10-K 1 d505343d10k.htm FORM 10-K FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended March 31, 2013

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 number: 000-52477

 

 

MAYFLOWER BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Massachusetts   20-8448499

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

30 South Main Street, Middleboro, Massachusetts   02346
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (508) 947-4343

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of Each Class

 

Name of each exchange on which registered

Common Stock, par value $1.00 per share   The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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 filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 definition 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   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   x

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

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of September 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $18.1 million.

The number of shares outstanding of the registrant’s common stock as of June 12, 2013 was 2,064,106.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 


Table of Contents

INDEX

 

          Page  

PART I

     

      Item 1.

   Business      1   

      Item 1A

   Risk Factors      33   

      Item 1B.

   Unresolved Staff Comments      39   

      Item 2.

   Properties      39   

      Item 3.

   Legal Proceedings      39   

      Item 4.

   Mine Safety Disclosures.      39   

PART II

     

      Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      40   

      Item 6.

   Selected Financial Data      41   

      Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      42   

      Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      48   

      Item 8.

   Financial Statements and Supplementary Data      48   

      Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      90   

      Item 9A

   Controls and Procedures      90   

      Item 9B.

   Other Information      92   

PART III

     

      Item 10.

   Directors, Executive Officers and Corporate Governance      92   

      Item 11.

   Executive Compensation      95   

      Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      100   

      Item 13.

   Certain Relationships and Related Transactions, and Director Independence      101   

      Item 14.

   Principal Accountant Fees and Services      102   

PART IV

     

      Item 15.

   Exhibits and Financial Statement Schedules      103   


Table of Contents

PART I

Note on Forward-Looking Statements

This document, as well as other written communications made from time to time by the Company and subsidiaries and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections, such as earnings projections, necessary tax provisions, and business trends) that are considered “forward looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements may be identified by the use of such words as “intend,” “believe,” “expect,” “should,” “planned,” “estimated,” and “potential.” For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA. The Company’s ability to predict future results is inherently uncertain and the Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. These factors include but are not limited to: recent and future regulatory and legislative initiatives by the government; a further slowdown in the national and Massachusetts economies; a further deterioration in asset values locally and nationwide; fluctuations in interest rates; changes in the regulatory environment; increasing competitive pressure in the banking industry; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; continued access to liquidity sources; changes in our borrowers’ performance on loans; changes in critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; changes in the equity and debt securities markets; the effect of additional provision for loan losses; fluctuations of our stock price; the impact of reputation risk created by these developments on such matters as business generation and retention, funding and liquidity; the impact of regulatory restrictions on our ability to receive dividends from our subsidiaries; political developments, wars or other hostilities may disrupt or increase volatility in securities or otherwise affect economic conditions; and the other matters set forth in Item 1A. herein.

The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Item 1. Business

General

The Company. Mayflower Bancorp, Inc. (the “Company”), a Massachusetts corporation, was organized by Mayflower Co-operative Bank (the “Bank”) on October 5, 2006, to acquire all of the capital stock of the Bank as part of the Bank’s reorganization into the holding company form of ownership, which was completed on February 15, 2007. Upon completion of the holding company reorganization, the Company’s common stock, par value $1.00 per share (the “Common Stock”), became registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is a registered bank holding company subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company has no significant assets other than the common stock of the Bank and various other liquid assets in which it invests in the ordinary course of business. For that reason, substantially all of the discussion in this Annual Report on Form 10-K relates to the operations of the Bank and its subsidiaries.

The Bank. The Bank was organized as a Massachusetts chartered co-operative bank in 1889. The primary business of the Bank is to acquire funds in the form of deposits and make permanent and construction mortgage loans on one-to-four family homes and commercial real estate located in its primary market area. Additionally, the Bank makes commercial business loans, consumer loans and offers home equity loans and lines of credit. The Bank also invests a portion of its funds in money market instruments, federal government and agency obligations, municipal obligations, various types of corporate debt and equity securities, and other authorized investments.

The Bank considers its market area to be southeastern Massachusetts, to include a primary focus on Plymouth County. The Bank’s deposits are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”), with additional insurance to the total amount of the deposit provided by

 

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the Share Insurance Fund of The Co-operative Central Bank, a deposit-insuring entity chartered by the Commonwealth of Massachusetts. The Bank is subject to regulation by the Massachusetts Division of Banks (the “Division”) and the FDIC. The Bank’s savings and lending activities are conducted through its main office in Middleboro and seven full-service offices in Plymouth, Wareham, Rochester, Bridgewater, and Lakeville, Massachusetts.

The Bank’s principal sources of income are interest on loans and loan origination fees, interest and dividends on investment securities and short-term investments, loan servicing and other fees, and gains on the sale of investment securities and mortgages. The Bank’s principal expenses are interest paid on deposits and borrowings and general and administrative expenses.

In February 2012, the Company and the Bank changed their fiscal year from April 30 to March 31. As a result of this change, References in this Annual Report on Form 10-K to fiscal year 2012 or fiscal 2012 refer to the eleven-month period from May 1, 2011 through March 31, 2012 and references to fiscal year 2011 or fiscal 2011 refer to the twelve-month period from May 1, 2010 through April 30, 2011. References to fiscal year 2013 or fiscal 2013 refer to the 12-month period from April 1, 2012 through March 31, 2013.

The main offices of the Company and Bank are located at 30 South Main Street, Middleboro, Massachusetts 02346 and their telephone number is (508) 947-4343. The Bank also maintains a website at www.mayflowerbank.com. Information on the Bank’s website should not be considered a part of this Annual Report on Form 10-K.

