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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2014

 

Commission File No. 001-34801

 

Peoples Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

27-2814821

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

435 Market Street, Brighton,
Massachusetts

 

02135

(Address of principal executive offices)

 

(Zip Code)

 

(617) 254-0707

(Registrant’s telephone number,
including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

 

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

 

Large accelerated filer

 

o

 

Accelerated filer

 

x

Non-accelerated filer

 

o

 

Smaller reporting company

 

o

 

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

 

The number of shares outstanding of registrant’s common stock; $0.01 par value, at January 31, 2015: 6,239,436

 

 

 



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2014 (Unaudited) and September 30, 2014

3

 

 

 

 

Consolidated Statements of Income for the Three Months Ended December 31, 2014 and 2013 (Unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2014 and 2013 (Unaudited)

5

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended December 31, 2014 and 2013 (Unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2013 (Unaudited)

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results

 

 

of Operations

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

44

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

46

 

 

 

 

Signature Page

47

 

2



Table of Contents

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Consolidated Financial Statements

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

4,446

 

$

4,301

 

Interest-bearing demand deposits with other banks

 

30,357

 

25,945

 

Federal funds sold

 

123

 

364

 

Federal Home Loan Bank - overnight deposit

 

1,502

 

1,502

 

Total cash and cash equivalents

 

36,428

 

32,112

 

Securities available-for-sale

 

8,496

 

8,819

 

Securities held-to-maturity (fair values of $35,859 and $36,965)

 

35,654

 

37,010

 

Federal Home Loan Bank stock (at cost)

 

4,252

 

4,252

 

Loans

 

484,873

 

490,899

 

Allowance for loan losses

 

(4,023

)

(4,026

)

Loans, net

 

480,850

 

486,873

 

Premises and equipment, net

 

3,464

 

3,614

 

Cash surrender value of life insurance policies

 

20,800

 

20,639

 

Accrued interest receivable

 

1,390

 

1,486

 

Deferred income tax asset, net

 

4,883

 

5,238

 

Other assets

 

803

 

1,241

 

Total assets

 

$

597,020

 

$

601,284

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest-bearing

 

$

64,522

 

$

60,862

 

Interest-bearing

 

365,691

 

373,675

 

Total deposits

 

430,213

 

434,537

 

Short-term borrowings

 

2,000

 

2,000

 

Long-term debt

 

51,000

 

51,000

 

Accrued expenses and other liabilities

 

9,341

 

9,857

 

Total liabilities

 

492,554

 

497,394

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 6,239,436 shares issued and outstanding at December 31, 2014 and September 30, 2014

 

62

 

62

 

Additional paid-in capital

 

57,028

 

56,814

 

Retained earnings

 

53,867

 

54,010

 

Accumulated other comprehensive income (loss)

 

16

 

(26

)

Unearned restricted shares; 139,359 and 162,866 shares at December 31, 2014 and September 30, 2014, respectively

 

(2,222

)

(2,614

)

Unearned compensation - ESOP

 

(4,285

)

(4,356

)

Total stockholders’ equity

 

104,466

 

103,890

 

Total liabilities and stockholders’ equity

 

$

597,020

 

$

601,284

 

 

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

 

3



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands, except
share data)

 

Interest and dividend income:

 

 

 

 

 

Interest and fees on loans

 

$

4,702

 

$

4,673

 

Interest on debt securities:

 

 

 

 

 

Taxable

 

228

 

233

 

Other interest

 

17

 

15

 

Dividends on equity securities

 

16

 

4

 

Total interest and dividend income

 

4,963

 

4,925

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Interest on deposits

 

451

 

454

 

Interest on Federal Home Loan Bank advances

 

164

 

168

 

Total interest expense

 

615

 

622

 

Net interest and dividend income

 

4,348

 

4,303

 

Provision for loan losses

 

 

 

Net interest and dividend income, after provision for loan losses

 

4,348

 

4,303

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

Customer service fees

 

198

 

196

 

Loan servicing fees, net

 

 

13

 

Net gain on sales of mortgage loans

 

20

 

 

Increase in cash surrender value of life insurance

 

161

 

168

 

Other income

 

19

 

22

 

Total non-interest income

 

398

 

399

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

2,492

 

2,610

 

Occupancy expense

 

286

 

228

 

Equipment expense

 

131

 

99

 

Professional fees

 

181

 

157

 

Advertising expense

 

146

 

133

 

Data processing expense

 

231

 

219

 

Deposit insurance expense

 

72

 

61

 

Merger expense

 

205

 

 

Other expense

 

275

 

253

 

Total non-interest expense

 

4,019

 

3,760

 

Income before income taxes

 

727

 

942

 

Provision for income taxes

 

581

 

388

 

Net income

 

$

146

 

$

554

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

5,649,107

 

5,746,458

 

Diluted

 

5,817,934

 

5,810,294

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.03

 

$

0.09

 

Diluted

 

$

0.02

 

$

0.09

 

 

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

 

4



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended
December 31

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

 

 

 

 

 

 

Net income

 

$

146

 

$

554

 

 

 

 

 

 

 

Net unrealized gain (loss) on securities available-for-sale

 

71

 

(52

)

Reclassification adjustment for net securities gains realized (1)

 

 

 

Net unrealized gains (losses)

 

71

 

(52

)

Income tax (expense) benefit

 

(29

)

21

 

Other comprehensive income (loss), net of tax

 

42

 

(31

)

Total comprehensive income

 

$

188

 

$

523

 

 


(1)         Reclassification adjustments are comprised of realized security gains and losses.  The gains and losses have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statements of income as follows:  the pre-tax amount is included in net gain on sales of securities available-for-sale, the tax expense amount is included in provision for income taxes and the after tax amount is included in net income.

 

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

 

5



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

For the Three Months Ended December 31, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Unearned

 

Unearned

 

Total

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Restricted

 

Compensation -

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

(Loss) Income

 

Shares

 

ESOP

 

Equity

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

 

6,465,934

 

$

65

 

$

60,039

 

$

55,103

 

$

(30

)

$

(4,183

)

$

(4,642

)

$

106,352

 

Net income

 

 

 

 

554

 

 

 

 

554

 

Other comprehensive loss

 

 

 

 

 

(31

)

 

 

(31

)

Purchase and retirement of Company stock

 

(34,607

)

(1

)

(606

)

 

 

 

 

(607

)

Restricted stock awards earned (23,507 shares)

 

 

 

 

 

 

392

 

 

392

 

Stock options expense

 

 

 

133

 

 

 

 

 

133

 

Common stock released by ESOP (7,141 shares)

 

 

 

53

 

 

 

 

71

 

124

 

Dividends paid ($0.29 per share)

 

 

 

 

(1,734

)

 

 

 

(1,734

)

Balance at December 31, 2013

 

6,431,327

 

$

64

 

$

59,619

 

$

53,923

 

$

(61

)

$

(3,791

)

$

(4,571

)

$

105,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

6,239,436

 

$

62

 

$

56,814

 

$

54,010

 

$

(26

)

$

(2,614

)

$

(4,356

)

$

103,890

 

Net income

 

 

 

 

146

 

 

 

 

146

 

Other comprehensive income

 

 

 

 

 

42

 

 

 

42

 

Restricted stock awards earned (23,507 shares)

 

 

 

 

 

 

392

 

 

392

 

Stock options expense

 

 

 

133

 

 

 

 

 

133

 

Common stock released by ESOP (7,141 shares)

 

 

 

81

 

 

 

 

71

 

152

 

Dividends paid ($0.05 per share)

 

 

 

 

(289

)

 

 

 

(289

)

Balance at December 31, 2014

 

6,239,436

 

$

62

 

$

57,028

 

$

53,867

 

$

16

 

$

(2,222

)

$

(4,285

)

$

104,466

 

 

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

 

6



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

146

 

$

554

 

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

 

 

 

 

 

Amortization of securities, net

 

43

 

36

 

Change in net deferred loan costs

 

72

 

(63

)

Depreciation and amortization

 

150

 

101

 

Decrease in accrued interest receivable

 

96

 

121

 

Income on cash surrender value of life insurance

 

(161

)

(168

)

Decrease in other assets

 

519

 

369

 

Decrease in accrued expenses and other liabilities

 

(357

)

(1,092

)

Increase in prepaid income taxes

 

(81

)

(348

)

Decrease in income taxes payable

 

(159

)

(8

)

Deferred income tax expense

 

326

 

124

 

Stock based compensation expense

 

525

 

525

 

ESOP expense

 

152

 

124

 

Net cash provided by operating activities

 

1,271

 

275

 

Cash flows from investing activities:

 

 

 

 

 

Activity in securities available-for-sale:

 

 

 

 

 

Purchases

 

 

(1,330

)

Maturities, prepayments and calls

 

385

 

2,251

 

Activity in securities held-to-maturity:

 

 

 

 

 

Purchases

 

 

(6,857

)

Maturities, prepayments and calls

 

1,322

 

1,010

 

Loan originations and principal collections, net

 

5,949

 

6,738

 

Purchased loans

 

 

(11,052

)

Recoveries of loans previously charged off

 

2

 

7

 

Capital expenditures

 

 

(67

)

Net cash provided by (used in) investing activities

 

7,658

 

(9,300

)

 

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

 

7



Table of Contents

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in:

 

 

 

 

 

Demand deposits, NOW and savings accounts

 

606

 

1,848

 

Term certificates

 

(4,930

)

(4,474

)

Short-term borrowings

 

 

2,000

 

Activity in long-term debt:

 

 

 

 

 

Proceeds from advances

 

 

10,000

 

Payment of advances

 

 

(4,000

)

Common stock repurchased

 

 

(607

)

Dividends paid

 

(289

)

(1,734

)

Net cash (used in) provided by financing activities

 

(4,613

)

3,033

 

Net increase (decrease) in cash and cash equivalents

 

4,316

 

(5,992

)

Cash and cash equivalents at beginning of period

 

32,112

 

37,134

 

Cash and cash equivalents at end of period

 

$

36,428

 

$

31,142

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

620

 

$

633

 

Income taxes

 

495

 

620

 

 

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

 

8



Table of Contents

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

The consolidated interim financial statements include the accounts of Peoples Federal Bancshares, Inc. (the “Company”), and its wholly-owned subsidiaries, Peoples Federal Savings Bank (the “Bank”) and Peoples Funding Corporation (“PFC”), as of December 31, 2014 (unaudited) and September 30, 2014.  All significant intercompany accounts and transactions have been eliminated in the consolidation.

