |
|
|
2,288,623 |
|
|
|
1.82 |
|
|
|
2,356,734 |
|
|
|
1.87 |
|
|
|
2,305,414 |
|
|
|
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
124,812,011 |
|
|
|
99.25 |
|
|
|
125,200,286 |
|
|
|
99.40 |
|
|
|
124,227,926 |
|
|
|
99.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
125,760,392 |
|
|
|
100.00 |
% |
|
$ |
125,959,893 |
|
|
|
100.00 |
% |
|
$ |
124,912,687 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances in noninterest-bearing deposits increased by approximately $75,000, or 10.9%,
from $685,000 at December 31, 2008 to $760,000 at December 31, 2009, and by $264,000, or 38.5%, to
$948,000 at June 30, 2010, as we were successful in increasing our checking deposits from
commercial customers.
54
The following table indicates the amount of jumbo certificates of deposit with balances
of $100,000 or greater by time remaining until maturity as of June 30, 2010, none of which are
brokered deposits.
|
|
|
|
|
Maturity Period at June 30, 2010 |
|
Amount |
|
|
|
(Unaudited) |
|
Three months or less |
|
$ |
2,921,773 |
|
Over three through six months |
|
|
2,724,488 |
|
Over six through twelve months |
|
|
11,251,496 |
|
Over twelve months |
|
|
12,947,261 |
|
|
|
|
|
Total |
|
$ |
29,845,018 |
|
|
|
|
|
The following table sets forth time deposits classified by rates at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
At June 30, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
0.00 - 1.00% |
|
$ |
3,817,376 |
|
|
$ |
1,263,930 |
|
|
$ |
|
|
1.01 - 2.00 |
|
|
41,171,123 |
|
|
|
29,421,599 |
|
|
|
|
|
2.01 - 3.00 |
|
|
19,690,414 |
|
|
|
22,406,778 |
|
|
|
10,112,736 |
|
3.01 - 4.00 |
|
|
14,905,550 |
|
|
|
22,661,398 |
|
|
|
45,766,843 |
|
4.01 - 5.00 |
|
|
27,259,699 |
|
|
|
32,004,693 |
|
|
|
45,798,532 |
|
5.01 - 6.00 |
|
|
175,236 |
|
|
|
176,777 |
|
|
|
4,992,400 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,019,398 |
|
|
$ |
107,935,175 |
|
|
$ |
106,670,510 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the amount and maturities of time deposits at June 30,
2010 (unaudited).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
More Than |
|
|
More Than |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Less Than |
|
|
One Year to |
|
|
Two Years to |
|
|
More Than |
|
|
|
|
|
|
Time |
|
|
|
One Year |
|
|
Two Years |
|
|
Three Years |
|
|
Three Years |
|
|
Total |
|
|
Deposits |
|
0.00 - 1.00% |
|
$ |
3,817,376 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,817,376 |
|
|
|
3.57 |
% |
1.01 - 2.00% |
|
|
34,629,259 |
|
|
|
4,355,932 |
|
|
|
2,185,931 |
|
|
|
|
|
|
|
41,171,123 |
|
|
|
38.47 |
|
2.01 - 3.00% |
|
|
3,162,421 |
|
|
|
6,248,531 |
|
|
|
6,139,554 |
|
|
|
4,139,908 |
|
|
|
19,690,414 |
|
|
|
18.40 |
|
3.01 - 4.00% |
|
|
7,452,126 |
|
|
|
4,863,986 |
|
|
|
367,265 |
|
|
|
2,222,173 |
|
|
|
14,905,550 |
|
|
|
13.93 |
|
4.01 - 5.00% |
|
|
8,811,797 |
|
|
|
8,532,941 |
|
|
|
6,003,158 |
|
|
|
3,911,803 |
|
|
|
27,259,700 |
|
|
|
25.47 |
|
5.01 - 6.00% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,236 |
|
|
|
175,236 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
57,872,978 |
|
|
$ |
24,001,390 |
|
|
$ |
14,695,908 |
|
|
$ |
10,449,120 |
|
|
$ |
107,019,398 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth deposit activity for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
125,959,893 |
|
|
$ |
124,912,687 |
|
|
$ |
124,912,687 |
|
|
$ |
133,134,406 |
|
Increase (decrease) before interest credited |
|
|
(942,602 |
) |
|
|
(631,958 |
) |
|
|
(2,126,343 |
) |
|
|
(12,794,308 |
) |
Interest credited |
|
|
1,395,465 |
|
|
|
1,887,932 |
|
|
|
3,589,677 |
|
|
|
4,572,589 |
|
Internal deposit accounts |
|
|
(652,364 |
) |
|
|
|
|
|
|
(416,128 |
) |
|
|
|
|
Net increase (decrease) in deposits |
|
|
(199,501 |
) |
|
$ |
1,255,974 |
|
|
|
1,047,206 |
|
|
|
(8,221,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
125,760,392 |
|
|
$ |
126,168,661 |
|
|
$ |
125,959,893 |
|
|
$ |
124,912,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Borrowings. We use borrowings from the Federal Home Loan Bank of Atlanta to supplement
our supply of funds for loans and investments and for interest rate risk management. The following
table sets forth information regarding our Federal Home Loan Bank advances for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Year Ended |
|
|
June 30, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2009 |
|
2008 |
Maximum amount of Federal Home Loan Bank advances
outstanding at any month end during the period |
|
$ |
27,888,889 |
|
|
$ |
28,305,556 |
|
|
$ |
28,305,556 |
|
|
$ |
28,750,000 |
|
Average Federal Home Loan Bank advances outstanding
during the period |
|
$ |
24,486,111 |
|
|
$ |
24,000,000 |
|
|
$ |
23,493,056 |
|
|
$ |
25,520,834 |
|
Weighted average interest rate during the period |
|
|
3.78 |
% |
|
|
3.13 |
% |
|
|
3.17 |
% |
|
|
3.50 |
% |
Balance outstanding at end of period |
|
$ |
22,750,000 |
|
|
$ |
23,083,333 |
|
|
$ |
22,916,667 |
|
|
$ |
28,416,667 |
|
Weighted average interest rate at end of period |
|
|
3.91 |
% |
|
|
3.20 |
% |
|
|
3.20 |
% |
|
|
2.98 |
% |
Equity. Equity decreased by $345,000, or 2.0%, to $16.6 million at June 30, 2010 from
$17.0 million at December 31, 2009 primarily as the result of a net loss of $411,000 for the six
months ended June 30, 2010. Equity increased by $517,000, or 3.1%, to $17.0 million at December
31, 2009 from $16.5 million at December 31, 2008 as the result of net income of $343,000 for the
year ended December 31, 2009.
Results of Operations for the Six Months Ended June 30, 2010 and 2009
Overview. We had a net loss of $411,000 for the six months ended June 30, 2010, as
compared to net income of $214,000 for the six months ended June 30, 2009. The decrease in net
income between the periods was primarily due to a provision for loan losses of $865,000 during the
six months ended June 30, 2010, as compared to a $51,000 provision for the same period in 2009.
Also contributing to the decline in net income during the six months ended June 30, 2010 was an
increase of $260,000, or 14.4%, in non-interest expenses.
Net Interest Income. Net interest income increased by $103,000, or 5.8%, from $1.8 million
for the six months ended June 30, 2009 to $1.9 million for the six months ended June 30, 2010. The
increase in net interest income is primarily attributable to a 19 basis point increase in our
interest rate spread from 1.79% for the six months ended June 30, 2009 to 1.98% for the six months
ended June 30, 2010, offset, in part, by an $11.3 million, or 9%, decrease in the average balance
of loans receivable net. During the six months ended June 30, 2010, we also were able to take
advantage of decreasing market interest rates to reduce our cost of funds while limiting the
decrease in yields earned on our other interest-earning assets.
Interest on loans receivable, net decreased by $507,000, or 13.1%, from $3.9 million for the
six months ended June 30, 2009 to $3.4 million for the six months ended June 30, 2010, due to an
$11.3 million, or 9%, decrease in the average balance of loans and a 39 basis point decrease in the
average yield. The decrease in the average balance of loans reflected our decision to sell a
greater portion of our fixed-rate one- to four-family loan originations during the year ended
December 31, 2009 due to the low rates available on those loans. The decrease in the average yield
on loans was attributable to a decrease in prevailing market interest rates during the year ended
December 31, 2009.
Interest on investment securities available-for-sale increased by $59,000, or 15%, for the six
months ended June 30, 2010 as compared to the six months ended June 30, 2009, as a $6.5 million, or
38%, increase in the average balance of investment securities available-for-sale more than offset a
79 basis point decrease in the average yield.
Interest on cash and cash equivalents remained low by historical standards during the six
months ended June 30, 2010 and 2009 due to the historically low prevailing market rates during
those periods.
During the six months ended June 30, 2010, we were able to reduce interest paid on deposits
primarily as the result of time deposits being rolled over at lower rates in response to general
declines in market interest rates and decreases in the cost of other deposits due to a decline in
market rates. Interest on time deposits decreased by $600,000, or 24%, from $2.5 million for the
six months ended June 30, 2009, to $1.9 million for the six months ended June 30, 2010, as a 94
basis point decrease in the average cost of time deposits more than offset a $1.9
56
million, or 1.8%, decrease in the average balance of time deposits. During the six months ended
June 30, 2010, we were able to take advantage of declining interest rates to reprice maturing
certificates of deposit at lower rates. Interest on brokered deposits remained stable at $49,000
for the six months ended June 30, 2010 and 2009, as both the average balance of, and average rate
earned on, brokered deposits remained stable. Interest on NOW and money market accounts remained
stable during the six months ended June 30, 2010 as compared to the six months ended June 30, 2009,
as a $577,000, or 13.5%, increase in the average balance was offset by a 3 basis point decrease in
the average cost of NOW and money market accounts. Interest on passbook accounts decreased by $10,
000, or 22%, from $45,000 for the six months ended June 30, 2009 to $34,000 for the six months
ended June 30, 2010, due primarily to a 16 basis point decrease in the average rate paid on
passbook accounts. The average balance of passbook accounts decreased slightly during the six
months ended June 30, 2010, as compared to the same period in 2009.
Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank
advances, decreased by $8,000, or 2%, during the six months ended June 30, 2010 as compared to the
six months ended June 30, 2009, primarily due to a 15 basis point decrease in the average cost of
other interest-bearing liabilities. At June 30, 2010, we had $22.8 million of Federal Home Loan
Bank advances. See note 8 of Notes to Consolidated Financial Statements for a schedule of the
amounts, rates and maturities of our Federal Home Loan Bank advances.
57
Average Balances and Yields. The following table presents information regarding
average balances of assets and liabilities, the total dollar amounts of interest income and
dividends from average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average yields and costs. The
yields and costs for the periods indicated are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for the periods presented. Average balances have
been calculated using monthly balances, and nonaccrual loans are included in average balances only.
Amortization of net deferred loan fees are included in interest income on loans and are
insignificant. No tax equivalent adjustments were made. Nonaccruing loans have been included in
the table as loans carrying a zero yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
and |
|
|
Yield/ |
|
|
Average |
|
|
and |
|
|
Yield/ |
|
|
|
Cost |
|
|
Balance |
|
|
Dividends |
|
|
Cost |
|
|
Balance |
|
|
Dividends |
|
|
Cost |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
0.15 |
% |
|
$ |
16,235,002 |
|
|
$ |
15,021 |
|
|
|
0.19 |
% |
|
$ |
13,418,516 |
|
|
$ |
6,767 |
|
|
|
0.10 |
% |
Loans receivable net |
|
|
5.65 |
|
|
|
119,871,686 |
|
|
|
3,355,586 |
|
|
|
5.60 |
|
|
|
131,225,844 |
|
|
|
3,862,758 |
|
|
|
5.89 |
|
Investment securities available-for-sale (1) |
|
|
4.57 |
|
|
|
23,877,056 |
|
|
|
446,326 |
|
|
|
3.74 |
|
|
|
17,309,468 |
|
|
|
392,382 |
|
|
|
4.53 |
|
Other interest-earning assets |
|
|
0.94 |
|
|
|
6,428,959 |
|
|
|
31,263 |
|
|
|
0.97 |
|
|
|
4,832,711 |
|
|
|
24,899 |
|
|
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
4.66 |
|
|
|
166,412,703 |
|
|
|
3,848,196 |
|
|
|
4.62 |
|
|
|
166,786,539 |
|
|
|
4,286,806 |
|
|
|
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
|
|
|
|
2,569,545 |
|
|
|
|
|
|
|
|
|
|
|
1,449,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
4.58 |
|
|
$ |
168,982,248 |
|
|
|
3,848,196 |
|
|
|
4.55 |
|
|
$ |
168,236,111 |
|
|
|
4,286,806 |
|
|
|
5.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
2.71 |
|
|
$ |
104,089,795 |
|
|
|
1,419,682 |
|
|
|
2.73 |
|
|
$ |
106,016,709 |
|
|
|
1,942,927 |
|
|
|
3.67 |
|
NOW and money market |
|
|
0.24 |
|
|
|
4,833,988 |
|
|
|
5,982 |
|
|
|
0.25 |
|
|
|
4,257,243 |
|
|
|
5,981 |
|
|
|
0.28 |
|
Passbook |
|
|
0.54 |
|
|
|
12,496,837 |
|
|
|
34,243 |
|
|
|
0.55 |
|
|
|
12,595,358 |
|
|
|
44,571 |
|
|
|
0.71 |
|
Brokered deposits |
|
|
4.31 |
|
|
|
2,308,853 |
|
|
|
49,287 |
|
|
|
4.27 |
|
|
|
2,314,264 |
|
|
|
49,290 |
|
|
|
4.26 |
|
Other interest-bearing liabilities (Federal
Home Loan Bank advances) |
|
|
3.94 |
|
|
|
24,486,111 |
|
|
|
448,306 |
|
|
|
3.66 |
|
|
|
24,000,000 |
|
|
|
456,745 |
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2.65 |
|
|
|
148,215,584 |
|
|
|
1,957,500 |
|
|
|
2.64 |
|
|
|
149,183,574 |
|
|
|
2,499,514 |
|
|
|
3.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning liabilities |
|
|
|
|
|
|
3,735,251 |
|
|
|
|
|
|
|
|
|
|
|
2,247,942 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2.59 |
|
|
|
151,950,835 |
|
|
|
1,957,500 |
|
|
|
2.58 |
|
|
|
151,431,516 |
|
|
|
2,499,514 |
|
|
|
3.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
17,031,413 |
|
|
|
|
|
|
|
|
|
|
|
16,804,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
|
2.34 |
|
|
$ |
168,982,248 |
|
|
|
1,957,500 |
|
|
|
2.32 |
|
|
$ |
168,236,111 |
|
|
|
2,499,514 |
|
|
|
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
1,890,696 |
|
|
|
|
|
|
|
|
|
|
$ |
1,787,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
1.99 |
% |
|
|
|
|
|
|
|
|
|
|
1.98 |
% |
|
|
|
|
|
|
|
|
|
|
1.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.27 |
% |
|
|
|
|
|
|
|
|
|
|
2.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112.28 |
% |
|
|
|
|
|
|
|
|
|
|
111.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment securities available-for-sale are presented at fair market value. |
58
Rate/Volume Analysis. The following table sets forth the effects of changing rates and
volumes on our net interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. Changes attributable to changes in both rate and volume
have been allocated proportionally based on the absolute dollar amounts of change in each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Compared to Six Months Ended |
|
|
|
June 30, 2009 |
|
|
|
Increase (Decrease Due To) |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,975 |
|
|
$ |
2,279 |
|
|
$ |
8,254 |
|
Loans receivable, net |
|
|
(180,950 |
) |
|
|
(326,222 |
) |
|
|
(507,172 |
) |
Investment securities |
|
|
(69,601 |
) |
|
|
128,443 |
|
|
|
58,842 |
|
Other interest-earning assets |
|
|
(7,231 |
) |
|
|
8,698 |
|
|
|
1,467 |
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
(251,806 |
) |
|
|
(186,803 |
) |
|
|
(438,609 |
) |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
(496,502 |
) |
|
|
(26,743 |
) |
|
|
(523,245 |
) |
NOW and money market |
|
|
(726 |
) |
|
|
727 |
|
|
|
1 |
|
Passbook |
|
|
(10,056 |
) |
|
|
(272 |
) |
|
|
(10,328 |
) |
Brokered deposits |
|
|
112 |
|
|
|
(115 |
) |
|
|
(3 |
) |
Other interest-bearing liabilities |
|
|
(17,353 |
) |
|
|
8,914 |
|
|
|
(8,439 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
(524,525 |
) |
|
|
(17,489 |
) |
|
|
(542,014 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in interest income |
|
$ |
272,718 |
|
|
$ |
(169,313 |
) |
|
$ |
103,405 |
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. We maintain an allowance at a level necessary to absorb
managements best estimate of probable loan losses in the portfolio. Management considers, among
other factors, historical loss experience, type and amount of loans, borrower concentrations and
current conditions of the economy. In addition, the allowance considers the level of loans which
management monitors as a result of inconsistent repayment patterns. Management has identified
commercial real estate loans as an area for expected increased lending. Such loans carry a higher
degree of credit risk than our historical single-family lending.
Our provision for loan losses was $865,000 for the six months ended June 30, 2010, compared to
a provision of $51,000 for the six months ended June 30, 2009. At June 30, 2010, the allowance for
loan losses was $805,000, or 0.7% of the total loan portfolio, compared to $277,000, or 0.2% of the
total loan portfolio, at December 31, 2009.
Management also reviews individual loans for which full collectibility may not be reasonably
assured and considers, among other matters, the estimated fair value of the underlying collateral.
This evaluation is ongoing and results in variations in our provision for loan losses.
Non-accrual loans amounted to $3.3 million and $1.0 million at June 30, 2010 and December 31,
2009, respectively. Net loan charge-offs amounted to $338,000 during the six months ended June 30,
2010, compared to $4,000 during the six months ended June 30, 2009.
Although management utilizes its best judgment in providing for losses, there can be no
assurance that they will not have to change its allowance for loan losses in subsequent periods.
Management will continue to monitor the allowance for loan losses and make additional provisions to
the allowance as appropriate.
An analysis of the changes in the allowance for loan losses, non-performing loans and
classified loans is presented under Risk ManagementAnalysis of Non-Performing and Classified
Assets and Risk ManagementAnalysis and Determination of the Allowance for Loan Losses.
Non-interest Income. Total non-interest income decreased by $67,000, or 17.8%, from $378,000
for the six months ended June 30, 2009 to $311,000 for the six months ended June 30, 2010. The
decrease primarily
59
reflected a decrease of $143,000, or 81.3%, in gain on sale of loans in 2009, as we elected to sell
most newly originated fixed-rate one- to four-family loans due to the low rate prevailing on such
loans. Also contributing to the decrease in non-interest income was a decrease of $52,000, or
52.9%, in gain on sale of investments, as we sold various securities to lock in gains, including
mortgage-backed securities on which we anticipated prepayments in a declining interest rate
environment.
Non-interest Expenses. Total non-interest expenses increased by $260,000, or 14.4%, from $1.8
million for the six months ended June 30, 2009 to $2.1 million for the six months ended June 30,
2010. The increase primarily was attributable to increases of $134,000, or 13.6%, $27,000, or
8.9%, and $78,000, or 22.9%, in salaries and employee benefits, occupancy expenses and other
general and administrative expenses, respectively, as a result of the opening of our new branch
office in Hampstead, Maryland in September 2009.
Income Tax Expense. We had an income tax benefit of $317,000 during the six months ended June
30, 2010, due to our incurring a net loss during that period. We had income tax expense of $95,000
during the six months ended June 30, 2009, resulting in an effective tax rate of 34% for that
period.
Results of Operations for the Years Ended December 31, 2009 and 2008
Overview. We had net income of $343,000 for the year ended December 31, 2009, as compared to
net income of $8,000 for the year ended December 31, 2008. The increase in net income in 2009 was
primarily due to a $330,000, or 10.5%, increase in net interest income, as we were able to increase
our interest rate spread in a declining interest rate environment. Also contributing to the
increase in net income was a $370,000, or 114.6%, increase in non-interest income, which was
primarily due to a $196,000, or 701.3%, increase in gain on sale of loans and a $137,000, or
150.3%, increase in gain on sale of investments.
Net Interest Income. Our net interest income benefited from falling interest rates during the
year ended December 31, 2009. Net interest income increased by
$330,000, or 10.5%, from $3.1
million for the year ended December 31, 2008 to $3.4 million for the year ended December 31, 2009.
The increase in net interest income is primarily attributable to a 46 basis point improvement in
our interest rate spread, from 1.48% for the year ended December 31, 2008 to 1.74% for the year
ended December 31, 2009, as we were able to take advantage of decreasing market interest rates
during the year ended December 31, 2009, to reduce our cost of funds while limiting the decrease in
yields earned on our other interest-earning assets. The improvement in our interest rate spread
during the year ended December 31, 2009 was offset, in part, by a $1.8 million, or 1.1%, decrease
in the average volume of interest-earning assets, due primarily to our decision to sell most newly
originated fixed-rate one- to four-family loans due to the low rates prevailing on such loans in
2009.
Interest on loans receivable, net decreased by $442,000, or 5.7%, from $7.8 million for the
year ended December 31, 2008 to $7.4 million for the year ended December 31, 2009, due to a $9.1
million, or 6.5%, decrease in the average balance of loans more than offset a 6 basis point
increase in the average yield. The decrease in the average balance of loans reflected our decision
to sell a greater portion of our fixed-rate one- to four-family loan originations during 2009 due
to the low rates available on those loans. The increase in the average yield on loans occurred as
we reinvested loan payments and repayments in higher yielding loans such as speculative
construction loans.
Interest on investment securities available-for-sale increased by $45,000, or 5.7%, for the
year ended December 31, 2009 as compared to the year ended December 31, 2008, as a $3.4 million, or
21.1%, increase in the average balance of investment securities available-for-sale more than offset
a 63 basis point decrease in the average yield. The increase in the average balance of investment
securities available-for-sale reflected the proceeds from loan sales into U.S. government agency
securities.
Interest on cash and cash equivalents decreased by $259,000, or 95.9%, from $270,000 for the
year ended December 31, 2008 to $11,000 for the year ended December 31, 2009, as the yield on cash
and cash equivalents fell from 2.20% for the year ended December 31, 2008 to .05% for the year
ended December 31, 2009, reflecting the historically low market rates prevailing during 2009.
60
During the year ended December 31, 2009, we were able to reduce interest paid on deposits
primarily as the result of time deposits being rolled over at lower rates in response to general
declines in market interest rates and decreases in the cost of other deposits due to a decline in
market rates. Interest on time deposits decreased by $1.0 million, or 21.3%, from $4.7 million for
the year ended December 31, 2008, to $3.7 million for the year ended December 31, 2009, primarily
due to an 87 basis point decrease in the average cost of time deposits and, to a lesser extent, a
$1.3 million, or 1.2%, decrease in the average balance of time deposits. During the year ended
December 31, 2009, we were able to take advantage of declining interest rates to reprice maturing
certificates of deposit at lower rates. Interest on brokered deposits increased from $11,000 for
the year ended December 31, 2008 to $100,000 for the year ended December 31, 2009, as we accepted
brokered deposits in late 2008 as part of our efforts to lengthen the average term of our deposits,
and brokered deposits were available at that time at favorable rates. Interest on NOW and money
market accounts decreased by $25,000, or 67.6%, from $37,000 during for the year ended December 31,
2008 to $12,000 for the year ended December 31, 2009, as a 63 basis point decrease in the average
cost of NOW and money market accounts more than offset a $324,000, or 8.0%, increase in the average
balance of NOW and money market accounts. Interest on passbook accounts decreased by $113,000, or
59.2%, from $191,000 for the year ended December 31, 2008 to $78,000 for the year ended December
31, 2009, due primarily to a 78 basis point decrease in the average rate paid on passbook accounts.
The average balance of passbook accounts decreased by $1.2 million, or 8.8%, during the year ended
December 31, 2009, as compared to the prior year.
Interest on other interest-bearing liabilities, which consist of Federal Home Loan Bank
advances, decreased by $13,000, or 1.4%, during the year ended December 31, 2009 as compared to the
year ended December 31, 2008, as a $1.1 million decrease in the average balance of other
interest-bearing liabilities more than offset a 26 basis point increase in the average cost of
other interest-bearing liabilities . The increase in the average cost of other interest-bearing
liabilities occurred as we elected to roll over maturing short-term, low cost advances for longer
terms at higher rates.
61
Average Balances and Yields. The following table presents information regarding
average balances of assets and liabilities, the total dollar amounts of interest income and
dividends from average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average yields and costs. The
yields and costs for the periods indicated are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for the periods presented. Average balances have
been calculated using monthly balances, and nonaccrual loans are included in average balances only.
Amortization of net deferred loan fees are included in interest income on loans and are
insignificant. No tax equivalent adjustments were made. Nonaccruing loans have been included in
the table as loans carrying a zero yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
and |
|
|
Yield/ |
|
|
Average |
|
|
and |
|
|
Yield/ |
|
|
|
Balance |
|
|
Dividends |
|
|
Cost |
|
|
Balance |
|
|
Dividends |
|
|
Cost |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,009,423 |
|
|
$ |
10,953 |
|
|
|
0.07 |
% |
|
$ |
12,254,289 |
|
|
$ |
270,099 |
|
|
|
2.20 |
% |
Loans receivable net |
|
|
126,464,432 |
|
|
|
7,372,112 |
|
|
|
5.83 |
|
|
|
135,357,320 |
|
|
|
7,814,228 |
|
|
|
5.77 |
|
Investment securities available-for-sale (1) |
|
|
19,614,289 |
|
|
|
838,433 |
|
|
|
4.27 |
|
|
|
16,201,821 |
|
|
|
793,512 |
|
|
|
4.90 |
|
Other interest-earning assets |
|
|
5,479,978 |
|
|
|
50,334 |
|
|
|
0.92 |
|
|
|
4,565,861 |
|
|
|
115,207 |
|
|
|
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
166,568,122 |
|
|
|
8,271,832 |
|
|
|
4.97 |
|
|
|
168,379,291 |
|
|
|
8,993,046 |
|
|
|
5.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
1,594,639 |
|
|
|
|
|
|
|
|
|
|
|
1,445,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
168,162,761 |
|
|
|
8,271,832 |
|
|
|
4.92 |
|
|
|
169,824,433 |
|
|
|
8,993,046 |
|
|
|
5.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
106,430,744 |
|
|
|
3,700,750 |
|
|
|
3.48 |
|
|
|
107,753,532 |
|
|
|
4,689,258 |
|
|
|
4.35 |
|
NOW and money market |
|
|
4,382,658 |
|
|
|
11,731 |
|
|
|
0.27 |
|
|
|
4,058,549 |
|
|
|
36,719 |
|
|
|
0.90 |
|
Passbook |
|
|
12,472,224 |
|
|
|
78,193 |
|
|
|
0.63 |
|
|
|
13,682,034 |
|
|
|
191,247 |
|
|
|
1.40 |
|
Brokered deposits |
|
|
2,324,574 |
|
|
|
100,001 |
|
|
|
4.30 |
|
|
|
383,841 |
|
|
|
11,352 |
|
|
|
2.96 |
|
Other interest-bearing liabilities (Federal
Home Loan Bank advances) |
|
|
23,493,056 |
|
|
|
914,690 |
|
|
|
3.89 |
|
|
|
25,520,834 |
|
|
|
927,601 |
|
|
|
3.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
149,103,256 |
|
|
|
4,805,365 |
|
|
|
3.22 |
|
|
|
151,398,790 |
|
|
|
5,856,177 |
|
|
|
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning liabilities |
|
|
2,168,808 |
|
|
|
|
|
|
|
|
|
|
|
1,931,859 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
151,272,064 |
|
|
|
4,805,365 |
|
|
|
3.18 |
|
|
|
153,330,649 |
|
|
|
5,856,177 |
|
|
|
3.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
16,890,697 |
|
|
|
|
|
|
|
|
|
|
|
16,493,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
168,162,761 |
|
|
|
4,805,365 |
|
|
|
2.86 |
|
|
$ |
169,824,433 |
|
|
|
5,856,177 |
|
|
|
3.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
3,466,467 |
|
|
|
|
|
|
|
|
|
|
$ |
3,136,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
1.74 |
% |
|
|
|
|
|
|
|
|
|
|
1.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
2.08 |
% |
|
|
|
|
|
|
|
|
|
|
1.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
111.71 |
% |
|
|
|
|
|
|
|
|
|
|
111.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment securities available-for-sale are presented at fair market value. |
62
Rate/Volume Analysis. The following table sets forth the effects of changing rates and
volumes on our net interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the effects
attributable to changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. Changes attributable to changes in both rate and volume
have been allocated proportionally based on the absolute dollar amounts of change in each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
Compared to Year Ended |
|
|
|
December 31, 2008 |
|
|
|
Increase (Decrease Due To) |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
(261,499 |
) |
|
$ |
2,353 |
|
|
$ |
(259,146 |
) |
Investment securities |
|
|
(122,210 |
) |
|
|
167,131 |
|
|
|
44,921 |
|
Loans receivable, net |
|
|
76,286 |
|
|
|
(518,402 |
) |
|
|
(442,116 |
) |
Other interest-earning assets |
|
|
(80,599 |
) |
|
|
15,726 |
|
|
|
(64,873 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
(388,023 |
) |
|
|
(333,192 |
) |
|
|
(721,215 |
) |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
(967,404 |
) |
|
|
(21,116 |
) |
|
|
(988,520 |
) |
NOW and money market |
|
|
(29,016 |
) |
|
|
4,029 |
|
|
|
(24,987 |
) |
Passbook |
|
|
(99,915 |
) |
|
|
(13,138 |
) |
|
|
(113,053 |
) |
Brokered deposits |
|
|
32,480 |
|
|
|
56,170 |
|
|
|
88,650 |
|
Other interest-bearing liabilities |
|
|
63,186 |
|
|
|
(76,088 |
) |
|
|
(12,902 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
(1,000,669 |
) |
|
|
(50,143 |
) |
|
|
(1,050,812 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
612,646 |
|
|
$ |
(283,049 |
) |
|
$ |
329,597 |
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. We maintain an allowance at a level necessary to absorb
managements best estimate of probable loan losses in the portfolio. Management considers, among
other factors, historical loss experience, type and amount of loans, borrower concentrations and
current conditions of the economy. In addition, the allowance considers the level of loans which
management monitors as a result of inconsistent repayment patterns. Management has identified
commercial real estate loans as an area for expected increased lending. Such loans carry a higher
degree of credit risk than our historical single-family lending.
Our provision for loan losses increased from $5,000 for the year ended December 31, 2008 to
$51,000 for the year ended December 31, 2009. At December 31, 2009, the allowance for loan losses
was $277,000 or 0.2% of the total loan portfolio, compared to $272,000, or 0.2% of the total loan
portfolio, at December 31, 2008.
Management also reviews individual loans for which full collectibility may not be reasonably
assured and considers, among other matters, the estimated fair value of the underlying collateral.
This evaluation is ongoing and results in variations in our provision for loan losses.
Nonaccrual loans amounted to $1,033,000 and $187,000 at December 31, 2009 and 2008,
respectively. Net loan charge-offs amounted to $46,000 during the year ended December 31, 2009,
compared to $0 during the year ended December 31, 2008.
Although management utilizes its best judgment in providing for losses, there can be no
assurance that they will not have to change its allowance for loan losses in subsequent periods.
Management will continue to monitor the allowance for loan losses and make additional provisions to
the allowance as appropriate.