Proposed Merger

On May 14, 2013, the Company and the Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Independent Bank Corp. (“Independent”), the parent company of Rockland Trust Company (“Rockland”), pursuant to which the Company will merge with and into Independent (the “Merger”). As part of the transaction, the Bank will also merge with and into Rockland. Under the terms of the Merger Agreement, each share of Company common stock, other than shares held by Independent, will convert into the right to receive either (i) $17.50 in cash (the “Cash Consideration”) or (ii) 0.565 shares of Independent common stock (the “Stock Consideration”), all as more fully set forth in the Merger Agreement and subject to the terms and conditions set forth therein. The Merger Agreement provides that 30% of the shares of Company common stock, par value $1.00 per share (the “Common Stock”) issued and outstanding immediately prior to the effective time of the Merger will be exchanged for the Cash Consideration, and 70% of the shares of Common Stock issued and outstanding immediately prior to the effective time of the Merger will be exchanged for the Stock Consideration. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the merger by the holders of at least two-thirds of the outstanding common shares of the Company. If the merger is not consummated under certain circumstances, the Company has agreed to reimburse Independent up to $625,000 for its reasonably documented fees and expenses and to pay Independent a termination fee of $1.5 million; provided however, that any amounts paid in reimbursement will be credited against the termination fee payable. Currently, the Merger is expected to be completed in the fourth quarter of 2013.

Lending Activities

General. With Federal Reserve policymakers focused on pushing down longer term interest rates through their “quantitative easing” program, mortgage rates remained low throughout fiscal year 2013 and residential loan activity maintained the historically strong pace begun in the second half of fiscal 2012. Most of this volume was sold into the secondary market. However, selective purchases of residential fixed-rate mortgages totaling $11.6 million were made to offset the high level of sales and accelerated prepayments from refinance activity, so that for the year ended March 31, 2013, the net result was an overall increase in the loan portfolio of $5.0 million.

 

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The Bank’s loan portfolio totaled $139.3 million as of March 31, 2013, which represented 53.3% of total assets. The Bank offers conventional residential mortgage loans, second mortgages and equity lines of credit on residential properties, commercial real estate mortgages, loans for the construction of residential and commercial properties and commercial business loans. The Bank offers jumbo fixed-rate mortgages intended for its own portfolio and for resale in the secondary market and also makes consumer loans, including secured and unsecured personal loans, automobile and boat loans.

The Bank continues to emphasize the origination of fixed interest rate home mortgages intended for resale and offers adjustable-rate mortgage products, most of which feature a fixed-rate of interest for the first three or five years, and are then adjustable on an annual basis. During the year ended March 31, 2013, the Bank originated mortgage loans of all types totaling $54.1 million, compared to $40.7 million in such loans originated during fiscal 2012. The Bank retains in its portfolio virtually all of its adjustable-rate mortgage originations, and also retains selected fixed-rate mortgage loans in its portfolio, as dictated by market conditions, or in consideration of asset and liability management factors. Fixed-rate mortgages retained in the Bank’s portfolio are typically underwritten in accordance with secondary market guidelines. As of March 31, 2013, the Bank had retained in its portfolio fixed-rate residential first mortgage loans totaling $54.1 million and adjustable-rate residential first mortgage loans totaling $15.2 million.

 

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Analysis of Loan Portfolio

The following table shows the composition of the Bank’s loan portfolio by type of loan and the percentage each type represents of the total loan portfolio at the dates indicated. Except as set forth below, at March 31, 2013, the Bank did not have any concentration of loans exceeding 10% of total loans.

 

     At March 31,     At April 30,  
     2013     2012     2011     2010     2009     2008  
     Amount     Percent           Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Mortgage loans:

                        

Residential conventional

   $ 69,295        48.5   $ 60,691        44.0   $ 48,724        38.4   $ 46,814        38.0   $ 54,706        40.9   $ 51,897        40.5

Commercial real estate

     42,666        29.8        44,273        32.1        43,511        34.3        41,061        33.4        43,404        32.5        37,319        29.1   

Construction

     6,946        4.9        6,605        4.8        6,272        4.9        5,684        4.6        6,589        4.9        8,239        6.4   

Home equity loans

     2,587        1.8        2,821        2.0        3,521        2.8        4,329        3.5        5,521        4.1        5,634        4.4   

Home equity lines of credit

     15,713        11.0        17,271        12.5        17,702        13.9        17,578        14.3        17,447        13.1        19,033        14.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans

     137,207        96.0        131,661        95.4        119,730        94.3        115,466        93.8        127,667        95.5        122,122        95.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial loans

     4,340        3.0        4,578        3.3        5,576        4.4        5,936        4.8        4,301        3.2        4,036        3.1   

Consumer loans

     1,461        1.0        1,745        1.3        1,620        1.3        1,688        1.4        1,755        1.3        2,127        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 143,008        100.0   $ 137,984        100.0     126,926        100.0     123,090        100.0     133,723        100.0     128,285        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less:

                        

Due borrowers on construction

and other loans

     2,553          2,487          1,308          1,453          1,392          1,639     

Net deferred loan origination fees (costs)

     (74       (51       (93       (102       (85       (65  

Allowances for possible loan losses

     1,208          1,217          1,214          1,194          1,305          1,375     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

     3,687          3,653          2,429          2,545          2,612          2,949     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net loans

   $ 139,321        $ 134,331        $ 124,497        $ 120,545        $ 131,111        $ 125,336     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Loan Maturity Analysis. The following table sets forth certain information at March 31, 2013, regarding the dollar amount of loans maturing (based on contractual terms) in the Bank’s portfolio. Demand loans, loans having no schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. Residential, commercial and construction mortgage loans are reported net of amounts due to borrowers.