 

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

 

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

 

Certain financial information, which is normally included in financial statements prepared in accordance with GAAP, but which is not required for interim reporting purposes, has been condensed or omitted.  The net income reported for the three months ended December 31, 2014 (unaudited) is not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015 or any interim periods.  The accompanying condensed interim financial statements should be read in conjunction with the financial statements and notes thereto included in Peoples Federal Bancshares, Inc.’s Form 10-K for the fiscal year ended September 30, 2014 filed with the Securities and Exchange Commission (“SEC”) on December 12, 2014.

 

The allowance for loan losses is a significant accounting policy and is presented in the Company’s Form 10-K for the fiscal year ended September 30, 2014, which provides information on how significant assets are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

 

NOTE 2 — NATURE OF OPERATIONS

 

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

 

9



Table of Contents

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323):  Accounting for Investments in Qualified Affordable Housing Projects.”  The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects.  For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.  The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323.  The amendments in this ASU should be applied retrospectively to all periods presented.  A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.  The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted.  The Company does not expect that the adoption of this ASU will have an impact on the Company’s results of operations or financial position.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  The amendments in this ASU reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method.  The Company does not expect that the adoption of this ASU will have an impact on the Company’s results of operations or financial position.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.”  This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements.  The new guidance is effective on a prospective

 

10



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basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards.  The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.  The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  The Company is currently reviewing this ASU to determine if it will have an impact on the Company’s results of operations or financial position.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.”  The amendments in this ASU require two accounting changes.  First, the amendments in this ASU change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  This ASU also includes new disclosure requirements.  The accounting changes in this update are effective for public business entities for the first interim or annual period beginning after December 15, 2014.  An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.  Earlier application for a public business entity is prohibited.  The Company is currently reviewing this ASU to determine if it will have an impact on the Company’s results of operations or financial position.

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.”  The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards.  This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  Earlier adoption is permitted.  ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter.  If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date.  The Company is currently reviewing this ASU to determine if it will have an impact on the Company’s result of operations or financial position.

 

In August 2014, the FASB issued ASU 2014-13, “Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.”  This ASU allows a reporting entity that consolidates a collateralized financing entity and accounts for the consolidated financial assets and financial liabilities at fair value to measure those assets and liabilities using the more observable of (1) the fair value of its financial assets, or (2) the fair value of its financial liabilities.  If the

 

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reporting entity chooses not to apply this measurement alternative to a consolidated entity that is within the scope of this guidance, any difference between the fair value of the financial assets and the fair value of the financial liabilities of that consolidated collateralized financing entity should be reflected currently in earnings and attributed to the reporting entity in the consolidated income statement.  The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted as of the beginning of an annual period.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

 

In August 2014, the FASB issued ASU 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.”  The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if (1)  the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40).”  The amendments in this ASU provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards.  Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).  The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).”  The objective of this ASU is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share.  The amendments in this ASU apply to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share.  The amendments in this ASU do not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required.  The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share.  Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.  Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract.  Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.  In addition, the amendments in this ASU clarify that, in evaluating the nature of a

 

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host contract, an entity should assess the substance of the relevant terms and features when considering how to weight those terms and features.  Specifically, the assessment of the substance of the relevant terms and features should incorporate a consideration of (1) the characteristics of the terms and features themselves, (2) the circumstances under which the hybrid financial instrument was issued or acquired, and (3) the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes.  The amendments in this ASU are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

In November 2014, the FASB issued ASU 2014-17, “Business Combinations (Topic 805): Pushdown Accounting.”  The amendments in this ASU provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity may elect to apply pushdown accounting in its separate financial statements upon a change-in-control event in which an acquirer obtains control of the acquired entity.  The amendments in this ASU are effective on November 18, 2014.  After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event.  However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle.  The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20).”  The amendments in this ASU eliminate the concept of extraordinary items.  Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary (even if they ultimately would conclude it is not).  This also alleviates uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.  The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively.  A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

 

NOTE 4 - SECURITIES

 

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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

8,469

 

$

65

 

$

38

 

$

8,496

 

Total securities available-for-sale

 

$

8,469

 

$

65

 

$

38

 

$

8,496

 

 

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Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

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

 

$

5,000

 

$

 

$

51

 

$

4,949

 

Mortgage-backed securities

 

30,654

 

329

 

73

 

30,910

 

Total securities held-to-maturity

 

$

35,654

 

$

329

 

$

124

 

$

35,859

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

8,863

 

$

41

 

$

85

 

$

8,819

 

Total securities available-for-sale

 

$

8,863

 

$

41

 

$

85

 

$

8,819

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

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

 

$

5,000

 

$

 

$

45

 

$

4,955

 

Mortgage-backed securities

 

32,010

 

180

 

180

 

32,010

 

Total securities held-to-maturity

 

$

37,010

 

$

180

 

$

225

 

$

36,965

 

 

As of December 31, 2014 and September 30, 2014, all mortgage-backed securities held by the Company were issued by FHLMC, GNMA or FNMA.

 

The scheduled maturities of debt securities were as follows as of December 31, 2014.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Available-for-Sale

 

Held-to-Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Due after 1 year through 5 years

 

$

 

$

 

$

5,000

 

$

4,949

 

 

 

 

 

5,000

 

4,949

 

Mortgage-backed securities

 

8,469

 

8,496

 

30,654

 

30,910

 

 

 

$

8,469

 

$

8,496

 

$

35,654

 

$

35,859

 

 

There were no sales of securities available-for-sale or held-to-maturity during the three months ended December 31, 2014 and 2013.

 

There were no securities of issuers with an amortized cost basis or fair value that exceeded 10% of stockholders’ equity as of December 31, 2014 and September 30, 2014.

 

As of December 31, 2014 and September 30, 2014, securities with carrying amounts totaling $8,496,000 and $8,819,000, respectively, were pledged to secure FHLB advances.

 

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

 

 

 

Less Than Twelve Months

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

 

 

Losses

 

Value

 

Losses

 

Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

7

 

$

2,590

 

$

31

 

$

2,395

 

 

 

$

7

 

$

2,590

 

$

31

 

$

2,395

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

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

 

$

4

 

$

996

 

$

47

 

$

3,953

 

Mortgage-backed securities

 

10

 

1,902

 

63

 

3,395

 

 

 

$

14

 

$

2,898

 

$

110

 

$

7,348

 

 

 

 

Less Than Twelve Months

 

Twelve Months or Longer

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

 

 

Losses

 

Value

 

Losses

 

Value

 

 

 

(In thousands)

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

10

 

$

2,332

 

$

75

 

$

4,193

 

 

 

$

10

 

$

2,332

 

$

75

 

$

4,193

 

 

 

 

 

 

 

 

 

 

 

Securities Held-to-Maturity

 

 

 

 

 

 

 

 

 

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

 

$

 

$

 

$

45

 

$

4,955

 

Mortgage-backed securities

 

59

 

12,060

 

121

 

3,456

 

 

 

$

59

 

$

12,060

 

$

166

 

$

8,411

 

 

At December 31, 2014, six debt securities had unrealized losses for less than twelve months with aggregate depreciation of 0.4% from the amortized cost of these securities and nine debt securities had unrealized losses for twelve months or longer with aggregate depreciation of 1.4% from the amortized cost of these securities.

 

At September 30, 2014, 13 debt securities had unrealized losses for less than twelve months with aggregate depreciation of 0.48% from the amortized cost of these securities and 12 debt securities had unrealized losses for twelve months or longer with aggregate depreciation of 1.87% from the amortized cost of these securities.

 

Each reporting period the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).  OTTI is required to be recognized if (1) the Company intends to sell the security or (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its

 

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amortized cost basis.  For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the impairment is recognized as OTTI through earnings.  For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.

 

At December 31, 2014, the unrealized losses on the Company’s debt securities issued by U.S. Government corporations and agencies and mortgage-backed securities were attributable to changes in market interest rates.  These securities are guaranteed or issued by government-sponsored enterprises with strong credit ratings.  The Company does not anticipate selling any of these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost basis or maturity.  Based on the review of the investment portfolio, the Company did not consider these securities to be other-than-temporarily impaired at December 31, 2014.

