Attached files

file filename
EX-32 - EXHIBIT 32 - Peoples Federal Bancshares, Inc.ex32.htm
EX-31.1 - EXHIBIT 31.1 - Peoples Federal Bancshares, Inc.ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Peoples Federal Bancshares, Inc.ex31-2.htm
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011
OR
o           Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to ______________________

Commission File No. 001-34801

Peoples Federal Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Maryland
27-2814821
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
435 Market Street, Brighton, Massachusetts
02135
(Address of Principal Executive Offices)
Zip Code
   
(617) 254-0707
(Registrant’s telephone number)



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 o       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
o
 
Non-accelerated filer
o
Smaller reporting company
x
 
(Do not check if smaller reporting company)
   

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.
 
7,141,500 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of March 31, 2011.


 
 

 


 
Peoples Federal Bancshares, Inc.
 
FORM 10-Q
 
Index
 

     
   
Page
  Part I. Financial Information
     
 
     
 
1
     
 
2
     
 
3
     
 
4
     
 
6
     
20
27
27
     
Part II. Other Information
     
28
28
28
28
28
28
28
 
29
 


 
 

 
 

Part I. Financial Information
 
Item 1.                      Consolidated Financial Statements
 
PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

   
March 31, 2011
   
September 30, 2010
 
   
(unaudited)
       
 
 
(In Thousands, except share date)
 
ASSETS
           
Cash and due from banks
  $ 9,359     $ 9,154  
Interest-bearing demand deposits with other banks and
               
     money market mutual funds
    40,285       66,888  
Federal funds sold
    8,154       12,505  
Federal Home Loan Bank - overnight deposit
    8,422       25,316  
               Total cash and cash equivalents
    66,220       113,863  
Investments in available-for-sale securities (at fair value)
    31,407       23,596  
Federal Home Loan Bank stock, at cost
    4,339       4,339  
Loans, net of allowance for loan losses of $3,318 as of March 31,
               
     2011 (unaudited) and $3,203 as of September 30, 2010
    393,682       377,664  
Loans held-for-sale
    0       260  
Other real estate owned
    551       795  
Premises and equipment
    3,192       3,257  
Accrued interest receivable
    1,506       1,589  
Cash surrender value of life insurance policies
    18,409       11,670  
Deferred income tax asset, net
    5,488       5,647  
Other assets
    3,761       3,257  
               Total assets
  $ 528,555     $ 545,937  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits:
               
     Noninterest-bearing
  $ 34,100     $ 35,359  
     Interest-bearing
    348,059       355,480  
               Total deposits
    382,159       390,839  
Federal Home Loan Bank advances
    23,000       33,000  
Other liabilities
    6,911       7,738  
               Total liabilities
    412,070       431,577  
                 
Stockholders’ Equity:
               
     Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
           
     Common stock, $.01, par value, 100,000,000 shares authorized, 7,141,500
               
               shares issued and outstanding
    71       71  
     Additional paid-in-capital
    69,370       69,331  
     Retained earnings
    52,407       50,606  
     Accumulated other comprehensive (loss) income
    (17 )     65  
     Unearned ESOP shares
    (5,346 )     (5,713 )
               Total stockholders’ equity
    116,485       114,360  
               Total liabilities and stockholders’ equity
  $ 528,555     $ 545,937  
                 


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


 
1

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF INCOME
 

 
 
Three Months
   
Six Months Ended
 
 
 
Ended March 31,
   
March 31,
 
 
 
2011
   
2010
   
2011
   
2010
 
 
 
(In Thousands, except share date)
 
 
 
(unaudited)
 
Interest and dividend income:
                       
     Interest and fees on loans
  $ 5,059     $ 5,486     $ 10,135     $ 10,617  
     Interest on debt securities:
                               
          Taxable
    69       11       143       70  
     Other interest
    29       18       74       35  
     Dividends on Federal Home Loan Bank stock
    3             3        
               Total interest and dividend income
    5,160       5,515       10,355       10,722  
Interest expense:
                               