 

     Due within
one year  after
March 31,
2013
     Due after
1 through
5 years after
March 31,
2013
     Due after
5 years after
March 31,
2013
     Total  
     (In thousands)  

Real estate mortgage loans:

           

Residential conventional

   $ 4       $ 689       $ 68,602       $ 69,295   

Commercial

     3,634         12,985         26,047         42,666   

Construction

     3,073         —           1,320         4,393   

Home equity loans

     358         300         1,929         2,587   

Home equity lines of credit

     —           —           15,713         15,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

   $ 7,069       $ 13,974       $ 113,611       $ 134,654   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other:

           

Consumer

     704         562         195         1,461   

Commercial loans

     3,102         686         552         4,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,806       $ 1,248       $ 747       $ 5,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

The next table shows at March 31, 2013, the dollar amount of all the Bank’s loans due one year or more after March 31, 2013, which have fixed interest rates and have floating or adjustable interest rates.

 

     Fixed-Rate      Floating or
Adjustable Rates
 
     (In thousands)  

Real estate loans:

     

Residential conventional

   $         54,132       $ 15,159   

Commercial

     12,638         26,394   

Construction

     1,087         233   

Home equity loans

     2,229         —     

Home equity lines of credit

     —           15,713   
  

 

 

    

 

 

 

Total mortgage loans

   $ 70,086       $ 57,499   
  

 

 

    

 

 

 

Other:

     

Consumer

     757         —     

Commercial loans

     1,088         150   
  

 

 

    

 

 

 

Total other loans

   $ 1,845       $ 150   
  

 

 

    

 

 

 

Scheduled contractual principal repayments of loans do not necessarily reflect the actual life of such assets. The average life of long-term loans is substantially less than their contractual terms, due to prepayments. In addition, the Bank’s mortgage loans generally give the Bank the right to declare a loan due and payable in the event that, among other things, a borrower sells the real property subject to the mortgage and the loan is not repaid.

Residential Lending. The Bank originates for its portfolio adjustable-rate residential mortgage loans secured by one—to four-family, owner-occupied residences and investment properties and owner-occupied second homes. The Bank also originates fixed-rate loans for sale in the secondary mortgage market, and from time to time has originated fixed-rate loans which it has retained in its portfolio, as dictated by market conditions, or as a function of asset and liability management considerations. Fixed-rate residential loans accounted for $54.1 million, or 78.1%, of the Bank’s total residential conventional mortgage loan portfolio as of March 31, 2013. As of that date, the Bank’s one, three and five-year adjustable-rate residential mortgages totaled $15.2 million, or 21.9%, of the total residential conventional mortgage loan portfolio.

 

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Residential mortgages are generally made in amounts of up to 80% of the appraised value of the property securing the loan. Loans up to 95% of appraised value are available if private mortgage insurance can be obtained in order to reduce the Bank’s exposure. Residential mortgage loans are typically made for terms of up to 30 years. A significant portion of mortgage loans held in the Bank’s portfolio provide for an initial interest rate that is fixed for no longer than 60 months, and the majority of such loans are adjusted thereafter at intervals of twelve months. The Bank utilizes an index that is tied to the rate paid on one-year U.S. Treasury Bills for interest rate adjustments.

In response to customer demand for fixed-rate borrowing, the Bank continues to originate fixed-rate loans. Fixed-rate loans originated may be retained in the Bank’s portfolio, or they may be sold to Fannie Mae with servicing rights retained for which the Bank receives a minimum fee of one quarter of one percent of the outstanding loan balance. During the year ended March 31, 2013, the Bank originated no adjustable-rate mortgage loans and originated fixed-rate mortgage loans amounting to $43.4 million. During the year ended March 31, 2013, the Bank sold $29.1 million of fixed-rate loans in the secondary mortgage market. At March 31, 2013, the Bank held $54.1 million in fixed-rate mortgages of which $790,000 are identified as available for sale.

Interest rates for loans are set internally as a function of the Bank’s cost of funds, competitive pressures, the requirements of the secondary mortgage market and other strategic considerations. These rates are reviewed and revised as necessary. Rate commitments are made to applicants for a period of 45 days. The underwriting of residential first mortgage loans is conducted by the Bank’s mortgage department which conducts and documents an extensive review of the applicant’s employment, income, and previous credit history.

Construction Lending. The Bank has traditionally been involved in construction lending. As of March 31, 2013, the Bank had 25 construction loans outstanding, with $6.9 million committed in construction loan financing, representing 4.9% of the total loan portfolio. On that date, $2.6 million of total committed construction loan financing had not been advanced. The Bank’s construction lending activity is primarily focused on single-family homes and residential development. Construction loans are also extended to individuals for the construction of their primary residences, for which the Bank provides permanent financing. The Bank also extends construction loan financing to builders and developers for the construction of single-family residences and the development of residential subdivisions and condominiums. Additionally, the Bank offers loans for the construction of commercial real estate such as office buildings, retail business development and other commercial properties. At March 31, 2013, the Bank’s average construction loan balance was $176,000 and the single largest construction loan with a commitment outstanding as of March 31, 2013, was for $568,000 ($568,000 advanced as of March 31, 2013) on a single-family home in Duxbury, Massachusetts. Collateral for this construction loan consists of a first mortgage on the real estate which has an appraised value of $905,000 as complete.

Construction loan financing is conducted by the Bank’s mortgage and commercial loan departments which are responsible for underwriting each project according to Bank policy. Typical homeowner’s construction loans are made for a maximum of 80% of completed value. The Bank takes particular care to screen each residential construction loan request to determine that sufficient funds are being committed at closing to ensure the completion of the project and the issuance of an occupancy permit, thereby avoiding the need to supply additional funding for which the borrower may not be qualified. With respect to pre-sold construction loan requests received from builders and developers, the Bank extends financing for a maximum of 80% of completed value. Construction loans without a pre-sale commitment are offered only to experienced builders, usually with loan-to-value ratios of no more than 75%. In some instances, the Bank further reduces this loan-to-value ratio to adequately protect its interests.