An analysis of the changes in the allowance for loan losses, nonperforming loans and
classified loans is presented under Risk ManagementAnalysis of Nonperforming and Classified
Assets and Risk ManagementAnalysis and Determination of the Allowance for Loan Losses.
Non-interest Income. Total non-interest income increased by $370,000, or 114.6%, from
$323,000 for the year ended December 31, 2008 to $693,000 for the year ended December 31, 2009.
The increase primarily reflected an increase of $196,368, or 801.3%, in gain on sale of loans in
2009, as we elected to sell most newly
63
originated fixed-rate one- to four-family loans due to low rates prevailing on such loans. The
increase also reflected an increase of $137,000, or 150%, in gain on sale of investments, as we
sold various securities to lock in gains, including mortgage-backed securities on which we
anticipated prepayments in a declining interest rate environment. Also contributing to the
increase in non-interest income was a $45,000, or 37%, increase in income on bank-owned life
insurance.
Non-interest Expenses. Total non-interest expenses increased by $47,000, or 1.3%. The
increase in non-interest expenses included increases of $125,000, or 7%, $31,000, or 5%, and
$192,000, or 40%, in salaries and employee benefits, occupancy expenses and other general and
administrative expenses, respectively, as a result of the opening of our new branch office in
Hampstead, Maryland in September 2009. Partly offsetting these increases was the absence in 2009
of a $299,000 expense we incurred in 2008 related to the termination of our pension plan.
Income Tax Expense. We recorded an income tax benefit of $153,000 during the year ended
December 31, 2008 as a result of our incurring a $145,000 loss before provision (benefit) for
income taxes for 2008. The tax benefit for the year ended December 31, 2008 was primarily the
result of nontaxable income generated by Fraternity Federal Savings and Loan Association investment in bank-owned life
insurance. We had income tax expense of $119,000 for the year ended December 31, 2009, resulting
in an effective tax rate of 25.7% for that year.
Risk Management
Overview. Managing risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk, interest rate risk and market
risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a
loan or investment when it is due. Interest rate risk is the potential reduction of interest
income as a result of changes in interest rates. Market risk arises from fluctuations in interest
rates that may result in changes in the values of financial instruments, such as available-for-sale
securities that are accounted for on a mark-to-market basis. Other risks that we face are
operational risk, liquidity risks and reputation risk. Operational risks include risks related to
fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk
is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk
is the risk that negative publicity or press, whether true or not, could cause a decline in our
customer base or income.
Credit Risk Management. Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing prompt attention to
potential problem loans. We do not offer, and have not offered, sub-prime or no-documentation
mortgage loans and have made only a limited amount of Alt A mortgage loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the
borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 day
past due, a late notice is sent to the borrower. When the loan becomes 30 days past due, a more
formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the
borrower. After 30 days, we regard the borrower in default. Between 30 and 45 days delinquent,
the borrower may be sent a letter from our attorney and we may commence collection proceedings. If
a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.
Management informs the board of directors monthly of the amount of loans delinquent more than 30
days, all loans in foreclosure and repossessed property that we own.
Analysis of Nonperforming and Classified Assets. We consider repossessed assets and loans
that are 90 days or more past due to be nonperforming assets. Loans are generally placed on
nonaccrual status when they become 90 days delinquent, at which time the accrual of interest ceases
and the allowance for any uncollectible accrued interest is established and charged against
interest income. Typically, payments received on a nonaccrual loan are first applied to the
outstanding principal balance. In addition, we consider certain nonagency mortgage-backed
securities as nonperforming due to ratings downgrades and cash flow concerns.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned until it is sold. When property is acquired it is recorded at the
lower of its cost, which is the unpaid
64
balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Any
holding costs and declines in fair value after acquisition of the property result in charges
against income.
The following table provides information with respect to our nonperforming assets at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At |
|
|
|
|
|
|
June 30, |
|
|
At December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Nonperforming loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
960,061 |
|
|
$ |
340,551 |
|
|
$ |
|
|
Lines of credit |
|
|
|
|
|
|
59,499 |
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction |
|
|
1,804,118 |
|
|
|
632,549 |
|
|
|
|
|
Land |
|
|
494,999 |
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
187,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,259,178 |
|
|
$ |
1,032,601 |
|
|
$ |
187,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
|
|
|
|
|
706,000 |
|
|
|
|
|
Lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
706,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total of nonperforming loans and accruing loans 90 days
or more past due |
|
$ |
3,259,178 |
|
|
$ |
1,738,601 |
|
|
$ |
187,000 |
|
Assets acquired through foreclosure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
3,259,178 |
|
|
$ |
1,738,601 |
|
|
$ |
187,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of nonperforming loans and accruing loans past due 90 days
or more to total loans |
|
|
2.72 |
% |
|
|
1.44 |
% |
|
|
0.14 |
% |
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total assets |
|
|
1.94 |
|
|
|
0.62 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets |
|
|
1.94 |
|
|
|
1.04 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, nonaccrual one- to four-family loans consisted of a $542,000 loan
secured by an owner-occupied property, a $306,000 loan secured by an owner occupied property that
was subsequently foreclosed on, an $82,000 loan secured by an investment property, two loans
totaling $8,000 originated under the Healthy Neighborhood Program and a $22,000 loan subsequently
foreclosed on and sold at no loss. At June 30, 2010, nonaccrual residential construction loans
consisted of two speculative construction loans.
For further information on our methodology for establishing specific valuation allowances, see
Analysis and Determination of the Allowance for Loan Losses Specific Valuation Allowance.
We occasionally modify loans to extend the term or make other concessions to help borrowers
stay current on their loan and to avoid foreclosure. We do not forgive principal or interest on
loans or modify the interest rates on loans to rates that are below market rates. At June 30, 2010
and December 31, 2009, we did not have any modified loans, which are also referred to as troubled
debt restructurings.
Interest income that would have been recorded for the six months ended June 30, 2010 and the
year ended December 31, 2009 had nonaccrual loans been current according to their original terms,
amounted to approximately $174,000 and $40,000, respectively. Interest income of $0 and $0 related
to nonaccrual loans was included in interest income for the six months ended June 30, 2010 and the
year ended December 31, 2009, respectively.
65
At June 30, 2010, we had no real estate owned.
Classified Assets. Federal regulations require us to review and classify our assets on a
regular basis. In addition, the Office of Thrift Supervision has the authority to identify problem
assets and, if appropriate, require them to be classified. There are three classifications for
problem assets; substandard, doubtful and loss. Substandard assets must have one or more
defined weakness and are characterized by the distinct possibility that we will sustain some loss
if the deficiencies are not corrected. Doubtful assets 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. An asset classified loss is considered uncollectible and of such little
value that continuance as an asset of the institution is not warranted. The regulations also
provide for a special mention category, described as assets which do not currently expose an
institution to a sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving close attention. When we classify an asset as
substandard or doubtful we may establish a specific allowance for loan losses. If we classify an
asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.
The following table shows the aggregate amounts of our classified and criticized assets at the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Special mention assets |
|
$ |
2,312,650 |
|
|
$ |
8,862,000 |
|
|
$ |
|
|
Substandard assets |
|
|
5,245,903 |
|
|
|
2,624,000 |
|
|
|
174,000 |
|
Doubtful assets |
|
|
|
|
|
|
81,000 |
|
|
|
187,000 |
|
|
|
|
|
|
|
|
|
|
|
Total classified and criticized assets |
|
$ |
7,558,553 |
|
|
$ |
11,567,000 |
|
|
$ |
361,000 |
|
|
|
|
|
|
|
|
|
|
|
Classified and criticized assets include loans that are classified due to factors other
than payment delinquencies, such as lack of current financial statements and other required
documentation, insufficient cash flows or other deficiencies, and, therefore are not included as
nonperforming assets. Other than as disclosed in the above tables, there are no other loans where
management has serious doubts about the ability of the borrowers to comply with the present loan
repayment terms. Also included in classified and criticized assets are delinquent ground rents and
certain nonagency mortgage-backed securities that have experienced rating downgrades or cash flow
deficiencies.
The decrease in our classified assets at June 30, 2010 compared to December 31, 2009 was due
to $3.0 million in loans being brought current by borrowers and a $1.2 million loan being
reclassified as owner-occupied rather than speculative when the owner of the property elected to
use it as his residence. The $1.2 million loan has been performing according to its terms but was
classified at December 31, 2009 as special mention in accordance with our policy, adopted in 2009,
of classifying all speculative construction loans as special mention. In addition, a $750,000
residential construction loan that had been classified as special mention at December 31, 2009 was
repaid during the six months ended June 30, 2010. Of the $7.6 million of substandard assets at
June 30, 2010, $3.3 million were nonaccrual loans. See " Analysis of Nonperforming and
Classified Assets.
Special mention assets increased from $0 at December 31, 2008 to $8.9 million at December 31,
2009. The increase occurred as a result of our decision in 2009 to adopt a policy of classifying
all speculative construction loans as special mention assets.
66
Delinquencies. The following table provides information about delinquencies in our loan portfolio
at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
At June 30, 2010 |
|
2009 |
|
2008 |
|
|
30 89 Days |
|
90 Days or More |
|
30 89 Days |
|
90 Days or More |
|
30 89 Days |
|
90 Days or More |
|
|
Number |
|
Principal |
|
Number |
|
Principal |
|
Number |
|
Principal |
|
Number |
|
Principal |
|
Number |
|
Principal |
|
Number |
|
Principal |
|
|
of |
|
Balance |
|
of |
|
Balance |
|
of |
|
Balance |
|
of |
|
Balance |
|
of |
|
Balance |
|
of |
|
Balance |
|
|
Loans |
|
of Loans |
|
Loans |
|
of Loans |
|
Loans |
|
of Loans |
|
Loans |
|
of Loans |
|
Loans |
|
of Loans |
|
Loans |
|
of Loans |
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
|
7 |
|
|
$ |
646,000 |
|
|
|
6 |
|
|
$ |
960,000 |
|
|
|
15 |
|
|
$ |
2,450,000 |
|
|
|
6 |
|
|
$ |
1,047,000 |
|
|
|
4 |
|
|
$ |
174,000 |
|
|
|
|
|
|
$ |
|
|
Lines of credit |
|
|
2 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
55,000 |
|
|
|
1 |
|
|
|
59,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
1,804,000 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
633,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
495,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9 |
|
|
$ |
696,000 |
|
|
|
9 |
|
|
$ |
3,259,000 |
|
|
|
18 |
|
|
$ |
2,506,000 |
|
|
|
8 |
|
|
$ |
1,739,000 |
|
|
|
4 |
|
|
$ |
174,000 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Analysis and Determination of the Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses inherent in the
loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly
basis, and any adjustments must be approved quarterly by the Board. When additional allowances are
necessary, a provision for loan losses is charged to earnings. Our methodology for assessing the
appropriateness of the allowance for loan losses is reviewed periodically by the board of
directors. The board of directors also reviews the allowance for loan losses established on a
quarterly basis.
General Valuation Allowance. We establish a general valuation allowance for loans that should
be adequate to reserve for the estimated credit losses inherent in each segment of our loan
portfolio, given the facts and circumstances as of the valuation date for all loans in the
portfolio that have not been classified. The allowance is based on our average annual rate of net
charge offs experienced over the previous four quarters on each segment of the portfolio and is
adjusted for current qualitative factors. If historical loss data is not available for a segment,
the estimates used will be based on various components such as industry averages. For purposes of
determining the estimated credit losses, the loan portfolio is segmented as follows: (i) one- to
four-family first mortgage real estate loans; (ii) one- to four-family second mortgage real estate
loans; (iii) one- to four-family home equity lines of credit; (iv) commercial loans; (v)
speculative construction loans; (vi) other construction loans; (vii) land loans; and (viii)
consumer loans. Qualitative factors that are considered in determining the adequacy of the
allowance for loan losses are as follows: (i) trends of delinquent and nonaccrual loans; (ii)
economic factors; (iii) concentrations of credit; (iv) changes in the nature and volume of the loan
portfolio; and (v) changes in lending staff and loan policies.
Specific Valuation Allowance. All adversely classified loans meeting the following loan
balance thresholds are individually reviewed: (i) speculative construction loans; (ii) commercial
loans greater than $500,000; (iii) land loans greater than $500,000; (iv) all other loans greater
than $1.5 million and (v) any other nonperforming loans. Any portion of the recorded investment in
excess of the fair value of the collateral less the disposition costs is charged off against the
allowance for loan losses.
We charge off 100% of the assets or portions thereof classified as loss. The amount of the
loss will be the excess of the recorded investment in the loan over the fair value of collateral
less disposition costs estimated on the date that a probable loss is identified. Management
obtains updated appraisals with respect to loans secured by real estate.
All other adversely classified loans as well as special mention and watch loans are reviewed
monthly. Our historical loss experience in each category of loans is utilized in determining the
allowance for that group. The determined loss factor in each loan category may be adjusted for
qualitative factors as determined by management.
At June 30, 2010, there were no loans that were delinquent or restructured or modified as the
result of being underwritten with limited or no documentation.
Unallocated Valuation Allowance. Our allowance for loan losses methodology also includes an
unallocated component to reflect the margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating specific and general losses in the loan portfolio.
68
The following table sets forth the breakdown of the allowance for loan losses by loan category
at the dates indicated. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any
category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
At June 30, 2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
% of |
|
|
Loans in |
|
|
|
|
|
|
% of |
|
|
Loans in |
|
|
|
|
|
|
% of |
|
|
Loans in |
|
|
|
|
|
|
|
Allowance |
|
|
Category |
|
|
|
|
|
|
Allowance |
|
|
Category |
|
|
|
|
|
|
Allowance |
|
|
Category |
|
|
|
|
|
|
|
to Total |
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
to Total |
|
|
|
|
|
|
to Total |
|
|
to Total |
|
|
|
Amount |
|
|
Allowance |
|
|
Loans |
|
|
Amount |
|
|
Allowance |
|
|
Loans |
|
|
Amount |
|
|
Allowance |
|
|
Loans |
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
$ |
178,009 |
|
|
|
22.13 |
% |
|
|
74.47 |
% |
|
$ |
91,335 |
|
|
|
33.02 |
% |
|
|
73.71 |
% |
|
$ |
110,461 |
|
|
|
40.59 |
% |
|
|
78.93 |
% |
Lines of credit |
|
|
206,089 |
|
|
|
25.62 |
|
|
|
10.84 |
|
|
|
132,257 |
|
|
|
47.81 |
|
|
|
10.16 |
|
|
|
96,179 |
|
|
|
35.34 |
|
|
|
9.55 |
|
Commercial |
|
|
93,573 |
|
|
|
11.63 |
|
|
|
3.33 |
|
|
|
20,986 |
|
|
|
7.59 |
|
|
|
3.46 |
|
|
|
1,776 |
|
|
|
0.65 |
|
|
|
2.61 |
|
Residential construction |
|
|
245,333 |
|
|
|
30.50 |
|
|
|
7.37 |
|
|
|
18,795 |
|
|
|
6.79 |
|
|
|
8.61 |
|
|
|
60,006 |
|
|
|
22.05 |
|
|
|
5.61 |
|
Land |
|
|
76,442 |
|
|
|
9.50 |
|
|
|
3.18 |
|
|
|
7,879 |
|
|
|
2.85 |
|
|
|
3.25 |
|
|
|
|
|
|
|
|
|
|
|
2.57 |
|
Consumer |
|
|
1,569 |
|
|
|
.19 |
|
|
|
0.80 |
|
|
|
1,166 |
|
|
|
0.42 |
|
|
|
0.78 |
|
|
|
|
|
|
|
|
|
|
|
0.71 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
0.02 |
|
Unallocated |
|
|
3,485 |
|
|
|
0.43 |
|
|
|
|
|
|
|
4,203 |
|
|
|
1.52 |
|
|
|
|
|
|
|
3,699 |
|
|
|
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
804,500 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
$ |
276,621 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
$ |
272,121 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Although we believe that we use the best information available to establish the allowance for
loan losses, future adjustments to the allowance for loan losses may be necessary and our results
of operations could be adversely affected if circumstances differ substantially from the
assumptions used in making the determinations. Furthermore, while we believe we have established
our allowance for loan losses in conformity with generally accepted accounting principles, there
can be no assurance that the Office of Thrift Supervision, in reviewing our loan portfolio, will
not require us to increase our allowance for loan losses. The Office of Thrift Supervision may
require us to increase our allowance for loan losses based on judgments different from ours. In
addition, because future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses is adequate or
that increases will not be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan losses may adversely
affect our financial condition and results of operation.
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance
for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of period |
|
|
276,621 |
|
|
|
272,121 |
|
|
|
272,121 |
|
|
|
267,121 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
|
207,124 |
|
|
|
|
|
|
|
42,500 |
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction |
|
|
112,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
6,786 |
|
|
|
3,960 |
|
|
|
3,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
337,660 |
|
|
|
3,960 |
|
|
|
46,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
336,841 |
|
|
|
3,960 |
|
|
|
46,460 |
|
|
|
|
|
Provision for loan losses |
|
|
864,719 |
|
|
|
50,960 |
|
|
|
50,960 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period |
|
$ |
804,500 |
|
|
$ |
319,121 |
|
|
|
276,621 |
|
|
$ |
272,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans at the end of the period |
|
|
0.67 |
% |
|
|
0.26 |
% |
|
|
0.23 |
% |
|
|
0.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding during the period |
|
|
0.28 |
% |
|
|
|
% |
|
|
0.04 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010, we had charge-offs totaling $338,000. Of this
amount, $207,000 related to two home equity lines of credit, and $113,000 was attributable to two
speculative construction loans.
Interest Rate Risk Management. 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 our loan mix by adding more loans with variable
rates and adjusting our investment portfolio mix and duration. Specifically, over the past several
years we have sought to shorten the average term of our loan portfolio by emphasizing the
origination of one- to four-family fixed-rate loans with ten year terms. In addition, at June 30,
2010, we had $13.0 million of home equity lines of credit, all of which reprice monthly. We also
had $20.1 million of cash and cash equivalents that reprice in the very near term. With respect to
liabilities, we have had some success in the current low interest rate environment in increasing
our longer-term certificates of deposit, as our customers have been willing to purchase longer-term
certificates of deposit in exchange for increased yield, while, conversely, decreasing our
short-term certificates of deposit.
70
We currently do not participate in hedging programs, interest rate swaps or other activities
involving the use of derivative financial instruments.
During the year ended December 31, 2007, we sold $9.5 million of low yielding loans in order
to reduce our interest rate risk profile and to enhance future earnings through the reinvestment of
the proceeds from such loan sales into higher yielding assets. The loans sold were long-term,
fixed-rate, one- to four-family mortgage loans with an average yield of 4.8%. Initially, we
reinvested the proceeds from this sale into interest-bearing deposits in other banks, and
eventually we seek to reinvest the proceeds into jumbo one- to four-family mortgage loans, which
generally carry higher yields than our conforming one- to four-family mortgage loans. The effect
of this transaction was to shorten the average maturity of our interest-earning assets, thereby
reducing our interest rate risk.
We have an Asset/Liability Management Committee, which includes members of management selected
by the board of directors and one non-management director, to communicate, coordinate and control
all aspects involving asset/liability management. The committee 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.
Our goal is to manage asset and liability positions to moderate the effects of interest rate
fluctuations on net interest and net income.
Net Portfolio Value Analysis. We currently use the net portfolio value analysis prepared by
the Office of Thrift Supervision to review our level of interest rate risk. This analysis
measures interest rate risk by capturing changes in net portfolio value of our cash flows from
assets, liabilities and off-balance sheet items, based on a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio equity and is equal
to the market value of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. These analyses assess the risk of loss in market risk-sensitive
instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 basis
point decrease in market interest rates with no effect given to any steps that we might take to
counter the effect of that interest rate movement. In addition to the net portfolio value analysis
prepared by the Office of Thrift Supervision, we utilize other interest rate risk software to help
us manage interest rate risk.
The following table, which is based on information that we provide to the Office of Thrift
Supervision, presents the change in our net portfolio value at June 30, 2010 that would occur in
the event of an immediate change in interest rates based on Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract that change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Portfolio Value as % of |
|
|
Estimated Net Portfolio Value |
|
Portfolio Value of Assets |
Basis Point |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Point |
Change in Rates |
|
Amount |
|
Change |
|
% Change |
|
NPV Ratio |
|
Change |
300 |
|
$ |
14,861,000 |
|
|
$ |
(418,000 |
) |
|
|
(26.72 |
)% |
|
|
9.02 |
% |
|
(255 |
) bp |
200 |
|
|
17,457,000 |
|
|
|
(2,822,000 |
) |
|
|
(13.92 |
) |
|
|
10.33 |
|
|
|
(124 |
) |
100 |
|
|
19,516,000 |
|
|
|
(763,000 |
) |
|
|
(3.76 |
) |
|
|
11.31 |
|
|
|
(26 |
) |
0 |
|
|
20,279,000 |
|
|
|
|
|
|
|
|
|
|
|
11.57 |
|
|
|
|
|
(100) |
|
|
19,969,000 |
|
|
|
(310,000 |
) |
|
|
(1.53 |
) |
|
|
11.32 |
|
|
|
(25 |
) |
The Office of Thrift Supervision uses various assumptions in assessing interest rate risk.
These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among others. As with any
method of measuring interest rate risk, certain shortcomings are inherent in the methods of
analysis presented in the foregoing table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different degrees to changes
in market interest rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates on other types may
lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, if there is a change in interest rates,
71
expected rates of prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table. Prepayment rates can have a significant
impact on interest income. Because of the large percentage of loans and mortgage-backed securities
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 future mortgage-backed security and loan repayment activity.
Liquidity Management. Liquidity is the ability to meet current and future financial
obligations of a short-term nature. Our primary sources of funds available to meet short-term
liquidity needs consist of deposit inflows, loan repayments and maturities and sales of investment
securities. While maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
We regularly adjust our investments in liquid assets available to meet short-term liquidity
needs based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii)
yields available on interest-earning deposits and securities and (iv) the objectives of our
asset/liability management policy. We do not have long-term debt or other financial obligations
that would create long-term liquidity concerns.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level
of these assets depends on our operating, financing, lending and investing activities during any
given period. At June 30, 2010, cash and cash equivalents totaled $20.1 million. Securities
classified as available-for-sale, amounting to $19.6 million at June 30, 2010, provides an
additional sources of liquidity. In addition, at June 30, 2010, we had the ability to borrow a
total of approximately $27.4 million from the Federal Home Loan Bank of Atlanta. At June 30, 2010,
we had $22.8 million in Federal Home Loan Bank advances outstanding. For additional liquidity, if
needed, we have a $3.0 million line of credit with another bank, on which we had no outstanding
balance at June 30, 2010.
At June 30, 2010 we had $1.1 million in commitments to extend credit outstanding.
Certificates of deposit due within one year of June 30, 2010 totaled $58 million, or 54% of
certificates of deposit. We believe the large percentage of certificates of deposit that mature
within one year reflects customers hesitancy to invest their funds for long periods due to the
recent low interest rate environment and local competitive pressures. 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 June 30, 2011. 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.
The following table presents certain of our contractual obligations as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Less than |
|
|
One to |
|
|
Three to |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
One Year |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
Operating lease obligations |
|
$ |
805,536 |
|
|
$ |
232,831 |
|
|
$ |
302,760 |
|
|
$ |
270,245 |
|
|
$ |
|
|
Federal Home Loan Bank
advances and other
borrowings |
|
|
22,916,667 |
|
|
|
336,000 |
|
|
|
7,580,667 |
|
|
|
|
|
|
$ |
15,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,722,503 |
|
|
$ |
568,831 |
|
|
$ |
7,883,724 |
|
|
$ |
270,245 |
|
|
$ |
15,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our primary investing activities are the origination of loans and the purchase of securities.
Our primary financing activity is activity in deposit accounts. Deposit flows are affected by the
overall level of interest rates, the interest rates and product offered by us and our local
competitors and other factors. We generally manage the pricing of our deposits to be competitive.
Occasionally, we offer promotional rates on certain deposit products to attract deposits.
72
Financing and Investing Activities
Capital Management. We are subject to various regulatory capital requirements administered by
the Office of Thrift Supervision, 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
June 30, 2010, we exceeded all of our regulatory capital requirements and were considered well
capitalized under regulatory guidelines. See Regulation and SupervisionRegulation of Federal
Savings AssociationsCapital Requirements, Regulatory Capital Compliance and note 13 of the
notes to consolidated financial statements included in this prospectus.
The capital from the offering will significantly increase our liquidity and capital resources.
Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering
are used for general corporate purposes, including the funding of lending activities. Our
financial condition and results of operations will be enhanced by the capital from the offering,
resulting in increased net interest-earning assets and income. However, the large increase in
equity resulting from the capital raised in the offering will, initially, have an adverse impact on
our return on equity. Following the offering, we may use capital management tools such as cash
dividends and common share repurchases. However, under Office of Thrift Supervision regulations,
we will not be allowed to repurchase any shares during the first year following the offering,
except to fund the restricted stock awards under the equity benefit plan after its approval by
shareholders, unless extraordinary circumstances exist and we receive regulatory approval.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of
financial transactions that, in accordance with generally accepted accounting principles, are not
recorded in our financial statements. These transactions involve, to varying degrees, elements of
credit, interest rate and liquidity risk. Such transactions are used primarily to manage
customers requests for funding and take the form of loan commitments, unused lines of credit and
letters of credit. For information about our loan commitments, unused lines of credit and letters
of credit, see note 11 of the notes to consolidated financial statements.
For the six months ended June 30, 2010 and the year ended December 31, 2009, we did not engage
in any off-balance sheet transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
Impact of Recent Accounting Pronouncements
Accounting Standards Codification. The Financial Accounting Standards Boards (FASB)
Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, ASC
became FASBs officially recognized source of authoritative United States (U.S.) generally
accepted accounting principles (GAAP) applicable to all public and non-public, non-governmental
entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA),
Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the
United States Securities and Exchange Commission under the authority of federal securities laws are
also sources of authoritative GAAP for Securities and Exchange Commission registrants. All other
accounting literature is considered non-authoritative. The switch to ASC affects the way companies
refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in
the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic,
Section and Paragraph structure.
Accounting Standards Updates (ASU) No. 2009-16, Transfers and Servicing (Topic-
860)-Accounting for Transfers of Financial Assets amends prior accounting guidance to enhance
reporting about transfers of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. ASU 2009-16 also
requires additional disclosures about all continuing involvement with transferred financial assets
including information about gains and losses resulting from transfers during the period. The
provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact
on our consolidated results of operations or financial position.
ASU No. 2009-17, Consolidations (Topic 810)-Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities amends prior guidance to change how a company
determines when an entity that is sufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated.
73
The determination of whether a company is required to consolidate an entity is based on, among
other things, an entitys purpose and design and a companys ability to direct the activities of
the entity that most significantly impact the entitys economic performance. ASU 2009-17 requires
additional disclosures about the reporting entitys involvement with variable interest entities and
any significant changes in risk exposure due to that involvement as well as its affect on the
entitys financial statements. As further discussed below, ASU No. 2010-10, Consolidations
(Topic 810), deferred the effective date of ASU 2009-17 for a reporting entitys interests in
investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and they
did not have a material impact on our consolidated results of operations or financial position.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures
About Fair Value Measurements requires expanded disclosures related to fair value measurements
including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2
of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of
assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers
disclosed separately, (iii) the policy for determining when transfers between the levels of the
fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and
liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about
purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) companies
should provide fair value measurement disclosures for each class of assets and liabilities (rather
than major category), which would generally be a subset of assets or liabilities within a line item
in the statement of financial position and (ii) companies should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and non-recurring
fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the
fair value hierarchy. ASU No. 2010-06 requires the disclosures related to the gross presentation
of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the
fair value hierarchy beginning January 1, 2011. The remaining disclosure requirements and
clarifications made by ASU 2010-06 became effective on January 1, 2010. The adoption of ASU No.
2010-06 did not have a material impact on our consolidated results of operations or financial
position.
ASU No. 2010-10, Consolidations (Topic 810)-Amendments for Certain Investment Funds defers
the effective date of the amendments to the consolidation requirements made by ASU 2009-17 to a
companys interest in an entity (i) that has all of the attributes of an investment company, as
specified under ASC Topic 946, Financial Services-Investment Companies, or (ii) for which it is
industry practice to apply measurement principles of financial reporting that are consistent with
those in ASC Topic 946. As a result of the deferral, companies are not required to apply the ASU
2009-17 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity
that meets the criteria to qualify for the deferral. ASU 2010-10 also clarifies that any interest
held by a related party should be treated as though it is an entitys own interest when evaluating
the criteria for determining whether such interest represents a variable interest. ASU 2010-10
also clarifies that companies should not use a quantitative calculation as the sole basis for
evaluating whether a decision makers or service providers fee is variable interest. The
provisions of ASU 2010-10 became effective as of January 1, 2010 and did not have a material impact
on our consolidated results of operations or financial position.
ASU No. 2010-11, Derivatives and Hedging (Topic 815)-Scope Exception Related to Embedded
Credit Derivatives clarifies that the only form of an embedded credit derivative that is exempt
from the embedded derivative bifurcation requirement are those that relate to the subordination of
one financial instrument to another. Entities that have contracts containing an embedded credit
derivative feature in a form other than subordination may need to separately account for the
embedded credit derivative feature. The provisions of ASU 2010-11 became effective on July 1,
2010. We do not anticipate that it will have a material impact on our consolidated results of
operations or financial position.
In April 2010, the FASB issued ASU 2010-18, Receivables (Subtopic 310) Effect of a Loan
Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset. This
guidance addresses diversity in practice on whether a loan that is part of a pool of loans
accounted for as a single asset should be removed from that pool upon modification that would
constitute a troubled debt restructuring or remain in the pool after modification. The guidance
also clarifies that modifications of loans that are accounted for within a pool do not result in
the removal of those loans from the pool even if the modification of those loans would otherwise be
considered a troubled debt restructuring. An entity will continue to be required to consider
whether the pool of assets in which the loan is included is impaired if the expected cash flows for
the pool change. The amendments in
74
this update do not require any additional disclosures and are effective for modifications of
loans accounted for within pools occurring in the first interim or annual period ending on or after
July 15, 2010. This guidance is not expected to have a significant impact on our consolidated
financial statements.
In July 2010, the FASB issued ASU 2010-20, Receivables (Subtopic 310)-Disclosures About the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective
of ASU 2010-20 is to provide financial statement users greater transparency about an entitys
allowance for credit losses and the credit quality of its financing receivables. Existing
disclosure guidance was amended to require an entity to provide a greater level of disaggregated
information about the credit quality of its financing receivables and its allowance for credit
losses. In addition, the amendments in ASU 2010-20 require an entity to disclose credit quality
indicators, past due information, and modifications of its financing receivables. These
improvements will help financial statement users assess an entitys credit risk exposures and its
allowance for credit losses. ASU 2010-20 is effective for interim or annual periods ending on or
after December 31, 2010. Since ASU 2010-20 only requires enhanced disclosures, management does not
expect the adoption of this statement to have a material impact on our consolidated financial
statements or results of operations.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this
prospectus have been prepared according to generally accepted accounting principles in the United
States, which require the measurement of financial positions and operating results in terms of
historical dollars without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation on our operations is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institutions performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of
goods and services.
Our Management
Board of Directors
The board of directors of Fraternity Community Bancorp and Fraternity Federal Savings and
Loan Association are each comprised of five persons who are elected for terms of three years,
approximately one-third of whom are elected annually. The same individuals comprise the boards of
directors of Fraternity Community Bancorp and Fraternity Federal Savings and Loan Association.
Three of our five directors are independent under the current listing standards of the Nasdaq
Stock Market. The two directors who are not independent under such standards are Thomas K.