     Interest on deposits
    835       1,149       1,726       2,469  
     Interest on Federal Home Loan Bank advances
    184       419       428       892  
               Total interest expense
    1,019       1,568       2,154       3,361  
               Net interest and dividend income
    4,141       3,947       8,201       7,361  
Provision for loan losses
    160       300       220       300  
               Net interest and dividend income
                               
                    after provision for loan losses
    3,981       3,647       7,981       7,061  
Noninterest income:
                               
     Customer service fees
    192       197       401       406  
     Loan servicing fees
    26       25       52       51  
     Net gain on sales of mortgage loans
    24       7       123       80  
     Net gain on sales of available-for-sale securities
                      210  
     Income on cash surrender value of life insurance
    123       116       240       216  
     Other income
    72       26       160       59  
                    Total noninterest income
    437       371       976       1,022  
Noninterest expense:
                               
     Salaries and employee benefits
    1,965       1,652       3,968       3,397  
     Occupancy expense
    230       212       439       404  
     Equipment expense
    104       100       213       206  
     Professional fees
    217       59       330       184  
     Advertising expense
    30       32       63       74  
     Data processing expense
    190       185       376       303  
     Deposit insurance expense
    119       123       242       238  
     Other expense
    306       256       629       464  
               Total noninterest expense
    3,161       2,619       6,260       5,270  
               Income before income taxes
    1,257       1,399       2,697       2,813  
Income tax expense
    433       538       896       1,094  
               Net income
  $ 824     $ 861     $ 1,801     $ 1,719  
                                 
Earnings per common share:
                               
               Basic
  $ 0.12       N/A     $ 0.27       N/A  
               Diluted
  $ 0.12       N/A     $ 0.27       N/A  


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

 
2

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Six Months Ended March 31, 2011 and 2010 (unaudited)
(In Thousands)


                           
Accumulated
       
         
Additional
         
Unearned
   
Other
       
   
Common
   
Paid-in
   
Retained
   
ESOP
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Shares
   
(Loss) Income
   
Total
 
Balance, September 30, 2009
  $     $     $ 50,770     $     $ 173     $ 50,943  
Comprehensive income:
                                               
     Net income
                1,719                    
     Net change in unrealized holding
                                               
          gain on available-for-sale
                                               
          securities, net of tax effect
                            (154 )      
               Comprehensive income
                                  1,565  
Balance, March 31, 2010
  $     $     $ 52,489     $     $ 19     $ 52,508  
                                                 
                                                 
                                                 
Balance, September 30, 2010
  $ 71     $ 69,331     $ 50,606     $ (5,713 )   $ 65     $ 114,360  
Comprehensive income:
                                               
     Net income
                1,801                    
     Net change in unrealized holding
                                               
          gain on available-for-sale
                                               
          securities, net of tax effect
                            (82 )      
               Comprehensive income
                                  1,719  
ESOP shares committed to be released
          39             367             406  
Balance, March 31, 2011
  $ 71     $ 69,370     $ 52,407     $ (5,346 )   $ ( 17 )   $ 116,485  



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




 
3

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Six Months
 
 
 
Ended March 31,
 
 
 
2011
   
2010
 
 
 
(In Thousands)
 
 
 
(unaudited)
 
Cash flows from operating activities:
           
     Net income
  $ 1,801     $ 1,719  
     Adjustments to reconcile net income to net cash
               
          provided by (used in) operating activities:
               
           Change in loans held for sale
    260        
               Amortization of securities, net
          2  
               Net gain on sales of available-for-sale securities
          (210 )
               Provision for loan losses
    220       300  
               Change in net deferred loan fees
    (63 )     (219 )
               Depreciation and amortization
    179       198  
               Write down of other real estate owned
    61        
               Unearned Compensation ESOP
    406        
               Decrease in accrued interest receivable
    83       72  
               Income on cash surrender value of life insurance
    (489 )     (216 )
               Increase in other assets
    (335 )     (2,186 )
               Decrease in accrued expenses and other liabilities
    (827 )     (1,002 )
               Increase (decrease) in prepaid income taxes
    (169 )     45  
               Deferred income tax expense
    216       74  
                 
