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, 2010
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ____________________
Commission File No. 333-165525
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 NO X .
--- ---
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 NO .
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] 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 NO X .
--- ---
No shares of the Registrant's common stock, par value $0.01 per share, were
issued and outstanding as of June 27, 2010.
Peoples Federal Bancshares, Inc.
FORM 10-Q
Index
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Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2010 (unaudited)
and September 30, 2009 1
Consolidated Statements of Income for the Three Months Ended
and Six Months Ended March 31, 2010 and 2009 (unaudited) 2
Consolidated Statements of Changes in Equity for the Six Months Ended
March 31, 2010 and 2009 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 2010 and 2009 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. [Reserved] 20
Item 5. Other Information 20
Item 6. Exhibits 21
Signature Page 21
EXPLANATORY NOTE
Peoples Federal Bancshares, Inc., a Maryland corporation (the
"Registrant"), was formed on March 11, 2010 to serve as the stock holding
company for Peoples Federal Savings Bank as part of the mutual-to-stock
conversion of Peoples Federal MHC (the "MHC"). As of March 31, 2010, the
conversion had not been completed, and, as of that date, the Registrant had no
assets or liabilities, and had not conducted any business other than that of an
organizational nature. Accordingly, financial and other information of the MHC
is included in this Quarterly Report.
Part I. Financial Information
Item 1. Consolidated Financial Statements
PEOPLES FEDERAL MHC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 2010 September 30, 2009
-------------- ------------------
(unaudited)
(In Thousands)
ASSETS
- ------
Cash and due from banks $ 9,254 $ 9,491
Interest-bearing demand deposits with other banks and
money market mutual funds 38,832 13,954
Federal funds sold 14,689 14,980
Federal Home Loan Bank - overnight deposit 27,374 50,209
---------- ----------
Total cash and cash equivalents 90,149 88,634
Investments in available-for-sale securities (at fair value) 3,808 6,328
Federal Home Loan Bank stock, at cost 4,339 4,339
Loans, net of allowance for loan losses of $3,084 as of March 31,
2010 (unaudited) and $3,204 as of September 30, 2009 366,413 362,667
Premises and equipment 3,375 3,473
Accrued interest receivable 1,472 1,544
Cash surrender value of life insurance policies 11,465 11,249
Deferred income tax asset, net 3,424 3,394
Other assets 3,302 1,200
---------- ----------
Total assets $ 487,747 $ 482,828
========== ==========
LIABILITIES AND EQUITY
- ----------------------
Deposits:
Noninterest-bearing $ 30,184 $ 30,489
Interest-bearing 347,675 335,975
---------- ----------
Total deposits 377,859 366,464
Federal Home Loan Bank advances 51,000 58,000
Other liabilities 6,380 7,421
---------- ----------
Total liabilities 435,239 431,885
---------- ----------
Equity:
Retained earnings 52,489 50,770
Accumulated other comprehensive income 19 173
---------- ----------
Total equity 52,508 50,943
---------- ----------
Total liabilities and equity $ 487,747 $ 482,828
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
1
PEOPLES FEDERAL MHC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three Months Six Months Ended
Ended March 31, March 31,
2010 2009 2010 2009
---- ---- ---- ----
(In Thousands)
(unaudited)
Interest and dividend income:
Interest and fees on loans $ 5,486 $ 5,456 $ 10,617 $ 11,177
Interest on debt securities:
Taxable 11 183 70 413
Other interest 18 4 35 11
Dividends on Federal Home Loan Bank stock -- -- -- 23
--------- ---------- ---------- ---------
Total interest and dividend income 5,515 5,643 10,722 11,624
--------- --------- ---------- ---------
Interest expense:
Interest on deposits 1,149 1,486 2,469 3,165
Interest on Federal Home Loan Bank advances 419 645 892 1,320
--------- --------- ---------- ---------
Total interest expense 1,568 2,131 3,361 4,485
------- --------- ---------- ---------
Net interest and dividend income 3,947 3,512 7,361 7,139
Provision for loan losses 300 --- 300 ---
--------- --------- ---------- ----------
Net interest and dividend income
after provision for loan losses 3,647 3,512 7,061 7,139
--------- --------- ---------- ---------
Noninterest income:
Customer service fees 197 194 406 409
Loan servicing fees 25 7 51 22
Net gain on sales of mortgage loans 7 44 80 45
Net gain on sales of available-for-sale securities --- 67 210 67
Income on cash surrender value of life insurance 116 98 216 200
Other income 26 11 59 32
--------- --------- ---------- ---------
Total noninterest income 371 421 1,022 775
--------- --------- ---------- ---------
Noninterest expense:
Salaries and employee benefits 1,652 1,747 3,397 3,354
Occupancy expense 212 199 404 372
Equipment expense 100 103 206 210
Professional fees 59 99 184 202
Advertising expense 32 31 74 107
Data processing expense 185 231 303 387
Deposit insurance expense 123 47 238 94
Other expense 256 183 464 359
--------- --------- ---------- ---------
Total noninterest expense 2,619 2,640 5,270 5,085
--------- --------- ---------- ---------
Income before income taxes 1,399 1,293 2,813 2,829
Income taxes 538 465 1,094 1,067
--------- --------- ---------- ---------
Net income $ 861 $ 828 $ 1,719 $ 1,762
========= ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
2
PEOPLES FEDERAL MHC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
--------------------------------------------
For the Six Months Ended March 31, 2010 and 2009 (unaudited)
------------------------------------------------------------
(In Thousands)
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
-------- -------------- -----
Balance, September 30, 2008 $ 48,366 $ (92) $ 48,274
Comprehensive income:
Net income 1,762 -- --