 

NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans

 

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

 

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

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

328,265

 

67.8

%

$

330,683

 

67.5

%

Multi-family

 

73,130

 

15.1

 

72,818

 

14.9

 

Commercial real estate

 

52,009

 

10.8

 

54,490

 

11.1

 

Construction loans

 

17,146

 

3.5

 

18,336

 

3.7

 

Total mortgage loans

 

470,550

 

97.2

 

476,327

 

97.2

 

Consumer loans

 

3,909

 

0.8

 

4,151

 

0.9

 

Commercial loans

 

9,519

 

2.0

 

9,454

 

1.9

 

Total loans

 

483,978

 

100.0

%

489,932

 

100.0

%

Deferred loan origination costs, net

 

895

 

 

 

967

 

 

 

Allowance for loan losses

 

(4,023

)

 

 

(4,026

)

 

 

Loans, net

 

$

480,850

 

 

 

$

486,873

 

 

 

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

 

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

 

General Component

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Allocated Component

 

The allocated component relates to loans that are classified as impaired.  Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flow (observable market price or collateral value) of the impaired loan is lower than the recorded investment of that loan.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

 

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Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment evaluation, unless such loans are subject to a troubled debt restructuring agreement or have been identified as impaired as part of a larger customer relationship.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Unallocated Component

 

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

 

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

 

 

 

Three Months Ended December 31, 2014

 

 

 

Mortgage Loans

 

 

 

 

 

 

 

 

 

Residential Loans

 

 

 

 

 

Other

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
 Loans

 

Commercial
Loans

 

Unallocated

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,019

 

$

787

 

$

626

 

$

225

 

$

66

 

$

129

 

$

174

 

$

4,026

 

Provision (benefit) for loan losses

 

(79

)

(12

)

(33

)

(19

)

(5

)

(3

)

151

 

 

Recoveries of loans previously charged-off

 

 

 

 

 

1

 

1

 

 

2

 

 

 

1,940

 

775

 

593

 

206

 

62

 

127

 

325

 

4,028

 

Loans charged-off

 

 

 

 

 

(2

)

(3

)

 

(5

)

Balance at end of period

 

$

1,940

 

$

775

 

$

593

 

$

206

 

$

60

 

$

124

 

$

325

 

$

4,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,940

 

775

 

593

 

206

 

60

 

124

 

325

 

4,023

 

 

 

$

1,940

 

$

775

 

$

593

 

$

206

 

$

60

 

$

124

 

$

325

 

$

4,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

608

 

$

 

$

 

$

 

 

 

$

608

 

Collectively evaluated for impairment

 

328,265

 

73,130

 

51,401

 

17,146

 

3,909

 

9,519

 

 

 

483,370

 

 

 

$

328,265

 

$

73,130

 

$

52,009

 

$

17,146

 

$

3,909

 

$

9,519

 

 

 

$

483,978

 

 

18



Table of Contents

 

 

 

Three Months Ended December 31, 2013

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial
Loans

 

Unallocated

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,930

 

$

728

 

$

719

 

$

249

 

$

86

 

$

135

 

$

190

 

$

4,037

 

Provision (benefit) for loan losses

 

70

 

39

 

(108

)

20

 

(10

)

(6

)

(5

)

 

Recoveries of loans previously charged-off

 

 

 

 

 

6

 

1

 

 

7

 

 

 

2,000

 

767

 

611

 

269

 

82

 

130

 

185

 

4,044

 

Loans charged-off

 

(21

)

 

 

 

(4

)

 

 

(25

)

Balance at end of period

 

$

1,979

 

$

767

 

$

611

 

$

269

 

$

78

 

$

130

 

$

185

 

$

4,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

1,979

 

767

 

611

 

269

 

78

 

130

 

185

 

4,019

 

 

 

$

1,979

 

$

767

 

$

611

 

$

269

 

$

78

 

$

130

 

$

185

 

$

4,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

303

 

$

 

$

 

$

 

 

 

$

303

 

Collectively evaluated for impairment

 

316,128

 

71,744

 

52,675

 

18,587

 

4,999

 

9,184

 

 

 

473,317

 

 

 

$

316,128

 

$

71,744

 

$

52,978

 

$

18,587

 

$

4,999

 

$

9,184

 

 

 

$

473,620

 

 

 

 

Year Ended September 30, 2014

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial

Loans

 

Unallocated

 

Total

 

 

 

(In thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

1,930

 

$

728

 

$

719

 

$

249

 

$

86

 

$

135

 

$

190

 

$

4,037

 

Provision (benefit) for loan losses

 

158

 

59

 

(93

)

(24

)

(12

)

(72

)

(16

)

 

Recoveries of loans previously charged-off

 

 

 

 

 

17

 

66

 

 

83

 

 

 

2,088

 

787

 

626

 

225

 

91

 

129

 

174

 

4,120

 

Loans charged-off

 

(69

)

 

 

 

(25

)

 

 

(94

)

Balance at end of year

 

$

2,019

 

$

787

 

$

626

 

$

225

 

$

66

 

$

129

 

$

174

 

$

4,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

2,019

 

787

 

626

 

225

 

66

 

129

 

174

 

4,026

 

 

 

$

2,019

 

$

787

 

$

626

 

$

225

 

$

66

 

$

129

 

$

174

 

$

4,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

611

 

$

 

$

 

$

 

 

 

$

611

 

Collectively evaluated for impairment

 

330,683

 

72,818

 

53,879

 

18,336

 

4,151

 

9,454

 

 

 

489,321

 

 

 

$

330,683

 

$

72,818

 

$

54,490

 

$

18,336

 

$

4,151

 

$

9,454

 

 

 

$

489,932

 

 

19



Table of Contents

 

Non-accrual and Past-due Loans

 

Residential loans are generally placed on non-accrual when reaching 90 days past due or in process of foreclosure.  All closed-end consumer loans 90 days or more past due and any equity line reaching 90 days past due or in the process of foreclosure are placed on non-accrual status.  Secured consumer loans are written down to realizable value and unsecured consumer loans are charged off upon reaching 120 or 180 days past due depending on the type of loan.  Commercial real estate loans and commercial business loans which are 90 days or more past due are generally placed on non-accrual status, unless adequately secured and in the process of collection.  When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans.  A loan can be returned to accrual status when collectibility of all contractual principal and interest is reasonably assured and the loan has performed for a period of time, generally six months.

 

The following tables set forth information regarding non-accrual and past-due loans:

 

 

 

Age Analysis of Past Due Loans

 

 

 

December 31, 2014

 

 

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

Total

 

 

 

30-59 Days

 

60-89 Days

 

or More

 

Total

 

 

 

Total

 

Non-Accrual

 

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Loans

 

Loans

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

16

 

$

358

 

$

2,290

 

$

2,664

 

$

325,601

 

$

328,265

 

$

2,290

 

Multi-family

 

 

 

 

 

73,130

 

73,130

 

 

Commercial real estate

 

 

 

310

 

310

 

51,699

 

52,009

 

310

 

Construction loans

 

 

 

 

 

17,146

 

17,146

 

 

Total mortgage loans

 

16

 

358

 

2,600

 

2,974

 

467,576

 

470,550

 

2,600

 

Consumer loans

 

43

 

4

 

7

 

54

 

3,855

 

3,909

 

7

 

Commercial loans

 

 

 

 

 

9,519

 

9,519

 

 

Total

 

$

59

 

$

362

 

$

2,607

 

$

3,028

 

$

480,950

 

$

483,978

 

$

2,607

 

 

 

 

Age Analysis of Past Due Loans

 

 

 

September 30, 2014

 

 

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

Total

 

 

 

30-59 Days

 

60-89 Days

 

or More

 

Total

 

 

 

Total

 

Non-Accrual

 

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Loans

 

Loans

 

 

 

(In thousands)

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

39

 

$

1,168

 

$

1,493

 

$

2,700

 

$

327,983

 

$

330,683

 

$

1,493

 

Multi-family

 

 

 

 

 

72,818

 

72,818

 

 

Commercial real estate

 

 

 

312

 

312

 

54,178

 

54,490

 

312

 

Construction loans

 

 

 

 

 

18,336

 

18,336

 

 

Total mortgage loans

 

39

 

1,168

 

1,805

 

3,012

 

473,315

 

476,327

 

1,805

 

Consumer loans

 

2

 

2

 

16

 

20

 

4,131

 

4,151

 

16

 

Commercial loans

 

39

 

 

 

39

 

9,415

 

9,454

 

 

Total

 

$

80

 

$

1,170

 

$

1,821

 

$

3,071

 

$

486,861

 

$

489,932

 

$

1,821

 

 

20



Table of Contents

 

There were no loans greater than 90 days past due and still accruing at December 31, 2014 and September 30, 2014.

 

Impaired Loans

 

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan.  Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible.  When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate.  Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows:

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

 

 

Unpaid

 

Related

 

 

 

Unpaid

 

Related

 

 

 

Recorded

 

Principal

 

Valuation

 

Recorded

 

Principal

 

Valuation

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

(In thousands)

 

(In thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

 

$

 

$

 

$

 

$

 

$

 

Multi-family

 

 

 

 

 

 

 

Commercial real estate

 

608

 

608

 

 

611

 

611

 

 

Construction loans

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

 

 

 

 

 

$

608

 

$

608

 

$

 

$

611

 

$

611

 

$

 

 

21



Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

Three Months Ended December 31,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Recorded

 

Interest Income Recognized

 

Recorded

 

Interest Income Recognized

 

Recorded

 

 

 

Investment

 

Total

 

Cash Basis

 

Investment

 

Total

 

Cash Basis

 

Investment

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands)

 

(In thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Multi-family

 

 

 

 

 

 

 

 

Commercial real estate

 

610

 

5

 

2

 

303

 

5

 

 

325

 

Construction loans

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

Commercial loans

 

 

 

 

2

 

 

 

1

 

 

 

$

610

 

$

5

 

$

2

 

$

305

 

$

5

 

$

 

$

326

 

 

At December 31, 2014 and 2013 and September 30, 2014, there were no impaired loans with a valuation allowance.  As of December 31, 2014 and 2013 and September 30, 2014, no additional funds were committed to be advanced to borrowers with impaired loans.

 

Troubled Debt Restructurings

 

The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).  Such concessions typically include a reduction of an interest rate to a below market rate, taking into account the credit quality of the borrower, a significant reduction or deferral of payments of principal and/or interest or an extension of the maturity date.  All TDRs are initially classified as impaired.  In addition, TDRs that have been performing in accordance with their modified terms for a period of less than six months are classified as non-performing, however, management may continue to classify a loan as a non-performing TDR for a longer period.

 

There were no loans modified as part of a TDR during the three months ended December 31, 2014 and 2013.  There were no loans modified as part of a TDR within the previous 12 months that subsequently defaulted during the three months ended December 31, 2014 and 2013.

 

At December 31, 2014 and 2013, TDRs amounted to $298,000 and $303,000, respectively, and consisted of one commercial real estate loan that was modified prior to September 30, 2013.  At December 31, 2014 and 2013, the loan was accruing in accordance with its modified terms and conditions, however, management continues to classify the loan as non-performing.

 

At September 30, 2014, TDRs amounted to $299,000 and consisted of one commercial real estate loan, noted above, that was accruing and performing in accordance with its modified terms and conditions, however, management continues to classify the loan as non-performing.