     Net cash provided by (used in) operating activities
    1,343       (1,423 )
                 
Cash flows from investing activities:
               
     Purchases of available-for-sale securities
    (18,000 )     (3,000 )
     Proceeds from sales of available-for-sale securities
          4,839  
     Proceeds from maturities, payments and calls of
               
          available-for-sale securities
    10,050       631  
     Loan originations and principal collections, net
    (2,602 )     21,005  
     Loans purchased
    (13,806 )     (24,837 )
     Investments in life insurance policies
    (6,250 )      
    Recoveries of loans previously charged off
    2       5  
    Capital expenditures
    (114 )     (100 )
    Proceeds from sale of other real estate owned
    414        
                 
     Net cash used in investing activities
    (30,306 )     (1,457 )
                 


 
4

 

PEOPLES FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

 
 
Six Months
 
 
 
Ended March 31,
 
 
 
2011
   
2010
 
 
 
(In Thousands)
 
 
 
(unaudited)
 
Cash flows from financing activities:
           
     Net (decrease) increase in demand deposits, NOW and
           
          savings accounts
    (9,316 )     16,388  
     Net increase(decrease) in time deposits
    636       (4,993 )
     Proceeds from Federal Home Loan Bank advances
          10,000  
     Repayment of Federal Home Loan Bank advances
    (10,000 )     (17,000 )
 
               
     Net cash (used in) provided by financing activities
    (18,680 )     4,395  
                 
Net (decrease) increase in cash and cash equivalents
    (47,643 )     1,515  
Cash and cash equivalents at beginning of period
    113,863       88,634  
Cash and cash equivalents at end of period
  $ 66,220     $ 90,149  
                 
                 
Supplemental disclosures:
               
     Interest paid
  $ 2,153     $ 3,388  
     Income taxes paid
    415       975  
 
               
Transfer from loans to other
               
real estate owned
    231        
 
 

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


 
5

 

PEOPLES FEDERAL BANCSHARES, INC AND SUBSIDIARY
 
Notes to Consolidated Financial Statements
 
NOTE 1 - NATURE OF OPERATIONS
 
Peoples Federal Savings Bank (Bank), was organized in 1888, and in 2005 reorganized into a mutual holding company structure.  The Bank is headquartered in Brighton, Massachusetts.  The Bank operates its business from six banking offices located in Brighton, Allston, West Roxbury, Jamaica Plain, Brookline and Norwood.  The Bank 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.
 
On July 6, 2010, in accordance with a Plan of Conversion (Conversion), Peoples Federal MHC, the Bank’s former federally chartered mutual holding company completed a mutual-to-stock conversion pursuant to which the Bank became the wholly owned subsidiary of Peoples Federal Bancshares, Inc. (Company), a stock holding company.  In connection with the Conversion, the Company sold 6,612,500 shares of common stock, at an offering price of $10 per share, and issued an additional 529,000 shares of its common stock to the Peoples Federal Savings Bank Charitable Foundation, resulting in an aggregate issuance of 7,141,500 shares of common stock.  The Company’s stock began trading on July 7, 2010 on the NASDAQ Stock Market LLC, under the symbol “PEOP.”
 
The net proceeds from the stock offering, net of offering costs of $2,012,000, amounted to $64,112,000.
 
As set forth above, in connection with the Conversion, the Bank established and funded the Peoples Federal Savings Bank Charitable Foundation (Foundation) with 529,000 shares of the Company’s common stock, which was equal to 8% of the shares issued in the stock offering.  This contribution resulted in recognition of expense in the quarter ended September 30, 2010, based on the $10 per share offering price.  The Foundation supports charitable causes and community development activities in the Bank’s areas of operations.
 
Also, in connection with the Conversion, the Bank established an employee stock ownership plan (ESOP), which purchased 571,320 shares of the Company’s common stock at a price of $10 per share.
 