Sterner, who serves as Chairman, Chief Executive Officer and Chief Financial Officer of Fraternity
Community Bancorp and Fraternity Federal Savings and Loan Association, and Richard C. Schultze, who
serves as President and Chief Operating Officer of Fraternity Community Bancorp and Fraternity
Federal Savings and Loan Association.
Information regarding the directors is provided below. Unless otherwise stated, each person
has held his or her current occupation for the last five years. Ages presented are as of June 30,
2010. The starting year of service as a director relates to service on the board of directors of
Fraternity Federal Savings and Loan Association.
The following directors have terms ending in 2011:
Michael P. OShea has been the President and Chief Executive Officer of OShea Lumber Company
since 1971. Director since 2002. Age 67.
Mr. OShea provides the Board with significant management, strategic and operational knowledge
through his experience as President and Chief Executive Officer of OShea Lumber Company. In
addition, Mr. OShea provides the Board of Directors with valuable insight regarding Fraternity
Federal Savings and Loan Associations
75
market area through his experience as President and Chief Executive Officer of OShea Lumber
Company over the past 39 years.
Richard C. Schultze has served with Fraternity Federal Savings and Loan Association since 1990
and has been our President and Chief Operating Officer since 1993. Director since 1993. Age 55.
Through his affiliation with Fraternity Federal Savings and Loan Association for over 20 years
and with over 32 years in the banking industry, Mr. Schultze brings in-depth knowledge and
understanding of the banking business and our history, operations and customer base. In addition,
Mr. Schultze has been a resident of Fraternity Federal Savings and Loan Associations market area
for many years and is an active member of the community. Mr. Schultzes active involvement in the
community has helped him establish a network of contacts that greatly assists us in our marketing
efforts.
The following directors have terms ending in 2012:
William D. Norton is the co-founder of and has served as an Executive Vice President of Red
Bag Solutions since March 2002. In addition to co-founding Red Bag Solutions, Mr. Norton has been
a Managing Member of Waste Processing Solutions Service Co. since May 2010. Director since 2003.
Age 63.
Mr. Norton has lived in Fraternity Federal Savings and Loan Associations market area for many
years and has developed extensive ties to the market area. Additionally, Mr. Nortons management
experience as a small business owner of two other companies in the local area have provided him
with leadership experience and expertise that is valuable to the Board of Directors.
Thomas K. Sterner has served with Fraternity Federal Savings and Loan Association since
January 1988 and has been our Chairman of the Board and Chief Executive Officer since 1993. He
also serves as our Chief Financial Officer. Director since 1993. Age 51.
Mr. Sterners over 31 years of banking experience, including 22 years with Fraternity Federal
Savings and Loan Association, have provided him with strong leadership and managerial skills, as
well as a deep understanding of the financial industry. In addition, Mr. Sterners knowledge of
all aspects of our business and its history, combined with his success and strategic vision,
position him well to serve as our Chairman, Chief Executive Officer and Chief Financial Officer.
The following director has a term ending in 2013:
William J. Baird, Jr. began his career with Armco Steel as an industrial engineer and in 1963
became a Partner in an engineering consulting business which he then sold in 1976. At that time,
he started a risk management insurance consulting firm which, after several mergers, became part of
the Willis Group, a global risk consulting/brokerage operation where he held several senior
management positions. He retired in 1995. Mr. Baird has been involved in numerous for-profit and
not-for profit organizations over 50 years, including service on the boards of directors of three
hospitals, two universities, three private businesses and numerous charities. Director since
2009. Age 70.
Mr. Baird provides extensive management experience in both large and small firm settings as
well as critical experience in risk management related matters. In addition, Mr. Bairds continued
involvement in community organizations and local matters is a vital component of a well rounded
board.
76
Executive Officers
The executive officers of Fraternity Community Bancorp and Fraternity Federal Savings and
Loan Association are elected annually by the board of directors and serve at the boards
discretion. The executive officers of Fraternity Community Bancorp and Fraternity Federal Savings
and Loan Association are:
|
|
|
Name |
|
Position |
Thomas K. Sterner
|
|
Chairman of the Board, Chief Executive Officer and
Chief Financial Officer of Fraternity Community
Bancorp and Fraternity Federal Savings and Loan
Association |
|
|
|
Richard C. Schultze
|
|
President and Chief Operating Officer of Fraternity
Community Bancorp and Fraternity Federal Savings and
Loan Association |
Meetings and Committees of the Board of Directors
We conduct business through meetings of our board of directors and its committees.
During the year ended December 31, 2009, the board of directors of Fraternity Federal Savings and
Loan Association met 28 times. As Fraternity Community Bancorp was incorporated in October 2010,
the board of directors of Fraternity Community Bancorp did not meet during the year ended December
31, 2009.
In connection with the formation of Fraternity Community Bancorp, the board of directors
established Audit, Compensation and Nominating Committees.
The Audit Committee consists of Michael P. OShea, William D. Norton and William J. Baird, Jr.
The Audit Committee is responsible for providing oversight relating to our financial statements
and financial reporting process, systems of internal accounting and financial controls, internal
audit function, annual independent audit and the compliance and ethics programs established by
management and the board. Each member of the Audit Committee is independent in accordance with the
listing standards of the Nasdaq Stock Market. The board of directors of Fraternity Community
Bancorp has designated William D. Norton as an audit committee financial expert under the rules of
the Securities and Exchange Commission.
The Compensation Committee consists of Michael P. OShea, William D. Norton and William J.
Baird, Jr. The Compensation Committee is responsible for human resources policies, salaries and
benefits, incentive compensation, executive development and management succession planning. Each
member of the Compensation Committee is independent in accordance with the listing standards of the
Nasdaq Stock Market.
The Nominating Committee consists of Michael P. OShea, William D. Norton and William J.
Baird, Jr. The Nominating Committee is responsible for identifying individuals qualified to become
board members and recommending a group of nominees for election as directors at each annual meeting
of shareholders, ensuring that the board and its committees have the benefit of qualified and
experienced independent directors, and developing a set of corporate governance policies and
procedures. Each member of the Nominating Committee is independent in accordance with the listing
standards of the Nasdaq Stock Market.
Each of Fraternity Community Bancorps committees listed above operates under a written
charter, which governs its composition, responsibilities and operations.
Corporate Governance Policies and Procedures
In addition to having established committees of the board of directors, Fraternity
Community Bancorp has also adopted certain policies to govern the activities of both Fraternity
Community Bancorp and Fraternity Federal Savings and Loan Association, including a code of business
conduct and ethics.
77
The code of business conduct and ethics, which applies to all employees and directors,
addresses conflicts of interest, the treatment of confidential information, general employee
conduct and compliance with applicable laws, rules and regulations. In addition, the code of
business conduct and ethics is designed to deter wrongdoing and to promote honest and ethical
conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with
all applicable laws, rules and regulations.
Executive Compensation
Summary Compensation Table
The following information is furnished for our principal executive officer and the next
most highly compensated executive officer whose total compensation for the year ended December 31,
2009 exceeded $100,000. These individuals are referred to in this prospectus as named executive
officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
Name and Principal Position |
|
Year |
|
Salary |
|
Bonus |
|
Compensation (1) |
|
Total |
Thomas K. Sterner |
|
|
2009 |
|
|
$ |
193,744 |
|
|
$ |
21,500 |
|
|
$ |
41,335 |
|
|
$ |
256,579 |
|
Chairman of the Board,
Chief Executive Officer and Chief
Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard C. Schultze |
|
|
2009 |
|
|
|
193,744 |
|
|
|
21,500 |
|
|
|
38,333 |
|
|
|
253,577 |
|
President and Chief Operating Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Details of the amounts disclosed in the All Other Compensation column are provided in the
table below: |
|
|
|
|
|
|
|
|
|
|
|
Mr. Sterner |
|
|
Mr. Schultze |
|
Employer matching contribution to 401(k) plan |
|
$ |
9,024 |
|
|
$ |
11,003 |
|
Contributions under deferred compensation arrangement |
|
|
9,750 |
|
|
|
9,750 |
|
Directors fees |
|
|
22,561 |
|
|
|
17,580 |
|
|
|
|
|
|
|
|
Total |
|
$ |
41,335 |
|
|
$ |
38,333 |
|
|
|
|
|
|
|
|
Employment Agreements and Severance Plan
Current Employment Agreement. On September 15, 2009, Fraternity Federal Savings and Loan
Association entered into employment agreements with Messrs. Sterner and Schultze. Each of the
agreements contain the same general terms, except for the employment positions with each of the
executives. The agreements provide for a three-year term, subject to annual renewal by the board
of directors for an additional year beyond the then-current expiration date. As extended, the term
of the agreements currently expires on September 15, 2013. Under the agreements, the current
annual base salary for each of Messrs. Sterner and Schultze is $205,368. We may modify the amount
of the base salaries under the agreements from time to time and will review the salaries not less
than annually. We may also pay Messrs. Sterner and Schultze discretionary bonuses. The
executives also participate in all standard benefit plans and programs we sponsor for employees or
other officers.
In addition to providing for base salary and other benefits, the employment agreements
incorporate the terms of a deferred compensation program originally established in 2004. Pursuant
to that program, we contribute to a trust for the benefit of each of the executives $812.50 each
month. Each executive is fully vested in these contributions, plus any earnings on the
contributions. Following their termination of employment, the trust will pay the accumulated
benefit to Messrs. Sterner and Schultze weekly over a 15-year period. However, upon a change in
control, the trust will pay the accumulated benefits in a single lump sum payment.
Under the employment agreements, if we terminate Messrs. Sterners or Schultzes employment
for cause, as that term is defined in the agreements, they will not receive any compensation for
any period of time after the termination date. If we terminate the executives employment without
cause, we will continue to pay their base salary for 36 months. In addition, we will continue
health and life insurance benefits for the executive and his dependents until the earlier of (i)
the date the executive turns age 65, (ii) his death or (iii) 36 months from his
78
termination. We will also provide the severance payment and benefits to the executives if
they voluntarily terminate employment for good reason. Under the agreement, the executives have
good reason to terminate employment upon (i) a material diminution of base salary, (ii) a material
diminution of authorities, duties or responsibilities or (iii) a relocation of place of employment
by more than 30 miles.
If we, or our successor, terminate Messrs. Sterners or Schultzes employment during the term
of the employment agreements following a change in control or if they voluntarily terminate
employment with us or our successor during the term of the agreements for good reason (as
described above) following a change in control, they will receive a lump sum severance benefit
equal to 2.99 times their average taxable income for the five taxable years preceding the change in
control. In addition, we will continue health and life insurance benefits for the executive and
his dependents until the earlier of (i) the date the he turns age 65, (ii) his death or (iii) 36
months from his termination.
Proposed Employment Agreements. Upon completion of the conversion, Fraternity Community
Bancorp expects to enter into separate employment agreements with each of Messrs. Sterner and
Schultze on the same general terms as contained in the agreements with Fraternity Federal Savings
and Loan Association.
Employee Severance Compensation Plan. In connection with the conversion, we expect to adopt
an employee severance plan to provide benefits to eligible employees who terminate employment in
connection with or following a change in control. Employees become eligible for severance benefits
under the plan if they complete a minimum of one year of service and do not enter into a separate
employment or change in control agreement. Under the severance plan, if, within twelve months
after a change in control, an employees employment involuntarily terminates, or if an employee
voluntarily terminates employment without being offered continued employment in a comparable
position, the terminated employee would receive a severance payment equal to two weeks of base
compensation for each year of service up to a maximum of 52 weeks of base compensation and with a
minimum of four (4) weeks base compensation. Based solely on compensation levels and years of
service at June 30, 2010, and assuming that a change in control occurred on June 30, 2010, and all
eligible employees became entitled to severance payments, the aggregate payments due under the
severance plan would equal approximately $388,000.
Benefit Plans
401(k) Plan. We maintain the Fraternity Federal Savings and Loan Association 401(k)
Plan, a tax-qualified defined contribution plan, for all employees of Fraternity Federal Savings
and Loan Association who satisfy the plans eligibility requirements. Participants become eligible
to participate in the plan on the first day of the month that coincides with or next follows the
date they complete one year of employment. Eligible employees may contribute up to 50% of their
compensation to the plan on a pre-tax basis, subject to limitations imposed by the Internal Revenue
Code. For 2010, the salary deferral contribution limit is $16,500; provided, however, that
participants over age 50 may contribute an additional $5,500 to the plan. Participants are always
100% vested in their salary deferral contributions. In addition to salary deferral contributions,
the plan provides that we will make a safe harbor matching contribution equal to 100% of the
participants deferrals, not to exceed 4% of the participants salary, plus 50% of the next 2% of the participants elective contributions. In addition, we currently make
monthly basic contributions equal to 3% of each participants compensation. Participants are 100%
vested in employer contributions under the plan. The plan allows participants to take loans and
other in-service distributions in accordance with certain requirements set forth in the plan.
Participants have individual accounts under the plan and may direct the investment of their
accounts among a variety of investment funds. In connection with the offering, we expect to add
another investment alternative, the Fraternity Community Bancorp Stock Fund (the Stock Fund),
which will permit participants to use their 401(k) plan funds to purchase Fraternity Community
Bancorp common stock in the offering as an investment under the 401(k) plan. Unlike the employee
stock ownership plan, the 401(k) plan does not have priority subscription rights to purchase common
stock in the offering. A 401(k) plan participant who elects to purchase common stock in the
offering through self-directed purchases within the plan will receive the same subscription
priority, and be subject to the same purchase limitations, as if the participant had elected to
purchase the common stock using funds outside the plan. See The Conversion and Stock
OfferingSubscription Offering and Subscription Rights and "Limitations on the Purchase of
Shares. The Stock Fund trustee will purchase common stock in the offering on behalf of plan
participants, to the extent that shares are available. Participants will direct the trustee
regarding the voting of shares purchased for their plan accounts through the Stock Fund.
79
Employee Stock Ownership Plan. In connection with the conversion, Fraternity Federal Savings
and Loan Association has adopted an employee stock ownership plan for eligible employees. Eligible
employees will participate in the employee stock ownership plan as of the first day of the month
following or coincident with their completion of one year of service.
We may engage an independent third party to act as trustee of the plan or we may appoint
certain directors or officers to serve as trustees of the plan. The trustees, on behalf of the
employee stock ownership plan, will subscribe for up to 8% of the number of shares of common stock
sold in the conversion 81,600, 96,000, 110,400 and 126,960 shares at the minimum, midpoint, maximum
and adjusted maximum of the offering range, respectively). The purchase of common stock by the
employee stock ownership plan in the offering will comply with all applicable Office of Thrift
Supervision regulations. The trustees will fund the stock purchase for the plan through a loan
from Fraternity Community Bancorp equal to 100% of the aggregate purchase price of the common
stock. The plan will repay the loan principally through contributions to the employee stock
ownership plan by Fraternity Federal and any dividends paid on common stock held by the plan over
an expected 12-year term of the loan. We anticipate that the fixed interest rate for the will
equal the prime rate, as published in the Wall Street Journal, on the
closing date of the offering. See Pro Forma Data.
The trustee will hold the shares purchased by the employee stock ownership plan in a loan
suspense account, and will release the shares from the suspense account on a pro rata basis as
Fraternity Federal Savings and Loan Association repays the loan. The trustee will allocate the
shares released among active participants on the basis of each active participants proportional
share of compensation. Participants will vest in their employee stock ownership plan allocations
at the rate of 33.3% per year beginning after two years of service. Participants will be credited
with past service for vesting purposes under the employee stock ownership plan. Participants will
become fully vested upon age 65, death or disability, a change in control, or termination of the
plan. Generally, participants will receive distributions from the employee stock ownership plan
upon separation from service. The plan reallocates any unvested shares of common stock forfeited
upon termination of employment among the remaining participants in the plan.
Participants may direct the plan trustee how to vote the shares of common stock credited to
their accounts. The plan trustee will vote all unallocated shares and allocated shares for which
participants do not provide instructions on any matter in the same ratio as it votes those shares
for which participants provide instructions, subject to fulfillment of its fiduciary
responsibilities as trustee.
Under applicable accounting requirements, Fraternity Federal Savings and Loan Association will
record a compensation expense for a leveraged employee stock ownership plan at the fair market
value of the shares when they are committed to be released from the suspense account to
participants accounts under the plan.
Equity Incentive Plans
Future Equity Incentive Plan. Following the conversion, Fraternity Community Bancorp plans to
adopt an equity incentive plan that will provide for grants of stock options and restricted stock.
In accordance with applicable regulations, we anticipate that the plan, if adopted within the first
year after the offering, will authorize a number of stock options equal to 10% of the shares sold
in the conversion stock offering and a number of shares of restricted stock equal to 4% of the
shares sold in the offering. Therefore, the number of shares reserved under the plan, if adopted
within that one-year period, will range from 142,800 shares, assuming 1,020,000 shares are sold in
the offering at the minimum of the offering range, to 193,200 shares, assuming 1,380,000 shares are
sold in the offering at the maximum of the offering range. If we adopt the equity incentive plan
more than one year after completion of the offering, we would not be subject to Office of Thrift
Supervision regulations limiting the awards we may make under the plan or certain other
requirements applicable to the plan implemented within the first year of conversion. We may fund
the plan with shares we purchase in the open market or with authorized, but unissued shares, of
common stock. We may also establish a trust to hold shares subject to the terms of the plan. In
determining the source of shares transferred to participants of the plan, we will consider our
financial condition and results of operations, capital requirements, economic conditions and
whether sufficient shares are available for purchase in the open market. The equity incentive plan
will comply with all applicable required Office of Thrift Supervision regulations except to the
extent waived by the Office of Thrift Supervision.
80
Nonqualified Deferred Compensation
Deferred Compensation Arrangement. Each month, we contribute $812.50 to a trust for the
benefit of Messrs. Sterner and Schultze. The trust will pay the accumulated benefit of these
contributions, plus any earnings on the contributions, to Messrs. Sterner and Schultze either in a
lump sum upon a change in control or over a 15-year period following the executives termination
from employment. For more information on this benefit see Employment Agreements and Severance Plan
Current Employment Agreement.
Existing Supplemental Executive Retirement Plan. On September 15, 2009, Fraternity Federal
established a supplemental executive retirement plans for the benefit of Messrs. Sterner and
Schultze. Under the plans, if Mr. Sterner or Mr. Schultze terminates employment after attaining
age 65, we will pay an annual retirement benefit of $90,115 for Mr. Sterner or $65,196 for Mr.
Schultze for 15 years (the Normal Retirement Benefit). If either executive terminates employment
before attaining age 65, we will pay him a reduced retirement benefit equal to the amount we have
accrued to date toward his Normal Retirement Benefit (the Early Retirement Benefit) in equal
monthly installments for 15 years. If either executive terminates employment at any time following
a change in control, regardless of age, we will pay him a lump sum benefit equal to the present
value of his Normal Retirement Benefit. If either executive dies while employed with Fraternity
Federal Savings and Loan Association, we will pay his beneficiaries a single lump sum benefit equal
to the lesser of $1.0 million or a portion of the insurance proceeds from a life insurance policy
on the life of the applicable executive pursuant to the terms of a death benefit plan agreement we
have entered into with each executive. If an executive dies after terminating employment and while
receiving payments under the plan, we will pay his beneficiaries a lump sum payment equal to the
present value of remaining scheduled payments under the plan.
Proposed Excess Benefit Supplemental Executive Retirement Plan. Following the conversion, we
intend to implement a supplemental executive retirement plan to provide for supplemental retirement
benefits with respect to the employee stock ownership plan and 401(k) plan. The plan will provide
participating executives with benefits otherwise limited by other provisions of the Internal
Revenue Code or the terms of the employee stock ownership plan loan. Specifically, the plan will
provide benefits to eligible individuals (those designated by our board of directors) that cannot
be provided under the employee stock ownership plan or 401(k) plan as a result of the limitations
imposed by the Internal Revenue Code, but that would have been provided under those plans but for
such limitations. In addition to providing for benefits lost under tax-qualified plans as a result
of limitations imposed by the Internal Revenue Code, the new plan will also provide supplemental
benefits to designated individuals upon a change of control before the complete scheduled repayment
of the employee stock ownership plan loan. Generally, upon a change in control, the supplemental
executive retirement plan will provide the participant with a benefit equal to the benefit the
individual would have received under the employee stock ownership plan had he remained employed
throughout the term of the employee stock ownership plan loan less the benefits actually provided
under the employee stock ownership on behalf of the participant. An individuals benefit under the
supplemental executive retirement plan will become payable upon a separation from service.
Director Compensation
The following table provides the compensation received by individuals, who are not
executive officers, who served as directors of Fraternity Federal Savings and Loan Association
during the 2009 fiscal year. Since the formation of Fraternity Community Bancorp, no directors
have received compensation for service as a director of Fraternity Community Bancorp.
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
|
|
|
Paid in Cash |
|
Total |
William J. Baird, Jr. |
|
$ |
3,780 |
|
|
$ |
3,780 |
|
William D. Norton |
|
$ |
20,457 |
|
|
$ |
20,456 |
|
Michael P. OShea |
|
$ |
20,226 |
|
|
$ |
20,225 |
|
81
Meeting Fees for Non-Employee Directors. The following table sets forth the applicable fees
that are paid to our non-employee directors for their service on the board of directors of
Fraternity Federal Savings and Loan Association. Members of the board of directors of Fraternity
Community Bancorp will not receive additional fees for service on the Companys board of directors.
|
|
|
|
|
Board of Directors of Fraternity Federal Savings and Loan Association: |
|
|
|
|
Fee for each board meeting attended |
|
$ |
630 |
|
Additional fee for each asset and liability committee and loan committee
meeting attended |
|
|
125 |
|
Director Retirement Policy
In 2009, Fraternity Federal established a director retirement policy under which Messrs.
OShea and Norton participate. Pursuant to that policy, each director will receive an annual
retirement benefit of $16,000, payable for 10 years, beginning upon his retirement at age 75.
Transactions with Fraternity Federal Savings and Loan Association
Loans and Extensions of Credit. The Sarbanes-Oxley Act of 2002 generally prohibits loans
by publicly traded companies to its executive officers and directors. However, the Sarbanes-Oxley
Act contains a specific exemption from such prohibition for loans by banks to their executive
officers and directors in compliance with federal banking regulations. Federal regulations
generally require that all loans or extensions of credit to executive officers and directors of
insured institutions must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with other persons and must
not involve more than the normal risk of repayment or present other unfavorable features, although
federal regulations allow us to make loans to executive officers and directors at reduced interest
rates if the loan is made under a benefit program generally available to all other employees that
does not give preference to any executive officer or director over any other employee.
In addition, loans made to a director or executive officer in an amount that, when aggregated
with the amount of all other loans to the person and his or her related interests, are in excess of
the greater of $25,000 or 5% of Fraternity Federal Savings and Loan Associations capital and
surplus, up to a maximum of $500,000, must be approved in advance by a majority of the
disinterested members of the board of directors. See Regulation and Supervision Regulation of
Federal Savings Banks Transactions with Related Parties.
The outstanding balance of loans extended by Fraternity Federal Savings and Loan Association
to its executive officers and directors and related parties was $814,000 at June 30, 2010, or
approximately 3.1% of pro forma shareholders equity assuming that 1,200,000 shares are sold in the
offering at the midpoint of the offering range. Such loans were made in the ordinary course of
business, on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable loans with persons not related to Fraternity Federal Savings
and Loan Association, and did not involve more than the normal risk of collectibility or present
other unfavorable features when made. All loans were performing according to their original terms
at June 30, 2010.
Other Transactions. Since January 1, 2008, there have been no transactions and there are no
currently proposed transactions in which we were or are to be a participant and the amount involved
exceeds $120,000, and in which any of our executive officers and directors had or will have a
direct or indirect material interest.
82
Indemnification for Directors and Officers
Fraternity Community Bancorps articles of incorporation provide that Fraternity
Community Bancorp shall indemnify its directors and officers, whether serving the Fraternity
Community Bancorp or at its request any other entity, to the fullest extent required or permitted
by the general laws of the State of Maryland, including the advance of expenses under the
procedures required, and other employees and agents to such extent as shall be authorized by the
board of directors or Fraternity Community Bancorps bylaws and as permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as amended, may be
permitted to directors, officers and controlling persons of Fraternity Community Bancorp pursuant
to its articles of incorporation or otherwise, Fraternity Community Bancorp has been advised that,
in the opinion of the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
83
Subscriptions by Executive Officers and Directors
The following table presents certain information as to the proposed purchases of common
stock by our directors and executive officers, including their associates, if any, as defined by
applicable regulations. No individual has entered into a binding agreement to purchase these
shares and, therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase in the aggregate more than 32% of the
shares sold in the offering. Like all of our depositors, our directors and officers have
subscription rights based on their deposits. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories. All directors and
officers as a group would own 4.4% of our outstanding shares at the minimum of the offering range
and 3.3% of our outstanding shares at the maximum of the offering range.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Purchases of Stock in the Offering |
|
|
|
|
|
|
|
|
|
|
Percent of Common |
|
|
|
|
|
|
|
|
|
|
Stock Outstanding at |
|
|
Number of |
|
|
|
|
|
|
Minimum of Offering |
Name |
|
Shares |
|
|
Dollar Amount |
|
|
Range |
Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
William J. Baird, Jr. |
|
|
2,500 |
|
|
$ |
25,000 |
|
|
|
0.2 |
% |
William D. Norton |
|
|
5,000 |
|
|
|
50,000 |
|
|
|
0.5 |
|
Michael P. OShea |
|
|
2,500 |
|
|
|
25,000 |
|
|
|
0.2 |
|
Richard C. Schultze |
|
|
15,000 |
|
|
|
150,000 |
|
|
|
1.5 |
|
Thomas K. Sterner |
|
|
20,000 |
|
|
|
200,000 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers
as a group (5 persons) |
|
|
45,000 |
|
|
$ |
450,000 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
84
Regulation and Supervision
General
Fraternity Federal Savings and Loan Association is subject to extensive regulation,
examination and supervision by the Office of Thrift Supervision, as its primary federal regulator,
and the Federal Deposit Insurance Corporation, as its deposits insurer. Fraternity Federal Savings
and Loan Association is a member of the Federal Home Loan Bank System, and its deposit accounts are
insured up to applicable limits by the Deposit Insurance Fund managed by the Federal Deposit
Insurance Corporation. Fraternity Federal Savings and Loan Association must file reports with the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its
activities and financial condition in addition to obtaining regulatory approval before entering
into certain transactions such as mergers with, or acquisitions of, other financial institutions.
There are periodic examinations by the Office of Thrift Supervision and, under certain
circumstances, the Federal Deposit Insurance Corporation, to evaluate Fraternity Federal Savings
and Loan Associations safety and soundness and compliance with various regulatory requirements.
This regulatory structure is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse
impact on Fraternity Community Bancorp and Fraternity Federal Savings and Loan Association and
their operations. Fraternity Community Bancorp, as a savings and loan holding company, will be
required to file certain reports with, is subject to examination by, and otherwise must comply with
the rules and regulations of the Office of Thrift Supervision. Fraternity Community Bancorp will
also be subject to the rules and regulations of the Securities and Exchange Commission under the
federal securities laws.
The Dodd-Frank Act, signed by the President on July 21, 2010, provides for the regulation and
supervision of federal savings associations like Fraternity Federal Savings and Loan Association to
be transferred to the Office of the Comptroller of the Currency, the agency that regulates national
banks. The Office of The Comptroller of the Currency will assume primary responsibility for
implementing and enforcing many of the laws and regulations applicable to federal savings
associations. The transfer will occur over a transition period of up to one year, subject to a
possible six month extension. At the same time, the responsibility for supervising savings and
loan holding companies like Fraternity Community Bancorp will be transferred to the Federal Reserve
Board. The Dodd-Frank Act also provides for the creation of a new agency, the Consumer Financial
Protection Bureau, as an independent bureau of the Federal Reserve Board, to take over the
implementation of federal consumer financial protection and fair lending laws from the depository
institution regulators. However, institutions of $10 billion or fewer in assets will continue to
be examined for compliance with such laws and regulations by, and subject to the enforcement
authority of, the prudential regulator rather than the Consumer Financial Protection Bureau.
The material regulatory requirements that are or will be applicable to Fraternity Federal
Savings and Loan Association and Fraternity Community Bancorp are described below. This
description of statutes and regulations is not intended to be a complete explanation of such
statutes and regulations and their effects on Fraternity Federal Savings and Loan Association and
Fraternity Community Bancorp.
Regulation of Federal Savings Association
Business Activities. Federal law and regulations, primarily the Home Owners Loan Act
and the regulations of the Office of Thrift Supervision, govern the activities of federal savings
associations, such as Fraternity Federal Savings and Loan Association. These laws and regulations
delineate the nature and extent of the activities in which federal savings associations may engage.
In particular, certain lending authority for federal savings associations, e.g., commercial,
nonresidential real property loans and consumer loans, is limited to a specified percentage of the
institutions capital or assets.
The Dodd-Frank Act authorizes depository institutions to pay interest on demand deposits
effective July 31, 2011. Depending upon competitive responses, that change could have an adverse
impact on Fraternity Federal Savings and Loan Associations interest expense.
85
Branching. Federal savings associations are authorized to establish branch offices in any
state or states of the United States and its territories, subject to the approval of the Office of
Thrift Supervision.
Capital Requirements. The Office of Thrift Supervisions capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total
assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS
examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for national banks.
The risk-based capital standard requires federal savings institutions to maintain Tier 1
(core) and total capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations,
residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to
1,250%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed
inherent in the type of asset. Core (Tier 1) capital is defined as common shareholders equity
(including retained earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than
certain mortgage servicing rights and credit card relationships. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance
for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
The Office of Thrift Supervision also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institutions capital level is or
may become inadequate in light of the particular circumstances. At June 30, 2010, Fraternity
Federal Savings and Loan Association met each of these capital requirements. See note 13 of the
notes to consolidated financial statements included in this prospectus.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take
certain supervisory actions against undercapitalized institutions, the severity of which depends
upon the institutions degree of undercapitalization. Generally, a savings institution that has a
ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating) is considered to be
undercapitalized. A savings institution that has a total risk-based capital ratio of less than
6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered
to be significantly undercapitalized and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be critically undercapitalized. Subject to a
narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator
within specified time frames for an institution that is critically undercapitalized. An
institution must file a capital restoration plan with the Office of Thrift Supervision within 45
days of the date it receives notice that it is undercapitalized, significantly undercapitalized
or critically undercapitalized. Compliance with the plan must be guaranteed by any parent
holding company in the amount of the lesser of 5% of the associations total assets when it became
undercapitalized or the amount necessary to achieve full compliance at the time the association
first failed to comply. In addition, numerous mandatory supervisory actions become immediately
applicable to an undercapitalized institution, including, but not limited to, increased monitoring
by regulators and restrictions on growth, capital distributions and expansion. Significantly
undercapitalized and critically undercapitalized institutions are subject to more extensive
mandatory regulatory actions. The Office of Thrift Supervision could also take any one of a number
of discretionary supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. At June 30, 2010, Fraternity Federal
Savings and Loan Association was considered well capitalized under these regulations.