Net change in unrealized holding loss on available-for-sale
securities, net of tax effect -- 346 --
Comprehensive income -- -- 2,108
-------- ------ ---------
Balance, March 31, 2009 (unaudited) $ 50,128 $ 254 $ 50,382
======== ====== =========
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 (unaudited) $ 52,489 $ 19 $ 52,508
======== ====== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
PEOPLES FEDERAL MHC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended March 31,
---------------
2010 2009
---- ----
(In Thousands)
(unaudited)
Cash flows from operating activities:
Net income $ 1,719 $ 1,762
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Amortization of securities, net 2 9
Net gain on sales of available-for-sale securities (210) (67)
Provision for loan losses 300 --
Change in net deferred loan fees (219) 44
Depreciation and amortization 198 66
Decrease in accrued interest receivable 72 203
Income on cash surrender value of life insurance (216) (200)
Increase in other assets (2,186) (344)
Decrease in accrued expenses and other liabilities (1,002) (1,085)
Decrease (increase) in prepaid income taxes 45 (226)
Deferred income tax expense 74 84
-------- --------
Net cash (used in) provided by operating activities (1,423) 246
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (3,000) --
Proceeds from sales of available-for-sale securities 4,839 3,067
Proceeds from maturities, payments and calls of
available-for-sale securities 631 5,621
Loan originations and principal collections, net 21,005 8,478
Loans purchased (24,837) (2,950)
Recoveries of loans previously charged off 5 --
Capital expenditures (100) (80)
-------- --------
Net cash (used in) provided by investing activities (1,457) 14,136
--------- --------
4
PEOPLES FEDERAL MHC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Six Months
Ended March 31,
---------------
2010 2009
---- ----
(In Thousands)
(unaudited)
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 16,388 27,529
Net Decrease in time deposits (4,993) (11,274)
Proceeds from Federal Home Loan Bank advances 10,000 ---
Repayment of Federal Home Loan Bank advances (17,000) (7,042)
---------- --------
Net cash provided by financing activities 4,395 9,213
--------- --------
Net increase in cash and cash equivalents 1,515 23,595
Cash and cash equivalents at beginning of period 88,634 17,339
--------- --------
Cash and cash equivalents at end of period $ 90,149 $ 40,934
========= ========
Supplemental disclosures:
Interest paid $ 3,388 $ 4,432
Income taxes paid 975 1,209
5
PEOPLES FEDERAL MHC AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Peoples Federal MHC (the Company), a federally chartered mutual holding company,
and its wholly-owned subsidiary, Peoples Federal Bancorp, Inc. (the Bancorp), a
federally chartered holding company, were formed on May 17, 2005. The Bancorp
owns 100 percent of Peoples Federal Savings Bank (the Bank).
The Bank is a federally chartered bank which was incorporated in 1888 and 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.
NOTE 2 - BASIS OF PRESENTATION
- ------------------------------
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.
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, 2010 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2010. The accompanying condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
Peoples Federal Bancshares, Inc.'s Prospectus dated May 14, 2010 for the period
ended September 30, 2009.
The allowance for loan losses is a significant accounting policy and is
presented in the Peoples Federal Bancshares, Inc.'s Prospectus dated May 14,
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.
7
NOTE 3 - RECENT PRONOUNCEMENTS
- ------------------------------
In June 2009, the Financial Accounting Standards Board ("FASB") issued an update
to Accounting Standard Codification 105-10, "Generally Accepted Accounting
Principles." This standard establishes the FASB Accounting Standard Codification
("Codification" or "ASC") as the source of authoritative U.S. GAAP recognized by
the FASB for nongovernmental entities. The Codification is effective for interim
and annual periods ending after September 15, 2009. The Codification is a
reorganization of existing U.S. GAAP and does not change existing U.S. GAAP. The
Company adopted this standard during the third quarter of 2009. The adoption had
no impact on The Company's financial position or results of operations.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets", and SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)." These standards are effective for the first interim reporting period of
2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a
qualifying special-purpose entity ("QSPE") and changes some of the requirements
for derecognizing financial assets. SFAS No. 167 amends the consolidation
guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the
exemption for QSPEs from the new guidance, (b) shift the determination of which
enterprise should consolidate a variable interest entity ("VIE") to a current
control approach, such that an entity that has both the power to make decisions
and right to receive benefits or absorb losses that could potentially be
significant, will consolidate a VIE, and (c) change when it is necessary to
reassess who should consolidate a VIE. The Company is evaluating the impact that
these standards will have on its financial statements.
In August 2009, the FASB issued Accounting Standards Update ("ASU") 2009-05,
"Measuring Liabilities at Fair Value," which updates ASC 820-10, "Fair Value
Measurements and Disclosures." The updated guidance clarifies that the fair
value of a liability can be measured in relation to the quoted price of the
liability when it trades as an asset in an active market, without adjusting the
price for restrictions that prevent the sale of the liability. This guidance is
effective beginning October 1, 2009. The Company does not expect that the
guidance will change its valuation techniques for measuring liabilities at fair
value.