In accordance with OTS regulations, at the time of the Conversion from a mutual holding company to a stock holding company, the Company will substantially restrict retained earnings by establishing a liquidation account and the Bank will establish a parallel liquidation account.  The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion.  The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account.  In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.  The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
 
NOTE 2 - BASIS OF PRESENTATION
 
The consolidated financial statements include the accounts of Peoples Federal Bancshares, Inc., and its wholly owned subsidiary, Peoples Federal Savings Bank as of March 31, 2011(unaudited) and September 30, 2010.  For the six months ended March 31, 2011 (unaudited), the consolidated financial statements include the accounts of Peoples Federal MHC and its wholly-owned subsidiary, Peoples Federal Bancorp, Inc. and its wholly-owned subsidiary, Peoples Federal Savings Bank.  All significant intercompany accounts and transactions have been eliminated in the consolidation.
 
In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company and the statements of income and changes in equity and cash flows for the interim periods presented.
 

 
6

 

The financial statements have been prepared in accordance with generally accepted accounting principles.  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 the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.
 
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted.  Operating results for the six month period ended March 31, 2011 (unaudited) are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Peoples Federal Bancshares, Inc.’s Form 10-K dated September 30, 2010.
 
The allowance for loan losses is a significant accounting policy and is presented in Peoples Federal Bancshares, Inc.’s Form 10-K dated September 30, 2010 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 3 - RECENT PRONOUNCEMENTS
 
In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other.”   This ASU address when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.   For public entities, the amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2010.
 
In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.”   This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earning disclosure requirements for business combinations.    The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.
 
In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance or clarification to help creditors determine whether a restructuring constitutes a troubled debt restructuring. For public entities, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired, and should measure impairment on those receivables prospectively for the first interim or annual period beginning on or after June 15, 2011.  Additional disclosures are also required under this ASU.  The Company is currently evaluating the impact of this ASU.  The ASU is expected to cause more loan modifications to be classified as Troubled Debt Restructurings and the Company is evaluating its modification programs and practices in light of the new ASU.
 
In April 2011, the FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The objective of this ASU is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  This ASU prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  Early adoption is not permitted.   The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
 

 
7

 

NOTE 4 - INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES
 
Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost of investment securities and their approximate fair values are as follows:
 
 
 
Amortized
   
Gross
   
Gross
       
 
 
Cost
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Basis
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
March  31, 2011 (unaudited):
                       
     Debt securities issued by U.S. government corporations
                       
         and agencies
  $ 30,990     $ 19     $ 91     $ 30,918  
     Mortgage-backed securities
    446       43             489  
 
  $ 31,436     $ 62     $ 91     $ 31,407  
                                 
                                 
 
                               
September 30, 2010:
                               
   Debt securities issued by U.S. government corporations
                               
         and agencies
  $ 23,000     $ 66     $     $ 23,066  
     Mortgage-backed securities
    486       44             530  
 
  $ 23,486     $ 110     $     $ 23,596  
 
The scheduled maturities of debt securities were as follows as of March 31, 2011.  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.
 
   
Fair
 
   
Value
 
   
(In Thousands)
 
Within one year
  $ -  
Over one through five years
    30,918  
After five through ten years
    -  
Over ten years
    -  
Mortgage-backed securities
    489  
    $ 31,407  

During the six months ended March 31, 2011, there were no sales of securities available-for-sale.   During the six months ended March 31, 2010, proceeds from sales of securities available-for-sale amounted to $4,839,000.  Gross realized gains on those sales amounted to $210,000 with no realized losses.
 
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows:
 
 
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(In Thousands)
 
March 31, 2011 (unaudited):
                                   
     Debt securities issued by U.S. government
                                   
          corporations and agencies
  $ 19,904     $ 91     $     $     $ 19,904     $ 91  
               Total temporarily impaired securities
  $ 19,904     $ 91     $     $     $ 19,904     $ 91  



 
8

 

Unrealized losses on debt securities as March 31, 2011 (unaudited) are due to changes in market interest rates and are deemed to be temporary.  The Company has the intent and ability to hold the securities until cost recovery occurs.
The Company did not have any impaired or temporarily impaired investments at September 30, 2010.
 
NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
LOANS:
 
Loans receivable that management has the intent and ability to hold until maturity or pay off are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.
 
Interest on loans is recognized on a simple interest basis.
 
Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan’s yield.  The Company is amortizing these amounts over the contractual life of the related loans.
 
Residential real estate loans are generally placed on nonaccrual 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 nonaccrual 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 and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash.  When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans.  A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.
 
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.
 
ALLOWANCE FOR LOAN LOSSES:
 
We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology.  All loan losses are charged to the allowance for loan losses and all recoveries are credited to it.  Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.  We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP.  The allowance for loan losses consists primarily of two components:
 
(1)           Specific allowances established for impaired loans (as defined by GAAP).  The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the fair value of the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and
 

 
9

 

(2)           General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans.  The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We apply an estimated loss rate to each loan group.  The loss rates applied are based upon our loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.  The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:
 
 
·
changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);
 
 
·
changes in the number and amount of non-accrual loans, watch list loans and past due loans;
 
 
·
changes in national, state and local economic trends;
 
 
·
changes in the types of loans in the loan portfolio;
 
 
·
changes in the experience and ability of personnel and management in the mortgage loan origination and loan servicing departments;
 
 
·
changes in the value of underlying collateral for collateral dependent loans;
 
 
·
changes in lending strategies; and
 
 
·
changes in lending policies and procedures.
 
Risk characteristics relevant to each portfolio segment are as follows:
 
Residential real estate and multi-family real estate loans – All loans in this segment are collateralized by owner-occupied and non-owner occupied residential and multifamily real estate.   Repayment is dependent on the credit quality of the individual borrower and/or cash flow derived from the property.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Multi-family loans generally present a higher level of risk than our loans which are secured by one to four family loans.
 
Commercial real estate – Loans in this segment are primarily income-producing properties throughout the greater Boston area.   Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property.    Management obtains rent rolls annually and continually monitors the cash flows on these loans.
 
Construction loans – Loans in this segment primarily include speculative residential, multi-family, and commercial mixed use 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.
 
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.
 
Consumer loans – Loans in this segment are both secured and unsecured and repayment is dependent on the credit quality of the individual borrower.
 
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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
 

 
10

 

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.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
 
Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
 
In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.
 
We evaluate the allowance for loan losses based upon the combined total of the specific and general components.  Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase.  Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
 
Loans consisted of the following as of March 31, 2011 (unaudited) and September 30, 2010:
 
 
 
March 31, 2011
   
September 30, 2010
 
 
 
(In Thousands)
 
Mortgage loans:
           
     Residential loans:
           
          One-to-four family
  $ 246,252     $ 239,257  
          Multi-family
    60,919       47,880  
     Commercial real estate
    65,830       67,901  
     Construction loans
    17,762       19,384  
               Total mortgage loans
    390,763       374,422  
Consumer loans
    2,010       2,113  
Commercial loans
    4,284       4,452  
 
    397,057       380,987  
Deferred loan origination fees, net
    (57 )     (120 )
Allowance for loan losses
    (3,318 )     (3,203 )
               Loans, net
  $ 393,682     $ 377,664  


 
11

 

Changes in the allowance for loan losses were as follows for the three and six months ended March 31, 2011 (unaudited) and March 31, 2010 (unaudited):

   
Periods Ended March 31,
 
   
Three months Ended
   
Six months Ended
 
   
2011
   
2010
   
2011
   
2010
 
   
(Dollars in thousands)
 
Balance at beginning of period
  $ 3,213     $ 3,150     $ 3,203     $ 3,204  
Provision for loan losses
    160       300       220       300  
Charge-offs:
                               
Mortgage loans:
                               
One- to four-family residential
                15       78  
Multi-family
    35                    
Commercial real estate
          338       61       314  
Construction
                       