 

At December 31, 2014 and September 30, 2014, none of the allowance for loan losses was allocated to TDRs and the impact of the identification of these loans as TDRs did not have a material impact on the allowance for loan losses.  There were no commitments to extend additional funds to borrowers with trouble debt restructured loans at December 31, 2014 and September 30, 2014.

 

22



Table of Contents

 

Credit Quality Indicators

 

The Company utilizes an eight grade internal loan rating system for loans as follows:

 

Loans rated 1-4:  Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 5:  Loans in this category are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 6:  Loans in this category are considered “substandard.”  Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged.  There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

Loans rated 7:  Loans in this category are considered “doubtful.”  Loans classified as doubtful have all the weakness inherent in those classified substandard with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

Loans rated 8:  Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, the Company formally reviews the loan risk rating on all multi-family, commercial real estate, construction and commercial loans.  At least annually, the Company engages an independent third-party to review a significant portion of loans within these loan segments.  Management uses the results of the independent review as part of its annual review process.  For all one-to four-family residential loans and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to service the debt and subsequently monitors these loans based upon the borrower’s payment activity.

 

The following is a summary of the Company’s loan portfolio by risk rating:

 

 

 

Credit Risk Profile by Credit Worthiness Category

 

 

 

December 31, 2014

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-
family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial
Loans

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Pass

 

$

324,816

 

$

73,130

 

$

49,945

 

$

17,146

 

$

3,909

 

$

8,816

 

$

477,762

 

Special Mention

 

 

 

1,456

 

 

 

700

 

2,156

 

Substandard

 

3,449

 

 

608

 

 

 

3

 

4,060

 

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total

 

$

328,265

 

$

73,130

 

$

52,009

 

$

17,146

 

$

3,909

 

$

9,519

 

$

483,978

 

 

23



Table of Contents

 

 

 

Credit Risk Profile by Credit Worthiness Category

 

 

 

September 30, 2014

 

 

 

Mortgage Loans

 

Other

 

 

 

 

 

Residential Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to Four-
family

 

Multi-
family

 

Commercial
Real Estate

 

Construction
Loans

 

Consumer
Loans

 

Commercial
Loans

 

Total

 

 

 

(In thousands)

 

Pass

 

$

327,915

 

$

72,818

 

$

52,382

 

$

18,336

 

$

4,151

 

$

8,804

 

$

484,406

 

Special Mention

 

 

 

1,497

 

 

 

645

 

2,142

 

Substandard

 

2,768

 

 

611

 

 

 

5

 

3,384

 

Doubtful

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

Total

 

$

330,683

 

$

72,818

 

$

54,490

 

$

18,336

 

$

4,151

 

$

9,454

 

$

489,932

 

 

NOTE 6 - FAIR VALUE MEASUREMENTS

 

ASC 820-10, “Fair Value Measurement - Overall,” provides a framework for measuring fair value under generally accepted accounting principles.  This guidance also allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

 

In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1 - Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

Level 2 - Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

 

Level 3 - Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions.  Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for December 31, 2014 and September 30, 2014.

 

The Company’s trading securities are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

The Company’s investment in securities available-for-sale is generally classified within level 2 of the fair value hierarchy.  For these securities, we obtain fair value measurements from independent pricing services.  The fair value measurements consider observable data that may include dealer quotes, market

 

24



Table of Contents

 

spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence.  In the absence of such evidence, management’s best estimate is used.  Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

 

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using level 2 inputs based upon appraisals of similar properties obtained from a third party.

 

The Company’s other real estate owned values are estimated using level 2 inputs based upon appraisals of similar properties from a third party.  For level 3 inputs fair values are based on management’s estimates.

 

The following summarizes assets measured at fair value at December 31, 2014 and September 30, 2014:

 

Assets Measured at Fair Value on a Recurring Basis

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Trading securities

 

$

177

 

$

 

$

 

$

177

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

8,496

 

 

8,496

 

Total assets

 

$

177

 

$

8,496

 

$

 

$

8,673

 

 

 

 

September 30, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Fair Value

 

 

 

(In thousands)

 

Trading securities

 

$

593

 

$

 

$

 

$

593

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

8,819

 

 

8,819

 

Total assets

 

$

593

 

$

8,819

 

$

 

$

9,412

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.  There were no assets or liabilities carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at December 31, 2014 and September 30, 2014, for which a nonrecurring change in fair value has been recorded.

 

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There were no significant transfers in and out of Level 1 and 2 during the three months ended December 31, 2014 and 2013 and fiscal year ended September 30, 2014.

 

Summary of Fair Value of Financial Instruments

 

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

 

 

 

December 31, 2014

 

 

 

Carrying

 

Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,428

 

$

36,428

 

$

 

$

 

$

36,428

 

Trading securities

 

177

 

177

 

 

 

177

 

Securities available-for-sale

 

8,496

 

 

8,496

 

 

8,496

 

Securities held-to-maturity

 

35,654

 

 

35,859

 

 

35,859

 

Federal Home Loan Bank stock

 

4,252

 

 

 

4,252

 

4,252

 

Loans, net

 

480,850

 

 

 

481,043

 

481,043

 

Accrued interest receivable

 

1,390

 

 

 

1,390

 

1,390

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

430,213

 

 

 

430,524

 

430,524

 

Short-term borrowings

 

2,000

 

 

 

2,000

 

2,000

 

Long-term debt

 

51,000

 

 

 

51,093

 

51,093

 

 

 

 

September 30, 2014

 

 

 

Carrying

 

Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,112

 

$

32,112

 

$

 

$

 

$

32,112

 

Trading securities

 

593

 

593

 

 

 

593

 

Securities available-for-sale

 

8,819

 

 

8,819

 

 

8,819

 

Securities held-to-maturity

 

37,010

 

 

36,965

 

 

36,965

 

Federal Home Loan Bank stock

 

4,252

 

 

 

4,252

 

4,252

 

Loans, net

 

486,873

 

 

 

487,031

 

487,031

 

Accrued interest receivable

 

1,486

 

 

 

1,486

 

1,486

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

434,537

 

 

 

434,836

 

434,836

 

Short-term borrowings

 

2,000

 

 

 

2,000

 

2,000

 

Long-term debt

 

51,000

 

 

 

51,065

 

51,065

 

 

NOTE 7 — EARNINGS PER SHARE

 

The Company defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities that are included in computing Earnings Per Share (“EPS”) using the two-class method.  The two-class method is an earnings allocation formula that determines EPS for each share of common stock and participating securities according to dividends declared and participation

 

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rights in undistributed earnings.  Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.  Earnings per common share is calculated by dividing earnings allocated to common stockholders by the weighted-average number of common shares outstanding during the period.  Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

The following table sets forth the computation of EPS (basic and diluted) for the periods indicated:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands, except per share data)

 

Net income applicable to common stock

 

$

146

 

$

554

 

Less: Undistributed earnings allocated to participating securities

 

(4

)

(23

)

Net income allocated to common stock

 

$

142

 

$

531

 

 

 

 

 

 

 

Average number of common shares issued

 

6,239,436

 

6,459,381

 

Less: Average unallocated ESOP shares

 

(435,554

)

(464,120

)

Less: Average unvested restricted stock awards

 

(154,775

)

(248,803

)

Average number of common shares outstanding used to calculate basic earnings per common share

 

5,649,107

 

5,746,458

 

Add: Dilutive effect of unvested restricted stock awards

 

72,580

 

63,836

 

Add: Dilutive effect of stock options

 

96,247

 

 

Average number of common shares outstanding used to calculate diluted earnings per common share

 

5,817,934

 

5,810,294

 

 

 

 

 

 

 

Earnings per common share (basic)

 

$

0.03

 

$

0.09

 

Earnings per common share (diluted)

 

$

0.02

 

$

0.09

 

 

For the three months ended December 31, 2013, stock options to purchase 642,735 shares were not included in the computation of diluted earnings per share because to do so would have been antidilutive.

 

NOTE 8 — EMPLOYEE BENEFIT PLANS

 

Employee Stock Ownership Plan

 

The Bank established an ESOP to provide eligible employees the opportunity to own Company stock.  As part of the Bank’s mutual to stock conversion, the Company invested in a subsidiary, PFC.  PFC used the proceeds from the investment to fund a loan to the Peoples Federal Savings Bank Employee Stock Ownership Plan Trust (the “Trust”) in the amount of $5,713,000, which was used to purchase 571,320 shares of the Company’s common stock at a price of $10.00 per share.  The loan bears an interest rate equal to the Wall Street Journal Prime Rate, adjusted annually, and provides for annual payments of interest and principal over the 20 year term of the loan.  Currently, the interest rate is 3.25%.

 

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The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan.  The loan is secured by the shares purchased, which are held in a suspense account until released for allocation to the participants, as principal and interest payments are made by the ESOP to the Company. Shares released are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants.  Forfeited shares shall be reallocated among other participants in the Plan.  Cash dividends paid on allocated shares will be distributed, at the direction of the Bank, to participants’ accounts or used to repay the principal and interest on the ESOP loan used to acquire Company stock on which dividends were paid.  Cash dividends on unallocated shares will be used to repay the outstanding debt of the ESOP.

 

As ESOP shares are earned by the participants, the Company recognizes compensation expense equal to the fair value of the earned ESOP shares during the period in which they become committed to be released.  Compensation expense recognized in connection with the ESOP for the three months ended December 31, 2014 and 2013 was $152,000 and $124,000, respectively.

 

Shares held by the ESOP trust include the following:

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

Allocated

 

138,542

 

109,976

 

Committed to be released

 

 

21,425

 

Unallocated

 

428,490

 

435,631

 

 

 

567,032

 

567,032

 

 

The fair value of the unallocated shares was $9,658,000 and $9,141,000 at December 31, 2014 and September 30, 2014, respectively.