In May 2009, the FASB updated ASC 855, "Subsequent Events." ASC 855 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The Company adopted this guidance during 2009. In
accordance with the update, the Company evaluates subsequent events through the
date its financial statements are issued. The adoption of this guidance did not
have an impact on the Company's financial position or results of operations.
In April 2009, the FASB updated ASC 320-10, "Investments - Debt and Equity
Securities." The guidance amends the other-than-temporary impairment ("OTTI")
guidance for debt securities. If the fair value of a debt security is less than
its amortized cost basis at the measurement date, the updated guidance requires
the Company to determine whether it has the intent to sell the debt security or
whether it is more likely than not it will be required to sell the debt security
before the recovery of its amortized cost basis. If either condition is met, an
entity must recognize full impairment. For all other debt securities that are
considered other-than-temporarily impaired and do not meet either condition, the
guidance requires that the credit loss portion of impairment be recognized in
earnings and the total impairment related to all other factors be recorded in
other comprehensive income. In addition, the guidance requires additional
disclosures regarding impairments on debt and equity securities. The Company
adopted this guidance effective April 1, 2009. The adoption of this guidance did
not have an impact on the Company's financial position or results of operations.
In April 2009, the FASB updated ASC 820-10, "Fair Value Measurements and
Disclosures" to provide guidance on determining fair value when the volume and
level of activity for the asset or liability have significantly decreased and
identifying transactions that are not orderly. This issuance provides guidance
on estimating fair value when there has been a significant decrease in the
volume and level of activity for the asset or liability and for identifying
transactions that may not be orderly. The guidance requires entities to disclose
the inputs and valuation techniques used to measure fair value and to discuss
changes in valuation techniques and related inputs, if any, in both interim and
annual periods. The Company adopted this guidance during 2009 and the adoption
did not have a material impact on the Company's financial position and results
of operations. The enhanced disclosures related to this guidance are included in
Note 7, "Fair Value Measurements."
7
In April 2009, the FASB updated ASC 825-10 "Financial Instruments." This update
amends the fair value disclosure guidance in ASC 825-10-50 and requires an
entity to disclose the fair value of its financial instruments in interim
reporting periods as well as in annual financial statements. The methods and
significant assumptions used to estimate the fair value of financial instruments
and any changes in methods and assumptions used during the reporting period are
also required to be disclosed both on an interim and annual basis. The Company
adopted this guidance during 2009. The required disclosures have been included
in Note 7, "Fair Value Measurements."
In February 2008, the FASB updated ASC 860, "Transfers and Servicing." This
guidance clarifies how the transferor and transferee should separately account
for a transfer of a financial asset and a related repurchase financing if
certain criteria are met. This guidance became effective October 1, 2009. The
adoption of this guidance did not have a material effect on The Company's
results of operations or financial position.
In December 2007, the FASB updated ASC 805, "Business Combinations." The updated
guidance significantly changes the accounting for business combinations. Under
ASC 805, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. It also amends the accounting treatment for certain specific
items including acquisition costs and non controlling minority interests and
includes a substantial number of new disclosure requirements. ASC 805 applies
prospectively to business combinations for which the acquisition date is on or
after October 1, 2009. The adoption of this statement did not have a material
impact on The Company's financial condition and results of operations.
In March 2010, the FASB issued ASU 2010-11, "Scope Exception Related to Embedded
Credit Derivatives." The ASU clarifies that certain embedded derivatives, such
as those contained in certain securitizations, CDOs and structured notes, should
be considered embedded credit derivatives subject to potential bifurcation and
separate fair value accounting. The ASU allows any beneficial interest issued by
a securitization vehicle to be accounted for under the fair value option at
transition. At transition, the Company may elect to reclassify various debt
securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or
available-for-sale (AFS) to trading. The new rules are effective July 1, 2010.
The Company is currently analyzing the impact of the changes to determine the
population of instruments that may be reclassified to trading upon adoption.
In January 2010, the FASB issued ASU 2010-06, "Improving Disclosures about Fair
Value Measurements." The ASU requires disclosing the amounts of significant
transfers in and out of Level 1 and 2 of the fair value hierarchy and describing
the reasons for the transfers. The disclosures are effective for reporting
periods beginning after December 15, 2009. The Company adopted ASU 2010-06 as of
January 1, 2010. The required disclosures are included in Note 7. Additionally,
disclosures of the gross purchases, sales, issuances and settlements activity in
the Level 3 of the fair value measurement hierarchy will be required for fiscal
years beginning after December 15, 2010.
NOTE 4 - PLAN OF CONVERSION AND REORGANIZATION
- ----------------------------------------------
On February 16, 2010, the Board of Directors of the Company approved a plan of
conversion and reorganization (the "Plan") under which the Company would convert
from a mutual holding company to a stock holding company. The Plan was
subsequently amended on March 11, 2010 and May 3, 2010. The conversion to a
stock holding company is subject to approval of the depositors and borrower
members of the Bank and of the Office of Thrift Supervision (OTS) and includes
the filing of a registration statement with the U.S. Securities and Exchange
Commission by Peoples Federal Bancshares, Inc. (the "New Holding Company"). If
such approvals are obtained, the Bank will become the wholly owned subsidiary of
the New Holding Company and the New Holding Company will issue and sell shares
of its capital stock to eligible depositors and borrower members of the Bank and
the public pursuant to an independent valuation appraisal of the Bank and the
New Holding Company on a converted basis that has been conducted by an
independent appraisal firm that is experienced in appraising financial
institutions in connection with mutual to stock conversions.