Loans to One Borrower. Federal law provides that savings institutions are generally subject
to the limits on loans to one borrower applicable to national banks. Subject to certain
exceptions, a savings institution may
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not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. See Our Business
Lending Activities Loans to One Borrower.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have
adopted Interagency Guidelines Establishing Standards for Safety and Soundness. The guidelines set
forth the safety and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes impaired. If the Office
of Thrift Supervision determines that a savings institution fails to meet any standard prescribed
by the guidelines, the Office of Thrift Supervision may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Limitation on Capital Distributions. Office of Thrift Supervision regulations impose
limitations upon all capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another institution in a cash-out
merger. Under the regulations, an application to and the prior approval of the Office of Thrift
Supervision is required before any capital distribution if the institution does not meet the
criteria for expedited treatment of applications under Office of Thrift Supervision regulations
(i.e., generally, examination and Community Reinvestment Act ratings in the two top categories),
the total capital distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with the Office of Thrift Supervision. If an application is not
required, the institution must still provide prior notice to the Office of Thrift Supervision of
the capital distribution if it is a subsidiary of a holding company, like Fraternity Federal
Savings and Loan Association will be upon the completion of the conversion. If Fraternity Federal
Savings and Loan Associations capital were ever to fall below its regulatory requirements or the
Office of Thrift Supervision notified it that it was in need of increased supervision, its ability
to make capital distributions could be restricted. In addition, the Office of Thrift Supervision
could prohibit a proposed capital distribution that would otherwise be permitted by the regulation,
if the agency determines that such distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either qualify as a
domestic building and loan association under the Internal Revenue Code or maintain at least 65%
of its portfolio assets (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain qualified thrift investments (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine months out of each
12-month period.
A savings institution that fails the qualified thrift lender test is subject to certain
operating restrictions. The Dodd-Frank Act also makes noncompliance with the qualified thrift
lender test subject to agency enforcement action for a violation of law and a basis for dividend
restrictions. As of June 30, 2010, Fraternity Federal Savings and Loan Association maintained
95.01% of its portfolio assets in qualified thrift investments and, therefore, met the qualified
thrift lender test.
Transactions with Related Parties. Fraternity Federal Savings and Loan Associations
authority to engage in transactions with affiliates is limited by Office of Thrift Supervision
regulations and Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal
Reserve Boards Regulation W. The term affiliates for these purposes generally means any company
that controls or is under common control with an institution. Fraternity Community Bancorp and any
of its non-savings institution subsidiaries would be affiliates of Fraternity Federal Savings and
Loan Association. In general, transactions with affiliates must be on terms that are as favorable
to the institution as comparable transactions with non-affiliates. In addition, certain types of
transactions are restricted to 10% of an institutions capital and surplus with any one affiliate
and 20% of capital and surplus with all affiliates. Collateral in specified amounts must usually be
provided by affiliates in order to receive loans from an institution. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its
executive officers and directors. However, that act contains a specific exception for loans by a
depository institution to its executive
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officers and directors in compliance with federal banking laws. Under such laws, Fraternity Federal
Savings and Loan Associations authority to extend credit to executive officers, directors and 10%
shareholders (insiders), as well as entities such persons control, is limited. The law restricts
both the individual and aggregate amount of loans Fraternity Federal Savings and Loan Association
may make to insiders based, in part, on Fraternity Federal Savings and Loan Associations capital
position and requires certain board approval procedures to be followed. Such loans must be made on
terms substantially the same as those offered to unaffiliated individuals and not involve more than
the normal risk of repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional restrictions applicable to loans
to executive officers. For information about transactions with our directors and officers, see Our
Management Transactions with Fraternity Federal Savings and Loan Association.
Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over
federal savings institutions and has the authority to bring actions against the institution and all
institution-affiliated parties, including shareholders, and any attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or directors to institution
of receivership, or conservatorship. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal
Deposit Insurance Corporation has authority to recommend to the Director of the Office of Thrift
Supervision that enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to
take such action under certain circumstances. Federal law also establishes criminal penalties for
certain violations.
The Office of the Comptroller of the Currency will assume the enforcement authority of the
Office of Thrift Supervision as part of the Dodd-Frank Act regulatory restructuring.
Assessments. Federal savings associations are required to pay assessments to the Office of
Thrift Supervision to fund its operations. The general assessments, paid on a semi-annual basis,
are based upon the savings institutions total assets, including consolidated subsidiaries, as
reported in the institutions latest quarterly thrift financial report, the institutions financial
condition and the complexity of its asset portfolio. The Office of the Comptroller of the Currency
also funds its operations through assessments on regulated institutions.
Insurance of Deposit Accounts. Fraternity Federal Savings and Loan Associations deposits are
insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation. Under the Federal Deposit Insurance Corporations risk-based assessment system,
insured institutions are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors, with less risky institutions paying lower
assessments. An institutions assessment rate depends upon the category to which it is assigned,
and certain potential adjustments established by Federal Deposit Insurance Corporation regulations.
Effective April 1, 2009, assessment rates range from seven to 77.5 basis points of assessable
deposits. Beginning January 1, 2011, assessment rates will range from 10 to 80.5 basis points of
assessable deposits. The Federal Deposit Insurance may adjust the scale uniformly from one quarter
to the next, except that no adjustment can deviate more than three basis points from the base scale
without notice and comment. No institution may pay a dividend if in default of the federal deposit
insurance assessment.
The Federal Deposit Insurance Corporation imposed on all insured institutions a special
emergency assessment of five basis points of total assets minus Tier 1 capital (as of June 30,
2009), capped at ten basis points of an institutions deposit assessment base, in order to cover
losses to the Deposit Insurance Fund. That special assessment, in the amount of $76,000, was
collected on September 30, 2009. The Federal Deposit Insurance Corporation provided for similar
assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of
further special assessments, the Federal Deposit Insurance Corporation required insured
institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009
through the fourth quarter of 2012. Such amount was $629,000 for the Fraternity Federal Savings
and Loan Association. The estimated assessments, which include an assumed annual assessment base
increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December
31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular
assessment with an offsetting credit to the prepaid asset.
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Due to the recent difficult economic conditions, deposit insurance per account owner has been
raised to $250,000. That limit was made permanent by the Dodd-Frank Act. In addition, the Federal
Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which,
for a fee, noninterest bearing transaction accounts would receive unlimited insurance coverage
until June 30, 2010, subsequently extended to December 31, 2010, with an additional possible
extension up to December 31, 2011, and certain senior unsecured debt issued by institutions and
their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the
Federal Deposit Insurance Corporation through June 30, 2012, or in some cases, December 31, 2012.
Fraternity Federal Savings and Loan Association opted to participate in the unlimited noninterest
bearing transaction account coverage and in the unsecured debt guarantee program. The Dodd-Frank
Act extended the unlimited coverage for certain noninterest bearing transaction accounts until
December 31, 2012.
In addition to the assessment for deposit insurance, institutions are required to make
payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a
predecessor deposit insurance fund. That payment is established quarterly and during the four
quarters ended June 30, 2010 averaged 1.04 basis points of assessable deposits. These financing
corporation payments will continue until the bonds mature in 2017 through 2019.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of
estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance
Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with
assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the
1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance
Corporation.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A
significant increase in insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of Fraternity Federal Savings and Loan Association. Management
cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a
finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
regulatory condition imposed in writing. The management of Fraternity Federal Savings and Loan
Association does not know of any practice, condition or violation that might lead to termination of
deposit insurance.
Federal Home Loan Bank System. Fraternity Federal Savings and Loan Association is a member of
the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The
Federal Home Loan Bank provides a central credit facility primarily for member institutions.
Fraternity Federal Savings and Loan Association, as a member of the Federal Home Loan Bank of
Atlanta, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank.
At June 30, 2010, Fraternity Federal Savings and Loan Association complied with this requirement
with an investment in Federal Home Loan Bank stock of $1.6 million.
The Federal Home Loan Banks are required to provide funds for the resolution of insolvent
thrifts in the late 1980s and to contribute funds for affordable housing programs. These
requirements, or general results of operations, could reduce or eliminate the dividends that the
Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members. If dividends are reduced, or interest on
future Federal Home Loan Bank advances increased, our net interest income could also be reduced.
In fact, Federal Home Loan Bank dividends have been significantly reduced over the past two years
from previous levels.
Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by Office of
Thrift Supervision regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor does it limit an
institutions discretion to develop the types of products and services that it believes are best
suited to its particular community, consistent with the Community Reinvestment Act. The Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with its
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examination of a savings association, to assess the institutions record of meeting the credit
needs of its community and to take such record into account in its evaluation of certain
applications by such institution.
The Community Reinvestment Act requires public disclosure of an institutions rating and
requires the Office of Thrift Supervision to provide a written evaluation of an associations
Community Reinvestment Act performance utilizing a four-tiered descriptive rating system.
Fraternity Federal Savings and Loan Association received a satisfactory rating as a result
of its most recent Community Reinvestment Act assessment.
Other Regulations
Interest and other charges collected or contracted for by Fraternity Federal Savings and
Loan Association are subject to state usury laws and federal laws concerning interest rates.
Fraternity Federal Savings and Loan Associations operations are also subject to federal laws
applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves; |
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit; |
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Fair Credit Reporting Act of 1978, governing the use and provision of information to
credit reporting agencies; |
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Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and |
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Rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. |
The operations of Fraternity Federal Savings and Loan Association also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; |
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs
automatic deposits to and withdrawals from deposit accounts and customers rights and
liabilities arising from the use of automated teller machines and other electronic
banking services; |
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Check Clearing for the 21st Century Act (also known as Check 21), which gives
substitute checks, such as digital check images and copies made from that image, the
same legal standing as the original paper check; |
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Title III of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the USA
PATRIOT Act), which significantly expands the responsibilities of financial
institutions, including savings and loan associations, in preventing the use of the
U.S. financial system to fund terrorist activities. Among other provisions, it
requires financial institutions operating in the United States to develop new
anti-money laundering compliance programs, due diligence policies and controls to
ensure the detection and reporting of money laundering. Such required compliance
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supplement existing compliance requirements, also applicable to financial
institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control
Regulations; and |
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The Gramm-Leach-Bliley Act which places limitations on the sharing of consumer
financial information with unaffiliated third parties. Specifically, the
Gramm-Leach-Bliley Act requires all financial institutions offering financial products
or services to retail customers to provide such customers with the financial
institutions privacy policy and provide such customers the opportunity to opt out of
the sharing of personal financial information with unaffiliated third parties. |
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
noninterest earning reserves against their transaction accounts (primarily Negotiable Order of
Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on
net transaction accounts up to and including $55.2 million; a 10% reserve ratio is applied above
$55.2 million. The first $10.7 million of otherwise reservable balances (subject to adjustments by
the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted
annually. Fraternity Federal Savings and Loan Association complies with the foregoing
requirements.
Holding Company Regulation
General. Fraternity Community Bancorp will be a unitary savings and loan holding
company within the meaning of federal law, will register with the Office of Thrift Supervision and
be subject to Office of Thrift Supervision regulations, examinations, supervision, reporting
requirements and regulations. In addition, the Office of Thrift Supervision will have enforcement
authority over Fraternity Community Bancorp and its non-savings institution subsidiaries. Among
other things, this authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to Fraternity Federal Savings and Loan
Association. As a savings and loan holding company, new Fraternity Community Bancorp will be able
to engage only in activities permitted to a financial holding company and those permitted for a
multiple savings and loan holding company, which includes non-banking activities that have been
determined to be permissible for bank holding companies. As part of the Dodd-Frank Act regulatory
restructuring, the Office of Thrift Supervisions authority over savings and loan holding companies
will be transferred to the Federal Reserve Board, which is the agency that regulates bank holding
companies.
The Gramm-Leach-Bliley Act of 1999 provided that no company may acquire control of a savings
institution after May 4, 1999 unless it engages only in the financial activities permitted for
financial holding companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan
holding companies may only engage in such activities. Upon any non-supervisory acquisition by
Fraternity Community Bancorp of another savings institution or savings association that meets the
qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift
Supervision, Fraternity Community Bancorp would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities
authorized by Office of Thrift Supervision regulation. However, the Office of Thrift Supervision
has issued an interpretation concluding that multiple savings and loan holding companies may also
engage in activities permitted for financial holding companies.
A savings and loan holding company is prohibited from, directly or indirectly, acquiring more
than 5% of the voting stock of another savings institution or savings and loan holding company,
without prior written approval of the Office of Thrift Supervision, and from acquiring or retaining
control of a depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating applications by holding companies to acquire savings institutions, the
Office of Thrift Supervision considers the financial and managerial resources and future prospects
of the company and institution involved, the effect of the acquisition on the risk to the deposit
insurance funds, the convenience and needs of the community and competitive factors.
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The Office of Thrift Supervision may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in more than one state,
subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and
loan holding companies; and (ii) the acquisition of a savings institution in another state if the
laws of the state target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Savings and loan holding companies are not currently subject to specific regulatory capital
requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate
consolidated capital requirements for depository institution holding companies that are no less
stringent, both quantitatively and in terms of components of capital, than those applicable to
institutions themselves. There is a five year transition period before the capital requirements
will apply to savings and loan holding companies. The Dodd-Frank Act also extends the source of
strength doctrine to savings and loan holding companies. The regulatory agencies must issue
regulations requiring that all bank and savings and loan holding companies serve as a source of
strength to their subsidiary depository institutions.
Fraternity Federal Savings and Loan Association must notify the Office of Thrift Supervision
30 days before declaring any dividend to Fraternity Community Bancorp. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is evaluated by the
Office of Thrift Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be
submitted to the Office of Thrift Supervision if any person (including a company), or group acting
in concert, seeks to acquire control of a savings and loan holding company or savings
association. An acquisition of control can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift
Supervision has 60 days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the acquirer and the
anti-trust effects of the acquisition. Any company that so acquires control would then be subject
to regulation as a savings and loan holding company.
Regulatory Restructuring Legislation
On July 21, 2010, President Obama signed the Dodd-Frank Act, which is legislation that
restructures the regulation of depository institutions. In addition to eliminating the Office of
Thrift Supervision and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among
other things, requires changes in the way that institutions are assessed for deposit insurance,
mandates the imposition of consolidated capital requirements on savings and loan holding companies,
requires that originators of securitized loans retain a percentage of the risk for the transferred
loans, reduces the federal preemption afforded to federal savings associations and contains a
number of reforms related to mortgage origination. Many of the provisions of the Dodd-Frank Act
require the issuance of regulations before their impact on operations can be assessed by
management. However, there is a significant possibility that the Dodd-Frank Act will, at a
minimum, result in increased regulatory burden and increase compliance and possibly interest
expense costs for Fraternity Community Bancorp and Fraternity Federal Savings and Loan Association.
Federal Securities Laws
Fraternity Community Bancorp has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of the common stock to
be issued in the offering. Upon completion of the offering, Fraternity Community Bancorps common
stock will be registered with the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended. Fraternity Community Bancorp will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the Securities Exchange Act
of 1934, as amended.
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The registration, under the Securities Act of 1933, as amended, of the shares of common stock
to be issued in the offering does not cover the resale of those shares. Shares of common stock
purchased by persons who are not affiliates of Fraternity Community Bancorp may be resold without
registration. Shares purchased by an affiliate of Fraternity Community Bancorp will be subject to
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended. If Fraternity
Community Bancorp meets the current public information requirements of Rule 144, each affiliate of
Fraternity Community Bancorp that complies with the other conditions of Rule 144, including those
that require the affiliates sale to be aggregated with those of other persons, would be able to
sell in the public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of Fraternity Community Bancorp or
the average weekly volume of trading in the shares during the preceding four calendar weeks. In the
future, Fraternity Community Bancorp may permit affiliates to have their shares registered for sale
under the Securities Act of 1933, as amended.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance,
auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate
information. As directed by the Sarbanes-Oxley Act of 2002, Fraternity Community Bancorps Chief
Executive Officer and Chief Financial Officer will be required to certify that Fraternity Community
Bancorps quarterly and annual reports do not contain any untrue statement of a material fact. The
rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act of 2002 have
several requirements, including having the Chief Executive Officer and Chief Financial Officer
certify that: he is responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal controls; he has made certain disclosures to our auditors and the
audit committee of the board of directors about our internal controls; and he has included
information in our quarterly and annual reports about his evaluation and whether there have been
significant changes in our internal controls or in other factors that could significantly affect
internal controls. Fraternity Community Bancorp will be subject to further reporting and audit
requirements beginning with the year ending March 31, 2011 under the requirements of the
Sarbanes-Oxley Act. Fraternity Community Bancorp will prepare policies, procedures and systems
designed to comply with these regulations to ensure compliance with these regulations.
Federal and State Taxation
Federal Income Taxation
General. We report our income on a fiscal year basis using the accrual method of
accounting. The federal income tax laws apply to us in the same manner as to other corporations
with some exceptions, including particularly our reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to us. Our federal income tax returns have
not been audited during the last five years. For its 2009 fiscal year, Fraternity Federal Savings
and Loan Associations maximum statutory federal income tax rate was 34%.
Fraternity Community Bancorp and Fraternity Federal Savings and Loan Association will enter
into a tax allocation agreement. Because Fraternity Community Bancorp will own 100% of the issued
and outstanding capital stock of Fraternity Federal Savings and Loan Association after the
completion of the conversion, Fraternity Community Bancorp and Fraternity Federal Savings and Loan
Association will be members of an affiliated group within the meaning of Section 1504(a) of the
Internal Revenue Code, of which group Fraternity Community Bancorp will be the common parent
corporation. As a result of this affiliation, Fraternity Federal Savings and Loan Association may
be included in the filing of a consolidated federal income tax return with Fraternity Community
Bancorp and, if a decision to file a consolidated tax return is made, the parties agree to
compensate each other for their individual share of the consolidated tax liability and/or any tax
benefits provided by them in the filing of the consolidated federal income tax return.
Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that
qualified under certain definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from taxable income for
annual additions to their bad debt reserve. A reserve could be established for bad debts on
qualifying real property loans, generally secured by interests in real
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property improved or to be improved, under the percentage of taxable income method or the
experience method. The reserve for nonqualifying loans was computed using the experience method.
Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the
percentage of taxable income method for tax years beginning after 1995 and require savings
institutions to recapture or take into income certain portions of their accumulated bad debt
reserves.
Distributions. If Fraternity Federal Savings and Loan Association makes non-dividend
distributions to Fraternity Community Bancorp, the distributions will be considered to have been
made from Fraternity Federal Savings and Loan Associations unrecaptured tax bad debt reserves,
including the balance of its reserves as of December 31, 1987, to the extent of the non-dividend
distributions, and then from Fraternity Federal Savings and Loan Associations supplemental
reserve for losses on loans, to the extent of those reserves, and an amount based on the amount
distributed, but not more than the amount of those reserves, will be included in Fraternity Federal
Savings and Loan Associations taxable income. Non-dividend distributions include distributions in
excess of Fraternity Federal Savings and Loan Associations current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation. Dividends paid out of Fraternity Federal Savings
and Loan Associations current or accumulated earnings and profits will not be so included in
Fraternity Federal Savings and Loan Associations taxable income.
The amount of additional taxable income triggered by a non-dividend is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the distribution.
Therefore, if Fraternity Federal Savings and Loan Association makes a non-dividend distribution to
Fraternity Community Bancorp, approximately one and one-half times the amount of the distribution
not in excess of the amount of the reserves would be includable in income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. Fraternity Federal Savings and Loan
Association does not intend to pay dividends that would result in a recapture of any portion of its
bad debt reserves.
State Taxation
The state of Maryland imposes an income tax of approximately 8.25% on income measured
substantially the same as federally taxable income. The State of Maryland currently assesses a
personal property tax for December 2000 and forward.
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The Conversion and Stock Offering
Our board of directors has approved the plan of conversion. The Office of Thrift
Supervision also has conditionally approved the plan of conversion, but its approval does not
constitute a recommendation or endorsement of the plan of conversion by the agency.
General
On September 14, 2010, the board of directors of Fraternity Federal Savings and Loan
Association unanimously adopted the plan of conversion according to which Fraternity Federal
Savings and Loan Association will convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association and become a wholly owned
subsidiary of Fraternity Community Bancorp, a newly formed Maryland corporation. On October 18,
2010, the board of directors of Fraternity Community Bancorp unanimously adopted the plan of
conversion. Fraternity Community Bancorp will offer 100% of its common stock to qualifying
depositors and borrowers of Fraternity Federal Savings and Loan Association in a subscription
offering and, if necessary, to members of the general public through a community offering and/or a
syndicate of registered broker-dealers. The completion of the offering depends on market
conditions and other factors beyond our control. We can give no assurance as to the length of time
that will be required to complete the sale of the common stock. If we experience delays,
significant changes may occur in the appraisal of Fraternity Federal Savings and Loan Association,
which would require a change in the offering range. A change in the offering range would result in
a change in the net proceeds realized by Fraternity Community Bancorp from the sale of the common
stock. If the offering is terminated, Fraternity Federal Savings and Loan Association would be
required to charge all offering expenses against current income. The Office of Thrift Supervision
approved our plan of conversion, subject to the fulfillment of certain conditions.
The following is a brief summary of the pertinent aspects of the conversion. A copy of the
plan of conversion is available from Fraternity Federal Savings and Loan Association upon request
and is available for inspection at the offices of Fraternity Federal Savings and Loan Association
and at the Office of Thrift Supervision. The plan of conversion is also filed as an exhibit to the
registration statement that we have filed with the Securities and Exchange Commission. See Where
You Can Find More Information.
Reasons for the Conversion
The primary reasons for the conversion and related stock offering are to:
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increase the capital of Fraternity Federal Savings and Loan Association to support
future lending; |
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enhance profitability and earnings through reinvesting and leveraging the proceeds,
primarily through traditional lending and investing activities; |
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support future branching activities and/or the acquisition of financial services
companies; and |
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implement equity compensation plans to retain and attract qualified directors,
officers and staff to enhance our current incentive-based compensation programs. |
As a stock holding company, Fraternity Community Bancorp will have greater flexibility than
Fraternity Federal Savings and Loan Association now has in structuring mergers and acquisitions,
including the consideration paid in a transaction. Our current mutual savings association
structure, by its nature, limits our ability to offer any common stock as consideration in a merger
or acquisition. Our new stock holding company structure will enhance our ability to compete with
other bidders when acquisition opportunities arise by better enabling us to offer stock or cash
consideration, or a combination of the two. We currently do not have any agreement or
understanding as to any specific acquisition.
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Effects of Conversion to Stock Form
General. Each depositor in a mutual savings association has both a deposit account in
the institution and a pro rata ownership interest in the net worth of the institution based upon
the balance in his or her account. However, this ownership interest is tied to the depositors
account and has no value separate from such deposit account. Furthermore, this ownership interest
may only be realized in the unlikely event that the institution is liquidated. In such event, the
depositors of record at that time, as owners, would be able to share in any residual surplus and
reserves after payment of other claims, including claims of depositors to the amounts of their
deposits. Any depositor who opens a deposit account obtains a pro rata ownership interest in the
net worth of the institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his or her account receives a portion or all of the balance in the
account but nothing for his or her ownership interest in the net worth of the institution, which is
lost to the extent that the balance in the account is reduced.
When a mutual savings association converts to stock form, depositors lose all rights to the
net worth of the mutual savings association, except the right to claim a pro rata share of funds
representing the liquidation account established in connection with the conversion. Additionally,
permanent nonwithdrawable capital stock is created and offered to depositors which represents the
ownership of the institutions net worth. The common stock of Fraternity Community Bancorp is
separate and apart from deposit accounts and cannot be and is not insured by the Federal Deposit
Insurance Corporation or any other governmental agency. Certificates are issued to evidence
ownership of the permanent stock. The stock certificates are transferable, and therefore the stock
may be sold or traded if a purchaser is available with no effect on any deposit account the seller
may hold in the institution.
No assets of Fraternity Community Bancorp will be distributed in connection with the
conversion other than the payment of those expenses incurred in connection with the conversion.
Continuity. While the conversion is being accomplished, the normal business of Fraternity
Federal Savings and Loan Association will continue without interruption, including being regulated
by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. After the
conversion, Fraternity Federal Savings and Loan Association will continue to provide services for
depositors and borrowers under current policies by its present management and staff.
The directors of Fraternity Federal Savings and Loan Association at the time of the conversion
will serve as directors of Fraternity Federal Savings and Loan Association after the conversion.
The initial directors of Fraternity Community Bancorp are composed of the individuals who serve on
the board of directors of Fraternity Federal Savings and Loan Association. All officers of
Fraternity Federal Savings and Loan Association at the time of conversion will retain their
positions after the conversion.
Deposit Accounts and Loans. Fraternity Federal Savings and Loan Associations deposit
accounts, account balances and existing Federal Deposit Insurance Corporation insurance coverage of
deposit accounts will not be affected by the conversion. Furthermore, the conversion will not
affect the loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with Fraternity Federal Savings and Loan Association.
Effect on Voting Rights. Voting rights in Fraternity Federal Savings and Loan Association, as
a mutual savings association, belong to its depositor and borrower members. After the conversion,
depositors and borrowers will no longer have voting rights in Fraternity Federal Savings and Loan
Association and, therefore, will no longer be able to elect directors of Fraternity Federal Savings
and Loan Association or control its affairs. Instead, Fraternity Community Bancorp, as the sole
shareholder of Fraternity Federal Savings and Loan Association, will possess all voting rights in
Fraternity Federal Savings and Loan Association. The holders of the common stock of Fraternity
Community Bancorp will possess all voting rights in Fraternity Community Bancorp. Depositors and
borrowers of Fraternity Federal Savings and Loan Association will not have voting rights after the
conversion except to the extent that they become shareholders of Fraternity Community Bancorp by
purchasing common stock.
Liquidation Account. In the unlikely event of a complete liquidation of Fraternity Federal
Savings and Loan Association before the conversion, each depositor in Fraternity Federal Savings
and Loan Association would receive a pro rata share of any assets of Fraternity Federal Savings and
Loan Association remaining after payment of
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claims of all creditors, including the claims of all depositors up to the withdrawal value of their
accounts. Each depositor would receive a pro rata share of the remaining assets in the same
proportion as the value of his or her deposit account to the total value of all deposit accounts in
Fraternity Federal Savings and Loan Association at the time of liquidation.
After the conversion, holders of withdrawable deposits in Fraternity Federal Savings and Loan
Association, including certificates of deposit, will not be entitled to share in any residual
assets upon liquidation of Fraternity Federal Savings and Loan Association. However, under
applicable regulations, Fraternity Federal Savings and Loan Association will, at the time of the
conversion, establish a liquidation account in an amount equal to its total equity as of the date
of the latest statement of financial condition contained in the final prospectus relating to the
conversion.
Fraternity Federal Savings and Loan Association will maintain the liquidation account after
the conversion for the benefit of eligible account holders and supplemental eligible account
holders who retain their savings accounts in Fraternity Federal Savings and Loan Association. Each
eligible account holder and supplemental account holder will, with respect to each deposit account
held, have a related inchoate interest in a sub-account portion of the liquidation account balance.
The initial sub-account balance for a savings account held by an eligible account holder or a
supplemental eligible account holder will be determined by multiplying the opening balance in the
liquidation account by a fraction of which the numerator is the amount of the holders qualifying
deposit in the deposit account and the denominator is the total amount of the qualifying
deposits of all eligible or supplemental eligible account holders. The initial subaccount balance
will not be increased, but it will be decreased as provided below.
If the deposit balance in any deposit account of an eligible account holder or supplemental
eligible account holder at the close of business on any annual closing day of Fraternity Federal
Savings and Loan Association (which is December) after June 30, 2009 or [SERD], is less than the
lesser of the deposit balance in a deposit account at the close of business on any other annual
closing date after June 30, 2009 or [SERD], or the amount of the qualifying deposit in a savings
account on June 30, 2009 or [SERD], then the subaccount balance for a savings account will be
adjusted by reducing the subaccount balance in an amount proportionate to the reduction in the
savings balance. Once reduced, the subaccount balance will not be subsequently increased,
notwithstanding any increase in the savings balance of the related savings account. If any savings
account is closed, the related subaccount balance will be reduced to zero.
Upon a complete liquidation of Fraternity Federal Savings and Loan Association, each eligible
account holder and supplemental account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current adjusted subaccount
balance(s) for deposit account(s) held by the holder before any liquidation distribution may be
made to shareholders. No merger, consolidation, bulk purchase of assets with assumptions of
savings accounts and other liabilities or similar transactions with another federally insured
institution in which Fraternity Federal Savings and Loan Association is not the surviving
institution will be considered to be a complete liquidation. In any of these transactions, the
liquidation account will be assumed by the surviving institution.
In the unlikely event Fraternity Federal Savings and Loan Association is liquidated after the
conversion, depositors will be entitled to full payment of their deposit accounts before any
payment is made to Fraternity Community Bancorp as sole shareholder of Fraternity Federal Savings
and Loan Association. There are no plans to liquidate either Fraternity Federal Savings and Loan
Association or Fraternity Community Bancorp in the future.
Material Income Tax Consequences
In connection with the conversion, we have received an opinion of counsel with respect to
federal tax laws that no gain or loss will be recognized by account holders receiving subscription
rights, except to the extent, if any, that subscription rights are deemed to have fair market value
on the date such rights are issued. We believe that the tax opinion summarized below addresses all
material federal income tax consequences that are generally applicable to persons receiving
subscription rights.
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Kilpatrick Stockton LLP has issued an opinion to us that, for federal income tax purposes:
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the conversion of Fraternity Federal Savings and Loan Association from the mutual to
the stock form of organization will qualify as a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code, and no gain or loss will be
recognized by account holders and no gain or loss will be recognized by Fraternity
Federal Savings and Loan Association by reason of such conversion; |
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no gain or loss will be recognized by Fraternity Community Bancorp upon the sale of
shares of common stock in the offering; |
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it is more likely than not that the fair market value of the non-transferable
subscription rights to purchase shares of common stock of Fraternity Community Bancorp
to be issued to eligible account holders, supplemental eligible account holders and
other members is zero and, accordingly, that no income will be realized by eligible
account holders, supplemental eligible account holders and other members upon the
issuance to them of the subscription rights or upon the exercise of the subscription
rights; and |
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it is more likely than not that the tax basis to the holders of shares of common
stock purchased in the stock offering pursuant to the exercise of the subscription
rights will be the amount paid therefor, and that the holding period for such shares of
common stock will begin on the date of completion of the stock offering. |
The reasoning in support of Kilpatrick Stockton LLPs statements set forth in the third and
fourth bullet points above is set forth below. Whether subscription rights have a market value for
federal income tax purposes is a question of fact, depending upon all relevant facts and
circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on
whether subscription rights have a market value. Counsel has also advised us that they are unaware
of any instance in which the Internal Revenue Service has taken the position that nontransferable
subscription rights have a market value. Counsel also noted that the subscription rights will be
granted at no cost to the recipients, will be nontransferable and of short duration, and will
afford the recipients the right only to purchase our common stock at a price equal to its estimated
fair market value, which will be the same price as the purchase price for the unsubscribed shares
of common stock.
Unlike a private letter ruling issued by the Internal Revenue Service, an opinion of counsel
is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with
the conclusions reached in the opinion. If there is a disagreement, no assurance can be given that
the conclusions reached in an opinion of counsel would be sustained by a court if contested by the
Internal Revenue Service.
Fraternity Federal Savings and Loan Association also has received an opinion from Stegman &
Company that, assuming the conversion does not result in any federal income tax liability to
Fraternity Federal Savings and Loan Association, its account holders, or Fraternity Community
Bancorp, implementation of the plan of conversion will not result in any Maryland income tax
liability to those entities or persons.
The opinions of Kilpatrick Stockton LLP and of Stegman & Company are filed as exhibits to the
registration statement that we have filed with the Securities and Exchange Commission. See Where
You Can Find More Information.