Builders’ home construction loans are written for a maximum term of twelve months, during which time the borrower is billed on an interest only basis. Pricing of these loans is individually determined on the basis of competitive and market conditions, the borrower’s experience and relationship with the Bank and the perceived level of risk. Maximum and aggregate loan limits for individual builders and borrowers depend upon market conditions and the applicant’s financial condition. Construction loan proceeds are disbursed in accordance with a Bank-established schedule as work progresses and based upon inspection by the Bank’s Security Committee or duly authorized officer or approved inspector. No funds are released in anticipation of progress or for the acquisition of materials. In the event a construction loan extended to a builder or developer is not paid off within the original term of the note (typically twelve months), the note would generally be extended for an additional six to twelve-month period at an adjusted market rate of interest if the borrower remained current on interest payments to maturity. Contractors and builders doing business with the Bank are encouraged to refer their buyers to the Bank for permanent financing, and in some instances, special financing packages are offered by the Bank to facilitate a permanent relationship.

 

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Commercial Real Estate Lending. The Bank also originates commercial real estate loans for its portfolio, secured by multi-family residences (over four units) and residential apartment complexes, retail buildings, office buildings and other types of commercial real estate. The Bank generally limits its commercial real estate lending activity to its primary market area. As of March 31, 2013, the Bank had $42.7 million in commercial real estate loans outstanding, representing 29.8% of the Bank’s total loans. At that date, the average commercial real estate loan balance was $251,000. The largest commercial real estate exposure at March 31, 2013, was $2.4 million and was secured by residential building lots in Nantucket, Massachusetts, and the limited personal guarantees of the principals. Appraised value of this parcel was approximately $4.6 million. The second largest commercial real estate loan as of March 31, 2013, was for $1.6 million, and was secured by a first mortgage on a mixed use building in Boston’s Back Bay and personal guarantee of the principals. The appraisal acquired in connection with the origination of this loan indicated its value to be approximately $9.7 million. These loans were current at March 31, 2013.

Commercial real estate loans are currently written in an amount not to exceed 75% of the appraised value of the property securing the loan. The personal guarantees of borrowers are required and in some instances additional collateral is taken. The majority of commercial real estate loans in the Bank’s portfolio are written for a term of up to ten years with amortization schedules typically based on a hypothetical term of 15 to 25 years. Interest rates may be fixed for up to seven years, with rate adjustments following the initial fixed period based on a margin over the prime rate, FHLB advance rate or a treasury index. Prepayment penalties are typically required. The underwriting of commercial real estate loans entails review by Bank personnel of all existing and projected income and operating expenses. A detailed evaluation of the creditworthiness of the borrower and the viability of the project in question is also conducted.

Commercial Loans. Commercial loans are of potential benefit to the Bank due to their higher yields and shorter terms and, although entailing greater risk than conventional mortgage, at March 31, 2013 totaled $4.3 million, or 3.0%, of the Bank’s loan portfolio. At that date, 114 commercial business loans were outstanding with an average balance of $38,000, while the largest commercial business loan at that date was a $370,000 term loan for a Plymouth, Massachusetts restaurant. This loan is secured by assets of the business, a junior mortgage on the guarantor’s residence and an SBA guarantee.

The Bank offers various types of commercial business loans including demand loans, time loans, term loans, and commercial lines of credit. These loans are generally written on demand or for terms of from three months to seven years and with fixed rates or variable rates of interest which adjust to a certain percentage (usually 2-4%) above the prime lending rate as reported in The Wall Street Journal. The Bank generally requires that commercial borrowers maintain a depository relationship with the Bank and management seeks to expand the depository relationship to include all other banking activity of its commercial business borrowers.

In conformity with the Bank’s lending policy, all commercial business loan applications are thoroughly screened and reviewed and a total credit package is required before approval. Most of these loans are collateralized by business assets, equipment or real estate and personal guarantees are required.

Consumer Loans, Home Equity Loans and Home Equity Lines of Credit. The Bank’s consumer loan portfolio decreased by $284,000 in the year ended March 31, 2013 and totaled $1.5 million on March 31, 2013, representing 1.0% of the total loan portfolio on that date. These loans had a weighted average yield of 6.25% at March 31, 2013. The Bank offers both secured and unsecured personal loans, automobile loans, short-term loans and overdraft protection. The consumer loan department fully considers all aspects of the application prior to approval or rejection.

The Bank also offers home equity loans and lines of credit which are secured by one—to four-family owner-occupied residences, and second homes. The Bank generally limits this lending activity to its primary market area. The Bank will lend up to 80% of the value of the property securing the loan, less any outstanding first mortgage. The maximum loan amount for home equity loans and lines of credit is $200,000 for loan-to-value ratios up to 75% and $100,000 for loan-to-value ratios up to 80%. Fixed-rate home equity loans are offered with 5 to 20-year terms. As of March 31, 2013, the Bank had $2.6 million outstanding in home equity loans, representing 1.8% of the Bank’s total loans.

 

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Table of Contents

The Bank’s home equity credit line program provides for monthly rate adjustments tied to the prime lending rate reported in The Wall Street Journal, subject to a floor rate as determined from time to time. Previously, the Bank has offered an initial fixed-rate period of up to five years. At March 31, 2013, the outstanding balance of the Bank’s home equity lines was $15.7 million, with a weighted average yield of 3.90%. The underwriting of home equity loans and lines of credit is conducted by the Bank’s consumer loan department using similar credit guidelines and parameters as are used with first mortgage requests.

The Bank believes its commercial business lending and consumer lending programs create diversity and mitigate interest rate sensitivity within its asset mix and offer attractive yields. The Bank is currently emphasizing its lending programs through the activities of its loan officers, branch managers and customer service personnel.