Consumer loans
    8       10       17       10  
Commercial loans
    13       23       13       23  
Total charge-offs
    56       371       106       425  
                                 
Recoveries:
                               
Mortgage loans:
                               
One- to four-family residential
                       
Multi-family
                       
Commercial real estate
                       
Construction
                       
Consumer loans
    1       5       1       5  
Commercial loans
                       
Total recoveries
    1       5       1       5  
Net charge-offs
    55       366       105       420  
                                 
Balance at end of period
  $ 3,318     $ 3,084     $ 3,318     $ 3,084  
                                 



 
12

 

Further information pertaining to the allowance for loan losses at March 31, 2011 follows:
 
   
Residential Loans
                               
   
One to Four
Family
   
Multi
Family
Loans
   
Commercial
Real Estate
   
Construction
Loans
   
Consumer
   
Commercial
   
Total
 
(In Thousands)
(Unaudited)
 
                                           
Amount of allowance for loan losses for loans deemed to be impaired
  $     $     $     $     $     $     $  
Amount of allowance for loans not deemed to be impaired
  $ 1,274     $ 689     $ 674     $ 617     $ 21     $ 43     $ 3,318  
Loans deemed to be impaired as of
March 31, 2011
  $ 1,093     $     $ 2,653     $ 1,868     $     $     $ 5,614  
Loans not deemed to be impaired as of March 31, 2011
  $ 245,159     $ 60,919     $ 63,177     $ 15,894     $ 2,010     $ 4,284     $ 391,443  
Total Loans
  $ 246,252     $ 60,919     $ 65,830     $ 17,762     $ 2,010     $ 4,284     $ 397,057  
 
The following is a summary of past due and non accrual loans at March 31, 2011:
 
   
Age Analysis of Past Due Loans
 
   
As of March 31, 2011
 
                 
   
30 to 59
Days
   
60 to 89
Days
   
Greater
than 90
Days
   
Total Past
Due
   
Total
Current
   
Total Loans
   
Non-Accrual
Loans
 
   
(In Thousands)
(Unaudited)
 
One to four family
  $ 624     $ 805     $ 1,471     $ 2,900     $ 243,352     $ 246,252     $ 1,471  
Multi-family
    1,604                   1,604       59,315       60,919        
Commercial real estate
    854       1,975             2,829       63,001       65,830        
Construction loans
                            17,762       17,762        
Total mortgage loans
    3,082       2,780       1,471       7,333       383,430       390,763       1,471  
Consumer loans
    42       15       20       77       1,933       2,010       20  
Commercial loans
                            4,284       4,284        
Total
  $ 3,124     $ 2,795     $ 1,491     $ 7,410     $ 389,647     $ 397,057     $ 1,491  

At March 31, 2011 (unaudited), the Company had no loans that were 90 days or more delinquent and which were accruing interest.


 
13

 

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 follows:
 
   
Impaired Loans
 
       
   
As of March 31, 2011
   
Six months ended March 31, 2011
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest Income
Recognized
 
   
(Dollars in thousands)
(unaudited)
 
With no related allowance recorded:
                             
Mortgage loans:
                             
    One to four family
  $ 1,093     $ 1,093     $     $ 1,093     $ 29  
    Multi family
                             
Commercial real estate
    2,653       2,653             2,823       72  
Construction loans
    1,868       1,868             1,243       46  
Total mortgage loans
    5,614       5,614             5,159       147  
Consumer loans
                             
Commercial loans
                             
Total impaired with no related allowance:
    5,614       5,614             5,159       147  
                                         
With a related allowance recorded:
                                       
Mortgage loans:
                                       
    One to four family
                             
    Multi family
                             
Commercial real estate
                             
Construction loans
                             
Total mortgage loans
                             
Consumer loans
                             
Commercial loans
                             
Total impaired with related allowance:
                             
                                         
Total impaired loans:
  $ 5,614     $ 5,614     $     $ 5,159     $ 147  

   
At or for the year ended September 30, 2010
 
             
   
Recorded
   
Related
 
   
Investment
   
Allowance
 
   
In Impaired
   
For Credit
 
   
Loans
   
Losses
 
             
 