 

Stock Option Plan

 

Under the Company’s 2011 Equity Incentive Plan (the “Stock Plan”), the Company may grant stock options to its directors and employees for up to 999,810 shares of its common stock, reduced by the number of restricted stock awards and restricted stock unit awards granted.  Both incentive stock options and non-qualified stock options may be granted under the Stock Plan.  The exercise price of each stock option shall not be less than the fair market value of the Company’s common stock on the date of the grant and the maximum term of each option is ten years (or five years with respect to incentive stock options granted to an employee who is a 10% stockholder).  There are no further shares available for grant under the Stock Plan.

 

On August 20, 2013, in accordance with the Stock Plan, the Company granted 58,255 stock options to its directors and certain employees of the Company.  The fair value of the stock options granted on August 20, 2013 was $2.37 per share.  The stock options vest 50% per year from the date of grant over a two-year period.

 

On February 21, 2012, in accordance with the Stock Plan, the Company granted 584,480 stock options to its directors and certain employees of the Company.  The fair value of the stock options granted on February 21, 2012 was $3.95 per share.  The stock options vest 20% per year from the date of grant over a five-year period.

 

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The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

 

August 20,

 

February 21,

 

 

 

2013

 

2012

 

Expected dividends

 

0.90%

 

—%

 

Expected term

 

5.75 years

 

10 years

 

Expected volatility

 

11.51%

 

13.01%

 

Risk-free interest rate

 

1.84%

 

1.99%

 

Forfeiture rate

 

—%

 

—%

 

 

The dividend yield assumption is based upon the Company’s history of dividend payouts.  The expected term is based upon the expected life or the contractual term of the stock option.  The expected volatility is based upon historic volatility.  The risk-free interest rate is estimated using the U.S. Treasury yield curve in effect at the time of the grant based upon the expected option term.

 

The following is a summary of stock options and activity under the Stock Plan for the three months ended December 31, 2014:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

 

Exercise

 

Term

 

Intrinsic

 

Stock Options

 

Shares

 

Price

 

(In Years)

 

Value

 

 

 

 

 

 

 

 

 

(In thousands)

 

Outstanding at beginning of period

 

642,735

 

$

15.74

 

7.4

 

$

2,557

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding at end of period

 

642,735

 

$

15.74

 

7.2

 

$

3,225

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

262,920

 

$

15.80

 

7.3

 

$

1,771

 

 

For both of the three months ended December 31, 2014 and 2013, the share-based compensation expense applicable to the stock options was $133,000 and the recognized tax benefit related to this expense was $34,000.

 

As of December 31, 2014 and September 30, 2014, the unrecognized share-based compensation expense related to the non-vested stock options was $1.0 million and $1.1 million, respectively.  As of December 31, 2014, this amount is expected to be recognized over a weighted-average period of 2.0 years.

 

Restricted Stock Awards and Restricted Stock Unit Awards

 

Under the Company’s Stock Plan, the Company may issue shares of its common stock as restricted stock awards or restricted stock unit awards to its directors and employees.  The maximum number of shares that may be issued under the Stock Plan as restricted stock awards or restricted stock unit awards is 357,075 shares.  A restricted stock award is a grant of shares of Company common stock for no

 

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consideration, subject to a vesting schedule or the satisfaction of market conditions or performance conditions.  A restricted stock unit award is similar, except no shares are actually granted on the grant date.  The Company may issue the shares or purchase the shares of its common stock through open market transactions or negotiated block transactions.  Shares issued upon vesting may be either authorized but unissued or reacquired shares held by the Company.  Any shares not issued because vesting requirements are not met will again be available for issuance under the Stock Plan.  The fair market value of shares awarded is based on market price at the date of grant and is recorded as unearned compensation and amortized over the applicable vesting period.  There are no further shares available for grant under the Stock Plan.

 

Restricted Stock Awards

 

On August 20, 2013 and February 21, 2012, in accordance with the Stock Plan, the Company granted 75,375 and 281,700 restricted stock awards, respectively, to its directors and certain employees.  The shares awarded in August 2013 vest 50% per year over a two-year period and the shares awarded in February 2012 vest 20% per year over a five-year period.  The fair value of the restricted stock awards granted on August 20, 2013 and February 21, 2012 was $18.49 and $15.47 per share, respectively.

 

The following table presents the status of non-vested restricted stock awards under the Stock Plan for the three months ended December 31, 2014:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number

 

Grant-date

 

 

 

of Shares

 

Fair Value

 

 

 

(Unaudited)

 

Non-vested restricted stock awards at beginning of period

 

206,707

 

$

16.02

 

Restricted shares granted

 

 

 

Shares vested

 

 

 

Forfeited

 

 

 

Non-vested restricted stock awards at end of period

 

206,707

 

$

16.02

 

 

The share-based compensation expense applicable to the non-vested restricted stock awards was $392,000 for both of the three months ended December 31, 2014 and 2013 and the recognized tax benefit related to this expense was $156,000 and $157,000, respectively, for the three months ended December 31, 2014 and 2013.

 

As of December 31, 2014 and September 30, 2014, the unrecognized share-based compensation expense related to the non-vested restricted stock awards was $2.2 million and $2.6 million, respectively.  As of December 31, 2014, this amount is expected to be recognized over a weighted-average period of 2.0 years.

 

Restricted Stock Unit Awards

 

As of December 31, 2014, there were no restricted stock unit awards granted under the Stock Plan.

 

NOTE 9 — DIVIDEND DECLARED

 

On January 21, 2015, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s common stock.  The dividend is payable to stockholders of record as of February 2, 2015 and is expected to be paid on February 13, 2015.

 

NOTE 10 — SUBSEQUENT EVENTS

 

On January 26, 2015, the Company filed with the Securities and Exchange Commission a joint press release with Independent Bank Corp. (Independent) reporting in connection with the previously announced merger of the Company with and into Independent that all regulatory approvals relating to the merger have been received, the deadline for the Company’s shareholders to elect the form of merger consideration they wish to receive in connection with the merger is 5:00 p.m., Eastern Time on February 12, 2015, and the merger is anticipated to close on or about February 20, 2015.

 

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

 

General

 

Management’s discussion and analysis of the financial condition at December 31, 2014 (unaudited) and September 30, 2014 and results of operations for the three months ended December 31, 2014 and 2013 (unaudited) is intended to assist in understanding the financial condition and results of operations of the Company.  The results of operations for the three months ended December 31, 2014 are not necessarily indicative of results for the fiscal year ending September 30, 2015.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

Overview of Income and Expense

 

Income

 

The Company has two primary sources of pre-tax income.  The first is net interest income.  Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

 

The second source of pre-tax income is non-interest income, the compensation received from providing products and services.  The majority of non-interest income comes from service charges on deposit accounts, bank owned life insurance income and loan servicing fees.  The Company also earns income from the sale of residential mortgage loans and other fees and charges.

 

The Company recognizes gains and losses as a result of sales of investment securities, foreclosed property, and premises and equipment.  In addition, the Company recognizes losses on its investment securities that are considered other-than-temporarily impaired.  Gains and losses are not a regular part of the Company’s primary source of income.

 

Expenses

 

In addition to the interest expense we pay on our deposits and borrowings, the expenses the Company incurs in operating its business consist of salaries and employee benefits, occupancy and equipment expense, external processing fees, FDIC assessments, director fees and other non-interest expense.

 

Salaries and employee benefits consist primarily of the salaries and wages paid to employees, payroll taxes, and expenses for health care, retirement and other employee benefits.

 

Occupancy expenses, which are fixed or variable costs associated with premises and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and cost of utilities.  Equipment expenses include expenses and depreciation charges related to office and banking equipment.

 

External processing fees are paid to third parties mainly for data processing services.

 

Other expenses include expenses for attorneys, accountants and consultants, advertising and marketing, franchise taxes, charitable contributions, insurance, merger, office supplies, postage, telephone and other miscellaneous operating expenses.

 

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Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

 

·                  statements of our goals, intentions and expectations;

 

·                  statements regarding our business plans, prospects, growth and operating strategies;

 

·                  statements regarding the asset quality of our loan and investment portfolios; and

 

·                  estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this document.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·                  our ability to successfully complete our merger with and into Independent Bank Corp;

 

·                  general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·                  competition among depository and other financial institutions;

 

·                  inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

·                  adverse changes in the securities markets;

 

·                  changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including the effects of the Dodd-Frank Act and Basel III;

 

·                  our ability to enter new markets successfully and capitalize on growth opportunities;

 

·                  changes in consumer spending, borrowing and savings habits;

 

·                  changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·                  changes in our organization, compensation and benefit plans;

 

·                  the timing and amount of revenues that we may recognize;

 

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·                  the value and marketability of collateral underlying our loan portfolios;

 

·                  the impact of current governmental efforts to restructure the U.S. financial and regulatory system;

 

·                  the quality of our investment portfolio;

 

·                  changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

·                  changes in the financial condition or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

Critical accounting policies are those which involve significant judgments and assessments by management and which could potentially result in materially different results under different assumptions and conditions.  As discussed in the Company’s 2014 Annual Report on Form 10-K, the Company considers the allowance for loan losses and income taxes to be our critical accounting policies.  The Company’s critical accounting policies have not changed from September 30, 2014.

 

Comparison of Financial Condition at December 31, 2014 (Unaudited) and September 30, 2014

 

At December 31, 2014, our total assets were $597.0 million, a decrease of $4.3 million, or 0.7%, from our total assets of $601.3 million at September 30, 2014.  Loans, net decreased $6.0 million, or 1.2%, to $480.9 million at December 31, 2014 from $486.9 million at September 30, 2014.  Securities decreased to $44.2 million at December 31, 2014 from $45.8 million at September 30, 2014, due primarily to principal pay-downs of $1.3 million.  At December 31, 2014, cash and cash equivalents totaled $36.4 million compared to $32.1 million at September 30, 2014, representing a $4.3 million increase, or 13.4%.  The increase was due mainly to loan collections in excess of loan originations and security repayments, offset by the decrease in deposits.