Certain Underwriting Risks. As noted above, a significant portion of residential mortgage loans currently originated by the Bank for its portfolio provide for periodic interest rate adjustments. Despite the benefits of adjustable-rate mortgages to the Bank’s asset and liability management program, such mortgages pose risks because as interest rates rise the underlying payments required from the borrower rise, increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. One of the ways the Bank seeks to protect itself on these loans is by generally limiting loans to 80% of the appraised value of the property and requiring substantially all mortgage loans with loan-to-value ratios in excess of 80% to carry private mortgage insurance. In addition, originating fixed-rate loans for sale in the secondary mortgage market may also involve certain risks as, in periods of rising interest rates, loans originated for sale may depreciate in value prior to their sale if a forward commitment for the sale of such loans has not been arranged. In such cases, the Bank may choose to retain such fixed-rate loans in its portfolio.

Commercial business, construction and commercial real estate financing are generally considered to involve a higher degree of credit risk than long-term financing of residential properties. Although commercial business loans are advantageous to the Bank because of their interest rate sensitivity, they also involve more risk due to the higher potential for default and the difficulty of disposing of the collateral, if any. The Bank’s risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. On commercial real estate loans, the risk to the Bank is primarily attributable to the cash flow from the property being financed or the owner-occupant business. If the cash flow from the property is reduced (e.g., if leases are not obtained or renewed), the borrower’s ability to repay the Bank’s loan may be impaired. In addition, the amount of a commercial real estate loan is typically substantially larger than a residential mortgage loan. As noted, the Bank seeks to protect itself on construction and commercial loans by limiting the loan-to-value ratios to 80% and 75% or less, respectively, depending on the amount of the loan and/or the type of property offered for security, and by requiring the personal guarantees of borrowers.

Origination Fees and Other Fees. The Bank presently receives origination fees on many of the real estate loans it originates. Fees to cover the cost of appraisals and credit reports are also collected. Loan origination income varies with the amount and type of loan made and with competitive and economic conditions. The Bank imposes late charges on all first mortgages loans.

In accordance with Financial Accounting Standards Board (“FASB”) guidance, certain non-refundable fees associated with lending activities, such as origination and commitment fees and discounts, and certain incremental loan origination costs, are deferred and amortized over the life of the loan. As a result of the statement, loan origination fees and costs are deferred from current income recognition and spread as an adjustment to the yield (interest income) on the loans over their lives using the interest method.

 

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Loan Solicitation and Underwriting Procedures. Loan originations are developed by the Bank’s officers, managers, other employees and Board of Directors from a number of sources, including referrals from realtors, builders, community organizations and customers. Consumer loans are solicited from existing depositors and loan customers as well as the community at large.

Applications for all types of loans are taken at all of the Bank’s offices and mortgage loan applications are forwarded to the main office for processing. Mortgage personnel may take applications at other locations to facilitate the application process and customers may also apply on-line. The Bank’s loan underwriting procedures include the use of detailed credit applications, property appraisals or evaluations and verifications of an applicant’s credit history, employment situation and banking relationships. Individual officers may approve loans up to the level of authority granted by the Bank’s Board of Directors. Loan amounts above the individual officers’ limits require Security Committee approval and in certain cases, by the Bank’s Board of Directors. All loans are ratified by the Board of Directors.

Mortgage loan applicants are promptly notified concerning their application by a commitment letter setting forth the terms and conditions of the action thereon. If approved, these commitments include the amount of the loan, interest rate, amortization term, a brief description of the real estate mortgaged to the Bank, the requirement for fire and casualty insurance to be maintained to protect the Bank’s interest and other special conditions as warranted.

Loan Originations and Sale. The Bank makes fixed-rate loans primarily for sale in the secondary mortgage market and adjustable-rate mortgages for its own portfolio. Interest rate commitments up to 45 days are offered to borrowers.

Delinquent Loans, Loans in Foreclosure and Foreclosed Property. Once a loan payment is 15 days past due, the Bank notifies the borrower of the delinquency. Repeated contacts are made if the loan remains in a delinquent status for 30 days or more. While the Bank generally is able to work out satisfactory repayment with a delinquent borrower, the Bank will usually undertake foreclosure proceedings or other collection efforts if the delinquency is not otherwise resolved when payments are 90 days past due. Property acquired by the Bank as a result of foreclosure, by deed in lieu of foreclosure or when the borrower has effectively abandoned the property and the loan meets the criteria of an in-substance foreclosure is classified as “real estate owned” until such time as it is sold or otherwise disposed of.

 

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Table of Contents

The following table sets forth information with respect to the Bank’s nonperforming assets at the dates indicated.

 

     At March 31,     At April 30,  
     2013     2012     2011     2010     2009     2008  
     (Dollars in Thousands)  

Loans accounted for on a nonaccrual basis:

            

Residential mortgages

   $ —        $ 282      $ 1,108      $ —        $ 315      $ 617   

Commercial mortgages

     298        —          456        295        —          —     

Home equity loans and lines of credit

     147        30        139        99        30        —     

Commercial loans

     —          —          —          120        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

   $ 445      $ 312      $ 1,703      $ 514      $ 345      $ 617   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing loans past due 90 days or more:

            

Residential loans

   $ —        $ —        $ —        $ —        $ —        $ —     

Commercial mortgages

     —          250        —          —          —          —     

Home equity loans and lines of credit

     —          —          —          —          —          —     

Commercial loans

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total accruing loans past due 90 days or more

   $ —        $ 250      $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans:

            

Residential loans

   $ —        $ —        $ 761      $ —        $ —        $ —     

Commercial mortgages

     —          —          456        881        595        —     

Home equity loans and lines of credit

     148        60        139        99        —          —     

Commercial loans

     1,808        —          —          120        —          —     

Consumer loans

     —          2         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,956      $ 62      $ 1,356      $ 1,100      $ 595      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total of nonaccruing loans, accruing loans past due 90 days or more and restructured loans

   $ 796      $ 562      $ 1,703      $ 1,100      $ 940      $ 617   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of net loans

     0.57     0.42     1.37     0.91     0.72     0.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other nonperforming assets(1)

   $ 139      $ 194      $ 1,211      $ 1,815      $ 590      $ 605   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other nonperforming assets represent property acquired by the Company through foreclosure. This property is carried at the lower of its fair market value or the principal balance of the related loan.