 
(In Thousands)
 
Loans for which there is a
           
     related allowance for credit
           
     losses
  $     $  
                 
Loans for which there is
               
     no related allowance for
               
     credit losses
    4,022        
                 
               Totals
  $ 4,022     $  
                 
Average reported investment
               
in impaired loans during the year
               
ended September 30, 2010
  $ 4,990          

 


 
14

 

CREDIT QUALITY INFORMATION:
 
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 uncollectible “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 rating on all loans.   Semi-annually, the Company engages an independent third-party to review a significant portion of loans within the loan segments.   Management uses the results of these reviews as part of its annual review process.
 

 
15

 

The following table presents the Company’s loans by risk rating at March 31, 2011:
 
   
Credit Risk Profile by Credit Worthiness Category
 
   
As of March 31, 2011
 
       
   
One to Four
Family
   
Multi Family
Loans
   
Commercial
Real Estate
   
Construction
Loans
   
Consumer
   
Commercial
   
Total Loans
 
   
(Dollars in thousands)
(Unaudited)
 
                                           
Pass
  $ 242,927     $ 55,832     $ 62,460     $ 14,117     $ 2,010     $ 4,284     $ 381,630  
Special Mention
    755                     3,645                   4,400  
Substandard
    2,570       5,087       3,370                         11,027  
Doubtful
                                         
Loss
                                         
Total
  $ 246,252     $ 60,919     $ 65,830     $ 17,762     $ 2,010     $ 4,284     $ 397,057  

NOTE 6 - FAIR VALUE MEASUREMENTS
 
ASC 820-10, “Fair Value Measurements and Disclosures,” 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.  Level 1 also includes U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets.  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 March 31, 2011 (unaudited) and September 30, 2010.
 
The Company’s cash instruments 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
 

 
16

 

value measurements consider observable data that may include dealer quotes, market 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 owned values are estimated using level 3 inputs based on management estimates.
 
The following summarizes assets measured at fair value at March  31, 2011 (unaudited) and September 30, 2010.
 
ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

   
Fair Value Measurements at Reporting Date Using:
 
         
Quoted Prices in
   
Significant
   
Significant
 
         
Active Markets for
   
Other Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
   
March 31, 2011
   
Level 1
   
Level 2
   
Level 3
 
(In Thousands)
                       
(unaudited)
                       
Trading securities
  $ 772     $ 772     $     $  
Securities available-for-sale
    31,407             31,407        
    Totals
  $ 32,179     $ 772     $ 31,407     $  
                                 
   
Fair Value Measurements at Reporting Date Using:
 
           
Quoted Prices in
   
Significant
   
Significant
 
           
Active Markets for
   
Other Observable
   
Unobservable
 
           
Identical Assets
   
Inputs
   
Inputs
 
   
September 30, 2010
   
Level 1
   
Level 2
   
Level 3
 
(In Thousands)
                               
Trading securities
  $ 712     $ 712     $     $  
Securities available-for-sale
    23,596             23,596        
    Totals
  $ 24,308     $ 712     $ 23,596     $  


 
17

 

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.  The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at March 31, 2011 (unaudited) and September 30, 2010, for which a nonrecurring change in fair value has been recorded:
 
   
Fair Value Measurements at Reporting Date Using:
 
         
Quoted Prices in
   
Significant
   
Significant
 
         
Active Markets for
   
Other Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
   
March 31, 2011
   
Level 1
   
Level 2
   
Level 3
 
(In Thousands)
                       
(unaudited)
                       
Other real estate owned
  $ 551     $     $     $ 551  
            Totals
  $ 551     $     $     $ 551  
                                 
   
Fair Value Measurements Using
 
   
Significant Unobservable Inputs Level 3
 
                   
Other Real
         
           
Impaired Loans
   
Estate Owned
   
Total
 
(In Thousands)
                               
(unaudited)
                               
Beginning balance, September 30, 2010
          $     $ 551     $ 551  
    Total Losses