Subscription Offering and Subscription Rights
Under the plan of conversion, we have granted rights to subscribe for Fraternity
Community Bancorp common stock to the following persons in the following order of priority:
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Persons with deposits in Fraternity Federal Savings and Loan Association with
balances aggregating $50 or more (qualifying deposits) as of the close of business on
June 30, 2009 |
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(eligible account holders). For this purpose, deposit accounts include all
savings, time and demand accounts. |
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Our employee stock ownership plan. |
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Persons with qualifying deposits in Fraternity Federal Savings and Loan Association
as of the close of business on [SERD] (supplemental eligible account holders) other
than our officers and directors and their associates. |
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Depositors and borrowers of Fraternity Federal Savings and Loan Association as of
the close of business on [RECORD DATE], who are neither eligible nor supplemental
eligible account holders (collectively, other members). |
The amount of common stock that any person may purchase will depend on the availability of the
common stock after satisfaction of all subscriptions having priority rights in the subscription
offering and to the maximum and minimum purchase limitations set forth in the plan of conversion.
See Limitations on Purchases of Shares. All persons on a joint account will be counted as a
single depositor for purposes of determining the maximum amount that may be subscribed for by
owners of a joint account.
We will strive to identify your ownership in all accounts, but cannot guarantee we will
identify all accounts in which you have an ownership interest.
Category 1: Eligible Account Holders. Subject to the purchase limitations as described below
under Limitations on Purchases of Shares, each eligible account holder has the right to
subscribe for up to the greater of:
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$250,000 of common stock (which equals 25,000 shares); |
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one-tenth of 1% of the total offering of common stock; or |
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15 times the product (rounded down to the next whole number) obtained by multiplying
the total number of shares of common stock to be sold by a fraction of which the
numerator is the amount of qualifying deposits of the eligible account holder and the
denominator is the total amount of qualifying deposits of all eligible account holders. |
If there are insufficient shares to satisfy all subscriptions by eligible account holders,
shares first will be allocated so as to permit each subscribing eligible account holder, if
possible, to purchase a number of shares sufficient to make the persons total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less. After that, unallocated
shares will be allocated among the remaining subscribing eligible account holders whose
subscriptions remain unfilled in the proportion that the amounts of their respective qualifying
deposits bear to the total qualifying deposits of all remaining eligible account holders whose
subscriptions remain unfilled. Unless waived by the Office of Thrift Supervision, subscription
rights of eligible account holders who are also executive officers or directors of Fraternity
Federal Savings and Loan Association or their associates will be subordinated to the subscription
rights of other eligible account holders to the extent attributable to increased deposits in
Fraternity Federal Savings and Loan Association in the one-year period preceding June 30, 2009.
To ensure a proper allocation of stock, each eligible account holder must list on his or her
stock order form all deposit accounts in which such eligible account holder had an ownership
interest at June 30, 2009. Failure to list an account, or providing incorrect information, could
result in the loss of all or part of a subscribers stock allocation.
Category 2: Tax-Qualified Employee Benefit Plans. Our tax-qualified employee benefit plans
(other than our 401(k) plan) have the right to purchase up to 10% of the shares of common stock
sold in the offering. As a tax-qualified employee benefit plan, our employee stock ownership plan
intends to purchase a number of shares equal to 8% of the shares sold in the offering.
Subscriptions by the employee stock ownership plan will not
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be aggregated with shares of common stock purchased by any other participants in the offering,
including subscriptions by our officers and directors, for the purpose of applying the purchase
limitations in the plan of conversion. If eligible account holders subscribe for all of the shares
being sold, no shares will be available for our tax-qualified employee benefit plans. However, if
we increase the number of shares offered above the maximum of the offering range, the employee
stock ownership plan will have a first priority right to purchase any shares exceeding that amount
up to 10% of the common stock issued in the offering. If the plans subscription is not filled in
its entirety, the employee stock ownership plan may purchase shares in the open market or may
purchase shares directly from us with the approval of the Office of Thrift Supervision.
Category 3: Supplemental Eligible Account Holders. Subject to the purchase limitations as
described below under " Limitations on Purchases of Shares, each supplemental eligible account
holder has the right to subscribe for up to the greater of:
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$250,000 of common stock (which equals 25,000 shares); |
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one-tenth of 1% of the total offering of common stock; or |
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15 times the product (rounded down to the next whole number) obtained by multiplying
the total number of shares of common stock to be sold by a fraction of which the
numerator is the amount of qualifying deposits of the supplemental eligible account
holder and the denominator is the total amount of qualifying deposits of all
supplemental eligible account holders. |
If eligible account holders and the employee stock ownership plan subscribe for all of the
shares being sold, no shares will be available for supplemental eligible account holders. If
shares are available for supplemental eligible account holders but there are insufficient shares to
satisfy all subscriptions by supplemental eligible account holders, shares first will be allocated
so as to permit each subscribing supplemental eligible account holder, if possible, to purchase a
number of shares sufficient to make the persons total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. After that, unallocated shares will be
allocated among the remaining subscribing supplemental eligible account holders whose subscriptions
remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to
the total qualifying deposits of all remaining supplemental eligible account holders whose
subscriptions remain unfilled.
To ensure a proper allocation of stock, each supplemental eligible account holder must list on
his or her stock order form all deposit accounts in which such supplemental eligible account holder
had an ownership interest at [SERD]. Failure to list an account, or providing incorrect
information, could result in the loss of all or part of a subscribers stock allocation.
Category 4: Other Members. Subject to the purchase limitations as described below under
"Limitations on Purchases of Shares, each other member has the right to purchase up to the
greater of $250,000 of common stock (which equals 25,000 shares) or one-tenth of 1% of the total
offering of common stock. If eligible account holders, the employee stock ownership plan and
supplemental eligible account holders subscribe for all of the shares being sold, no shares will be
available for other members. If shares are available for other members but there are not
sufficient shares to satisfy all subscriptions by other members, shares first will be allocated so
as to permit each subscribing other member, if possible, to purchase a number of shares sufficient
to make the persons total allocation equal 100 shares or the number of shares actually subscribed
for, whichever is less. After that, unallocated shares will be allocated among the remaining
subscribing other members in the proportion that each other members subscription bears to the
total subscriptions of all such subscribing other members whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each other member must list on his or her stock order
form all deposit accounts in which such other member had an ownership interest at [RECORD DATE].
Failure to list an account or providing incorrect information could result in the loss of all or
part of a subscribers stock allocation.
Expiration Date for the Subscription Offering. The subscription offering, and all
subscription rights under the plan of conversion, will expire at 2:00 p.m., Eastern time, on [EXP
DATE]. We will not accept orders for common stock in the subscription offering received after that
time. We will make reasonable attempts to provide a
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prospectus and related offering materials to holders of subscription rights; however, all
subscription rights will expire on the expiration date whether or not we have been able to locate
each person entitled to subscription rights.
Office of Thrift Supervision regulations require that we complete the sale of common stock
within 45 days after the close of the subscription offering. If the sale of the common stock is
not completed within that period, all funds received will be returned promptly with interest at our
passbook rate and without deduction, and all withdrawal authorizations will be canceled unless we
receive approval of the Office of Thrift Supervision to extend the time for completing the
offering. If regulatory approval of an extension of the time period has been granted, we will
notify all subscribers of the extension and of the duration of any extension that has been granted,
and subscribers will have the right to modify or rescind their purchase orders. If we do not
receive an affirmative response from a subscriber to any resolicitation, the subscribers order
will be rescinded and all funds received will be returned promptly with interest and without
deduction, or withdrawal authorizations will be canceled. No single extension can exceed 90 days.
Persons in Non-Qualified States. We will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to subscribe for stock
under the plan of conversion reside. However, we are not required to offer stock in the
subscription offering to any person who resides in a foreign country or who resides in a state of
the United States in which (1) only a small number of persons otherwise eligible to subscribe for
shares of common stock reside; (2) the granting of subscription rights or the offer or sale of
shares to such person would require that we or our officers or directors register as a broker,
dealer, salesman or selling agent under the securities laws of the state, or register or otherwise
qualify the subscription rights or common stock for sale or qualify as a foreign corporation or
file a consent to service of process; or (3) we determine that compliance with that states
securities laws would be impracticable for reasons of cost or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. Subscription rights are
nontransferable. You may not transfer, or enter into any agreement or understanding to transfer,
the legal or beneficial ownership of your subscription rights issued under the plan of conversion
or the shares of common stock to be issued upon exercise of your subscription rights. Your
subscription rights may be exercised only by you and only for your own account. If you exercise
your subscription rights, you will be required to certify that you are purchasing shares solely for
your own account and that you have no agreement or understanding regarding the sale or transfer of
such shares. Federal regulations also prohibit any person from offering, or making an announcement
of an offer or intent to make an offer, to purchase such subscription rights or shares of common
stock before the completion of the offering.
If you sell or otherwise transfer your rights to subscribe for common stock in the
subscription offering or subscribe for common stock on behalf of another person, you may forfeit
those rights and face possible further sanctions and penalties imposed by the Office of Thrift
Supervision or another agency of the U.S. Government. We will pursue any and all legal and
equitable remedies if we become aware of the transfer of subscription rights and will not honor
orders known by us to involve the transfer of such rights.
Community Offering
To the extent that shares remain available for purchase after satisfaction of all
subscriptions received in the subscription offering, we may offer shares in a community offering to
the following persons in the following order of priority:
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First priority, to natural persons and trusts of natural persons who are residents
of Baltimore, Carroll and Howard Counties and Baltimore City in Maryland; and |
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Second priority, to other persons to whom we deliver a prospectus. |
We will consider persons to be residents of the above listed counties if they occupy a
dwelling in the county and have established an ongoing physical presence in the county that is not
merely transitory in nature. We may utilize depositor or loan records or other evidence provided
to us to make a determination as to whether a person is a resident of such counties. In all cases,
the determination of residence status will be made by us in our sole discretion.
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Purchasers in the community offering are eligible to purchase up to $250,000 of common stock
(which equals 25,000 shares). If shares are available for preferred purchasers in the community
offering but there are insufficient shares to satisfy all orders, the available shares will be
allocated first to each preferred purchaser whose order we accept in an amount equal to the lesser
of 100 shares or the number of shares ordered by each such subscriber, if possible. After that,
unallocated shares will be allocated among the remaining preferred purchasers whose orders remain
unsatisfied in the same proportion that the unfilled order of each such purchaser bears to the
total unfilled orders of all such subscribers. If, after filling the orders of preferred
purchasers in the community offering, shares are available for other purchasers in the community
offering but there are insufficient shares to satisfy all orders, shares will be allocated in the
same manner as for preferred purchasers.
The community offering, if held, may commence concurrently with, during or after the
subscription offering and will terminate no later than 45 days after the close of the subscription
offering unless extended by us, with approval of the Office of Thrift Supervision. If we receive
regulatory approval for an extension, all purchasers will be notified of the extension and of the
duration of any extension that has been granted, and will have the right to confirm, increase,
decrease or rescind their orders. If we do not receive an affirmative response from a purchaser to
any resolicitation, the purchasers order will be rescinded and all funds received will be promptly
returned with interest and without deduction.
The opportunity to purchase shares of common stock in the community offering is subject to our
right to reject orders, in whole or part, either at the time of receipt of an order or as soon as
practicable following the expiration date of the offering. If your order is rejected in part, you
will not have the right to cancel the remainder of your order.
Syndicated Offering
If feasible, our Board of Directors may decide to offer for sale shares of common stock
not subscribed for or purchased in the subscription and community offerings in a syndicated
offering, subject to such terms, conditions and procedures as we may determine, in a manner that
will achieve a wide distribution of our shares of common stock. We retain the right to accept or
reject in whole or in part any orders in the syndicated offering. Unless the Office of Thrift
Supervision permits otherwise, accepted orders for Fraternity Community Bancorp common stock in the
syndicated offering will first be filled up to a maximum of two percent (2%) of the shares sold in
the offering, and thereafter any remaining shares will be allocated on an equal number of shares
basis per order until all shares have been allocated. Unless the syndicated offering begins during
the community offering, the syndicated offering will begin as soon as possible after the completion
of the subscription and community offerings.
If a syndicated offering is held, Sandler ONeill + Partners, L.P. will serve as sole
book-running manager, and each firm will assist us in selling our common stock on a best efforts
basis. Neither Sandler ONeill + Partners, L.P. nor any registered broker-dealer will have any
obligation to take or purchase any shares of the common stock in the syndicated offering. The
syndicated offering will be conducted in accordance with certain Securities and Exchange Commission
rules applicable to best efforts offerings. Under these rules, Sandler ONeill + Partners, L.P. or
the other broker-dealers participating in the syndicated offering generally will accept payment for
shares of common stock to be purchased in the syndicated offering through a sweep arrangement,
provided we have received subscriptions to meet the minimum of the offering range, under which a
customers brokerage account at the applicable participating broker-dealer will be debited in the
amount of the purchase price for the shares of common stock that such customer wishes to purchase
in the syndicated offering on the settlement date. Participating broker-dealers will only sell to
customers who have accounts at the participating broker-dealer and who authorize the broker-dealer
to debit their accounts. Customers who authorize participating broker-dealers to debit their
brokerage accounts are required to have the funds for the payment in their accounts on, but not
before, the settlement date. Certain investors may pay Sandler ONeill + Partners, L.P. for shares
purchased in the syndicated offering on the settlement date through the services of the Depository
Trust Company on a delivery versus payment basis. The closing of the syndicated offering is subject
to conditions set forth in an agency agreement among Fraternity Community Bancorp and Fraternity
Federal Savings and Loan Association on one hand and Sandler ONeill + Partners, L.P., as
representative of the several agents, on the other hand. If and when all the conditions for the
closing are met, funds for common stock sold in the syndicated offering, less fees and commissions
payable, will be delivered promptly to us. Normal customer ticketing will be used for order
placement.
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If for any reason we cannot affect a syndicated offering of shares of common stock not
purchased in the subscription and community offerings, or in the event that there are a significant
number of shares remaining unsold after such offerings, we will try to make other arrangements for
the sale of unsubscribed shares, if possible. The Office of Thrift Supervision, the Securities and
Exchange Commission and Financial Industry Regulatory Authority must approve any such arrangements.
Limitations on Purchases of Shares
In addition to the purchase limitations described above under Subscription Offering and
Subscription Rights, Community Offering, the plan of conversion provides for the following
purchase limitations:
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Except for our employee stock ownership plan, no person may purchase in the
aggregate more than $250,000 of the common stock, or 25,000 shares sold in the
offering. |
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No person, either alone or together with associates of or persons acting in concert
with such person, may purchase more than $400,000 of the common stock, or 40,000 shares
sold in the offering. |
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Our tax-qualified employee benefit plans are entitled to purchase up to 10.0% of the
shares sold in the conversion. As a tax-qualified employee benefit plan, our employee
stock ownership plan intends to purchase 8.0% of the shares sold in the offering. |
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Each subscriber must subscribe for a minimum of 25 shares. |
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Our directors and executive officers, together with their associates, may purchase
in the aggregate up to 32% of the common stock sold in the offering. |
We may, in our sole discretion, increase the individual or aggregate purchase limitation to up
to 5% of the shares of common stock sold in the offering. If we decide to increase the purchase
limitations, persons who subscribed for the maximum number of shares of common stock will be given
the opportunity to increase their subscriptions accordingly, subject to the rights and preferences
of any person who has priority subscription rights.
If we increase the maximum purchase limitation to 5% of the shares of common stock sold in the
offering, we may further increase the maximum purchase limitation to 9.99%, provided that orders
for common stock exceeding 5% of the shares of common stock sold in the offering may not exceed in
the aggregate 10% of the total shares of common stock sold in the offering.
The plan of conversion defines acting in concert to mean knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal whether or not by an
express agreement; or a combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts in concert with
another party will also be deemed to be acting in concert with any person who is also acting in
concert with that other party. We may presume that certain persons are acting in concert based
upon, among other things, joint account relationships or the fact that persons share a common
address (whether or not related by blood or marriage) or may have filed joint Schedules 13D or 13G
with the Securities and Exchange Commission with respect to other companies. For purposes of the
plan of conversion, our directors are not deemed to be acting in concert solely by reason of their
Board membership.
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The plan of conversion defines associate, with respect to a particular person, to mean:
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a corporation or organization other than Fraternity Community Bancorp or Fraternity
Federal Savings and Loan Association or a majority-owned subsidiary of Fraternity
Community Bancorp or Fraternity Federal Savings and Loan Association of which a person
is a senior officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity securities of such corporation or organization; |
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a trust or other estate in which a person has a substantial beneficial interest or
as to which a person serves as a trustee or a fiduciary; and |
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any person who is related by blood or marriage to such person and who lives in the
same home as such person or who is a director or senior officer of Fraternity Community
Bancorp or Fraternity Federal Savings and Loan Association or any of their
subsidiaries. |
For example, a corporation of which a person serves as an officer would be an associate of
that person and, therefore, all shares purchased by the corporation would be included with the
number of shares that the person could purchase individually under the aggregate purchase
limitation described above. We have the right in our sole discretion to reject any order submitted
by a person whose representations we believe to be false or who we otherwise believe, either alone
or acting in concert with others, is violating or circumventing, or intends to violate or
circumvent, the terms and conditions of the plan of conversion. Directors and officers are not
treated as associates of each other solely by virtue of holding such positions. We have the sole
discretion to determine whether prospective purchasers are associates or acting in concert.
Marketing Arrangements
We have retained Sandler ONeill + Partners, L.P. to consult with and advise and assist
us, on a best efforts basis, in the distribution of shares in the offering. Sandler ONeill +
Partners, L.P. is a broker-dealer registered with the Securities and Exchange Commission and a
member of the Financial Industry Regulatory Authority. Sander ONeill + Partners, L.P. will assist
us in the conversion by acting as marketing agent with respect to the subscription offering and
will represent us as placement agent on a best efforts basis in the sale of the common stock in the
community offering and syndicated offering, if held. The services that Sandler ONeill + Partners,
L.P. will provide include, but are not limited to:
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Consulting as to the financial and securities market implications of the plan of
conversion and any related corporate documents; |
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Reviewing with the board of directors the financial impact of the offering on
Fraternity Community Bancorp, based upon the independent appraisers appraisal of the
common stock; |
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Reviewing all offering documents, including the prospectus, stock order forms and
related offering materials; |
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Assisting in the design and implementation of a marketing strategy for the offering; |
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Assisting management in scheduling and preparing for meetings with potential
investors in the offering; and |
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Providing such other general advice and assistance as we may request to promote the
successful completion of the offering. |
For its services performed as marketing agent, if the offering is consummated, Sandler ONeill
+ Partners, L.P. is entitled to receive a fee equal to the greater of 1.00% of the aggregate actual
purchase price of the shares of common stock sold in the subscription and community offerings
(excluding shares sold to certain persons) and $160,000. Regardless of whether the offering is
consummated, or if Sandler ONeill + Partners, L.P.s engagement
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is terminated for certain specified reasons, Sandler ONeill + Partners, L.P. is entitled to be
reimbursed for its reasonable out of pocket expenses (including legal fees) up to a maximum of
$75,000 incurred in connection with its engagement and for fees and expenses incurred on behalf of
Fraternity Community Bancorp. In recognition of the long lead times involved in the offering
process, Fraternity Community Bancorp has made an advance payment of $25,000 to Sandler ONeill +
Partners, L.P., which shall be credited against any fees or reimbursement of expenses and refunded
to the extent it exceeds the actual amount due.
In the event that common stock is sold through a group of broker-dealers in a syndicated
offering, we will pay (i) a management fee of 1.00% of the aggregate dollar amount of the common
stock sold in the syndicated offering, and (ii) a selling concession not to exceed 6.00% of the
actual purchase price of each security sold in the syndicated offering, which shall be allocated to
dealers in accordance with the actual number of shares of common stock sold by such dealers.
Sandler ONeill + Partners, L.P. will serve as sole book-running manager of the syndicated offering
and will be reimbursed for all reasonable out of pocket expenses, including attorneys fees, if the
offering is not completed.
We have also engaged Sandler ONeill + Partners, L.P. to act as our conversion agent in
connection with the stock offering. In its role as conversion agent, Sandler ONeill + Partners,
L.P. will assist us in the stock offering as follows:
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consolidation of accounts and vote calculation; |
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design and preparation of proxy and stock order forms; |
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organization and supervision of the stock information center; |
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proxy solicitation and special meeting services; and |
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subscription order processing and stock allocation services. |
For all these services, Sandler ONeill + Partners, L.P. will receive a fee of $20,000, which
is payable as follows: (i) a nonrefundable $10,000 fee payable upon execution of the engagement
letter; and (ii) the balance upon completion or termination of the offering, as the case may be.
In addition to its fee, Sandler ONeill + Partners, L.P. will be reimbursed for its reasonable
out-of-pocket expenses incurred in connection with its engagement as conversion agent up to
$25,000.
Sandler ONeill + Partners, L.P. has not prepared any report or opinion constituting a
recommendation or advice to us or to persons who subscribe for stock, nor has it prepared an
opinion as to the fairness to us of the purchase price or the terms of the stock to be sold.
Sandler ONeill + Partners, L.P. expresses no opinion as to the prices at which common stock to be
issued may trade.
We have also agreed to indemnify Sandler ONeill + Partners, L.P.. against liabilities and
expenses, including legal fees, incurred in connection with certain claims or litigation arising
out of or based upon untrue statements or omissions contained in the offering materials for the
common stock, including liabilities under the Securities Act of 1933 and the performance of Sandler
ONeill + Partners, L.P. of its services in connection with the conversion.
Description of Sales Activities
Fraternity Community Bancorp will offer the common stock in the subscription offering and
community offering by the distribution of this prospectus and through activities conducted at the
stock information center. The stock information center is expected to operate during normal
business hours throughout the subscription offering and any community offering. It is expected
that at any particular time one or more Sandler ONeill + Partners, L.P. employees will be working
at the stock information center. Employees of Sandler ONeill + Partners, L.P. will be responsible
for responding to questions regarding the conversion and the offering and processing stock orders.
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Sales of common stock will be made by registered representatives affiliated with Sandler
ONeill + Partners, L.P. or by the selected dealers managed by Sandler ONeill + Partners, L.P.
Fraternity Federal Savings and Loan Associations officers and employees may participate in the
offering in clerical capacities, providing administrative support in effecting sales transactions
or, when permitted by state securities laws, answering questions of a mechanical nature relating to
the proper execution of the order form. Fraternity Federal Savings and Loan Associations officers
may answer questions regarding our business when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. Fraternity Federal Savings and Loan
Associations officers and employees have been instructed not to solicit offers to purchase common
stock or provide advice regarding the purchase of common stock.
No officer, director or employee of Fraternity Federal Savings and Loan Association will be
compensated, directly or indirectly, for any activities in connection with the offer or sale of
common stock in the offering.
None of Fraternity Federal Savings and Loan Associations personnel participating in the
offering is registered or licensed as a broker or dealer or an agent of a broker or dealer.
Fraternity Federal Savings and Loan Associations personnel will assist in the above-described
sales activities under an exemption from registration as a broker or dealer provided by Rule 3a4-l
promulgated under the Securities Exchange Act of 1934, as amended. Rule 3a4-l generally provides
that an associated person of an issuer of securities will not be deemed a broker solely by reason
of participation in the sale of securities of the issuer if the associated person meets certain
conditions. These conditions include, but are not limited to, that the associated person
participating in the sale of an issuers securities not be compensated in connection with the
offering at the time of participation, that the person not be associated with a broker or dealer
and that the person observe certain limitations on his or her participation in the sale of
securities. For purposes of this exemption, associated person of an issuer is defined to include
any person who is a director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
Procedure for Purchasing Shares in the Subscription and Community Offerings
Use of Order Forms. To purchase shares in the subscription offering, a properly
completed and executed order form must be received (not postmarked) by us at the address printed at
the top of the stock order form or at our stock information center, by 2:00 p.m., Eastern time, on
[EXP DATE]. Your order form must be accompanied by full payment for all of the shares subscribed
for or include appropriate authorization in the space provided on the order form for withdrawal of
full payment from a deposit account with Fraternity Federal Savings and Loan Association. To
purchase shares in the community offering, you must deliver a properly completed and executed order
form to us, accompanied by the required payment for each share subscribed for, before the community
offering terminates, which may be on, or at any time after, the end of the subscription offering.
Our interpretation of the terms and conditions of the plan of conversion and of the acceptability
of the order forms will be final.
To ensure that your stock purchase eligibility and priority are properly identified, you must
list all accounts on the order form, giving all names in each account and the account number. We
will strive to identify your ownership in all accounts, but cannot guarantee we will identify all
accounts in which you have an ownership interest. Failure to list all of your accounts may result
in fewer shares being allocated to you than if all of your accounts were listed.
We need not accept order forms that are received after the expiration of the subscription
offering or community offering, as the case may be, or that are executed defectively or that are
received without full payment or without appropriate withdrawal instructions. In addition, we are
not obligated to accept orders submitted on photocopied or facsimilied stock order forms. We have
the right to waive or permit the correction of incomplete or improperly executed order forms, but
do not represent that we will do so. Under the plan of conversion, our interpretation of the terms
and conditions of the plan of conversion and of the order form will be final. Once received, an
executed order form may not be modified, amended or rescinded without our consent unless the
offering has not been completed within 45 days after the end of the subscription offering.
106
The reverse side of the order form contains a regulatorily mandated certification form. We
will not accept order forms where the certification form is not executed. By executing and
returning the certification form, you will be certifying that you received this prospectus and
acknowledging that the common stock is not a deposit account and is not insured or guaranteed by
the federal government. You also will be acknowledging that you received disclosure concerning the
risks involved in this offering. The certification form could be used as support to show that you
understand the nature of this investment.
To ensure that each purchaser in the subscription and community offering receives a prospectus
at least 48 hours before the end of the subscription and community offering, as required by Rule
15c2-8 under the Securities Exchange Act of 1934, as amended, no prospectus will be mailed any
later than five days before that date or hand delivered any later than two days before that date.
Execution of the order form will confirm receipt or delivery under Rule 15c2-8. Order forms will
be distributed only when preceded or accompanied by a prospectus.
Payment for Shares. Payment for subscriptions may be made by check, bank draft or money
order, or by authorization of withdrawal from deposit accounts maintained with Fraternity Federal
Savings and Loan Association. Funds received before the completion of the offering will be
maintained in a segregated account at Fraternity Federal Savings and Loan Association. All checks,
bank drafts and money orders must be made payable to the Fraternity Community Bancorp segregated
account in compliance with Securities and Exchange Commission Rule 15c2-4. However, we will not
maintain more than one account. All subscriptions received will bear interest at Fraternity
Federal Savings and Loan Associations passbook savings rate, which is subject to change at any
time and is currently _____% per annum. Subscribers funds will be transmitted to the segregated
account no later than noon of the next business day where they will be invested in investments that
are permissible under Securities and Exchange Commission Rule 15c2-4. Appropriate means by which
withdrawals may be authorized are provided on the order form. No wire transfers or third party
checks will be accepted. Interest will be paid on payments made by check, bank draft or money
order at our passbook rate from the date payment is received at the stock information center until
the completion or termination of the offering. Payment in cash will not be accepted unless the
cash is converted into a bank check or money order. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or termination of the
offering, but a hold will be placed on the funds, making them unavailable to the depositor until
completion or termination of the offering. When the offering is completed, the funds received in
the offering will be used to purchase the shares of common stock ordered. The shares of common
stock issued in the offering cannot and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency. If the offering is not consummated for any reason, all
funds submitted will be promptly refunded with interest and without deduction as described above.
If a subscriber authorizes us to withdraw the amount of the purchase price from his or her
deposit account, we will do so as of the completion of the offering, though the account must
contain the full amount necessary for payment at the time the subscription order is received. We
will waive any applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable minimum balance
requirement at the time funds are actually transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the remaining balance will
earn interest at our passbook rate.
The employee stock ownership plan will not be required to pay for the shares subscribed for at
the time it subscribes, but will pay for shares of common stock subscribed for upon the completion
of the offering; provided that there is in force from the time of its subscription until the
completion of the offering a loan commitment from an unrelated financial institution or from us to
lend to the employee stock ownership plan, at that time, the aggregate purchase price of the shares
for which it subscribed.
We may, in our sole discretion, permit institutional investors to submit irrevocable orders
together with the legally binding commitment for payment and to thereafter pay for such shares of
common stock for which they subscribe in the community offering at any time before the 48 hours
before the completion of the offering. This payment may be made by wire transfer.
Our individual retirement accounts do not permit investment in common stock. A depositor
interested in using his or her individual retirement account funds to purchase common stock must do
so through a self-directed individual retirement accounts. Since we do not offer those accounts,
we will allow a depositor to make a trustee-to-
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trustee transfer of the individual retirement account funds to a trustee offering a self-directed
individual retirement account program with the agreement that the funds will be used to purchase
our common stock in the offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for such transfers. The new trustee would hold the common stock in a
self-directed account in the same manner as we now hold the depositors individual retirement
account funds. An annual administrative fee may be payable to the new trustee. You may use funds
currently in an independent, self-directed individual retirement account to purchase stock by
having your trustee complete and return the subscription form together with a check payable to
Fraternity Community Bancorp before the expiration of the subscription offering. Depositors
interested in using funds in an individual retirement account with us to purchase common stock
should contact the stock information center as soon as possible so that the necessary forms may be
forwarded for execution and returned before the subscription offering ends. In addition, federal
laws and regulations require that officers, directors and 10% shareholders who use self-directed
individual retirement account funds to purchase shares of common stock in the subscription
offering, make purchases for the exclusive benefit of individual retirement accounts.
How We Determined the Offering Range and the $10.00 Per Share Purchase Price
Federal regulations require that the aggregate purchase price of the securities sold in
connection with the offering be based upon our estimated pro forma value, as determined by an
independent appraisal. We have retained Feldman Financial Advisors, Inc., which is experienced in
the evaluation and appraisal of business entities, to prepare the independent appraisal. Feldman
Financial Advisors will receive fees totaling $32,500 for its appraisal services, plus $5,000 for
each appraisal valuation update other than the required final valuation update at closing, and a
maximum of $1,000 for reimbursement of out-of-pocket expenses. We have agreed to indemnify Feldman
Financial Advisors and its employees and affiliates for certain costs and expenses, including
reasonable legal fees arising out of, related to, or based upon the offering and due to any
misstatement or untrue statement or intentional omission by Fraternity Federal Savings and Loan
Association. We have not paid any fees to Feldman Financial Advisors during the past three fiscal
years.
Feldman Financial Advisors prepared the appraisal taking into account the pro forma impact of
the offering. For its analysis, Feldman Financial Advisors undertook substantial investigations to
learn about our business and operations. We supplied financial information, including annual
financial statements, information on the composition of assets and liabilities, and other financial
schedules. In addition to this information, Feldman Financial Advisors reviewed our conversion
application as filed with the Office of Thrift Supervision and our registration statement as filed
with the Securities and Exchange Commission. Furthermore, Feldman Financial Advisors visited our
facilities and had discussions with our management. Feldman Financial Advisors did not perform a
detailed individual analysis of the separate components of our assets and liabilities. We did not
impose any limitations on Feldman Financial Advisors in connection with its appraisal.
In connection with its appraisal, Feldman Financial Advisors reviewed the following factors,
among others:
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our present and projected operating results and financial condition; |
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the economic and demographic conditions of our primary market area; |
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pertinent historical financial and other information relating to Fraternity Federal
Savings and Loan Association; |
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a comparative evaluation of our operating and financial statistics with those of
other thrift institutions; |
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the proposed price per share; |
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the aggregate size of the offering of common stock; |
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the impact of the conversion on our capital position and earnings potential; and |
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the trading market for securities of comparable institutions and general conditions
in the market for such securities. |
Consistent with Office of Thrift Supervision appraisal guidelines, Feldman Financial Advisors
analysis utilized three selected valuation procedures, the price/tangible book method, the
price/core earnings method, and the price/assets method, all of which are described in its report.