 

Deposits decreased $4.3 million, or 1.0%, to $430.2 million at December 31, 2014 from $434.5 million at September 30, 2014.  The decrease resulted primarily from decreases in term certificates to $117.1 million at December 31, 2014 from $122.0 million at September 30, 2014 and in money market deposits to $150.6 million from $153.7 million for the comparable periods, offset by an increase in demand deposits to $64.5 million from $60.9 million for the comparable periods.

 

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Table of Contents

 

The following table sets forth the Company’s deposit accounts at the dates indicated:

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

64,522

 

15.0

%

$

60,862

 

14.0

%

NOW deposits

 

41,288

 

9.6

 

41,417

 

9.5

 

Money market deposits

 

150,556

 

35.0

 

153,671

 

35.4

 

Savings

 

56,714

 

13.2

 

56,524

 

13.0

 

Total non-certificate accounts

 

313,080

 

72.8

 

312,474

 

71.9

 

Term certificates

 

117,133

 

27.2

 

122,063

 

28.1

 

Total deposits

 

$

430,213

 

100.0

%

$

434,537

 

100.0

%

 

The following table sets forth the maturities of the Company’s term certificates for each of the fiscal years ending after the dates indicated:

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

Amount

 

Weighted
Average
Rate

 

Amount

 

Weighted
Average
Rate

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Within 1 year

 

$

70,218

 

0.73

%

$

66,811

 

0.67

%

Over 1 year to 2 years

 

33,077

 

0.96

 

41,515

 

0.98

 

Over 2 years to 3 years

 

7,675

 

1.52

 

8,230

 

1.47

 

Over 3 years to 4 years

 

3,189

 

1.23

 

3,239

 

1.60

 

Over 4 years to 5 years

 

2,974

 

1.84

 

2,268

 

1.54

 

 

 

$

117,133

 

0.89

%

$

122,063

 

0.86

%

 

Borrowings, consisting of short-term and long-term FHLB advances, remained at $53.0 million at December 31, 2014 and September 30, 2014.  There were no FHLB advances or repayments of FHLB advances during the three months ended December 31, 2014.

 

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The following table sets forth the weighted average rate by type for the Company’s FHLB advances at the dates indicated:

 

 

 

December 31, 2014

 

September 30, 2014

 

 

 

Amount

 

Weighted
Average
Rate

 

Amount

 

Weighted
Average
Rate

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances:

 

 

 

 

 

 

 

 

 

Short-term

 

$

2,000

 

0.37

%

$

2,000

 

0.37

%

Long-term

 

51,000

 

1.25

 

51,000

 

1.25

 

 

 

$

53,000

 

1.21

%

$

53,000

 

1.21

%

 

Total equity increased to $104.5 million at December 31, 2014 from $103.9 million at September 30, 2014.  The increase resulted primarily from stock based compensation expense of $525,000 and common stock released by the ESOP of $152,000 for the three months ended December 31, 2014 and net income of $146,000 for the quarter.  The increase was offset by dividends paid on the Company’s common stock of $289,000.

 

Comparison of Operating Results for the Three Months December 31, 2014 and 2013 (Unaudited)

 

General.  We recorded net income of $146,000 for the three months ended December 31, 2014 compared to net income of $554,000 for the three months ended December 31, 2013.  Net interest and dividend income was $4.3 million for both three months ended December 31, 2014 and 2013.  No provision for loan losses was made for either of the three months ended December 31, 2014 or 2013.  Non-interest income decreased slightly to $398,000 for the quarter ended December 31, 2014 from $399,000 for the comparable 2014 period.  Non-interest expense increased to $4.0 million for the three month period ended December 31, 2014 compared to $3.8 million for the three months ended December 31, 2013.

 

Total Interest and Dividend Income.  Total interest and dividend income increased to $5.0 million for the three months ended December 31, 2014 compared to $4.9 million for the three months ended December 31, 2013.  The average balance on total interest-earning assets increased to $563.8 million for the 2014 period compared to $547.6 million for the 2013 period while the average yield on total interest-earning assets decreased to 3.52% from 3.60% during the comparable periods.  The increase in total interest and dividend income was due mainly to the increase in average balances on loans and the increase in the yield on FHLB stock, offset partially by the decrease in yield on loans.  The current interest rate environment contributed to the downward re-pricing of a portion of our existing adjustable rate assets and lower rates on newer interest-earning assets.

 

Interest and fee income on loans was $4.7 million for both the three months ended December 31, 2014 and 2013.  The average balance of our loans increased for the three month period ended December 31, 2014 to $484.8 million from $467.3 million for the period ended December 31, 2013.  The average yield on loans decreased to 3.88% from 4.00%, reflecting decreases in interest rates on our adjustable-rate loan products, as well as lower rates on newly originated loans based on the current interest rate environment.  Interest income on taxable securities decreased to $228,000 for the three months ended December 31, 2014 from $233,000 for the three months ended December 31, 2013, reflecting the decrease in the average balance of such securities to $45.1 million from $49.1 million, offset slightly by the increase in yield on taxable securities to 2.02% from 1.90% during the comparable periods.

 

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Total Interest Expense. Total interest expense decreased $7,000, or 1.1%, to $615,000 for the three months ended December 31, 2014 from $622,000 for the three months ended December 31, 2013.  The decrease reflected a decrease in the average rate paid on interest-bearing liabilities in the quarter ended December 31, 2014 to 0.58%, compared to an average rate paid of 0.61% in the comparable 2013 period.  Total average deposits increased to $370.9 million for the quarter ended December 31, 2014 from $366.6 million for the quarter ended December 31, 2013.  Conversely, the average rate paid on total deposits decreased one basis point to 0.49% for the quarter ended December 31, 2014 from 0.50% for the quarter ended December 31, 2013.  Interest expense on term certificates decreased to $263,000 for the three months ended December 31, 2014 from $278,000 for the three months ended December 31, 2013, as the average rate paid on term certificates decreased to 0.87% for the quarter ended December 31, 2014 from 0.94% for the quarter ended December 31, 2013, offset in part by the average balance on term certificates that increased to $120.3 million from $118.7 million for the comparable periods.  Interest expense on money market accounts increased to $168,000 for the quarter ended December 31, 2014 from $155,000 for the quarter ended December 31, 2013, an increase of $13,000, or 8.4%, as the average cost of money market accounts increased to 0.44% for the quarter ended December 31, 2014 from 0.41% for the quarter ended December 31, 2013, reflecting higher market rates.  Additionally, the average balance of money market accounts increased to $152.8 million during the quarter ended December 31, 2014 as compared to $150.5 million during the quarter ended December 31, 2013.  Interest expense on borrowings, which consisted solely of advances from the Federal Home Loan Bank of Boston, decreased to $164,000 for the quarter ended December 31, 2014 compared to $168,000 for the quarter ended December 31, 2013.  The decrease resulted from a 28 basis points decrease in the average cost of borrowings to 1.24% for the quarter ended December 31, 2014 from 1.52% for the comparable 2013 quarter, offset partially by an $8.7 million increase in the average balance of borrowings to $53.0 million for the quarter ended December 31, 2014 compared to $44.3 million for the quarter ended December 31, 2013.

 

Net Interest and Dividend Income.  Net interest and dividend income was $4.3 million for both quarters ended December 31, 2014 and 2013.  Net interest and dividend income for the quarter ended December 31, 2014 was positively impacted primarily by a higher average outstanding balance on our loan portfolio and lower cost of funds on our borrowings and negatively impacted primarily by lower market interest rates on our loan portfolio and a higher average balance on our borrowings.  The increase in interest income from loan growth during the period and the decrease in interest expense on our deposits and borrowings resulted in a slight increase on net interest and dividend income of $45,000.  The Company’s net interest rate spread and net interest margin both decreased period to period.  The net interest rate spread and net interest margin were 2.94% and 3.08%, respectively, for the quarter ended December 31, 2014, compared to 2.99% and 3.14%, respectively, for the comparable 2013 quarter.  The ratio of our average interest-earning assets to average interest-bearing liabilities for both quarters ended December 31, 2014 and 2013 was 1.33x.

 

Provision for Loan Losses.  We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date.  In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans.  The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates, as more information becomes available or economic conditions change.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change or as more information becomes available.  We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses as required in order to maintain the allowance.

 

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Table of Contents

 

Based on the above factors, we did not record a provision for loan losses for the three months ended December 31, 2014 and 2013.  The allowance for loan losses remained at $4.0 million, or 0.8% of total loans, at December 31, 2014, September 30, 2014 and December 31, 2013.  Total non-performing assets were $2.9 million at December 31, 2014 compared to $2.1 million at September 30, 2014.  The increase was due primarily to the increase in non-accrual one-to four-family family loans of $797,000.  To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2014 and 2013.

 

Total Non-interest Income.  Total non-interest income decreased slightly to $398,000 for the three months ended December 31, 2014 from $399,000 for the three months ended December 31, 2013.  The decrease was due primarily to a decrease in loan servicing fees, net of $13,000, or 100%.  Loan servicing fees were offset by amortization of mortgage servicing rights for the three months ended December 31, 2014 compared to loan servicing fees, net of $13,000 for the three months ended December 31, 2013. In addition, income from the increase in cash surrender value of life insurance decreased to $161,000 for the three months ended December 31, 2014 from $168,000 for the three months ended December 31, 2013. This was offset by net gain on sales of mortgage loans of $20,000 for the three months ended December 31, 2014.  There were no sales of mortgages for the three months ended December 31, 2013.

 

Total Non-interest Expense.  Total non-interest expense increased to $4.0 million for the three months ended December 31, 2014 from $3.8 million for the three months ended December 31, 2013.  The increase was due primarily to merger expense, which increased $205,000, or 100%, for the three months ended December 31, 2014.  The Company did not have any merger expense for the three months ended December 31, 2013.  During the 2014 and 2013 periods, occupancy expense increased to $286,000 from $228,000, equipment expense increased to $131,000 from $99,000, professional fees increased to $181,000 from $157,000, other operating expense increased to $275,000 from $253,000, advertising expense increased to $146,000 from $133,000, data processing expense increased to $231,000 from $219,000 and deposit insurance expense increased to $72,000 from $61,000.  The increase was offset slightly by a decrease in salaries and employee benefits of $118,000, or 4.5% to $2.5 million for the three months ended December 31, 2014 from $2.6 million for the three months ended December 31, 2013.  The decrease was due to decreased contributions to the Company’s defined benefit plan based upon actuarial pension expense estimates offset by normal salary increases and other employee benefit expenses.