 

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At March 31, 2013, the Bank had one commercial mortgage and two home equity lines of credit on nonaccrual status.

During the year ended March 31, 2013, gross interest income of $8,000 would have been recorded on mortgage loans accounted for on a nonaccrual basis if such loans had been current through the period; $16,000 of interest income was actually recorded on such loans during the year ended March 31, 2013.

At March 31, 2013, the Bank had 10 loans with a total outstanding principal balance of $3.3 million which were not classified as nonperforming assets, but where information about credit problems of the borrowers has caused management to have concern as to the ability of the borrower to comply with current repayment terms.

While the Bank believes it is holding sufficient collateral and has established reserves in amounts adequate to cover losses that may be incurred upon disposition of its problem assets, there can be no assurance that additional losses will not be incurred. The recent economic recession and its effect on borrowers’ repayment capacities and on the values of properties held as collateral by the Bank could negatively impact the performance of the Bank’s loan portfolio going forward.

Allowance for Possible Loan Losses. The Bank maintains an allowance for possible losses on loans. The allowance for possible loan losses is determined by management quarterly on the basis of several factors including the risk characteristics of the portfolio, the Bank’s charge-off history, current economic conditions and trends in loan delinquencies and charge-offs, and is reviewed and endorsed by the Bank’s Security Committee and the Board of Directors on a quarterly basis. A provision is made if needed to bring the allowance to its recommended level. Estimated losses on specific loans are charged to income when, in the opinion of management, such losses are expected to be incurred. Losses are usually indicated when the net realizable value is determined to be less than the investment in such loans.

Management actively monitors the Bank’s problem assets, formally reviewing identified and potential troubled assets at the Board of Directors level on a monthly basis. Additionally, the Bank regularly reviews its lending policies and maintains conservative limits on loan-to-value ratios on land loans, construction loans to builders and commercial real estate mortgages. However, a continuing downturn in the real estate market and economy in the Bank’s primary market area could result in the Bank experiencing additional loan delinquencies, thereby having a negative impact on the Bank’s interest income and negatively affecting net income in future periods.

At March 31, 2013, the Bank had five impaired loans totaling $2.0 million. The average investment in impaired loans during the fiscal year was $2.0 million and the valuation allowance related to the impaired loans was $241,000. During the year ended March 31, 2013, interest income recognized on the impaired loans was $112,000.

During the year ended March 31, 2013, the Bank made provisions for loan losses totaling $40,000 compared to $228,000 for loan losses for the eleven months ended March 31, 2013, a provision of $201,000 for loan losses for the year ended April 30, 2011. At March 31, 2013, the Bank’s reserve for loan losses totaled $1.2 million. While the Bank believes it has established its reserve for loan losses in accordance with generally accepted accounting principles, there can be no assurance (i) that regulators, in reviewing the Bank’s loan portfolio in the future, will not request that the Bank increase its allowance for possible loan losses, or (ii) that deterioration will not occur in the Bank’s loan portfolio, thereby negatively impacting the Bank’s financial condition and earnings.

Management believes that the present loss allowance is adequate to provide for probable losses based upon evaluation of known and inherent risks in the loan portfolio. In determining the appropriate level for the allowance of loan loss, the Company considers past loss experience, evaluations of underlying collateral, prevailing economic conditions, the nature of the loan portfolio and levels of nonperforming and other classified loans. While management uses the best information available to recognize loan losses, future additions to the allowance may be necessary based on additional increases in nonperforming loans, changes in economic conditions, or for other reasons.

 

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The following table provides an analysis of the allowance for loan losses during the dates indicated.

 

     Year Ended
March  31,
    Eleven
Months
Ended

March  31
    Years Ended April 30,  
     2013     2012     2011     2010     2009     2008  
           (Dollars in thousands)  

Balance at beginning of period

   $ 1,217      $ 1,214      $ 1,194      $ 1,305      $ 1,375      $ 1,673   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

            

Mortgage loans

     —          (124     (123     (264     (78     (300

Other loans

     (57     (107     (130     (68     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (57     (231     (253     (332     (78     (305
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     8        6        72        6        8        7   

Net loans (charged-off) recoveries

     (49     (225     (181     (326     (70     (298
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for possible loan losses

     40        228        201        215        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,208      $ 1,217      $ 1,214      $ 1,194      $ 1,305      $ 1,375   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net (charge-offs) recoveries to average loans outstanding

     (.04 )%      (0.18 )%      (0.14 )%      (0.26 )%      (0.05 )%      (0.22 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

 

    At March 31,     At April 30,  
    2013     2012     2011     2010     2009     2008  
    Amount     Percent
of

Loans in
Category
to
Total
Loans
    Amount     Percent
of
Loans in
Category
to
Total
Loans
    Amount     Percent
of
Loans in
Category
to
Total
Loans
    Amount     Percent
of

Loans in
Category
to
Net
Loans
    Amount     Percent
of

Loans in
Category
to
Total
Loans
    Amount     Percent
of

Loans in
Category
to
Total
Loans
 
    (Dollars in thousands)  

At end of period allocated to:

                       

Residential mortgages

  $ 173        48.5   $ 182        44.0   $ 173        38.4   $ 161        38.0   $ 242        40.9   $ 339        40.5

Commercial mortgages

    640        29.8        585        32.1        635        34.3        639        33.4        706        32.5        591        29.1   

Construction mortgages

    55        4.9        65        4.8        95        4.9        95        4.6        89        4.9        181        6.4   

Home equity loans and lines of credit

    238        12.8        246        14.5        182        16.7        151        17.8        166        17.2        161        19.2   

Commercial loans

    89        3.0        114        3.3        112        4.4        129        4.8        82        3.2        76        3.1   

Consumer loans

    13        1.0        25        1.3        17        1.3        19        1.4        20        1.3        27        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

  $ 1,208        100.0   $ 1,217        100.0   $ 1,214        100.0   $ 1,194        100.0   $ 1,305        100.0   $ 1,375        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Based upon management’s assessment and year-end economic and real estate market conditions, management believes that the allowance for loan losses as of March 31, 2013, is adequate to absorb potential future losses in the Bank’s loan portfolio. However, further deterioration of the real estate market or economy in the Bank’s market area could result in the Bank experiencing increased levels of nonperforming assets and charge-offs, significant provisions for loan losses and a further reduction in net interest income.