The cost of conversion and issuing the capital stock will be deferred and
deducted from the proceeds of the offering. In the event the conversion and
offering are not completed, any deferred costs will be charged to operations.
Through March 31, 2010, the Company had incurred approximately $220,000
(unaudited) in conversion costs, which are included in prepaid expenses and
other assets on the consolidated balance sheet.
In connection with the Plan, the New Holding Company plans to establish the
Peoples Federal Savings Bank Charitable Foundation (the "Foundation"). The
Foundation will be funded with up to 8.0% of the New Holding Company's stock
that is outstanding upon completion of the conversion.
8
In accordance with OTS regulations, at the time of the conversion from a mutual
holding company to a stock holding company, the New Holding 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.
9
NOTE 5 - 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, 2010 (unaudited):
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 3,000 $ --- $ 12 $ 2,988
Mortgage-backed securities 776 44 --- 820
-------- ------- ------- --------
$ 3,776 $ 44 $ 12 $ 3,808
======== ======= ======= ========
September 30, 2009:
Mortgage-backed securities $ 6,037 $ 291 $ -- $ 6,328
-------- ------- ------- --------
$ 6,037 $ 291 $ -- $ 6,328
======== ======= ======= ========
The Company did not have any temporarily impaired investments at September 30,
2009.
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, 2010 (unaudited):
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 2,988 $ (12) $ - $ - $ 2,988 $ (12)
------- ------- -------- ------- -------- ------
Total temporarily impaired securities $ 2,988 $ (12) $ - $ - $ 2,988 $ (12)
======= ======= ======= ======= ======== ======
10
NOTE 6 - NONACCRUAL AND IMPAIRED LOANS
- --------------------------------------
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue:
March 31, September 30,
2010 2009
----------------- --------------------
(In Thousands)
(unaudited)
Nonaccrual loans $ 1,549 $ 5,341
======== ========
Accruing loans which are 90 days or more overdue $ 0 $ 384
======== =======
Information about loans that meet the definition of an impaired loan in ASC
310-10-35, "Receivables - Loans and Debt Securities Acquired with Deteriorated
Credit Quality - Subsequent Measurement," is as follows:
March 31, September 30,
-------------------------------- -------------------------------
2010 2009
-------------------------------- -------------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
------------- ------------- ------------- -------------
(unaudited)
(In Thousands)
Loans for which there is a
related allowance for credit
losses $ --- $ --- $ 1,540 $ 40
Loans for which there is
no related allowance for
credit losses 2,787 --- 4,958 --
------------- ------------- ------------- -------------
Totals $ 2,787 $ --- $ 6,498 $ 40
============= ============= ============= =============
11
NOTE 7 - FAIR VALUE MEASUREMENTS
- ---------------------------------
The following summarizes assets measured at fair value for the period ending
March 31, 2010 (unaudited) and September 30, 2009.
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, 2010 Level 1 Level 2 Level 3
---------------- -------------------- ----------------- ----------------
(In Thousands)
(unaudited)
Trading securities $ 666 $ 666 $ - $ -
Securities available-for-sale $ 3,808 - 3,808 -
----------- -------- -------- ----------
Totals $ 4,474 $ 666 $ 3,808 $ -
=========== ======== ======== ----------
Fair Value Measurements at Reporting Date Using:
-------------------------------------------------------------
Quoted Prices in Significant Significant
Active Markets for Other Observable Unobservable
Identical Assets Inputs Inputs
September 30, 2009 Level 1 Level 2 Level 3
------------------ -------------------- ----------------- ----------------
(In Thousands)
Securities available-for-sale $ 6,328 $ -- $ 6,328 $ --
----------- --------- -------- -----------
Totals $ 6,328 $ -- $ 6,328 $ --
=========== ======== ======== ===========
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, 2010 (unaudited) and September 30, 2009, 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, 2010 Level 1 Level 2 Level 3
---------------- -------------------- ----------------- ----------------
(In Thousands)
(unaudited)
Impaired loans $ --- $ --- $ --- $ ---
----------- --------- -------- -----------
Totals $ --- $ --- $ --- $ ---
=========== ========= ======== ===========
Fair Value Measurements at Reporting Date Using:
-------------------------------------------------------------
Quoted Prices in Significant Significant
Active Markets for Other Observable Unobservable
Identical Assets Inputs Inputs
September 30, 2009 Level 1 Level 2 Level 3
------------------ -------------------- ----------------- ----------------
(In Thousands)
Securities available-for-sale $ 1,500 $ -- $ 1,500 $ --
----------- --------- -------- -----------
Totals $ 1,500 $ -- $ 1,500 $ --
=========== ========= ======== ===========
There were no significant transfers in and out of Level 1 and 2 during the six
months ended March 31, 2010.