Feldman Financial Advisors appraisal report is filed as an exhibit to the registration statement
that we have filed with the Securities and Exchange Commission. See Where You Can Find More
Information. Feldman Financial Advisors placed the greatest emphasis on the price/tangible book
method in estimating pro forma market value, as Fraternity Federal Savings and Loan Association
recorded negative core earnings for the most recent 12-month period. Feldman Financial Advisors
compared the pro forma price/tangible book ratio for Fraternity Community Bancorp to the same
ratios for a peer group of comparable companies. The peer group included publicly traded companies
listed on a major exchange (not organized in a mutual holding company structure or subject to an
announced or rumored transaction) with:
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total assets of less than $625 million; |
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net loans of 50% or more of total assets; |
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tangible equity to assets greater than 6.0%; and |
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a return on average assets for the last 12-month period of 0.20% or less. |
As indicated in its appraisal, Feldman Financial Advisors compared the operating
characteristics of Fraternity Federal Savings and Loan Association to those of the peer group to
determine Fraternity Federal Savings and Loan Associations relative strengths and weaknesses as
compared to the peer group companies. Feldman Financial Advisors then derived benchmark pricing
ratios for the price/tangible book value and price/assets ratios based on the comparative group
medians. Investors tend to make decisions to purchase thrift conversion stocks and more seasoned
thrift issues based upon consideration of core earnings profitability and price/tangible book value
comparisons. Generally, the price/earnings ratio is an important valuation ratio in the current
thrift stock environment for companies reporting core profitability. In cases where companies are
reporting negative core earnings, as is the case with Fraternity Federal Savings and Loan
Association and the peer group companies, the price/tangible book value ratio becomes a key
determinant of the estimate of Fraternity Community Bancorps pro forma market value. Feldman
Financial Advisors reviewed the core earnings of Fraternity Federal Savings and Loan Association
and the peer group companies to apply the pricing methodology related to core earnings. As both
Fraternity Federal Savings and Loan Association and most of the peer group companies recorded core
losses, no meaningful comparison or conclusions were derived for purposes of establishing a
price/core earnings ratio.
Feldman Financial Advisors appraisal concluded that the Fraternity Community Bancorps pro
forma market value should be discounted relative to the peer group companies on a price/tangible
book value and a price/assets basis because of factors associated with liquidity of the issue,
stock market conditions, and the new issue discount. Individual discounts and premiums are not
necessarily additive and may, to some extent, offset or overlay each other. Currently, converting
thrifts are often valued at discounts to peer institutions relative to price/tangible book value
and price/assets.
The peer group selected by Feldman Financial Advisors is comprised solely of companies traded
on Nasdaq.
On the basis of the analysis in its report, Feldman Financial Advisors has advised us that, in
its opinion, as of October 12, 2010, our estimated pro forma market value, was within the valuation
range of $10,200,000 and $13,800,000 with a midpoint of $12,000,000.
In determining the estimated pro forma market value of Fraternity Community Bancorp, Feldman
Financial Advisors employed the comparative company approach and considered, among others, the
following pricing ratios: price-to-earnings per share, price-to-book value per share and
price-to-tangible book value per share. As Fraternity Federal Savings and Loan Association and the
majority of peer group companies recorded negative earnings for the last 12-month period,
price-to-earnings ratios were not meaningful. The following table presents a summary of
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selected pricing ratios for Fraternity Community Bancorp, for the peer group companies and for all
publicly traded thrifts. Compared to the average pricing ratios of the peer group, Fraternity
Community Bancorps pro forma pricing ratios at the maximum of the offering range indicated
discount of 8.5% on a price-to-book value basis and 11.5% on a price to tangible book value basis.
Such amounts represent the difference between the price-to-book value ratio or the price to
tangible book value ratio of the peer group and the comparable ratio for Fraternity Community
Bancorp, assuming completion of the offering at the maximum of the offering range, expressed as a
percentage of the applicable peer group ratio.
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Price to Book |
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Price to Tangible |
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Value Ratio (1) |
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Book Value Ratio (1)(2) |
Fraternity Community Bancorp (pro forma): |
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Minimum |
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41.1 |
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41.1 |
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Midpoint |
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45.4 |
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45.4 |
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Maximum |
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49.3 |
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49.3 |
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Maximum, as adjusted |
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53.2 |
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53.2 |
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Peer Group: |
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BCSB Bancorp, Inc. |
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59.4 |
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59.5 |
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Central Federal Corporation |
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40.5 |
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41.1 |
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Citizens Community Bancorp, Inc. |
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39.9 |
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45.1 |
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CMS Bancorp, Inc. |
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87.8 |
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87.8 |
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First Advantage Bancorp |
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66.0 |
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66.0 |
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First Clover Leaf Financial Corp. |
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58.2 |
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69.5 |
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First Federal of Northern Michigan Bcrp. |
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29.3 |
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30.3 |
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GS Financial Corp. |
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42.9 |
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42.9 |
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Hampden Bancorp, Inc. |
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75.1 |
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75.1 |
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WSB Holdings, Inc. |
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40.1 |
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40.1 |
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Average |
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53.9 |
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55.7 |
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Median |
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50.5 |
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52.3 |
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All publicly traded thrifts: |
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Average |
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73.0 |
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80.9 |
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Median |
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74.2 |
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77.5 |
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(1) |
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Ratios are based on book value and tangible book value as of June 30, 2010, and
share prices as of October 12, 2010. |
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Tangible book value is book value less intangible assets, such as goodwill or
core deposit intangibles. |
The pro forma information presented under Pro Forma Data reflects an estimated expense
for the equity incentive plan that may be adopted by Fraternity Community Bancorp and the resulting
effect on the pro forma price-to-earnings multiples for Fraternity Community Bancorp.
Our board of directors reviewed Feldman Financial Advisors appraisal report, including the
methodology and the assumptions used by Feldman Financial Advisors, and determined that the
valuation range was reasonable and adequate. Assuming that the shares are sold at $10.00 per share
in the conversion, the estimated number of shares would be between 1,020,000 at the minimum of the
valuation range and 1,380,000 at the maximum of the valuation range, with a midpoint of 1,200,000.
The purchase price of $10.00 per share was determined by us, taking into account, among other
factors, the requirement under Office of Thrift Supervision regulations that the common stock be
offered in a manner that will achieve the widest distribution of the stock and desired liquidity in
the common stock after the offering.
Since the outcome of the offering relates in large measure to market conditions at the time of
sale, it is not possible for us to determine the exact number of shares that we will issue at this
time. The offering range may be amended, with the approval of the Office of Thrift Supervision, if
necessitated by developments following the date of the appraisal in, among other things, market
conditions, our financial condition or operating results, regulatory guidelines or national or
local economic conditions.
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If, upon completion of the subscription offering, at least the minimum number of shares are
subscribed for, Feldman Financial Advisors, after taking into account factors similar to those
involved in its prior appraisal, will determine its estimate of our pro forma market value as of
the close of the subscription offering. If, as a result of regulatory considerations, demand for
the shares or changes in market conditions, Feldman Financial Advisors determines that our pro
forma market value has increased, we may sell up to 1,587,000 shares without any further notice to
you.
No shares will be sold unless Feldman Financial Advisors confirms that, to the best of its
knowledge and judgment, nothing of a material nature has occurred that would cause it to conclude
that the actual total purchase price of the shares on an aggregate basis was materially
incompatible with its appraisal. If, however, the facts do not justify that statement, we may
either: terminate the stock offering and promptly return all funds without deduction; set a new
offering range, notify all subscribers and give them the opportunity to place a new order for
shares of Fraternity Community Bancorp common stock; or take such other actions as may be permitted
by the Office of Thrift Supervision. If the offering is terminated all subscriptions will be
cancelled and subscription funds will be returned promptly with interest and without deduction, and
holds on funds authorized for withdrawal from deposit accounts will be released or reduced. If
Feldman Financial Advisors establishes a new valuation range, it must be approved by the Office of
Thrift Supervision.
In formulating its appraisal, Feldman Financial Advisors relied upon the truthfulness,
accuracy and completeness of all documents we furnished to it. Feldman Financial Advisors also
considered financial and other information from regulatory agencies, other financial institutions,
and other public sources, as appropriate. While Feldman Financial Advisors believes this
information to be reliable, Feldman Financial Advisors does not guarantee the accuracy or
completeness of the information and did not independently verify the consolidated financial
statements and other data provided by us nor independently value our assets or liabilities. The
appraisal is not intended to be, and must not be interpreted as, a recommendation of any-kind as to
the advisability of purchasing shares of common stock. Moreover, because the appraisal must be
based on many factors that change periodically, there is no assurance that purchasers of shares in
the offering will be able to sell shares after the offering at prices at or above the purchase
price.
Copies of the appraisal report of Feldman Financial Advisors, including any amendments to the
report, and the detailed memorandum of the appraiser setting forth the method and assumptions for
such appraisal are available for inspection at our main office and the other locations specified
under Where You Can Find More Information.
Delivery of Certificates
Certificates representing the common stock sold in the subscription and community
offerings will be mailed by our transfer agent to the persons whose subscriptions or orders are
filled at the addresses of such persons appearing on the stock order form as soon as practicable
following completion of the offering. We will hold certificates returned as undeliverable until
claimed by the persons legally entitled to the certificates or otherwise disposed of in accordance
with applicable law. Until certificates for common stock are available and delivered to
subscribers, subscribers may not be able to sell their shares, even though trading of the common
stock may have commenced. All shares of Fraternity Community Bancorp common stock sold in the
syndicated offering will be in book entry form, and physical certificates will not be issued.
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Restrictions on Repurchase of Stock
Under Office of Thrift Supervision regulations, we may not for a period of one year from
the date of the completion of the offering repurchase any of our common stock from any person,
except (1) in an offer made to all shareholders to repurchase the common stock on a pro rata basis,
approved by the Office of Thrift Supervision; (2) the repurchase of qualifying shares of a
director; or (3) repurchases to fund restricted stock plans or tax-qualified employee stock benefit
plans. Where extraordinary circumstances exist, the Office of Thrift Supervision may approve the
open market repurchase of up to 5% of our common stock during the first year following the
offering. To receive such approval, we must establish compelling and valid business purposes for
the repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore, repurchases
of any common stock are prohibited if they would cause Fraternity Federal Savings and Loan
Associations regulatory capital to be reduced below the amount required under the regulatory
capital requirements imposed by the Office of Thrift Supervision.
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Restrictions on Transfer of Shares After the Conversion Applicable to Officers and Directors
Common stock purchased in the offering will be freely transferable, except for shares
purchased by our directors and executive officers.
Shares of common stock purchased by our directors and executive officers may not be sold for a
period of one year following the offering, except upon the death of the shareholder or unless
approved by the Office of Thrift Supervision. Shares purchased by these persons in the open market
after the offering will be free of this restriction. Shares of common stock issued to directors
and executive officers will bear a legend giving appropriate notice of the restriction and, in
addition, we will give appropriate instructions to our transfer agent with respect to the
restriction on transfers. Any shares issued to directors and executive officers as a stock
dividend, stock split or otherwise with respect to restricted common stock will be similarly
restricted.
Persons affiliated with us, including our directors and executive officers, received
subscription rights based only on their deposits with Fraternity Federal Savings and Loan
Association as account holders. Any purchases made by persons affiliated with us for the explicit
purpose of meeting the minimum of the offering must be made for investment purposes only, and not
with a view towards redistribution. Furthermore, as set forth above, Office of Thrift Supervision
regulations restrict sales of common stock purchased in the offering by directors and executive
officers for a period of one year following the offering.
Purchases of outstanding shares of our common stock by directors, officers, or any person who
becomes an executive officer or director after adoption of the plan of conversion, and their
associates, during the three-year period following the offering may be made only through a broker
or dealer registered with the Securities and Exchange Commission, except with the prior written
approval of the Office of Thrift Supervision. This restriction does not apply, however, to
negotiated transactions involving more than 1% of our outstanding common stock or to the purchase
of stock under stock benefit plans.
We have filed with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933, as amended, for the registration of the common stock to be issued in the
offering. This registration does not cover the resale of the shares. Shares of common stock
purchased by persons who are not affiliates of us may be resold without registration. Shares
purchased by an affiliate of us will have resale restrictions under Rule 144 of the Securities Act
of 1933, as amended. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including those that require
the affiliates sale to be aggregated with those of certain other persons, would be able to sell in
the public market, without registration, a number of shares not to exceed, in any three-month
period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the
shares during the preceding four calendar weeks. We may make future provision to permit affiliates
to have their shares registered for sale under the Securities Act of 1933, as amended, under
certain circumstances.
Interpretation, Amendment and Termination
To the extent permitted by law, all interpretations by us of the plan of conversion will
be final; however, such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of conversion provides that, if deemed necessary or desirable, we may substantively amend
the plan of conversion as a result of comments from regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the common stock within 90 days
following approval of the plan of conversion by the Office of Thrift Supervision, unless an
extension is granted by the Office of Thrift Supervision. If this condition is not satisfied, the
plan of conversion will be terminated and we will continue our business as a federal mutual savings
association. We may terminate the plan of conversion at any time.
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Restrictions on the Acquisition of
Fraternity Community Bancorp and
Fraternity Federal Savings and Loan Association
General
Fraternity Federal Savings and Loan Associations plan of conversion provides for the
conversion of Fraternity Federal Savings and Loan Association from the mutual to the stock form of
organization and, as part of the conversion, the adoption of a new federal stock charter and bylaws
by Fraternity Federal Savings and Loan Associations members. The plan of conversion also provides
for the concurrent formation of a holding company. As described below and elsewhere in this
document, certain provisions in Fraternity Community Bancorps articles of incorporation and bylaws
may have anti-takeover effects. In addition, provisions in Fraternity Federal Savings and Loan
Associations federal stock charter and bylaws may also have anti-takeover effects. Finally,
Maryland corporate law and regulatory restrictions may make it difficult for persons or companies
to acquire control of either Fraternity Community Bancorp or Fraternity Federal Savings and Loan
Association.
Anti-takeover Provisions in Fraternity Community Bancorps Articles of Incorporation and Bylaws
Fraternity Community Bancorps articles of incorporation and bylaws contain provisions that
could make more difficult an acquisition of Fraternity Community Bancorp by means of a tender
offer, proxy contest or otherwise. Some provisions will also render the removal of the incumbent
board of directors or management of Fraternity Community Bancorp more difficult. These provisions
may have the effect of deterring a future takeover attempt that is not approved by the directors of
Fraternity Community Bancorp, but which Fraternity Community Bancorp shareholders may deem to be in
their best interests or in which shareholders may receive a substantial premium for their shares
over then current market prices. As a result, shareholders who might desire to participate in such
a transaction may not have the opportunity to do so. The following description of these provisions
is only a summary and does not provide all of the information contained in Fraternity Community
Bancorps articles of incorporation and bylaws. See Where You Can Find More Information for
information on where to obtain a copy of these documents.
Limitation on Voting Rights. Our articles of incorporation provide that in no event will any
record owner of any outstanding common stock which is beneficially owned, directly or indirectly,
by a person who, as of any record date for the determination of shareholders entitled to vote on
any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock, be
entitled, or permitted to any vote in respect of the shares held in excess of the limit. This
limitation does not apply to any director or officer acting solely in their capacities as directors
and officers, or any employee benefit plans of Fraternity Community Bancorp or any subsidiary or a
trustee of a plan.
Board of Directors
Classified Board. Our board of directors is divided into three classes as nearly as equal in
number as possible. The shareholders elect one class of directors each year for a term of three
years. The classified board makes it more difficult and time consuming for a shareholder group to
fully use its voting power to gain control of the board of directors without the consent of the
incumbent board of directors of Fraternity Community Bancorp.
Filling of Vacancies; Removal. Our bylaws provide that any vacancy occurring in the board of
directors, including a vacancy created by an increase in the number of directors, may be filled
only by a vote of a majority of the directors then in office. A person elected to fill a vacancy
on the board of directors will serve for the remainder of the full term of the class of directors
in which the vacancy occurred and until his or her successor shall have been elected and qualified.
Our articles of incorporation provide that a director may be removed from the board of directors
before the expiration of his or her term only for cause and only upon the vote of a majority of the
shares entitled to vote in the election of directors. These provisions make it more difficult for
shareholders to remove directors and replace them with their own nominees.
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Qualification. Our bylaws provide that to be eligible to serve on the board of directors a
person must not: (1) be under indictment for, or ever have been convicted of, a criminal offense
involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for
more than one year, (2) be a person against whom a banking agency has, within the past ten years,
issued a cease and desist order for conduct involving dishonesty or breach of trust and that order
is final and not subject to appeal, or (3) have been found either by a regulatory agency whose
decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty
involving personal profit, or (ii) committed a willful violation of any law, rule or regulation
governing banking, securities, commodities or insurance, or any final cease and desist order issued
by a banking, securities, commodities or insurance regulatory agency. These provisions contained
in our bylaws may prevent shareholders from nominating themselves or persons of their choosing for
election to the board of directors.
Elimination of Cumulative Voting. Our articles of incorporation provide that no shares will be
entitled to cumulative voting. The elimination of cumulative voting makes it more difficult for a
shareholder group to elect a director nominee.
Special Meetings of Shareholders. Our shareholders must act only through an annual or special
meeting. Special meetings of shareholders may only be called by the Chairman, the President, by
two-thirds of the total number of directors or by the Corporate Secretary upon the written request
of the holders of a majority of all the shares entitled to vote at a meeting. The limitations on
the calling of special meetings of shareholders may have the effect of delaying consideration of a
shareholder proposal until the next annual meeting.
Amendment of Articles of Incorporation. Our articles of incorporation provide that certain
amendments to our articles of incorporation relating to a change in control of us must be approved
by at least 75% of the outstanding shares entitled to vote.
Advance Notice Provisions for Shareholder Nominations and Proposals. Our bylaws establish an
advance notice procedure for shareholders to nominate directors or bring other business before an
annual meeting of shareholders. A person may not be nominated for election as a director unless
that person is nominated by or at the direction of our board of directors or by a shareholder who
has given appropriate notice to us before the meeting. Similarly, a shareholder may not bring
business before an annual meeting unless the shareholder has given us appropriate notice of the
shareholders intention to bring that business before the meeting. Our Secretary must receive
notice of the nomination or proposal not less than 90 days before the date of the annual meeting;
provided, however, that if less than 100 days notice of prior public disclosure of the date of the
meeting is given or made to the shareholders, notice by the shareholder to be timely must be
received not later than the close of business on the 10th day following the
day on which such notice of the date of the annual meeting was mailed or such public disclosure was
made. A shareholder who desires to raise new business must provide us with certain information
concerning the nature of the new business, the shareholder, the shareholders ownership of
Fraternity Community Bancorp and the shareholders interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must provide us with certain
information concerning the nominee and the proposing shareholder.
Advance notice of nominations or proposed business by shareholders gives our board of
directors time to consider the qualifications of the proposed nominees, the merits of the proposals
and, to the extent deemed necessary or desirable by our board of directors, to inform shareholders
and make recommendations about those matters.
Authorized but Unissued Shares of Capital Stock. Following the offering, we will have
authorized but unissued shares of common and preferred stock. Our articles of incorporation
authorize the board of directors to establish one or more series of preferred stock and, for any
series of preferred stock, to determine the terms and rights of the series, including voting
rights, dividend rights, conversion and redemption rates, and liquidation preferences. Such shares
of common and preferred stock could be issued by the board of directors to render more difficult or
to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest
or otherwise.
Business Combinations with Interested Shareholders. Under Maryland law, business
combinations between Fraternity Community Bancorp and an interested shareholder or an affiliate of
an interested
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shareholder are prohibited for five years after the most recent date on which the interested
shareholder becomes an interested shareholder. These business combinations include a merger,
consolidation, statutory share exchange or, in circumstances specified in the statute, certain
transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications
involving interested shareholders and their affiliates or issuance or reclassification of equity
securities. Maryland law defines an interested shareholder as: (1) any person who beneficially
owns 10% or more of the voting power of Fraternity Community Bancorps voting stock after the date
on which Fraternity Community Bancorp had 100 or more beneficial owners of its stock; or (2) an
affiliate or associate of Fraternity Community Bancorp at any time after the date on which
Fraternity Community Bancorp had 100 or more beneficial owners of its stock who, within the
two-year period before the date in question, was the beneficial owner of 10% or more of the voting
power of the then-outstanding voting stock of Fraternity Community Bancorp. A person is not an
interested shareholder under the statute if the board of directors approved in advance the
transaction by which the person otherwise would have become an interested shareholder. However, in
approving a transaction, the board of directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and conditions determined by the
board.
After the five-year prohibition, any business combination between Fraternity Community Bancorp
and an interested shareholder generally must be recommended by the board of directors of Fraternity
Community Bancorp and approved by the affirmative vote of at least: (1) 80% of the votes entitled
to be cast by holders of outstanding shares of voting stock of Fraternity Community Bancorp and (2)
two-thirds of the votes entitled to be cast by holders of voting stock of Fraternity Community
Bancorp other than shares held by the interested shareholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate or associate of the interested
shareholder. These super-majority vote requirements do not apply if Fraternity Community Bancorps
common shareholders receive a minimum price, as defined under Maryland law, for their shares in the
form of cash or other consideration in the same form as previously paid by the interested
shareholder for its shares.
Restrictions in Fraternity Federal Savings and Loan Associations Federal Stock Charter and
Bylaws
Although the board of directors of Fraternity Federal Savings and Loan Association is not
aware of any effort that might be made to obtain control of Fraternity Federal Savings and Loan
Association after its conversion to the stock form of ownership, the board of directors believes it
is appropriate to adopt certain provisions permitted by federal regulations that may have the
effect of deterring a future takeover attempt that is not approved by Fraternity Federal Savings
and Loan Associations board of directors. The following description of these provisions is only a
summary and does not provide all of the information contained in Fraternity Federal Savings and
Loan Associations proposed federal stock charter and bylaws.
Beneficial Ownership Limitation. Fraternity Federal Savings and Loan Associations charter
provides that, for a period of five years from the date of the conversion, no person, other than
Fraternity Community Bancorp, may acquire directly or indirectly the beneficial ownership of more
than 10% of any class of any equity security of Fraternity Federal Savings and Loan Association.
If a person acquires shares in violation of this provision, all shares beneficially owned by such
person in excess of 10% will be considered excess shares and will not be counted as shares
entitled to vote or counted as voting shares in connection with any matters submitted to the
shareholders for a vote.
Board of Directors
Classified Board. Fraternity Federal Savings and Loan Associations board of directors is
divided into three classes as nearly as equal in number as possible. The shareholders elect one
class of directors each year for a term of three years. The classified board makes it more
difficult and time consuming for a shareholder group to fully use its voting power to gain control
of the board of directors without the consent of the incumbent board of directors of Fraternity
Federal Savings and Loan Association.
Filling of Vacancies; Removal. The bylaws provide that any vacancy occurring in the board of
directors, including a vacancy created by an increase in the number of directors, may be filled by
a vote of a majority of the remaining directors although less than a quorum of the board of
directors then in office. A person elected to fill a vacancy on the board of directors will serve
until the next election of directors by the shareholders.
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Fraternity Federal Savings and Loan Associations bylaws provide that a director may be removed
from the board of directors before the expiration of his or her term only for cause and only upon
the vote of the holders of at least a majority of the outstanding shares of voting stock. These
provisions make it more difficult for shareholders to remove directors and replace them with their
own nominees.
Elimination of Cumulative Voting. The charter of Fraternity Federal Savings and Loan
Association does not provide for cumulative voting with respect to the election of directors. The
elimination of cumulative voting makes it more difficult for a shareholder group to elect a
director nominee.
Authorized but Unissued Shares of Capital Stock. Following the conversion, Fraternity Federal
Savings and Loan Association will have authorized but unissued shares of common and preferred
stock. Fraternity Federal Savings and Loan Associations charter authorizes the board of directors
to establish one or more series of preferred stock and, for any series of preferred stock, to
determine the terms and rights of the series, including voting rights, conversion rates, and
liquidation preferences. Such shares of common and preferred stock could be issued by the board of
directors to render more difficult or to discourage an attempt to obtain control of Fraternity
Federal Savings and Loan Association by means of a merger, tender offer, proxy contest or
otherwise.
Regulatory Restrictions
Office of Thrift Supervision Regulations. Regulations of the Office of Thrift
Supervision provide that, for a period of three years following the date of the completion of the
conversion, no person, acting singly or together with associates in a group of persons acting in
concert, will directly or indirectly offer to acquire or acquire the beneficial ownership of more
than 10% of any class of any equity security of Fraternity Community Bancorp without the prior
written approval of the Office of Thrift Supervision. Where any person, directly or indirectly,
acquires beneficial ownership of more than 10% of any class of any equity security of Fraternity
Community Bancorp without the prior written approval of the Office of Thrift Supervision, the
securities beneficially owned by such person in excess of 10% will not be voted by any person or
counted as voting shares in connection with any matter submitted to the shareholders for a vote,
and will not be counted as outstanding for purposes of determining the affirmative vote necessary
to approve any matter submitted to the shareholders for a vote.
Change in Bank Control Act. The acquisition of 10% or more of the common stock outstanding
may trigger the provisions of the Change in Bank Control Act, a federal law. The Office of Thrift
Supervision has also adopted a regulation under the Change in Bank Control Act which generally
requires persons who at any time intend to acquire control of a federally chartered savings
association, including a converted savings and loan association such as Fraternity Federal Savings
and Loan Association, to provide 60 days prior written notice and certain financial and other
information to the Office of Thrift Supervision.
The 60-day notice period does not commence until the information is deemed to be substantially
complete. Control for the purpose of this Act exists in situations in which the acquiring party
has voting control of at least 25% of any class of Fraternity Community Bancorps voting stock or
the power to direct the management or policies of Fraternity Community Bancorp. However, under
Office of Thrift Supervision regulations, control is presumed to exist where the acquiring party
has voting control of at least 10% of any class of Fraternity Community Bancorps voting securities
if specified control factors are present. The statute and underlying regulations authorize the
Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.
Description of Fraternity Community Bancorp Capital Stock
The common stock of Fraternity Community Bancorp will represent
nonwithdrawable capital, will not be an account of any type, and will not be
insured by the Federal Deposit Insurance Corporation or any other government
agency.
General
Fraternity Community Bancorp is authorized to issue 15 million (15,000,000) shares of
common stock having a par value of $0.01 per share and one million (1,000,000) shares of preferred
stock having a par value of
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$0.01 per share. Each share of Fraternity Community Bancorps common stock will have the same
relative rights as, and will be identical in all respects with, each other share of common stock.
Upon payment of the purchase price for the common stock, as required by the plan of conversion, all
stock will be duly authorized, fully paid and nonassessable. Fraternity Community Bancorp will not
issue any shares of preferred stock in the conversion.
Common Stock
Dividends. Under applicable law, Fraternity Community Bancorp can pay dividends on its
common stock if, after giving effect to the distribution, it would be able to pay its indebtedness
as the indebtedness comes due in the usual course of business and its total assets exceed the sum
of its liabilities and the amount needed, if Fraternity Community Bancorp were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon dissolution of any holders of
capital stock who have a preference upon dissolution. The holders of common stock of Fraternity
Community Bancorp will be entitled to receive and share equally in dividends as may be declared by
the board of directors of Fraternity Community Bancorp out of funds legally available for
dividends. If Fraternity Community Bancorp issues preferred stock, the holders of the preferred
stock may have a priority over the holders of the common stock with respect to dividends. See Our
Dividend Policy and Regulation and Supervision.
Voting Rights. After the conversion, the holders of common stock of Fraternity Community
Bancorp will possess exclusive voting rights in Fraternity Community Bancorp. They will elect
Fraternity Community Bancorps board of directors and act on other matters as are required to be
presented to them under Maryland law or as are otherwise presented to them by the board of
directors. Except as discussed under Restrictions on the Acquisition of Fraternity Community
Bancorp and Fraternity Federal Savings and Loan AssociationRestrictions in Fraternity Community
Bancorps Articles of Incorporation and BylawsLimitations on Voting Rights, each holder of common
stock will be entitled to one vote per share and will not have any right to cumulate votes in the
election of directors. If Fraternity Community Bancorp issues preferred stock, holders of
Fraternity Community Bancorp preferred stock may also possess voting rights.
Liquidation. If there is any liquidation, dissolution or winding up of Fraternity Federal
Savings and Loan Association, Fraternity Community Bancorp, as the sole holder of Fraternity
Federal Savings and Loan Associations capital stock, would be entitled to receive all of
Fraternity Federal Savings and Loan Associations assets available for distribution after payment
or provision for payment of all debts and liabilities of Fraternity Federal Savings and Loan
Association, including all deposit accounts and accrued interest. Upon liquidation, dissolution or
winding up of Fraternity Community Bancorp, the holders of its common stock would be entitled to
receive all of the assets of Fraternity Community Bancorp available for distribution after payment
or provision for payment of all its debts and liabilities. If Fraternity Community Bancorp issues
preferred stock, the preferred stock holders may have a priority over the holders of the common
stock upon liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of Fraternity Community Bancorp
will not be entitled to preemptive rights with respect to any shares that may be issued. The
common stock cannot be redeemed.
Preferred Stock
Fraternity Community Bancorp will not issue any preferred stock in the conversion and it
has no current plans to issue any preferred stock after the conversion. Preferred stock may be
issued with designations, powers, preferences and rights as the board of directors may from time to
time determine. The board of directors can, without shareholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights that could dilute the voting strength of
the holders of the common stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be
.
Registration Requirements
We have registered our common stock with the Securities and Exchange Commission under
Section 12(b) of the Securities Exchange Act of 1934, as amended, and will not deregister our
common stock for a period of at least three years following the offering. As a result of
registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual
and periodic reporting and other requirements of that statute will apply.
Legal and Tax Opinions
The legality of our common stock has been passed upon for us by Kilpatrick Stockton LLP,
Washington, D.C. The federal tax consequences of the conversion have been opined upon by
Kilpatrick Stockton LLP and the state tax consequences of the conversion have been opined upon by
Stegman & Company. Kilpatrick Stockton LLP and Stegman & Company have consented to the references
to their opinions in this prospectus. Certain legal matters will be passed upon for Sandler
ONeill + Partners, L.P. by SNR Denton US LLP.
Experts
The consolidated financial statements of Fraternity Federal Savings and Loan Association
as of December 31, 2009 and 2008, and for each of the years in the two-year period ended December
31, 2009 included in this prospectus and in the registration statement have been audited by Stegman
& Company, an independent registered public accounting firm, as stated in its report appearing
herein and elsewhere in the registration statement (which report expresses an unqualified opinion),
and has been so included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Feldman Financial Advisors has consented to the summary in this prospectus of its report to us
setting forth its opinion as to our estimated pro forma market value and to the use of its name and
statements with respect to it appearing in this prospectus.
Where You Can Find More Information
We have filed with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933, as amended, that registers the common stock offered in the stock
offering. This prospectus forms a part of the registration statement. The registration statement,
including the exhibits, contains additional relevant information about us and our common stock.
The rules and regulations of the Securities and Exchange Commission allow us to omit certain
information included in the registration statement from this prospectus. You may read and copy the
registration statement at the Securities and Exchange Commissions public reference room at 100 F
Street, NE, Room 1580, Washington, DC 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Securities and Exchange Commissions public reference
rooms. The registration statement also is available to the public from commercial document
retrieval services and at the Internet World Wide Website maintained by the Securities and Exchange
Commission at http://www.sec.gov.
Fraternity Federal Savings and Loan Association has filed an application for approval of the
plan of conversion with the Office of Thrift Supervision. This prospectus omits certain
information contained in the application. The application may be inspected, without charge, at the
offices of the Office of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552 and at the
offices of the Regional Director of the Office of Thrift Supervision at the Southeast Regional
Office of the Office of Thrift Supervision, 1475 Peachtree Street, NE, Atlanta, Georgia 30309.