 

Provision for Income Taxes.  The provision for income taxes was $581,000 for the three months ended December 31, 2014 compared to $388,000 for the three months ended December 31, 2013.  Pre-tax income for the three months ended December 31, 2014 was $727,000 compared to $942,000 for the comparable period ended December 31, 2013.  Our effective tax rate was 79.9% for the three months ended December 31, 2014 compared to 41.2% for the three months ended December 31, 2013.  The Company made a provision of $194,000 during the December 2014 quarter to the valuation allowance on the deferred tax asset related to the charitable contribution made to Peoples Federal Savings Bank Charitable Foundation in 2010.  A valuation allowance is established against deferred tax assets when, based upon the available evidence, including historical and projected taxable income, management determines that it is more likely than not that some or all of the deferred tax asset will not be realized.

 

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Table of Contents

 

The following table sets forth average balance sheets, average yields and costs and certain other information for the periods indicated.  No tax-equivalent yield adjustments were made, as the effect thereof was not material.  All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.  The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

 

 

Three Months Ended December 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Interest

 

Average

 

Average

 

Interest

 

Average

 

 

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

 

 

Balance

 

Paid

 

Rate (1)

 

Balance

 

Paid

 

Rate (1)

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

$

484,800

 

$

4,702

 

3.88

%

$

467,306

 

$

4,673

 

4.00

%

Taxable securities (3)

 

45,122

 

228

 

2.02

 

49,126

 

233

 

1.90

 

Other interest-earning assets

 

29,651

 

17

 

0.23

 

27,414

 

15

 

0.22

 

FHLB stock

 

4,252

 

16

 

1.51

 

3,775

 

4

 

0.42

 

Total interest-earning assets

 

563,825

 

4,963

 

3.52

 

547,621

 

4,925

 

3.60

 

Non-interest-earning assets

 

35,920

 

 

 

 

 

35,806

 

 

 

 

 

Total assets

 

$

599,745

 

 

 

 

 

$

583,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

55,742

 

14

 

0.10

 

$

56,362

 

14

 

0.10

 

Money market accounts

 

152,794

 

168

 

0.44

 

150,495

 

155

 

0.41

 

NOW accounts

 

42,045

 

6

 

0.06

 

41,054

 

7

 

0.07

 

Term certificates

 

120,335

 

263

 

0.87

 

118,657

 

278

 

0.94

 

Total deposits

 

370,916

 

451

 

0.49

 

366,568

 

454

 

0.50

 

FHLB advances

 

53,000

 

164

 

1.24

 

44,326

 

168

 

1.52

 

Total interest-bearing liabilities

 

423,916

 

615

 

0.58

 

410,894

 

622

 

0.61

 

Demand deposits

 

61,955

 

 

 

 

 

56,015

 

 

 

 

 

Other non-interest-bearing liabilities

 

9,561

 

 

 

 

 

10,564

 

 

 

 

 

Total non-interest-bearing liabilities

 

71,516

 

 

 

 

 

66,579

 

 

 

 

 

Total liabilities

 

495,432

 

 

 

 

 

477,473

 

 

 

 

 

Stockholders’ equity

 

104,313

 

 

 

 

 

105,954

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

599,745

 

 

 

 

 

$

583,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

4,348

 

 

 

 

 

$

4,303

 

 

 

Net interest rate spread (4)

 

 

 

 

 

2.94

%

 

 

 

 

2.99

%

Net interest-earning assets (5)

 

$

139,909

 

 

 

 

 

$

136,727

 

 

 

 

 

Net interest margin (6)

 

 

 

 

 

3.08

%

 

 

 

 

3.14

%

Ratio of interest-earning assets to total interest-bearing liabilities

 

1.33

x

 

 

 

 

1.33

x

 

 

 

 

 


(1) Yields are annualized.

(2) Average loans include non-accrual loans and are net of average deferred loan fees/costs.

(3) Average balances are presented at average amortized cost.

(4) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Table of Contents

 

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated.  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.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

 

Three Months Ended December 31,

 

 

 

2014 vs. 2013

 

 

 

Increase (Decrease)

 

Total

 

 

 

Due to

 

Increase

 

 

 

Volume

 

Rate

 

(Decrease)

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

Loans (1)

 

$

175

 

$

(146

)

$

29

 

Taxable securities (2)

 

(19

)

14

 

(5

)

Other interest-earning assets

 

1

 

1

 

2

 

FHLB stock

 

1

 

11

 

12

 

Total interest-earning assets

 

158

 

(120

)

38

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Savings

 

 

 

 

Money market accounts

 

2

 

11

 

13

 

NOW accounts

 

 

(1

)

(1

)

Term certificates

 

4

 

(19

)

(15

)

Total deposits

 

6

 

(9

)

(3

)

FHLB advances

 

33

 

(37

)

(4

)

Total interest-bearing liabilities

 

39

 

(46

)

(7

)

Increase (decrease) in net interest income

 

$

119

 

$

(74

)

$

45

 

 


(1)         Average loans include non-accrual loans and are net of average deferred loan fees/costs.

(2)         Average balances are presented at average amortized cost.

 

Liquidity Management.  Liquidity is the ability to meet current and future financial obligations of a short-term nature.  Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Boston.  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 based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning assets and (4) the objectives of our asset/liability management policy.

 

Our most liquid assets are cash and cash equivalents.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At December 31, 2014, cash and cash equivalents totaled $36.4 million.  Securities classified as available-for-sale, which provide additional

 

39



Table of Contents

 

sources of liquidity, totaled $8.5 million.  Additionally, at December 31, 2014, the Company had $53.0 million of borrowings outstanding with the Federal Home Loan Bank of Boston and we had the ability to borrow an additional $62.6 million from the Federal Home Loan Bank of Boston.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.  At December 31, 2014, we had $33.3 million in loan commitments and standby letters of credit outstanding, which consisted of $12.3 million of unadvanced home equity lines of credit commitments, $9.8 million of unadvanced commercial real estate lines of credit commitments, $7.6 million of unadvanced construction loan commitments, $2.2 million of unadvanced commercial loan commitments, $791,000 of commitments to originate loans, $628,000 of unadvanced consumer loan commitments and $20,000 of standby letters of credit.  Term certificates due within one year as of December 31, 2014 totaled $70.2 million, or 59.9% of total term certificates.  We believe this percentage of term certificates that mature within one year reflects continued depositor hesitance to invest their funds long-term in the current interest rate environment.  If these maturing term certificates do not remain with us, we will be required to seek other sources of funds, including other term deposits and other borrowing arrangements.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay as of December 31, 2014.  We believe, based on past experience that a significant portion of our term certificates will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

Loan Commitments.  Loan 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 and generally have fixed expiration dates or other termination clauses.  The following table presents information indicating various loan commitments of the Company as of the date indicated and their respective maturity dates:

 

 

 

December 31, 2014

 

 

 

 

 

More than

 

More than

 

 

 

 

 

 

 

 

 

One Year

 

Three Years

 

 

 

 

 

 

 

One Year

 

Through

 

Through

 

Over

 

 

 

 

 

or Less

 

Three Years

 

Five Years

 

Five Years

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Commitments to originate loans

 

$

791

 

$

 

$

 

$

 

$

791

 

Unadvanced portions of loans:

 

 

 

 

 

 

 

 

 

 

 

Construction loans

 

3,506

 

4,048

 

 

 

7,554

 

Commercial real estate lines of credit

 

 

 

 

9,838

 

9,838

 

Home equity lines of credit

 

 

 

151

 

12,151

 

12,302

 

Consumer

 

 

 

 

628

 

628

 

Commercial

 

1,092

 

440

 

 

620

 

2,152

 

Standby letters of credit

 

20

 

 

 

 

20

 

Total

 

$

5,409

 

$

4,488

 

$

151

 

$

23,237

 

$

33,285

 

 

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Table of Contents

 

Contractual Obligations.  The following table presents information indicating various contractual obligations and commitments of the Company as of the date indicated and their respective maturity dates:

 

 

 

December 31, 2014

 

 

 

 

 

More than

 

More than

 

 

 

 

 

 

 

 

 

One Year

 

Three Years

 

 

 

 

 

 

 

One Year

 

Through

 

Through

 

Over

 

 

 

 

 

or Less

 

Three Years

 

Five Years

 

Five Years

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands)

 

Federal Home Loan Bank advances

 

$

8,000

 

$

36,000

 

$

9,000

 

$

 

$

53,000

 

Operating leases

 

200

 

272

 

265

 

341

 

1,078

 

Total contractual obligations

 

$

8,200

 

$

36,272

 

$

9,265

 

$

341

 

$

54,078

 

 

Capital ManagementThe Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (“OCC”), 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 December 31, 2014 and September 30, 2014, the Bank exceeded all of its regulatory capital requirements and was considered “well-capitalized” under regulatory guidelines.