12
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
September 30,
--------------------
March 31, 2010 2009
---------------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- --------- ----------
(In Thousands)
(unaudited)
Financial assets:
Cash and cash equivalents $ 90,149 $ 90,149 $ 88,634 $ 88,634
Trading securities 666 666 637 637
Available-for-sale securities 3,808 3,808 6,328 6,328
Federal Home Loan Bank stock 4,339 4,339 4,339 4,339
Loans, net 366,413 360,071 362,667 358,003
Accrued interest receivable 1,472 1,472 1,544 1,544
Financial liabilities:
Deposits 377,859 377,544 366,464 367,209
Federal Home Loan Bank advances 51,000 51,875 58,000 59,354
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Management's discussion and analysis of the financial condition and results of
operations at and for three and six months ended March 31, 2010 and 2009 is
intended to assist in understanding the financial condition and results of
operations of the Company. 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 investments
securities, foreclosed property, and premise and equipment. In addition the
company recognized losses on its investments 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
The expenses the Company incurs in operating its business consist of salaries
and employee benefits, occupancy, 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 premise
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,
office supplies, postage, telephone and other miscellaneous operating expenses.
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:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
14
o 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 prospectus.
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:
o general economic conditions, either nationally or in our market areas,
that are worse than expected;
o competition among depository and other financial institutions;
o inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
o adverse changes in the securities markets;
o changes in laws or government regulations or policies affecting
financial institutions, including changes in regulatory fees and
capital requirements;
o our ability to enter new markets successfully and capitalize on growth
opportunities;
o our ability to successfully integrate acquired entities, if any;
o changes in consumer spending, borrowing and savings habits;
o 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;
o changes in our organization, compensation and benefit plans;
o changes in our financial condition or results of operations that
reduce capital available to pay dividends; and
o 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
There are no material changes to the critical accounting policies disclosed
in Peoples Federal Bancshares, Inc.'s Prospectus dated May 14, 2010, as filed
with the Securities and Exchange Commission pursuant to Securities Act Rule
424(b)(3) on May 24, 2010.
Comparison of Financial Condition at March 31, 2010 and September 30, 2009
At March 31, 2010, our total assets were $487.7 million, an increase of
$4.9 million, or 1.0%, from our total assets of $482.8 million at September 30,
2009. Loans, net increased $3.7 million, or 1.0%, to $366.4 million at March 31,
2010 from $362.7 million at September 30, 2009. Investments in
available-for-sale securities declined to $3.8 million at March 31, 2010 from
$6.3 million at September 30, 2009, due primarily to principal repayments and
sales of these securities. At March 31, 2010, cash and due from banks totaled
$90.1 million as compared to $88.6 million at September 30, 2009, representing a
$1.5 million, or 1.7% increase.
15
Deposits increased by $11.4 million, or 3.1%, to $377.9 million at March
31, 2010 from $366.5 million at September 30, 2009. The increase resulted in
part from an increase in money market accounts to $162.2 million at March 31,
2010, from $148.3 million at September 30, 2009, offset partially by a decrease
in our certificates of deposit to $107.4 million at March 31, 2010 from $112.3
million at September 30, 2009.
Borrowings, consisting of FHLB advances, decreased $7.0 million to $51.0
million at March 31, 2010 from $58.0 million at September 30, 2009 as we used
loan repayments to pay down these borrowings.
Total equity increased to $52.5 million at March 31, 2010 from $50.9
million at September 30, 2009. The increase resulted primarily from net income
of $1.7 million for the six months ended March 31, 2010. Total equity was also
impacted by $154,000 in other comprehensive loss. Other comprehensive loss
consisted of a decrease in net unrealized gains, net of tax, on
available-for-sale securities. The change in net unrealized gains or losses on
securities classified as available-for-sale is affected by market interest rates
and other conditions and, therefore, can fluctuate daily. Other comprehensive
income or loss does not include changes in fair value of other financial
instruments reflected on the balance sheet.
Comparison of Operating Results for the Six Months Ended March 31, 2010 and
March 31, 2009
General. We recorded net income of $1.7 million for the six months ended
March 31, 2010 compared to net income of $1.8 million for the six months ended
March 31, 2009 as net interest and dividend income increased period over period
to $7.4 million from $7.1 million. Although noninterest income increased to $1.0
million for the 2010 six month period from $775,000 for the 2009 six month
period, this increase was offset by a $185,000 increase in noninterest expense
to $5.3 million for the six months ended March 31, 2010 from $5.1 million from
the year earlier period.
Interest and Dividend Income. Interest and dividend income decreased
$902,000 to $10.7 million for the six months ended March 31, 2010 from $11.6
million for the six months ended March 31, 2009. Average interest-earning assets
increased to $454.4 million for the 2010 period from $409.2 million for the 2009
period; however, the average yield on interest-earning assets decreased 96 basis
points to 4.72% from 5.68% during the periods. The decrease in market interest
rates contributed to the downward re-pricing of a portion of our existing assets
and to lower rates for new assets.