Investment Activities

The Bank has authority to invest in a wide range of securities deemed to be prudent, subject to regulatory restrictions which have not significantly limited the Bank’s investment activities. The Bank’s management believes it is proper to maintain an investment portfolio that provides not only a source of income, but also a source of liquidity to meet lending demands and fluctuations in deposit flows. The relative mix of investment securities and loans in the Bank’s portfolio is dependent upon the comparative attractiveness of yields available to the Bank and

 

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demand for various types of loans that it makes as compared to yields on investment securities. At March 31, 2013, the Bank’s portfolio of interest-bearing deposits in banks and investment securities totaled $103.1 million, which represented 39.5% of total assets.

During the year ended March 31, 2013, the Bank’s portfolio of investment and interest-bearing deposits in banks increased by $6.3 million. This increase was comprised of growth of $4.6 million in U.S. Government Agency Obligations, an increase of $2.1 million in mortgage-backed and related securities, and an increase of $329,000 in interest-bearing deposits in banks. Offsetting these increases was a reduction of $335,000 in municipal obligations. Finally, the unrealized gain on securities available-for-sale decreased by $401,000, from $1.3 million at March 31, 2012 to $894,000 at March 31, 2013.

The Bank’s portfolio of fixed-income investment securities consists of instruments offering varying maturities or adjustable interest rates, including interest-bearing deposits in banks, United States Treasury and government agency obligations, investment grade corporate bonds, municipal obligations and money market instruments. The average life to maturity of the Bank’s U.S. Government agency and municipal obligations fixed-income investment portfolio was 5.4 years at March 31, 2013. The Bank’s investment portfolio is managed by the Bank’s President and Treasurer, who make investment decisions (with the assistance of an independent investment advisory firm) for the Bank. For more information on the Bank’s investment portfolio see Note B of Notes to Consolidated Financial Statements.

Investment Portfolio. The following table sets forth the composition of the Bank’s investment portfolio at the dates indicated. For information regarding the classification of investment securities as available for sale or held to maturity see Notes A and B of Notes to Consolidated Financial Statements in this Form 10-K.

 

     At March 31, At April 30,  
     2013      2012      2011      2010  
     Book
Value
     Market
Value
     Book
Value
     Market
Value
     Book
Value
     Market
Value
     Book
Value
     Market
Value
 
     (Dollars in thousands)  

Short-term Investments:

                       

Interest-bearing deposits in banks

   $ 8,931       $ 8,931       $ 8,602       $ 8,602       $ 6,256       $ 6,256       $ 15,914       $ 15,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment Securities:

                    

Bonds and obligations:

                    

U.S. Government agency Obligations

     26,993         27,022         22,398         22,434         25,476         25,421         33,495         33,641   

Mortgage-backed and related securities

     60,029         61,630         57,952         60,169         57,983         59,788         52,888         55,102   

Corporate debt securities

     —           —           —           —           500         501         500         500   

Municipal obligations

     5,534         5,886         5,869         6,280         6,015         6,182         4,638         4,803   

Trust preferred securities

     750         762         750         717         750         732         750         628   

Equity securities

     —           —           —           74         —           126         748         799   

Unrealized gain (loss) on securities available for sale

     894         —           1,295         —           1,180         —           1,350         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

     94,200         95,300         88,264         89,674         91,904         92,750         94,369         95,473   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments and investment securities

   $ 103,131       $ 104,231       $ 96,866       $ 98,276       $ 98,160       $ 99,006       $ 110,283       $ 111,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table sets forth the scheduled maturities, carrying values and average yields for the Bank’s investment portfolio at March 31, 2013

 

    One Year or Less     One to Five Years     Five to Ten Years     More than Ten Years     Total Investment
Portfolio
 
    Book
Value
    Weighted
Average
Yield
    Book
Value
    Weighted
Average
Yield
    Book
Value
    Weighted
Average
Yield
    Book
Value
    Weighted
Average
Yield
    Book
Value
    Weighted
Average
Yield
 
    (Dollars in thousands)  

Securities held to maturity:

               

U.S. Government agency obligations

  $ —          —        $ 7,998        1.01   $ 3,999        1.24   $ —          —        $ 11,997        1.09

Mortgage-backed and related securities (1)

    67        4.16     15,240        3.41     15,678        1.98     —          —          30,985        2.69

Municipal obligations

    —          —          —          —          2,256        3.91     714        3.07     2,970        3.71
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 67        4.16   $ 23,238        2.58   $ 21,933        2.04   $ 714        3.07   $ 45,952        2.34
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Securities available for sale:

               

U.S. Government agency obligations

  $ —          —        $ 13,512        0.99   $ 1,501        1.40   $ —          —        $ 15,013        1.03

Mortgage-backed and related securities (1)

    9        4.00     15,605        2.92     14,147        2.21     —          —          29,761        2.58

Municipal obligations

    —          —          —          —          1,621        2.95     1,091        3.31     2,712        3.09

Trust preferred securities

    —          —          —          —          —          —          762        7.08     762        7.08
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 9        4.00   $ 29,117        2.02   $ 17,269        2.21   $ 1,853        4.86   $ 48,248        2.20
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) For purposes of the maturity table, mortgage-backed and asset-backed securities, which are not due at a single maturity date, have been allocated to maturity groups based on the weighted average estimated life of the underlying collateral.