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A copy of the plan of conversion and Fraternity Community Bancorps articles of incorporation
and bylaws are available without charge from Fraternity Federal Savings and Loan Association.
The appraisal report of Feldman Financial Advisors has been filed as an exhibit to our
registration statement and to our application to the Office of Thrift Supervision. The appraisal
report was filed electronically with the Securities and Exchange Commission and is available on its
website as described above. The appraisal report also is available at the public reference room of
the Securities and Exchange Commission and the offices of the Office of Thrift Supervision as
described above.
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Index to Consolidated Financial Statements
of Fraternity Federal Savings and Loan Association
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All schedules are omitted as the required information either is not applicable or is included
in the financial statements or related notes. Separate financial statements for Fraternity
Community Bancorp have not been included in this prospectus because Fraternity Community Bancorp,
which has engaged only in organizational activities to date, has no significant assets, contingent
or other liabilities, revenues or expenses.
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[LETTERHEAD OF STEGMAN & COMPANY]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Fraternity Federal Savings and Loan Association, Inc.
Baltimore, Maryland
We have audited the consolidated statements of financial condition of Fraternity Federal Savings and Loan Association and subsidiary (the Association) as of
December 31, 2009 and 2008, and the related consolidated statements of income and retained earnings, comprehensive income and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Associations management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America.
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. The Association is not required to have, nor were we engaged to perform, an audit of the internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Associations internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Fraternity Federal Savings and Loan Association and subsidiary as of December 31, 2009 and 2008, and the consolidated
results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ Stegman & Company
Baltimore, Maryland
May 14, 2010
F - 1
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
ASSETS
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,846,485 |
|
|
$ |
4,400,585 |
|
|
$ |
2,574,151 |
|
Interest-bearing deposits in other banks |
|
|
17,288,095 |
|
|
|
9,506,968 |
|
|
|
8,864,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
20,134,580 |
|
|
|
13,907,553 |
|
|
|
11,438,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale at fair value |
|
|
19,649,504 |
|
|
|
24,116,110 |
|
|
|
8,525,615 |
|
Held-to-maturity at amoritized cost (fair value
approximates $-0-, $-0- and $8,356,400, respectively) |
|
|
|
|
|
|
|
|
|
|
7,446,849 |
|
Loans net of allowance for loan losses of $804,500, $276,621
and $272,121, respectively |
|
|
118,770,320 |
|
|
|
120,091,892 |
|
|
|
136,547,199 |
|
Investment in bank-owned life insurance |
|
|
4,079,167 |
|
|
|
3,983,719 |
|
|
|
2,319,216 |
|
Property and equipment, net |
|
|
798,600 |
|
|
|
812,357 |
|
|
|
699,268 |
|
Federal Home Loan Bank stock at cost restricted |
|
|
1,562,400 |
|
|
|
1,353,700 |
|
|
|
1,597,300 |
|
Ground rents net of valuation allowance |
|
|
863,837 |
|
|
|
863,994 |
|
|
|
885,245 |
|
Accrued interest receivable |
|
|
687,040 |
|
|
|
722,443 |
|
|
|
669,631 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
94,694 |
|
Other assets |
|
|
1,382,688 |
|
|
|
1,123,892 |
|
|
|
464,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
167,928,136 |
|
|
$ |
166,975,660 |
|
|
$ |
170,688,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
125,760,392 |
|
|
$ |
125,959,893 |
|
|
$ |
124,912,688 |
|
Advances from the Federal Home Loan Bank |
|
|
22,750,000 |
|
|
|
22,916,667 |
|
|
|
28,416,667 |
|
Advances by borrowers for taxes and insurance |
|
|
1,809,866 |
|
|
|
644,217 |
|
|
|
580,310 |
|
Other liabilities |
|
|
960,791 |
|
|
|
463,117 |
|
|
|
303,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
151,281,049 |
|
|
|
149,983,894 |
|
|
|
154,213,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
16,592,187 |
|
|
|
17,003,434 |
|
|
|
16,660,310 |
|
Accumulated other comprehensive loss |
|
|
54,900 |
|
|
|
(11,668 |
) |
|
|
(185,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
16,647,087 |
|
|
|
16,991,766 |
|
|
|
16,475,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
167,928,136 |
|
|
$ |
166,975,660 |
|
|
$ |
170,688,467 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F - 2
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
$ |
3,355,587 |
|
|
$ |
3,862,759 |
|
|
$ |
7,372,112 |
|
|
$ |
7,814,228 |
|
Interest and dividends on investment securities |
|
|
464,244 |
|
|
|
397,148 |
|
|
|
851,620 |
|
|
|
1,117,400 |
|
Income from ground rents owned |
|
|
28,366 |
|
|
|
26,899 |
|
|
|
48,099 |
|
|
|
61,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
3,848,197 |
|
|
|
4,286,806 |
|
|
|
8,271,831 |
|
|
|
8,993,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
1,509,194 |
|
|
|
2,042,769 |
|
|
|
3,890,675 |
|
|
|
4,928,576 |
|
Interest on borrowings |
|
|
448,306 |
|
|
|
456,745 |
|
|
|
914,690 |
|
|
|
927,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,957,500 |
|
|
|
2,499,514 |
|
|
|
4,805,365 |
|
|
|
5,856,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
1,890,697 |
|
|
|
1,787,292 |
|
|
|
3,466,466 |
|
|
|
3,136,868 |
|
PROVISION FOR LOAN LOSSES |
|
|
864,719 |
|
|
|
50,960 |
|
|
|
50,960 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES |
|
|
1,025,978 |
|
|
|
1,736,332 |
|
|
|
3,415,506 |
|
|
|
3,131,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of fixed assets |
|
|
|
|
|
|
(2,977 |
) |
|
|
(2,977 |
) |
|
|
|
|
Gain on sale of investments |
|
|
150,461 |
|
|
|
98,384 |
|
|
|
228,705 |
|
|
|
91,375 |
|
Income on bank-owned life insurance |
|
|
95,448 |
|
|
|
66,163 |
|
|
|
164,503 |
|
|
|
119,216 |
|
Gain on sale of loans |
|
|
32,978 |
|
|
|
176,127 |
|
|
|
224,368 |
|
|
|
28,000 |
|
Other income |
|
|
32,030 |
|
|
|
40,556 |
|
|
|
78,164 |
|
|
|
84,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
310,917 |
|
|
|
378,253 |
|
|
|
692,763 |
|
|
|
322,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,123,988 |
|
|
|
989,551 |
|
|
|
2,006,969 |
|
|
|
1,881,620 |
|
Occupancy expenses |
|
|
324,674 |
|
|
|
298,120 |
|
|
|
607,803 |
|
|
|
576,858 |
|
Advertising |
|
|
26,872 |
|
|
|
24,432 |
|
|
|
47,977 |
|
|
|
64,453 |
|
Data processing expense |
|
|
124,201 |
|
|
|
110,018 |
|
|
|
226,510 |
|
|
|
211,418 |
|
Directors fees |
|
|
48,148 |
|
|
|
43,618 |
|
|
|
88,180 |
|
|
|
88,780 |
|
Pension termination expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,944 |
|
Other general and administrative expenses |
|
|
417,496 |
|
|
|
339,623 |
|
|
|
669,038 |
|
|
|
476,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
2,065,379 |
|
|
|
1,805,362 |
|
|
|
3,646,477 |
|
|
|
3,599,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES |
|
|
(728,484 |
) |
|
|
309,223 |
|
|
|
461,792 |
|
|
|
(145,154 |
) |
PROVISION (BENEFIT) FOR INCOME TAXES: |
|
|
(317,237 |
) |
|
|
94,835 |
|
|
|
118,668 |
|
|
|
(153,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
|
(411,247 |
) |
|
|
214,388 |
|
|
|
343,124 |
|
|
|
8,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS AT BEGINNING OF PERIOD |
|
|
17,003,434 |
|
|
|
16,660,310 |
|
|
|
16,660,310 |
|
|
|
16,652,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS AT END OF PERIOD |
|
$ |
16,592,187 |
|
|
$ |
16,874,698 |
|
|
$ |
17,003,434 |
|
|
$ |
16,660,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F - 3
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
$ |
(411,247 |
) |
|
$ |
214,388 |
|
|
$ |
343,124 |
|
|
$ |
8,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME ON
AVAILABLE-FOR-SALE INVESTMENTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during period,
net of income tax |
|
|
172,367 |
|
|
|
64,123 |
|
|
|
217,880 |
|
|
|
(198,150 |
) |
Less reclassification adjustment for gains net of taxes |
|
|
(105,799 |
) |
|
|
(39,359 |
) |
|
|
(138,732 |
) |
|
|
(55,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss) net of
taxes |
|
|
66,568 |
|
|
|
24,764 |
|
|
|
79,148 |
|
|
|
(253,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
$ |
(344,679 |
) |
|
$ |
239,152 |
|
|
$ |
422,272 |
|
|
$ |
(245,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F - 4
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(411,247 |
) |
|
$ |
343,124 |
|
|
$ |
8,024 |
|
Adjustments to reconcile net income used in
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
60,977 |
|
|
|
114,957 |
|
|
|
118,066 |
|
Gain on sale of available-for-sale securities |
|
|
(150,461 |
) |
|
|
(228,705 |
) |
|
|
(91,375 |
) |
Gain on sale of loans |
|
|
(32,978 |
) |
|
|
(224,368 |
) |
|
|
(28,000 |
) |
Loss on sale of fixed assets |
|
|
|
|
|
|
2,977 |
|
|
|
|
|
Origination of loans sold |
|
|
(2,418,900 |
) |
|
|
(20,195,300 |
) |
|
|
(3,066,148 |
) |
Proceeds from loans sold |
|
|
2,451,878 |
|
|
|
20,419,668 |
|
|
|
3,094,148 |
|
Amortization/accretion of premium/discount |
|
|
11,892 |
|
|
|
|
|
|
|
3,083 |
|
Increase in value of bank-owned life insurance |
|
|
(95,448 |
) |
|
|
(164,503 |
) |
|
|
(119,216 |
) |
Deferred income taxes |
|
|
|
|
|
|
1,191 |
|
|
|
1,917 |
|
Provision for loan losses |
|
|
864,719 |
|
|
|
50,960 |
|
|
|
5,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable and other assets |
|
|
(223,393 |
) |
|
|
(758,498 |
) |
|
|
(170,816 |
) |
Other liabilities |
|
|
498,495 |
|
|
|
252,967 |
|
|
|
(261,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
555,534 |
|
|
|
(385,530 |
) |
|
|
(506,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans |
|
|
456,030 |
|
|
|
16,455,307 |
|
|
|
(5,455,682 |
) |
Redemption of ground rents |
|
|
159 |
|
|
|
21,251 |
|
|
|
18,525 |
|
Acquisition of property and equipment |
|
|
(47,220 |
) |
|
|
(231,023 |
) |
|
|
(41,821 |
) |
Purchase of: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
|
(8,486,500 |
) |
|
|
(20,002,550 |
) |
|
|
(9,180,165 |
) |
Federal Home Loan Bank stock |
|
|
(208,700 |
) |
|
|
|
|
|
|
(441,900 |
) |
Bank-owned life insurance (BOLI) |
|
|
|
|
|
|
(1,500,000 |
) |
|
|
|
|
Proceeds from: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and maturities investment securities available-for-sale |
|
|
11,654,450 |
|
|
|
7,946,948 |
|
|
|
5,410,539 |
|
Principal paydowns on investment securities
available-for-sale |
|
|
1,503,793 |
|
|
|
4,309,654 |
|
|
|
759,434 |
|
Principal paydowns on investment securities
held-to-maturity |
|
|
|
|
|
|
|
|
|
|
1,128,378 |
|
Sale of Federal Home Loan Bank stock |
|
|
|
|
|
|
243,600 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
4,872,012 |
|
|
|
7,243,187 |
|
|
|
(7,562,692 |
) |
|
|
|
|
|
|
|
|
|
|
F - 5
Fraternity Federal Savings and Loan Association and Subsidiary
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
$ |
(199,501 |
) |
|
$ |
1,047,205 |
|
|
$ |
(8,221,714 |
) |
Borrowings from the Federal Home Loan Bank |
|
|
5,000,000 |
|
|
|
|
|
|
|
41,000,000 |
|
Repayments of Federal Home Loan Bank borrowings |
|
|
(5,166,667 |
) |
|
|
(5,500,000 |
) |
|
|
(36,250,000 |
) |
Increase in advances by borrowers
for taxes and insurance |
|
|
1,165,649 |
|
|
|
63,907 |
|
|
|
25,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used
in) financing
activities |
|
|
799,481 |
|
|
|
(4,388,888 |
) |
|
|
(3,446,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
|
|
6,227,027 |
|
|
|
2,468,769 |
|
|
|
(11,516,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR |
|
|
13,907,553 |
|
|
|
11,438,784 |
|
|
|
22,954,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT
END OF YEAR |
|
$ |
20,134,580 |
|
|
$ |
13,907,553 |
|
|
$ |
11,438,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,957,527 |
|
|
$ |
4,805,504 |
|
|
$ |
5,855,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
|
|
|
$ |
125,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of investment securities from
held-to-maturity
to available for sale |
|
$ |
|
|
|
$ |
4,337,231 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F - 6
FRATERNITY FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Fraternity Federal Savings and Loan (the Association) provides a full range of banking services
to individuals and businesses through its main office and three branches in the Baltimore
metropolitan area. Its primary deposit products are certificates of deposit and demand, savings,
NOW, and money market accounts. Its primary lending products are consumer loans and real estate
mortgages.
Unaudited Interim Financial Statements
The interim consolidated financial statements prepared by management as of June 30, 2010 and for
the six months ended June 30, 2010 and 2009 are not covered by the Independent Auditors Report. In
the opinion of management, the accompanying consolidated financial statements as of June 30, 2010
and for the six months ended June 30, 2010 and 2009 contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position at June 30, 2010, and
the results of operations and cash flows for the six months ended June 30, 2010 and 2009. The
results of operations for the six months ended June 30, 2010 are not necessarily indicative of the
results to be expected for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Association and its wholly owned
subsidiary, Fraternity Insurance Agency, Inc. (an inactive corporation). All significant
intercompany accounts and transactions have been eliminated. The accounting and reporting policies
of the Association conform to U.S. generally accepted accounting principles and to general
practices in the banking industry.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investment Securities
Investment securities designated as available-for-sale are stated at estimated fair value based on
quoted market prices. They represent those securities which management may sell as part of its
asset/liability strategy or that may be sold in response to changing interest rates or liquidity
needs. Unrealized holding gains and losses, net of tax, on available-for-sale securities are
included in other comprehensive income. Realized gains (losses) on available-for-sale securities
are included in other income and, when applicable, are reported as a reclassification adjustment in
other comprehensive income. Gains and losses on the sale of available-for-sale securities are
recorded on the trade date and are determined by
F - 7
the specific identification method. The
amortization of premiums and the accretion of discounts are recognized in interest income using
methods approximating the interest method over the term of the security.
Investment securities designated as held-to-maturity are stated at amortized cost and adjusted for
premiums and discounts that are recognized in interest income using methods in approximating the
interest method over the period of maturity.
Restricted Stock Investment
The Association, as a member of the Federal Home Loan Bank System, is required to maintain an
investment in capital stock of the Federal Home Loan Bank of Atlanta (FHLB) in varying amounts
based on balances of outstanding home loans and on amounts borrowed from the FHLB. Because no ready
market exists for this stock and it has no quoted market value, the Association investment in this
stock is carried at cost.
Loans Held for Sale
Loans originated for sale are carried at the lower of aggregate cost or market value. Market value
is based on commitments from investors. Gains and losses on sales are determined using the specific
identification method.
Loans Receivable
Loans are stated at the principal amount outstanding net of unearned income. Interest income on
loans is accrued at the contractual rate on the principal amount outstanding. When scheduled
principal and interest payments are past due 90 days or more, the accrual of interest income is
discontinued and recognized only as collected. Accrual of interest resumes when the loan is brought
current and the borrower demonstrates an ability to service the debt on a current basis.
Loan origination fees and qualifying deferred loan costs are being deferred, and the net amount is
amortized over the contractual life of the loan as an adjustment to the loans yield. The
computation on a per loan basis was based on salaries of loan officers, employees associated with
originating loans and loan volume.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in managements judgment, is adequate
to absorb loan losses inherent in the loan portfolio. The amount of the allowance is based on
managements evaluation of the collectability of the loan portfolio, including the nature of the
portfolio, credit concentrations, and trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
While management uses all available information to recognize credit losses in accordance with U.S.
generally accepted accounting principles, future increases or decreases to the allowance may be
necessary based on several factors such as changes in local economic conditions affecting the
Associations customers, the payment performance of individual loans, portfolio seasoning, changes
in collateral values, and reviews of loan relationships. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Associations allowance for
credit losses. Such examinations could result in the Association recognizing additions to this
allowance based on the regulators judgments about information available to them at the time of
their examination.
F - 8
A loan is considered impaired when it is probable that the Association will be unable to collect
scheduled payments. Factors in determining impairment include payment status, collateral value and
probability of collection. Impairment is measured on a loan-by-loan basis for commercial and
construction loans by either the present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Bank-Owned Life Insurance
The Association purchased single premium life insurance policies on certain employees of the
Association. The net cash surrender value of those policies is included in the accompanying
statement of financial position. Appreciation in the value of the insurance policies is classified
in non-interest income.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the various classes of assets
from the respective dates of acquisition. The useful lives for the principal classes of assets are:
|
|
|
|
|
Buildings and improvements |
|
30 - 40 years |
Furniture, fixtures and equipment |
|
3 - 20 years |
Leasehold improvements |
|
10 years |
Expenditures for maintenance, repairs and minor renewals are expensed as incurred. Expenditures for
additions, improvements and replacements are added to premises and equipment accounts. The cost of
retirements and other dispositions is removed from both the asset and accumulated depreciation
accounts.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related primarily to differences
between the basis of available-for-sale securities, allowance for loan losses, accumulated
depreciation, deferred loan fees, and accrued employee benefits for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $47,977 and $64,453 for the
years ended December 31, 2009 and 2008, respectively. Advertising expense was $26,872 and $24,432
for the six months ended June 30, 2010 and 2009, respectively.
Cash and Cash Equivalents
The Association considers all cash and due from banks and interest-bearing deposits in other banks
having original maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
F - 9
Financial Statement Presentation
Certain reclassifications have been made to the financial statement presentation to conform with
the current years method of presentation. Such reclassifications had no effect on net income.
Recent Accounting Pronouncements
Financial Accounting Standards Board (FASB) Accounting Standards Board (ASC) Topic 320,
Investments Debt and Equity Securities. New authoritative accounting guidance under ASC Topic
320, Investments Debt and Equity Securities, (i) changes existing guidance for determining
whether an impairment is other than temporary to debt securities and (ii) replaces the existing
requirement that the entitys management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert: (a) it does not have
the intent to sell the security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the impairment is related
to credit losses. The amount of the impairment related to other factors is recognized in other
comprehensive income. The Association adopted the provisions of the new authoritative accounting
guidance under ASC Topic 320 during the first quarter of 2009. Adoption of the new guidance did not
significantly impact the Associations financial statements.
FASB ASC Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820, Fair Value
Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair value measurements.
The provisions of ASC Topic 820 became effective for the Association on January 1, 2008 for
financial assets and financial liabilities and on January 1, 2009 for non-financial assets and
non-financial liabilities (see Note 14 Fair Value Measurements).
Additional new authoritative accounting guidance under ASC Topic 820 affirms that the objective of
fair value when the market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction, and clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity for an asset when the market for
that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. The new accounting guidance amended
prior guidance to expand certain disclosure requirements. The Association adopted the new
authoritative accounting guidance under ASC Topic 820 during 2009. Adoption of the new guidance did
not significantly impact the Associations financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC
Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a
quoted price in an active market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation technique that uses (i)
the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar
liabilities when traded as assets, or (iii) another valuation technique that is consistent with the
existing principles of ASC Topic 820, such as an income approach or market approach. The new
authoritative accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability.
The foregoing new authoritative accounting guidance under ASC Topic 820 became effective for the
Associations financial statements for 2009 and did not have a significant impact on the
Associations financial statements.
F - 10
FASB ASC Topic 855, Subsequent Events. New authoritative accounting guidance under ASC Topic 855,
Subsequent Events, establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or available to be
issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting
entitys management should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial
statements, and (iii) the disclosures an entity should make about events or transactions that
occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic
855 became effective for the Associations financial statements for 2009 and did not have a
significant impact on the Associations financial statements.
FASB ASC Topic 860, Transfers and Servicing. New authoritative accounting guidance under ASC
Topic 860, Transfers and Servicing, amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a qualifying special-purpose entity and changes the
requirements for derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC Topic 860 became effective January 1, 2010 and did not
have a significant impact on the Associations financial statements.
Credit Risk
The Association has deposits in other financial institutions in excess of amounts insured by the
Federal Deposit Insurance Corporation (FDIC).
Subsequent Events
The Association has evaluated subsequent events through May 14, 2010 the date the financial
statements were available to be issued.
F - 11
2. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 (unaudited) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank notes |
|
$ |
1,476,669 |
|
|
$ |
9,510 |
|
|
$ |
23,239 |
|
|
$ |
1,462,940 |
|
Obligations of U.S. Government agencies |
|
|
13,775,389 |
|
|
|
90,984 |
|
|
|
|
|
|
|
13,866,373 |
|
Mortgage-backed securities |
|
|
4,308,003 |
|
|
|
80,563 |
|
|
|
68,375 |
|
|
|
4,320,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,560,061 |
|
|
$ |
181,057 |
|
|
$ |
91,614 |
|
|
$ |
19,649,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank notes |
|
$ |
1,425,882 |
|
|
$ |
7,218 |
|
|
$ |
|
|
|
$ |
1,433,100 |
|
Obligations of U.S. Government agencies |
|
|
12,310,007 |
|
|
|
10,687 |
|
|
|
122,854 |
|
|
|
12,197,840 |
|
Mortgage-backed securities |
|
|
10,399,230 |
|
|
|
200,651 |
|
|
|
114,711 |
|
|
|
10,485,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,135,119 |
|
|
$ |
218,556 |
|
|
$ |
237,565 |
|
|
$ |
24,116,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies |
|
$ |
3,616,516 |
|
|
$ |
36,885 |
|
|
$ |
|
|
|
$ |
3,653,401 |
|
Mortgage-backed securities |
|
|
5,210,762 |
|
|
|
88,399 |
|
|
|
426,947 |
|
|
|
4,872,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,827,278 |
|
|
$ |
125,284 |
|
|
$ |
426,947 |
|
|
$ |
8,525,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
7,446,849 |
|
|
$ |
119,619 |
|
|
$ |
|
|
|
$ |
7,566,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 12
The amortized cost and fair value of debt securities at December 31, 2009 and June 30, 2010 by
contractual maturities are shown below. Expected maturities may differ from contractual maturities
because borrowers may have to call or repay obligations with or without call or prepayment
penalties.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 (unaudited) |
|
|
|
Available-for-Sale |
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due in one year through five years |
|
$ |
3,493,560 |
|
|
$ |
3,493,280 |
|
Due in five years through ten years |
|
|
10,815,803 |
|
|
|
10,897,488 |
|
Due after ten years |
|
|
5,250,698 |
|
|
|
5,258,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,560,061 |
|
|
$ |
19,649,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Available-for-Sale |
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due in one year through five years |
|
$ |
3,432,582 |
|
|
$ |
3,448,453 |
|
Due in five years through ten years |
|
|
6,200,268 |
|
|
|
6,290,126 |
|
Due after ten years |
|
|
14,502,269 |
|
|
|
14,377,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,135,119 |
|
|
$ |
24,116,110 |
|
|
|
|
|
|
|
|
The Association recognized gains on sales of available-for-sale securities of $228,705 and $91,375
for the years ended December 31, 2009 and 2008, respectively. The Association recognized gains on
sales of available-for-sale securities of $150,461 and $98,384 for the six months ended June 30,
2010 and 2009, respectively.
Securities with unrealized losses, segregated by length of impairment, as of June 30, 2010 and
December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
June 30, 2010 (unaudited) |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Available-for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Notes |
|
$ |
967,550 |
|
|
$ |
23,239 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
967,550 |
|
|
$ |
23,239 |
|
Obligation of U.S.
Government Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
1,009,846 |
|
|
|
203 |
|
|
|
489,653 |
|
|
|
68,172 |
|
|
|
1,499,499 |
|
|
|
68,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,977,396 |
|
|
$ |
23,442 |
|
|
$ |
489,653 |
|
|
$ |
68,172 |
|
|
$ |
2,467,049 |
|
|
$ |
91,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
More than 12 Months |
|
|
Total |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
December 31, 2009 |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Available-for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Obligation of U.S.
Government Agencies |
|
|
6,160,950 |
|
|
|
122,854 |
|
|
|
|
|
|
|
|
|
|
|
6,160,950 |
|
|
|
122,854 |
|
Mortgage-backed
securities |
|
|
1,342,931 |
|
|
|
13,199 |
|
|
|
1,202,956 |
|
|
|
101,512 |
|
|
|
2,545,887 |
|
|
|
114,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,503,881 |
|
|
$ |
136,053 |
|
|
$ |
1,202,956 |
|
|
$ |
101,512 |
|
|
$ |
8,706,837 |
|
|
$ |
237,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declines in the fair value of investment securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses to the extent the impairment is
related to credit losses. The amount of the impairment related to other factors is recognized in
other comprehensive income. In estimating other-than-temporary impairment losses, management
considers, among other things, (i) the length of time and the extent to which the fair value has
been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii)
the intent and ability of the Association to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in cost.
Furthermore, as of June 30, 2010, management does not have the intent to sell any of the securities
classified as available-for-sale in the table above and believes that it is more likely than not
that the Association will not have to sell any such securities before a recovery of cost. The
unrealized losses are largely due to increases in market interest rates over the yields available
at the time the underlying securities were purchased. The fair value is expected to recover as the
securities approach their maturity date or repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to reasons of credit
quality. Accordingly, as of June 30, 2010, management believes the impairments detailed in the
table above are temporary and no impairment loss has been realized in the Associations
consolidated income statement.
Effective December 31, 2009 the Association transferred all of the investment securities in its
held-to-maturity portfolio to available for sale. The tranfer resulted in a positive adjustment to
accumulated other comprehensive loss in the amount of $94,345, net of related income taxes.
F - 14
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans and allowance for loan losses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Real Estate Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family |
|
$ |
89,616,716 |
|
|
$ |
89,312,560 |
|
|
$ |
108,696,059 |
|
Lines of Credit |
|
|
13,043,637 |
|
|
|
12,305,473 |
|
|
|
13,154,109 |
|
Commercial |
|
|
4,001,867 |
|
|
|
4,197,266 |
|
|
|
3,594,160 |
|
Residential Construction |
|
|
8,864,409 |
|
|
|
10,437,002 |
|
|
|
7,723,822 |
|
Land |
|
|
3,822,076 |
|
|
|
3,939,296 |
|
|
|
3,535,873 |
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Loans |
|
|
119,348,705 |
|
|
|
120,191,597 |
|
|
|
136,704,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans |
|
|
53,966 |
|
|
|
33,510 |
|
|
|
42,454 |
|
Commercial Loans |
|
|
27,794 |
|
|
|
26,688 |
|
|
|
28,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
119,430,465 |
|
|
|
120,251,795 |
|
|
|
136,775,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(804,500 |
) |
|
|
(276,621 |
) |
|
|
(272,121 |
) |
Deferred loan fees and costs (net) |
|
|
144,355 |
|
|
|
116,718 |
|
|
|
44,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and allowance for loan losses |
|
$ |
118,770,320 |
|
|
$ |
120,091,892 |
|
|
$ |
136,547,199 |
|
|
|
|
|
|
|
|
|
|
|
Transactions in the allowance for loan losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Beginning of year |
|
$ |
276,621 |
|
|
$ |
272,121 |
|
|
$ |
272,121 |
|
|
$ |
267,121 |
|
Charge-offs, net |
|
|
(336,840 |
) |
|
|
(3,960 |
) |
|
|
(46,460 |
) |
|
|
|
|
Provision charged to expense |
|
|
864,719 |
|
|
|
50,960 |
|
|
|
50,960 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
804,500 |
|
|
$ |
319,121 |
|
|
$ |
276,621 |
|
|
$ |
272,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of impaired loans is
$822,747 and $-0- as of December 31, 2009 and 2008,
respectively. The balance of impaired loans is $2,240,990
and $2,489,623 as of June 30, 2010 and 2009, respectively.
Non-Performing/Past Due Loans Loans are placed on
non-accrual status when, in managements opinion, the
borrower may be unable to meet payment obligations, which
typically occurs when principal or interest payments are
more than 90 days past due. Non-accrual loans totalled
$1,035,000 at December 31, 2009 and $187,000 at December 31,
2008. Non-accrual loans totalled $3,259,000 at June 30,
2010 and $268,000 at June 30, 2009. Accruing loans past due
more than 90 days totalled $706,000 at December 31, 2009 and
$ -0- at December 31, 2008. Accruing loans past due more
than 90 days totalled $0 at June 30, 2010 and 2009.
F - 15
Impaired Loans Impaired loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Balance of impaired loans with no allocated allowance |
|
$ |
2,240,990 |
|
|
$ |
822,747 |
|
|
$ |
|
|
Balance of impaired loans with an allocated allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recorded investment in impaired loans |
|
$ |
2,240,990 |
|
|
$ |
822,747 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the allowance allocated to impaired loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The impaired loans included in the
table above were primarily comprised of collateral dependent
residential real estate loans. No interest income was
recognized on these loans subsequent to their classification
as impaired.
Aggregate loans to executive officers, directors and their
associates, including companies in which they have partial
ownership interest, did not exceed 5% of equity as of June
30, 2010, or December 31, 2009 and 2008. Such loans were
made under terms and conditions substantially the same as
loans made to parties not affiliated with the Association.
Loans to such borrowers are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Beginning of year |
|
$ |
819,907 |
|
|
$ |
1,096,069 |
|
|
$ |
1,115,831 |
|
New loans |
|
|
|
|
|
|
220,000 |
|
|
|
|
|
Repayments |
|
|
(5,518 |
) |
|
|
(496,162 |
) |
|
|
(19,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
814,389 |
|
|
$ |
819,907 |
|
|
$ |
1,096,069 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, respectively, $16,983,168 and $21,043,336 of loans receivable are
being serviced for the benefit of others. As of June 30, 2010 and 2009, respectively, $14,089,356 and
$18,899,544 of loans receivable are being serviced for the benefit of others. The amount of
compensation received by the Association approximates the cost of servicing the assets. Accordingly, no
servicing asset or liability has been recorded. Service fee revenue recognized in 2009 and 2008 was $52,959 and
$55,351, respectively. Service fee revenue recognized for the six-months ended June 30, 2010 and 2009 was $20,947 and $28,879, respectively.