Interest income on loans decreased to $10.6 million for the six months
ended March 31, 2010 from $11.2 million for the six months ended March 31, 2009,
as the average balance of our loans decreased to $366.2 million from $366.9
million, reflecting management's decision to reduce our one- to four-family
residential mortgage loan portfolio in the low interest rate environment, and
the average yield on loans decreased to 5.80% from 6.09%. The decrease in
average yield on our loan portfolio reflected the impact of decreases in
interest rates on our adjustable-rate loan products, as well as decreased rates
on newly originated loans based on lower market interest rates. Interest income
on taxable investment securities decreased to $70,000 for the six months ended
March 31, 2010 from $413,000 for the six months ended March 31, 2009, reflecting
the significant decrease in the average balance of such securities to $3.3
million from $19.1 million. The average yield on such securities declined
slightly to 4.31% for the six months ended March 31, 2010 from 4.32% for the
same period one year earlier.
Interest Expense. Interest expense decreased $1.1 million, or 25.1%, to
$3.4 million for the six months ended March 31, 2010 from $4.5 million for the
six months ended March 31, 2009. The decrease reflected an 88 basis point
decrease in the average rate paid on deposits and borrowings in the 2010 period
to 1.70%, compared to an average rate paid of 2.58% in the 2009 period, which
more than offset an increase of $47.0 million in the average balance of such
deposits and borrowings to $394.5 million for the 2010 period from $347.5
million during the 2009 period.
Interest expense on money market accounts increased to $1.1 million for the
six months ended March 31, 2010 from $765,000 for the six months ended March 31,
2009, an increase of $373,000, or 48.7%, reflecting a $95.2 million increase in
the average balance of these accounts during the 2010 period to $156.2 million,
from an average balance of $61.0 million during the year earlier period,
resulting from our competitive pricing of these accounts. The average cost of
these accounts decreased to 1.46% for the six months ended March 31, 2010 from
2.51% for the 2009 period. Interest expense on certificates of deposit decreased
to $1.1 million for the six months ended March 31, 2010 from $2.1 million for
the six months ended March 31, 2009, as the average balance of such certificates
decreased to $109.2 million from $136.7 million, and the average rate paid on
these certificates decreased to 2.01% for the six months ended March 31, 2010
from 3.13% for the six months ended March 31, 2009. The decrease in average
balances of our certificates of deposit resulted primarily from our customers
16
seeking higher returns in our money market accounts which we competitively
priced, while the decrease in the average cost of such certificates and other
deposits reflected the re-pricing in response to interest rate cuts initiated by
the Federal Reserve Board and the lower market interest rates resulting from
such cuts.
Interest expense on borrowings, which were solely advances from the Federal
Home Loan Bank of Boston, was $892,000 for the six months ended March 31, 2010
versus $1.3 million for the six months ended March 31, 2009 due to lower average
balances and rates paid on such borrowings.
Net Interest and Dividend Income. Net interest and dividend income
increased to $7.4 million for the six months ended March 31, 2010 from $7.1
million for the six months ended March 31, 2009. The increase was due to lower
interest expense and, in part, to the increase in the average balance of our
income-earning assets, including net loans, over the period, offset in part by
the impact of lower market interest rates on our loan portfolio, greater than
60% of which has adjustable rates of interest. Our interest rate spread and net
interest margin both decreased period to period. The interest rate spread and
net interest margin were 3.02% and 3.24%, respectively, during the six months
ended March 31, 2010, compared to 3.10% and 3.49% for the six months ended March
31, 2009. Additionally, the ratio of our average interest-earning assets to
average interest-bearing liabilities decreased to 115.18% during the six ended
March 31, 2010 from 117.78% during the six months ended March 31, 2009. The
decreases in our interest rate spread, net interest margin and ratio of our
average interest-earning assets to average interest-bearing liabilities all
reflect our decision to reduce our exposure to fixed-rate loans during the
low-interest rate environment and to increase our liquidity through increased
cash and cash equivalents.
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 loans 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 nonperforming
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.
Based on the above factors, we recorded a $300,000 provision for loan
losses for the six months ended March 31, 2010 as compared to no provision for
the six months ended March 31, 2009. The allowance for loan losses was $3.1
million or 0.83% of total loans at March 31, 2010 compared to $3.2 million, or
0.86% of total loans at March 31, 2009. Total non-performing assets decreased
substantially to $1.6 million at March 31, 2010 from $3.1 million at March 31,
2009. The significant decline in non-performing assets resulted from (i) two
non-performing loans totaling $2.0 million being paid off and collected in full
during the quarter ended March 31, 2010, and (ii) the Bank recognizing loan
charge-offs totaling $371,000 during the quarter ending March 31, 2010.
While we used the same methodology in assessing the allowances for both
periods, we increased the impact of qualitative factors in the first quarter of
fiscal 2010 to reflect further deterioration in the economy. To the best of our
knowledge, we have recorded all losses that are both probable and reasonably
estimable for the six months ended March 31, 2010 and 2009.
Noninterest Income. Noninterest income increased to $1.0 million for the
six months ended March 31, 2010 from $775,000 for the six months ended March 31,
2009. The increase in noninterest income was due to a gain of $210,000 on the
sale of approximately $4.6 million of short-term, mortgage-backed securities and
a gain of $80,000 on loan sales to Freddie Mac. These sales reflected
management's decision to reduce our interest rate risk profile in a low interest
rate environment by reducing our securities portfolio and increasing our
liquidity position.