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

For Capital

 

Capitalized Under

 

 

 

 

 

 

 

Adequacy

 

Prompt Corrective

 

 

 

Actual

 

Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in thousands)

 

December 31, 2014 (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

$

97,445

 

25.89

%

$

30,107

 

8.0

%

$

37,634

 

10.0

%

Tier 1 Capital (to Risk Weighted Assets)

 

93,422

 

24.82

 

15,054

 

4.0

 

22,580

 

6.0

 

Tier 1 Leverage Capital (to Adjusted Total Assets)

 

93,422

 

15.68

 

23,840

 

4.0

 

29,800

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

$

96,549

 

25.34

%

$

30,482

 

8.0

%

$

38,102

 

10.0

%

Tier 1 Capital (to Risk Weighted Assets)

 

92,523

 

24.28

 

15,241

 

4.0

 

22,861

 

6.0

 

Tier 1 Leverage Capital (to Adjusted Total Assets)

 

92,523

 

15.40

 

24,029

 

4.0

 

30,036

 

5.0

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss due to adverse changes in market prices and rates, and typically encompasses exposures such as sensitivity to changes in market interest rates, foreign currency exchange rates, and commodity prices.  The Bank has no exposure to foreign currency exchange or commodity price movements.  Because net interest income is the Bank’s primary source of revenue, interest rate risk is a significant market risk to which the Bank is exposed.

 

Interest rate risk is the exposure of the Bank’s net interest income in response to movements in interest rates.  Net interest income is affected by changes in interest rates as well as by fluctuations in the level and duration of the Bank’s assets and liabilities.  Over and above the influence that interest rates have on net interest income, changes in rates may also affect the volume of lending activity, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancing, the availability,

 

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mix and cost of deposits and other funding alternatives, and the market value of the Bank’s assets and liabilities.

 

Exposure to interest rate risk is managed by the Bank through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, primarily deposits, borrowings, loans and investment securities, coupled with determinations of the level of risk considered appropriate given the Bank’s capital and liquidity requirements, business strategy and performance objectives.  Through such management, the Bank seeks to manage the vulnerability of its net interest income to changes in interest rates.

 

The Asset/Liability Committee (“ALCO”), comprised of several members of senior management and two members of the board of directors, is responsible for managing interest rate risk.  On a quarterly basis, this committee reviews with the board of directors its analysis of our exposure to interest rate risk, the effect subsequent changes in interest rates could have on the Bank’s future net interest income, key interest rate risk strategies and other activities, and the effect of those strategies on the Bank’s operating results.  This committee is also involved in the Bank’s planning and budgeting process as well as in determining pricing strategies for deposits and loans.  Management is aided in these efforts by the use of an independent third party that convenes with management on a quarterly basis for a complete asset/liability analysis and review.

 

The primary method that ALCO uses for measuring and evaluating interest rate risk is an income simulation analysis.  This analysis considers the maturity and interest rate re-pricing characteristics of all of our interest-earning assets and interest-bearing liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios.  Interest rate scenarios tested generally include parallel and flattening/steepening rate ramps over a one-year period, and static, or flat, rates.  The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specified time horizon, usually a two-year period.  The simulations also show the net interest income volatility for up to five years.

 

Management does not believe that the Company’s primary market risk exposures at December 31, 2014, and how those exposures were managed during the three months ended December 31, 2014, have changed materially when compared to the immediately preceding quarter ended September 30, 2014.  However, the Company’s primary market risk exposure has not yet been quantified at December 31, 2014 as it is not yet available, and the complexity of the model makes it difficult to accurately predict results. Accordingly, the Company is presenting information for the quarter ended September 30, 2014.

 

For the quarter ended September 30, 2014, we used a simulation model to project changes for four rate scenarios.  This analysis calculates the difference between net interest income forecasts for these scenarios compared to the net interest income forecast using a flat rate scenario.  In each of these instances, Federal Funds was used as the driving rate.

 

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Table of Contents

 

The table below sets forth, as of September 30, 2014, the estimated changes in the Bank’s net interest income that would result.

 

 

 

 

 

Economic Value of Equity (2)

 

Net Interest Income

 

Changes in

 

 

 

Estimated Increase

 

Estimated Net

 

Estimated Increase

 

Interest Rates

 

Estimated

 

(Decrease)

 

Interest

 

(Decrease)

 

(basis points)(1)

 

EVE (2)

 

Amount

 

Percent

 

Income

 

Amount

 

Percent

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

+300bp

 

93,971

 

$

(21,405

)

(18.6

)%

$

16,603

 

$

(1,171

)

(6.6

)%

+200bp

 

102,782

 

(12,594

)

(10.9

)%

17,516

 

(258

)

(1.5

)%

+100bp

 

110,087

 

(5,289

)

(4.6

)%

17,857

 

83

 

0.5

%

0bp

 

115,376

 

 

%

17,774

 

 

%

-100bp

 

121,693

 

6,317

 

5.5

%

17,111

 

(663

)

(3.7

)%

 


(1)         Assumes an instantaneous uniform change in interest rates at all maturities.

(2)         EVE is the discounted present value of expected cash flows from interest-earning assets, interest-bearing bearing liabilities and off-balance sheet contracts.

 

The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products.  Many of our assets are floating rate loans tied to the Prime rate, which are assumed to re-price immediately and to the same extent as the change in market rates, according to their contracted index.  Many of these credit relationships, however, now have interest rate “floors” at “above market” levels.  Many of these loans may not re-price with the first couple of increases in short-term interest rates.  Conversely, we have various transaction account products that would not increase or decrease in the same increments or at the same speed.  Money market accounts, as an example, are assumed to increase sooner and in larger increments than savings and NOW accounts.  These assumptions are based on our prior experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates.  The model begins by disseminating data into appropriate re-pricing buckets.  Assets and liabilities are then assigned a multiplier to simulate how much that particular balance sheet item will reprice when interest rates change.  The final step is to simulate the timing effect of assets and liabilities with a month-by-month simulation to estimate the change in interest income and expense over the next 12 months.

 

This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions.  It does not incorporate any balance sheet growth, and it assumes that the structure and composition of the balance sheet will remain comparable to the structure at the start of the simulation.  It does not account for other factors that might impact this analysis, including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.  Furthermore, loan prepayment rate estimates and spread relationships change regularly.  Interest rate changes create changes in actual loan prepayment rates that differ from the market estimates incorporated in this analysis.  Changes that vary significantly from the assumptions may have significant effects on our net interest income.

 

For the rising interest rate scenarios, the base market interest rate forecast was increased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points.  For the falling interest rate scenario, the base market interest rate forecast was decreased, on an instantaneous and sustained basis, by 100 basis points.  The 2014 table above indicates that at September 30, 2014, in the event of a 100 basis point

 

43



Table of Contents

 

decrease in interest rates, we would experience a 5.5% increase in the economic value of equity.  In the event of a 300 basis point increase in interest rates, we would experience an 18.6% decrease in the economic value of equity.  At September 30, 2014, our net interest income exposure related to these hypothetical changes in market interest rates was within our established guidelines. 

 

There are inherent shortcomings to income simulations, given the number and variety of assumptions that must be made in performing the analysis.  The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar attributes react to changes in market interest rates, and the degree to which non-maturity deposits, such as checking accounts, react to changes in market rates.  Although the analysis shown above provides an indication of the Bank’s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank’s net interest income and may differ from actual results.

 

Item 4.  Controls and Procedures

 

(a)         Evaluation of Disclosure Controls and Procedures.

 

The Company’s Chief Executive Officer, its President, its Chief Financial Officer and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of December 31, 2014.  Based on such evaluation, the Chief Executive Officer, the President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company, including the Bank, in reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

 

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error and the risk of fraud.  Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition and the risk that the degree of compliance with policies or procedures may deteriorate over time.  Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

 

(b)         Changes in Internal Controls Over Financial Reporting.

 

There have been no changes in the Company’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

44



Table of Contents

 

Part II — OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company and its subsidiary are subject to various legal actions arising in the normal course of business.  In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

Item 1A.  Risk Factors

 

For the three months ended December 31, 2014, there have been no material changes to the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2014, filed December 12, 2014, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.

 

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

 

(a)         Unregistered Sales of Equity Securities.  Not applicable.

 

(b)         Use of Proceeds.  Not applicable.

 

(c)          Repurchase of Equity Securities.

 

On December 6, 2013, the Company announced that its Board of Directors authorized an increase in the number of common shares that may be repurchased pursuant to the Company’s stock repurchase plan that was previously announced on July 20, 2011 and subsequently expanded in February 2012 and October 2012.  Under the expanded repurchase plan, the Company is authorized to repurchase up to an additional 5% of its issued and outstanding common shares, or up to an additional 323,296 common shares.  The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.  The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.

 

At December 31, 2014, total repurchases under the repurchase program were 1,254,039 shares at an average price of $16.23.  The Company did not repurchase any shares under the repurchase program during the fiscal quarter ended December 31, 2014.

 

 

 

 

 

 

 

Total Number of

 

Maximum Number of

 

 

 

Total

 

 

 

Shares Purchased

 

Shares That May

 

 

 

Number

 

Average

 

as Part of Publicly

 

Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

Announced Plans

 

Under the Plans

 

Period

 

Purchased

 

per Share

 

or Programs

 

or Programs

 

 

 

(Unaudited)

 

October 1-31, 2014

 

 

$

 

 

101,898

 

 

 

 

 

 

 

 

 

 

 

November 1-30, 2014

 

 

$

 

 

101,898

 

 

 

 

 

 

 

 

 

 

 

December 1-31, 2014

 

 

$

 

 

101,898

 

Total

 

 

$

 

 

 

 

 

45



Table of Contents

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

32

 

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

 

 

 

101.INS

 

XBRL Instance Document*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema*

 

 

 

101.CAL

 

XBRL Extension Calculation Linkbase*

 

 

 

101.DEF

 

XBRL Extension Definition Linkbase*

 

 

 

101.LAB

 

XBRL Extension Labels Linkbase*

 

 

 

101.PRE

 

XBRL Extension Presentation Linkbase*

 

 

 


*

 

Filed herewith.

**

 

Furnished herewith.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

PEOPLES FEDERAL BANCSHARES, INC.

 

 

 

 

 

 

Date:  February 6, 2015

 

 

/s/ Maurice H. Sullivan, Jr.

 

 

 

Maurice H. Sullivan, Jr.

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

 

 

 

Date:  February 6, 2015

 

 

/s/ Christopher Lake

 

 

 

Christopher Lake

 

 

 

Senior Vice President and Chief Financial Officer

 

47