F - 16
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
FDIC insured CDs |
|
$ |
1,633 |
|
|
$ |
1,470 |
|
|
$ |
|
|
Obligations of U.S. Government agencies |
|
|
147,682 |
|
|
|
76,244 |
|
|
|
29,619 |
|
Mortgage-backed securities |
|
|
17,610 |
|
|
|
49,021 |
|
|
|
51,691 |
|
Loans |
|
|
519,100 |
|
|
|
595,708 |
|
|
|
586,321 |
|
Dividends |
|
|
1,015 |
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
687,040 |
|
|
$ |
722,443 |
|
|
$ |
669,631 |
|
|
|
|
|
|
|
|
|
|
|
5. GROUND RENTS
The carrying value of ground rents was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Ground rents at cost |
|
$ |
909,337 |
|
|
$ |
909,494 |
|
|
$ |
929,345 |
|
Less valuation allowance |
|
|
(45,500 |
) |
|
|
(45,500 |
) |
|
|
(44,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net ground rents |
|
$ |
863,837 |
|
|
$ |
863,994 |
|
|
$ |
885,245 |
|
|
|
|
|
|
|
|
|
|
|
Based on the analysis of the
ground rents owned by the Association, management has
determined that the valuation allowance is adequate as of
June 30, 2010.
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Land |
|
$ |
170,773 |
|
|
$ |
170,773 |
|
|
$ |
170,773 |
|
Land improvements |
|
|
27,284 |
|
|
|
27,284 |
|
|
|
27,284 |
|
Building |
|
|
968,520 |
|
|
|
949,761 |
|
|
|
835,630 |
|
Furniture, fixtures, and equipment |
|
|
755,510 |
|
|
|
739,572 |
|
|
|
649,407 |
|
Leasehold improvements |
|
|
164,278 |
|
|
|
151,755 |
|
|
|
151,755 |
|
Automobiles |
|
|
79,152 |
|
|
|
79,152 |
|
|
|
81,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,165,517 |
|
|
|
2,118,297 |
|
|
|
1,916,205 |
|
Less accumulated depreciation and amortization |
|
|
1,366,917 |
|
|
|
1,305,940 |
|
|
|
1,216,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value of premises and equipment |
|
$ |
798,600 |
|
|
$ |
812,357 |
|
|
$ |
699,268 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to
$114,957 and $118,066 for the years ended December 31, 2009
and 2008, respectively. Depreciation expense amounted to
$60,977 and $55,474 for the six months ended June 30, 2010
and 2009, respectively.
F - 17
The Association is obligated under noncancelable lease
agreements for three branches. The leases each contain
renewal options and provide that the Association pay
property taxes, insurance and maintenance costs. Total rent
expense under operating leases for the years ended December
31, 2009 and 2008 was $207,384 and $193,316, respectively.
Total rent expense for the six months ended June 30, 2010
and 2009 was $121,633 and $107,752, respectively.
Future minimum lease payments under leases having initial or remaining noncancelable leases:
|
|
|
|
|
2011 |
|
$ |
167,610 |
|
2012 |
|
|
136,545 |
|
2013 |
|
|
142,000 |
|
2014 |
|
|
128,245 |
|
2015 |
|
|
8,036 |
|
7. DEPOSIT ACCOUNTS
Deposit accounts by type are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Demand |
|
$ |
948,381 |
|
|
$ |
759,607 |
|
|
$ |
684,761 |
|
Passbook |
|
|
12,735,858 |
|
|
|
12,500,646 |
|
|
|
12,753,294 |
|
NOW accounts |
|
|
3,248,080 |
|
|
|
2,822,422 |
|
|
|
2,783,410 |
|
Money market funds |
|
|
1,703,621 |
|
|
|
1,814,694 |
|
|
|
1,706,557 |
|
Certificates of deposit |
|
|
104,835,829 |
|
|
|
105,705,790 |
|
|
|
104,679,252 |
|
Brokered deposits |
|
|
2,288,623 |
|
|
|
2,356,734 |
|
|
|
2,305,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
125,760,392 |
|
|
$ |
125,959,893 |
|
|
$ |
124,912,688 |
|
|
|
|
|
|
|
|
|
|
|
The following tables present contractual maturities of certificate
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
thereafter |
|
Certificates of Deposit |
|
$ |
24,489,059 |
|
|
$ |
47,577,863 |
|
|
$ |
14,129,301 |
|
|
$ |
12,322,438 |
|
|
$ |
6,317,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
thereafter |
|
Certificates of Deposit |
|
$ |
53,149,986 |
|
|
$ |
27,031,482 |
|
|
$ |
12,701,678 |
|
|
$ |
7,101,853 |
|
|
$ |
5,720,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other
time deposits in denominations of more than $250,000
totalled $2,521,556 and $3,999,443 as of December 31, 2009
and 2008, respectively. Certificates of deposit and other
time deposits in denominations of more than $250,000
totalled $3,643,821 and $3,290,728 as of June 30, 2010 and
2009, respectively.
The Association held deposits of $248,718 for related
parties at December 31, 2009. The Association held deposits
of $257,894 for related parties at June 30, 2010.
F - 18
8. BORROWED FUNDS
Total advances outstanding from the Federal Home Loan Bank
(FHLB) were $22,916,667 and $28,416,667 as of December 31,
2009 and 2008, respectively. Total advances from the
Federal Home Loan Bank were $22,750,000 as of June 30, 2010.
The total amount available under the line of credit at
December 31, 2009 was approximately $27,400,000. The total
amount available under the line of credit at June 30, 2010
was approximately $27,600,000. Advances are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Year of |
|
Interest |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Maturity |
|
Rate |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2.84 |
% |
|
$ |
|
|
|
$ |
|
|
|
$ |
166,667 |
|
2009 |
|
|
0.88 |
% |
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
2011 |
|
|
4.40 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
2011 |
|
|
2.72 |
% |
|
|
250,000 |
|
|
|
416,667 |
|
|
|
750,000 |
|
2012 |
|
|
3.32 |
% |
|
|
2,500,000 |
|
|
|
2,500,000 |
|
|
|
2,500,000 |
|
2017 |
|
|
4.28 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
2018 |
|
|
3.94 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
2018 |
|
|
3.38 |
% |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,750,000 |
|
|
$ |
22,916,667 |
|
|
$ |
28,416,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest is paid monthly with
principal due at maturity except one of the notes where
principal and interest are paid monthly. Interest expense
on advances from the FHLB amounted to $914,687 and $927,589
for the years ended December 31, 2009 and 2008,
respectively. Interest expense on advances from the FHLB
amounted to $448,305 and $456,744 for the six months ended
June 30, 2010 and 2009, respectively.
Pursuant to collateral agreements with the FHLB, advances
are secured by all stock in the FHLB and qualifying first
and second mortgage loans.
9. INCOME TAXES
A reconciliation between income tax expense and taxes
computed at the statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2009 |
|
2008 |
|
|
(unaudited) |
|
(unaudited) |
|
|
|
|
|
|
|
|
Statutory federal tax rate |
|
|
(34.0 |
)% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
(34.0 |
)% |
Increases (decreases) in tax resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State franchise tax, net of federal income tax benefit |
|
|
(5.3 |
) |
|
|
3.7 |
|
|
|
1.2 |
|
|
|
0.0 |
|
Non-taxable on bank-owned life insurance |
|
|
(4.5 |
) |
|
|
(7.3 |
) |
|
|
(12.1 |
) |
|
|
(56.2 |
) |
Other |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
2.6 |
|
|
|
(15.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43.5 |
)% |
|
|
30.7 |
% |
|
|
25.7 |
% |
|
|
(105.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 19
The deferred tax effects of temporary
differences between financial and taxable income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Depreciation |
|
$ |
(16,662 |
) |
|
$ |
1,720 |
|
Loan fee income |
|
|
(28,668 |
) |
|
|
(4,226 |
) |
Deferred compensation |
|
|
35,186 |
|
|
|
952 |
|
Allowance for loan losses |
|
|
1,775 |
|
|
|
2,952 |
|
Ground rents |
|
|
|
|
|
|
655 |
|
Net operating loss |
|
|
9,560 |
|
|
|
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
$ |
1,191 |
|
|
$ |
1,917 |
|
|
|
|
|
|
|
|
Net deferred income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
$ |
50,299 |
|
|
$ |
50,299 |
|
|
$ |
48,524 |
|
Ground rents |
|
|
655 |
|
|
|
655 |
|
|
|
655 |
|
Deferred compensation |
|
|
72,718 |
|
|
|
72,718 |
|
|
|
37,532 |
|
State net operating loss |
|
|
9,560 |
|
|
|
9,560 |
|
|
|
|
|
Unrealized holding losses
on available-for-sale securities |
|
|
|
|
|
|
7,342 |
|
|
|
116,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,232 |
|
|
|
140,574 |
|
|
|
203,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
84,041 |
|
|
$ |
84,041 |
|
|
$ |
67,379 |
|
Loan Fee income |
|
|
46,046 |
|
|
|
46,046 |
|
|
|
17,378 |
|
FHLB stock dividend |
|
|
23,762 |
|
|
|
23,762 |
|
|
|
23,762 |
|
Unrealized gains on available-for-sale
securities |
|
|
34,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,392 |
|
|
|
153,849 |
|
|
|
108,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability) asset |
|
$ |
(55,160 |
) |
|
$ |
(13,275 |
) |
|
$ |
94,694 |
|
|
|
|
|
|
|
|
|
|
|
10. EMPLOYEE RETIREMENT PLANS
During 2008 the Association terminated its defined benefit
pension plan and eliminated any future liability for
benefits. Expense related to this termination totalled
$299,944 and is included in the 2008 statement of
operations.
The Association also sponsors an employee 401(k) savings and
investment plan. The plan covers substantially all
employees meeting age and service requirements and provides
for both employee and employer matching contributions under
Safe Harbor provisions. Expenses related to this plan for
the years ended December 31, 2009 and 2008 was $57,651 and
$59,899, respectively. Expenses related to this plan for
the six months ended June 30, 2010 and 2009 was $31,124 and
$29,757, respectively.
F - 20
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association is a party to financial instruments with
off-balance sheet risk in the normal course of business to
meet the financing needs of its customers consisting of
commitments to extend credit. This involves, to varying
degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated statements of
financial condition.
The Associations exposure to credit loss in the event of
non-performance by the other party for commitments to extend
credit is represented by the contractual notional amount of
those instruments. The Association uses the same credit
policies in making commitments as it does for on-balance
sheet instruments.
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. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Association evaluates each customers
creditworthiness on a case-by-case basis. The amount and
type of collateral obtained, if deemed necessary by the
Association upon extension of credit, varies and is based on
managements credit evaluation of the counterparty.
The Association had commitments to originate mortgages of
$2,577,800 and $980,200, secured by dwelling units, at
December 31, 2009 and 2008, respectively. The Association
had commitments to originate mortgages of $1,105,000 and
$774,050, secured by dwelling units, at June 30, 2010 and
2009, respectively. Additionally, the Association had
unfunded lines of credit totalling $13,145,037 and
$13,133,757 as of December 31, 2009 and 2008, respectively.
The Association had unfunded lines of credit totalling
$13,419,383 and $13,198,766 as of June 30, 2010 and 2009,
respectively.
12. DEFERRED COMPENSATION
The Association has entered into deferred compensation
agreements with two of its executive officers. Under the
terms of the agreements, which consist of both a defined
contribution component and a defined benefit component, the
Association is obligated to provide annual benefits for the
officers or their beneficiaries, after the officers death,
disability, or retirement. For the defined benefit
component the estimated present value to be paid is being
accrued over the period from the effective date of the
agreements until the full eligibility dates of the
participants. The expense incurred for these plans for the
years ended December 31, 2009 and 2008 was $87,422 and
$19,500, respectively. The expense incurred for these plans
for the six months ended June 30, 2010 and 2009 was $47,807
and $29,750, respectively.
13. REGULATORY MATTERS
The Association is subject to various regulatory capital
requirements administered by its primary federal regulator,
the Office of Thrift Supervision (OTS). Failure to meet the
minimum regulatory capital requirements can initiate certain
mandatory and possible additional discretionary actions by
regulators that if undertaken, could have a direct material
effect on the Association and the consolidated financial
statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific
capital guidelines involving quantitative measures of the
Associations assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting
practices. The Associations capital amounts and
classification under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F - 21
Quantitative measures established by regulation to ensure
capital adequacy require the Association to maintain minimum
amounts and ratios of: total risk-based capital and Tier I
capital and Tier I capital to risk-weighted assets (as
defined in the regulations), Tier I capital to adjusted
total assets (as defined), and tangible capital to adjusted
total assets (as defined).
As of June 30, 2010, December 31, 2009 and 2008 (the most
recent notification from the OTS), the Association was
categorized as well capitalized under the regulatory
framework for prompt corrective action. The following table
details the Associations capital position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy |
|
|
|
|
|
|
|
|
|
|
Purposes and to be |
|
|
|
|
|
|
|
|
|
|
Adequately Capitalized |
|
|
|
|
|
|
|
|
|
|
Under the Prompt Corrective |
|
|
Actual |
|
Action Provisions |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
(dollars in thousands) |
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
As of June 30, 2010 (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-Weighted Assets) |
|
$ |
17,405 |
|
|
|
18.79 |
% |
|
$ |
7,411 |
|
|
|
8.0 |
% |
Tier I Capital
(to Risk-Weighted Assets) |
|
$ |
16,555 |
|
|
|
17.87 |
% |
|
$ |
3,706 |
|
|
|
4.0 |
% |
Tier I Capital
(to Adjusted Total Assets) |
|
$ |
16,555 |
|
|
|
9.87 |
% |
|
$ |
5,033 |
|
|
|
3.0 |
% |
Tangible Capital
(to Adjusted Total Assets) |
|
$ |
16,555 |
|
|
|
9.87 |
% |
|
$ |
2,516 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-Weighted Assets) |
|
$ |
17,326 |
|
|
|
18.69 |
% |
|
$ |
7,416 |
|
|
|
8.0 |
% |
Tier I Capital
(to Risk-Weighted Assets) |
|
$ |
17,003 |
|
|
|
18.34 |
% |
|
$ |
3,708 |
|
|
|
4.0 |
% |
Tier I Capital
(to Adjusted Total Assets) |
|
$ |
17,003 |
|
|
|
10.19 |
% |
|
$ |
5,006 |
|
|
|
3.0 |
% |
Tangible Capital
(to Adjusted Total Assets) |
|
$ |
17,003 |
|
|
|
10.19 |
% |
|
$ |
2,503 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital
(to Risk-Weighted Assets) |
|
$ |
16,976 |
|
|
|
18.35 |
% |
|
$ |
7,401 |
|
|
|
8.0 |
% |
Tier I Capital
(to Risk-Weighted Assets) |
|
$ |
16,660 |
|
|
|
18.01 |
% |
|
$ |
3,700 |
|
|
|
4.0 |
% |
Tier I Capital
(to Adjusted Total Assets) |
|
$ |
16,660 |
|
|
|
9.75 |
% |
|
$ |
5,126 |
|
|
|
3.0 |
% |
Tangible Capital
(to Adjusted Total Assets) |
|
$ |
16,660 |
|
|
|
9.75 |
% |
|
$ |
2,563 |
|
|
|
1.5 |
% |
F - 22
14. FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted FASB guidance
on Fair Value Measurements which defines fair value,
establishes a framework for measuring fair value in
generally accepted accounting principles and expands
disclosures about fair value measurements. This guidance
applies whenever other standards require (or permit) assets
or liabilities to be measured at fair value but does not
expand the use of fair value in any new circumstances. In
this standard, the FASB clarifies the principle that fair
value should be based on the assumptions market participants
would use when pricing the asset or liability. In support
of this principle, the guidance establishes a fair value
hierarchy that prioritizes the information used to develop
those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs Unadjusted quoted prices in active markets for identical
assets or liabilities that the entity has the ability to access at the
measurement date.
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These
might include quoted prices for similar assets and liabilities in active
markets, and inputs other than quoted prices that are observable for the asset
or liability, such as interest rates and yield curves that are observable at
commonly quoted intervals.
Level 3 Inputs Unobservable inputs for determining the fair values of assets
or liabilities that reflect an entitys own assumptions about the assumptions
that market participants would use in pricing the assets or liabilities.
The following table presents the Associations assets measured at fair value on a recurring
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
Fair Value |
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
at June 30, 2010 |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
(unaudited) |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Available-for-sale securities |
|
$ |
19,649,504 |
|
|
$ |
|
|
|
$ |
19,649,504 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured
at fair value |
|
$ |
19,649,504 |
|
|
$ |
|
|
|
$ |
19,649,504 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
at December 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Available-for-sale securities |
|
$ |
24,116,110 |
|
|
$ |
|
|
|
$ |
24,116,110 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured
at fair value |
|
$ |
24,116,110 |
|
|
$ |
|
|
|
$ |
24,116,110 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 23
Securities classified as
available-for-sale are reported at fair value utilizing Level 2
Inputs. For these securities, the Association obtains fair
values from an independent pricing service and safekeeping
custodians. The observable data may include dealer quotes,
cash flows, U.S. Treasury yield curve, trading levels, credit
information, and the terms and conditions of the security,
among other things.
Financial Instruments Measured on a Nonrecurring Basis
The Association may be required, from time to time, to measure
certain other financial assets and liabilities at fair value on
a nonrecurring basis. These adjustments to fair value usually
result from application of lower-of-cost-or-market accounting
or write-downs of individual assets. For assets measured at
fair value on a nonrecurring basis as of June 30, 2010, the
following table provides the level of valuation assumptions
used to determine each adjustment and the carrying value of the
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Quoted |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Prices |
|
|
Inputs |
|
|
Inputs |
|
|
|
at June 30, 2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Impaired Loans |
|
$ |
2,240,990 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,240,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Quoted |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Prices |
|
|
Inputs |
|
|
Inputs |
|
|
|
at December 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Impaired Loans |
|
$ |
822,747 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
822,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans for which it is probable that
the Association will not collect all principal and interest
due according to contractual terms are measured for
impairment in accordance with FASB guidance. Allowable
methods for estimating fair value include using the fair
value of the collateral for collateral dependent loans or,
where a loan is determined not to be collateral dependent,
using the discounted cash flow method. In our determination
of fair value, we have categorized both methods of valuation
as estimates based on Level 3 inputs.
If the impaired loan is identified as collateral dependent,
then the fair value method measuring the amount of
impairment is utilized. This method requires obtaining a
current independent appraisal or utilizing some other method
of valuation for the collateral and applying a discount
factor to the value based on our loan review policy and
procedures.
If the impaired loan is determined not to be collateral
dependent, then the discounted cash flow method is used.
This method requires the impaired loan to be recorded at the
present value of expected future cash flows discounted at
the loans effective interest rate. The effective interest
rate of a loan is the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums, or discounts
existing at origination or acquisition of the loan.
F - 24
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth
below for the Associations financial instruments as of
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 (unaudited) |
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,134,580 |
|
|
$ |
20,134,580 |
|
|
$ |
13,907,553 |
|
|
$ |
13,907,553 |
|
|
$ |
11,438,784 |
|
|
$ |
11,438,784 |
|
Securities available-for-sale |
|
|
19,649,504 |
|
|
|
19,649,504 |
|
|
|
24,116,110 |
|
|
|
24,116,110 |
|
|
|
8,525,615 |
|
|
|
8,525,615 |
|
Securities held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,446,849 |
|
|
|
7,566,468 |
|
Loans |
|
|
119,574,820 |
|
|
|
123,173,624 |
|
|
|
120,368,513 |
|
|
|
122,239,029 |
|
|
|
136,819,320 |
|
|
|
138,532,552 |
|
Fed Home Loan Bank stock |
|
|
1,562,400 |
|
|
|
1,562,400 |
|
|
|
1,353,700 |
|
|
|
1,353,700 |
|
|
|
1,597,300 |
|
|
|
1,597,300 |
|
Accrued interest receivable |
|
|
687,040 |
|
|
|
687,040 |
|
|
|
722,443 |
|
|
|
722,443 |
|
|
|
669,631 |
|
|
|
669,631 |
|
Investment in bank-owned
life insurance |
|
|
4,079,167 |
|
|
|
4,079,167 |
|
|
|
3,983,719 |
|
|
|
3,983,719 |
|
|
|
2,319,216 |
|
|
|
2,319,216 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts and
advances by borrowers |
|
|
127,570,258 |
|
|
|
129,370,334 |
|
|
|
126,604,110 |
|
|
|
128,413,988 |
|
|
|
125,492,998 |
|
|
|
126,451,070 |
|
Advances from the FHLB |
|
|
22,750,000 |
|
|
|
23,172,311 |
|
|
|
22,916,667 |
|
|
|
22,997,847 |
|
|
|
28,416,667 |
|
|
|
28,438,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
Off-Balance Sheet Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
1,105,000 |
|
|
$ |
2,577,800 |
|
|
$ |
980,200 |
|
Unused lines of credit |
|
$ |
13,419,383 |
|
|
$ |
13,145,037 |
|
|
$ |
13,133,757 |
|
(a) Cash and Cash
Equivalents The carrying amount for cash on hand
and in banks approximates fair value due to the short
maturity of these instruments.
(b) Securities The fair value of securities
excluding Federal Home Loan Bank stock, is based on
bid prices received from an external pricing service
or bid quotations received from securities dealers.
(c) Loans Loans were segmented into portfolios with
similar financial characteristics. Loans were also
segmented by type such as residential, multifamily
and non-residential, construction and land, second
mortgage loans, commercial, and consumer. Each loan
category was further segmented by fixed and
adjustable rate interest terms and performing and
nonperforming categories. The fair value of
residential loans was calculated by discounting
anticipated cash flows based on weighted-average
contractual maturity, weighted-average coupon, and
discount rate.
The fair value for nonperforming loans was determined
by reducing the carrying value of nonperforming loans
by the Companys historical loss percentage for each
specific loan category.
F - 25
(d) Federal Home Loan Bank Stock The fair value of
Federal Home Loan Bank stock approximates its
carrying value based on the redemption provisions of
the Federal Home Loan Bank.
(e) Accrued Interest Receivable The carrying
amounts of accrued interest approximate the fair
values.
(f) Investments in Bank-Owned Life Insurance The
fair value of the insurance contracts approximates
the carrying value.
(g) Deposits and Advances by Borrowers The fair
value of deposits with no stated maturity, such as
noninterest bearing deposits, interest-bearing NOW
accounts, money market and statement savings
accounts, is deemed to be equal to the carrying
amounts. The fair value of certificates of deposit
is based on the discounted value of contractual cash
flows. The discount rate for certificates of deposit
was estimated using the rate currently offered for
deposits of similar remaining maturities.
(h) Advances from the FHLB Fair values are
estimated by discounting carrying values using a cash
flow approach based on market rates as of June 30,
2010 and December 31, 2009.
(i) Off-Balance Sheet Financial Instruments The
Companys adjustable rate commitments to extend
credit move with market rates and are not subject to
interest rate risk. The rates and terms of the
Companys fixed rate commitments to extend credit are
competitive with others in the various markets in
which the Company operates. The fair values of these
instruments are immaterial.
(j) Limitations Fair value estimates are made at a
specific point in time, based on relevant market
information and information about financial
instruments. These estimates do not reflect any
premium or discount that could result from offering
for sale at one time the Companys entire holdings of
a particular financial instrument. Because no market
exists for a significant portion of the Companys
financial instruments, fair value estimates are based
on 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 estimates.
F - 26
You should rely only on the information contained in this prospectus.
Neither Fraternity Community Bancorp nor Fraternity Federal Savings and Loan
Association has authorized anyone to provide you with different information. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered by this prospectus to any person or in any
jurisdiction in which an offer or solicitation is not authorized or in which the
person making an offer or solicitation is not qualified to do so, or to any person
to whom it is unlawful to make an offer or solicitation in those jurisdictions.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of common stock.
[LOGO]
(Proposed Holding Company for Fraternity Federal Savings and Loan Association)
1,380,000 Shares
(Anticipated Maximum, Subject to Increase
to up to 1,587,000 Shares)
COMMON STOCK
Prospectus
Sandler ONeill + Partners, L.P.
Until ___________, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold allotments
or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth our anticipated expenses of the offering:
|
|
|
|
|
SEC filing fee (1) |
|
$ |
2,000 |
|
OTS filing fee |
|
|
12,000 |
|
FINRA filing fee (1) |
|
|
3,000 |
|
EDGAR, printing, postage and mailing |
|
|
75,000 |
|
Blue Sky fees and expenses |
|
|
20,000 |
|
Legal fees and expenses |
|
|
285,000 |
|
Accounting fees and expenses |
|
|
30,000 |
|
Appraisers fees and expenses |
|
|
38,500 |
|
Marketing firm expenses (including legal fees) |
|
|
250,000 |
|
Conversion agent fees and expenses |
|
|
30,000 |
|
Business plan fees and expenses |
|
|
30,000 |
|
Transfer agent and registrar fees and expenses |
|
|
10,000 |
|
Certificate printing |
|
|
7,500 |
|
Miscellaneous |
|
|
7,000 |
|
|
|
|
|
TOTAL |
|
$ |
800,000 |
|
|
|
|
|
|
|
|
(1) |
|
Based on the registration of $15.9 million of common stock. |
Item 14. Indemnification of Directors and Officers.
The Articles of Incorporation of Fraternity Community Bancorp, Inc. provides as follows:
NINTH: The Corporation shall indemnify (A) its directors and officers, whether serving the
Corporation or at its request any other entity, to the fullest extent required or permitted by the
general laws of the State of Maryland now or hereafter in force, including the advance of expenses
under the procedures required, and (B) other employees and agents to such extent as shall be
authorized by the Board of Directors or the Corporations Bylaws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any rights to which those seeking
indemnification may be entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt, approve and amend
from time to time such Bylaws, resolutions or contracts implementing such provisions or such
further indemnification arrangements as may be permitted by law. No amendment of the Articles of
Incorporation of the Corporation shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
Item 15. Recent Sales of Unregistered Securities.
None.
II-1
Item 16. Exhibits and Financial Statement Schedules.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits
|
|
|
|
|
Exhibit |
|
Description |
|
Location |
|
1.1
|
|
Engagement Letter by and between
Fraternity Federal Savings and Loan
Association and Sandler ONeill &
Partners, L.P., as marketing agent
|
|
Filed herewith |
|
|
|
|
|
1.2
|
|
Draft Agency Agreement
|
|
Filed herewith |
|
|
|
|
|
2.0
|
|
Plan of Conversion, as amended
|
|
Filed herewith |
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Fraternity
Community Bancorp, Inc.
|
|
Filed herewith |
|
|
|
|
|
3.2
|
|
Bylaws of Fraternity Community Bancorp,
Inc.
|
|
Filed herewith |
|
|
|
|
|
4.0
|
|
Specimen Common Stock Certificate of
Fraternity Community Bancorp, Inc.
|
|
Filed herewith |
|
|
|
|
|
5.0
|
|
Form of Opinion of Kilpatrick Stockton LLP
re: Legality
|
|
Filed herewith |
|
|
|
|
|
8.1
|
|
Form of Opinion of Kilpatrick Stockton LLP
re: Federal Tax Matters
|
|
Filed herewith |
|
|
|
|
|
8.2
|
|
Form of Opinion of Stegman & Company re:
State Tax Matters
|
|
Filed herewith |
|
|
|
|
|
10.1
|
|
Fraternity Federal Savings and Loan
Association Employees 401(k) Plan and
Trust
|
|
To be filed by amendment |
|
|
|
|
|
10.2
|
|
Form of Fraternity Federal Savings and
Loan Association Employee Stock Ownership
Plan and Trust Agreement
|
|
Filed herewith |
|
|
|
|
|
10.3
|
|
Form of Employee Stock Ownership Plan Loan
Agreement, Pledge Agreement and Promissory
Note
|
|
Filed herewith |
|
|
|
|
|
10.4
|
|
+Employment Agreement between Fraternity
Federal Savings and Loan Association and
Thomas K. Sterner
|
|
Filed herewith |
|
|
|
|
|
10.5
|
|
+Employment Agreement between Fraternity
Federal Savings and Loan Association and
Richard C. Schultze
|
|
Filed herewith |
|
|
|
|
|
10.6
|
|
+Supplemental Executive Retirement Plan
Agreement between Fraternity Federal
Savings and Loan Association and Thomas K.
Sterner
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Filed herewith |
II-2
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Exhibit |
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Description |
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Location |
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10.7
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+Supplemental Executive Retirement Plan
Agreement between Fraternity Federal
Savings and Loan Association and Richard
C. Schultze
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Filed herewith |
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10.8
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+Rabbi Trust Agreement
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Filed herewith |
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10.9
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+Form of Employment Agreement between
Fraternity Community Bancorp, Inc. and
each of Thomas K. Sterner and Richard C.
Schultze
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To be filed by amendment |
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10.10
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+Form of Supplemental Executive Retirement
Plan
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Filed herewith |
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10.11
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+Form of Fraternity Federal Savings and
Loan Association Employee Severance
Compensation Plan
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Filed herewith |
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10.12
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+ Form of Fraternity Federal Savings and
Loan Association Deferred Compensation
Plan
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To be filed by amendment |
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23.1
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Consent of Kilpatrick Stockton LLP
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Contained in Exhibits 5.0 and 8.1 |
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23.2
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Consent of Stegman & Company
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Filed herewith |
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23.3
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Consent of Feldman Financial Advisors, Inc.
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Filed herewith |
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24.0
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Powers of Attorney
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Included on signature page |
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99.1
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Appraisal Report of Feldman Financial
Advisors, Inc.
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Filed herewith |
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99.2
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Draft of Marketing Materials
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Filed herewith |
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99.3
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Draft of Subscription Order Form and
Instructions
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Filed herewith |
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Management contract or compensation plan or arrangement. |
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the rules of Regulation
S-X.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
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(1) |
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To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: |
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(i) |
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To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; |
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(ii) |
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To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the forgoing, |
II-3
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any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the Calculation of Registration Fee
table in the effective registration statement; |
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(iii) |
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To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement. |
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(2) |
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That, for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering thereof. |
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(3) |
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To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the offering. |
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(4) |
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That, for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of the time
it was declared effective. |
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(5) |
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That, for the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona fide
offering thereof. |
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(6) |
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That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the securities: |
The undersigned registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
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(i) |
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Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to Rule 424; |
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(ii) |
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Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned registrant or used or referred to by the
undersigned registrant; |
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(iii) |
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The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and |
II-4
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(iv) |
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Any other communication that is an offer in the offering made
by the undersigned registrant to the purchaser. |
The undersigned registrant hereby undertakes to provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused
this registration statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland on
October 29, 2010.
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Fraternity Community Bancorp, Inc.
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By: |
/s/ Thomas K. Sterner
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Thomas K. Sterner |
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Chairman of the Board, Chief Executive Officer
and Chief Financial Officer |
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POWER OF ATTORNEY
We, the undersigned directors and officers of Fraternity Community Bancorp, Inc. (the
Company) hereby severally constitute and appoint Thomas K. Sterner with full power of
substitution, our true and lawful attorney-in-fact and agent, to do any and all things in our names
in the capacities indicated below which said Thomas K. Sterner may deem necessary or advisable to
enable Fraternity Community Bancorp, Inc. to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange Commission, in
connection with the registration statement on Form S-1 of Fraternity Community Bancorp, Inc.,
including specifically but not limited to, power and authority to sign for us in our names in the
capacities indicated below, the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby ratify and confirm all that said Thomas K.
Sterner shall lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
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Name |
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Title |
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Date |
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/s/ Thomas K. Sterner
Thomas K. Sterner
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Chairman of the Board, Chief
Executive Officer and
Chief Financial Officer
(principal executive officer and
principal financial and accounting officer)
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October 29, 2010 |
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/s/ Richard C. Schultze
Richard C. Schultze
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President, Chief Operating Officer
and Director
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October 29, 2010 |
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/s/ William J. Baird, Jr.
William J. Baird, Jr.
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Director
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October 29, 2010 |
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/s/ William D. Norton
William D. Norton
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Director
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October 29, 2010 |
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/s/ Michael P. OShea
Michael P. OShea
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Director
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October 29, 2010 |