Noninterest Expense. Noninterest expense increased $185,000, or 3.6%, to
$5.3 million for the six month period ended March 31, 2010 from $5.1 million for
the six month period ended March 31, 2009. The increase in noninterest expense
was primarily attributable to increases in salaries and employee benefits (which
increased to $3.40 million from $3.35 million), occupancy expense (which
increased to $404,000 from $372,000), FDIC insurance premiums (which increased
to $238,000 from $94,000) and other expenses (which increased to $464,000 from
$359,000). These increases were partially offset by decreases in data processing
expense (which decreased to $303,000 from $387,000), professional fees (which
decreased to $184,000 from $202,000), advertising expense (which decreased to
$74,000 from $107,000) and equipment expense (which decreased to $206,000 from
$210,000).
17
Income Tax Expense. The provision for income taxes was $1.1 million for the
six months ended March 31, 2010 compared to $1.1 million for the six months
ended March 31, 2009, reflecting pre-tax income in the 2010 period of $2.8
million versus pre-tax income of $2.8 million for the 2009 period. Our effective
tax rate was 38.9% for the six months ended March 31, 2010 compared to 37.7% for
the six months ended March 31, 2009.
Comparison of Operating Results for the Three Months Ended March 31, 2010 and
March 31, 2009
General. We recorded net income of $861,000 for the three months ended
March 31, 2010 compared to net income of $828,000 for the three months ended
March 31, 2009 as net interest and dividend income increased period over period
to $4.0 million from $3.5 million and noninterest expense decreased to $2.6
million for the three months ended March 31, 2010 from $2.6 million for the year
earlier period, offset partially by a decrease in noninterest income to $371,000
for the 2010 quarter from $421,000 for the 2009 quarter.
Interest and Dividend Income. Interest and dividend income decreased to
$5.5 million for the three months ended March 31, 2010 from $5.6 million for the
three months ended March 31, 2009. Average interest-earning assets increased to
$442.0 million for the 2010 period compared to $411.0 million for the 2009
period; however, the average yield on interest-earning assets decreased to 4.99%
from 5.49% during the periods. The decrease in market interest rates contributed
to the downward re-pricing of a portion of our existing assets and to lower
rates for new assets.
Interest income on loans remained unchanged at $5.4 million for both three
month periods. The average balance of our loans increased to $370.1 million for
the three month period ended March 31, 2010 from $363.7 million for the three
month period ended March 31, 2009. The average yield on loans decreased to 5.93%
from 5.99%. The decrease in average yield on our loan portfolio reflected the
impact of decreases in interest rates on our adjustable-rate loan products, as
well as decreased rates on newly originated loans based on lower market interest
rates. Interest income on taxable investment securities decreased to $11,000 for
the three months ended March 31, 2010 from $183,000 for the three months ended
March 31, 2009, reflecting the significant decrease in the average balance of
such securities to $1.1 million from $16.7 million. The average yield on such
securities decreased to 4.15% for the quarter ended March 31, 2010 from 4.38%
for the quarter ended March 31, 2009.
Interest Expense. Interest expense decreased $563,000, or 26.4%, to $1.6
million for the three months ended March 31, 2010 from $2.1 million for the
three months ended March 31, 2009. The decrease reflected a decrease in the
average rate paid on deposits and borrowings in the 2010 period to 1.60%,
compared to an average rate paid of 2.45% in the 2009 period, which more than
offset an increase of $45.1 million in the average balance of such deposits and
borrowings to $393.2 million for the 2010 quarter versus $348.0 million during
the 2009 quarter.
Interest expense on money market accounts increased to $536,000 for the
quarter ended March 31, 2010 from $385,000 for the quarter ended March 31, 2009,
an increase of $151,000, or 39.2%, reflecting a $91.2 million increase in the
average balance of these accounts during the March 31, 2010 quarter to $157.6
million, from an average balance of $66.4 million during the quarter ended March
31, 2009. The average cost of these accounts decreased to 1.36% for the quarter
ended March 31, 2010 from 2.32% for the 2009 quarter. Interest expense on
certificates of deposit decreased to $506,000 for the three months ended March
31, 2010 from $972,000 for the three months ended March 31, 2009, as the average
balance of such certificates decreased to $108.0 million from $132.6 million,
and the average rate paid on these certificates decreased to 1.87% for the
quarter ended March 31, 2010 from 2.93% for the quarter ended March 31, 2009.
The decrease in the average balance of our certificates of deposit resulted
primarily from our customers seeking higher returns in our money market accounts
which we competitively priced, while the decrease in the average cost of such
certificates and other deposits reflected lower market interest rates.
Interest expense on borrowings, which were solely advances from the Federal
Home Loan Bank of Boston, were $419,000 for the quarter ended March 31, 2010
versus $645,000 for the year earlier period, reflecting a lower average balance
of borrowings during the 2010 period.
Net Interest and Dividend Income. Net interest and dividend income
increased to $4.0 million for the three months ended March 31, 2010 from $3.5
million for the three months ended March 31, 2009. The increase in net interest
income in the quarter ended March 31, 2010 was positively impacted by the
recovery of $335,000 of delinquent interest on two nonperforming loans, as well
as the impact of lower market interest rates on our deposit portfolio, offset in
part by the impact of lower market interest rates on our loan portfolio, greater
than 60% of which have adjustable rates of interest, and the change in the
overall mix of our interest-earning assets. Our interest rate spread and net
interest margin both increased period to period. The interest rate spread and
net interest margin were 3.39% and 3.57%, respectively, during the quarter ended
March 31, 2010, compared to 3.04% and 3.42% for the 2009 quarter. Additionally,
the ratio of our average interest-earning assets to average interest-bearing
18
liabilities decreased to 112.42% during the quarter ended March 31, 2010 from
118.10% during the quarter ended March 31, 2009. The decreases in our average
interest-earning assets to average interest-bearing liabilities reflects our
decision to reduce our exposure to fixed-rate loans during the low-interest rate
environment and to increase the Bank's liquidity through increased cash and cash
equivalents.
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 loans 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 nonperforming
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.
Based on the above factors, we recorded a provision for loan losses of
$300,000 for the three months ended March 31, 2010 as compared to no recorded
provision for loan losses for the three months ended March 31, 2009. The
allowance for loan losses was $3.1 million, or 0.83%, of total loans at March
31, 2010 compared to $3.2 million, or 0.86%, of total loans at March 31, 2009.
Total non-performing assets were $1.6 million at March 31, 2010 compared to $3.1
million at March 31, 2009, reflecting the payoff and collection in full of two
non-performing loans totaling $2.0 million and the Bank recognizing loan
charge-offs totaling $371,000 during the quarter ending March 31, 2010. While we
used the same methodology in assessing the allowances for both periods, we
increased the impact of qualitative factors in the first quarter of fiscal 2010
to reflect further deterioration in the economy. To the best of our knowledge,
we have recorded all losses that are both probable and reasonably estimable for
the three months ended March 31, 2010 and 2009.
Noninterest Income. Noninterest income decreased to $371,000 for the three
months ended March 31, 2010 from $421,000 for the three months ended March 31,
2009. The decrease in noninterest income was due to a reduction in the gain on
the sale on securities to $0 for the three months ended March 31, 2010 from
$67,000 for the three months ended March 31, 2009. Also contributing to the
decline was a decrease in the gain from the sales of mortgage loans to $7,000
for the three months ended March 31, 2010 from $44,000 for the three months
ended March 31, 2009.
Noninterest Expense. Noninterest expense decreased $81,000, or 3.0%, to
$2.6 million for the three month period ended March 31, 2010 from $2.6 million
for the three month period ended March 31, 2009. The decrease in noninterest
expense was primarily attributable to decreases in salaries and employee
benefits (which decreased to $1.6 million from $1.7 million), professional fees
expense (which decreased to $59,000 from $99,000), data processing fees (which
decreased to $185,000 from $231,000) and equipment expense (which decreased to
$100,000 from $103,000). These decreases were partially offset by increases in
FDIC insurance premiums (which increased to $123,000 from $47,000), occupancy
expense (which increased to $212,000 from $199,000), other expense (which
increased to $256,000 from $183,000) and advertising expense (which increased
slightly to $32,000 from $31,000).
Income Tax Expense. The provision for income taxes was $538,000 for the
three months ended March 31, 2010 compared to $465,000 for the three months
ended March 31, 2009, reflecting slightly higher pre-tax income in the 2010
quarter of $1.4 million versus pre-tax income of $1.3 million for the 2009
quarter and higher effective tax rates. Our effective tax rate was 38.4% for the
three months ended March 31, 2010 compared to 36.0% for the three months ended
March 31, 2009.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Registrant is a smaller reporting company.
19
ITEM 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and the Senior Vice President and Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act
of 1934, as amended) as of March 31, 2010. Based on that evaluation, the
Company's management, including the Chief Executive Officer and the Senior Vice
President and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective.
During the quarter ended March 31, 2010, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries 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
Not applicable, as the Registrant is a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) There were no sales of unregistered securities during the period
covered by this Report.
(b) Not applicable.
(c) There were no issuer repurchases of securities during the period
covered by this Report.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved]
Item 5. Other Information
None.
Item 6. Exhibits
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 Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
20
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: June 28, 2010 /s/ Maurice H. Sullivan, Jr.
------------------------------------
Maurice H. Sullivan, Jr.
Chief Executive Officer
Date: June 28, 2010 /s/ Christopher Lake
------------------------------------
Christopher Lake
Senior Vice President and Chief
Financial Officer
21
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Maurice H. Sullivan, Jr., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Peoples Federal
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and
other financial information included in this report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 28, 2010 /s/ Maurice H. Sullivan, Jr.
----------------------------
Maurice H. Sullivan, Jr.
Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher Lake, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Peoples Federal
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and
other financial information included in this report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 28, 2010 /s/ Christopher Lake
--------------------
Christopher Lake
Senior Vice President and Chief
Financial Officer
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Maurice H. Sullivan, Jr., Chief Executive Officer of Peoples Federal
Bancshares, Inc., (the "Company") and Christopher Lake, Senior Vice President
and Chief Financial Officer of the Company, each certify in his capacity as an
officer of the Company that he has reviewed the quarterly report on Form 10-Q
for the quarter ended March 31, 2010 (the "Report") and that to the best of his
knowledge:
1. the Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: June 28, 2010 /s/ Maurice H. Sullivan, Jr.
----------------------------
Maurice H. Sullivan, Jr.
Chief Executive Officer
Date: June 28, 2010 /s/ Christopher Lake
---------------------
Christopher Lake
Senior Vice President and Chief
Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.