 

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Table of Contents

Savings Activities and Other Sources of Funds

General. Savings accounts and other types of deposits have traditionally been an important source of funds for use in lending and for other general business purposes. The Bank also derives funds from loan amortization and repayments, sales of securities and loans, and from other operations. The availability of funds is influenced by general interest rates and other market conditions. Scheduled loan repayments are a relatively stable source of funds while deposit inflows and outflows can vary widely and are influenced by prevailing interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer term basis to support expanded lending and investment activity.

Deposits. The Bank’s deposit accounts consist of regular savings, NOW and commercial checking accounts, money market deposit and term certificates of deposit. During the year ended March 31, 2013, deposits, including interest credited, increased by $9.1 million to $235.7 million from $226.6 million at March 31, 2012. As of March 31, 2013, 16.7% of the Bank’s total deposits were in money market deposit accounts, 21.9% were in regular savings accounts, 33.1% were in term certificates of deposit and 28.3% were in NOW and demand deposit accounts. At March 31, 2013, retirement account balances totaled $15.4 million, or 6.5% of total deposits.

Substantially all of the Bank’s deposit accounts are derived from customers who reside or work in its market area, and from businesses located in that area. The Bank also encourages borrowers to maintain deposit accounts at the Bank.

The Bank prices its deposit products on the basis of its deposit objectives, cash flow requirements, the cost of available alternatives and rates offered by competitors. The Bank believes that its rates on money market deposit accounts and term certificate accounts are generally competitive with rates offered by other financial institutions in its market area. The Bank’s management reviews the interest rate offered on term certificates weekly and establishes new rates as market and other conditions warrant. The interest rates on money market deposit accounts are reviewed and adjusted monthly based on market conditions. From time to time, the Bank may offer promotional gifts, premium interest rates or different terms in order to attract deposits.

The Bank has further enhanced its delivery systems by providing online banking, mobile banking, telephone banking and automatic teller machine (“ATM”) and debit cards. The Bank has no brokered deposit accounts and does not intend to solicit or to accept such deposits. The Bank does not actively solicit certificate of deposit accounts over $100,000, but may accept them or negotiate premium interest rates on such deposits, as circumstances dictate.

 

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Table of Contents

Deposit Accounts. The following table shows the distribution of the Bank’s deposit accounts and the average rate paid on such deposits at the dates indicated.

 

     At March 31, 2013     At March 31, 2012     At April 30, 2011     At April 30, 2010  
     Amount      Percent
to Total
    Average
Rate
    Amount      Percent
to Total
    Average
Rate
    Amount      Percent
to Total
    Average
Rate
    Amount      Percent
to Total
    Average
Rate
 
     (Dollars in thousands)  

Demand deposits and official checks

   $ 22,634         9.6     —     $ 19,954         8.8     —     $ 20,525         9.3     —     $ 19,728         8.7     —  

NOW accounts

     43,972         18.7        0.09        37,955         16.7        0.14        33,649         15.2        0.20        32,598         14.5        0.20   

Regular savings

     51,676         21.9        0.10        42,770         18.9        0.10        38,150         17.3        0.25        34,849         15.5        0.25   

Money market deposit accounts

     39,324         16.7        0.29        39,341         17.4        0.35        36,650         16.6        0.54        38,527         17.1        0.82   
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

Total noncertificate accounts

     157,606         66.9        0.13        140,020         61.8        0.17        128,974         58.4        0.28        125,702         55.8        0.37   

Certificate accounts

     78,077         33.1        0.83        86,542         38.2        1.04        92,049         41.6        1.24        99,615         44.2        1.50   
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 235,683         100.0     0.36   $ 226,562         100.0     0.50   $ 221,023         100.0     0.68   $ 225,317         100.0     0.87
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Certificates of Deposit. The following table sets forth the Bank’s time deposits classified by interest rate at the dates indicated.

 

     At March 31,      At April 30,  
     2013      2012      2011      2010  

Under 2.00%

   $ 71,764       $ 78,976       $ 81,897       $ 88,077   

2.00 – 3.99%

     6,313         7,531         9,303         9,209   

4.00 – 5.99%

     —           35         849         2,329   

6.00 – 7.99%

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 78,077       $ 86,542       $ 92,049       $ 99,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the amount and maturities of the Bank’s time deposits at March 31, 2013.

 

     Amount Due  
     Less Than
One Year
     One to
Two Years
     Two to
Three Years
     After
Three Years
     Total  

Rate

   (In thousands)  

Under 2.00%

   $ 51,580       $ 14,612       $ 3,092       $ 2,480       $ 71,764   

2.00 – 3.99%

     689         1,712         3,309         603         6,313   

4.00 – 5.99%

     —           —           —           —           —     

6.00 – 7.99%

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 52,269       $ 16,324       $ 6,401       $ 3,083       $ 78,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table indicates the amount of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 2013.

 

Maturity Period

   Certificates
Of Deposit
 
(In thousands)  

Three months or less

   $ 7,895   

Over three through six months

     3,432   

Over six through 12 months

     6,929   

Over 12 months

     12,842   
  

 

 

 

Total

   $ 31,098   
  

 

 

 

For further information concerning the Bank’s deposits, see Note G of Notes to Consolidated Financial Statements.

Borrowings. Savings deposits and loan repayments are the primary source of funds for the Bank’s lending and investment activities and for its general business purposes. From time to time, the Bank also borrows funds from the FHLB of Boston to meet loan demand and to take advantage of other investment opportunities. All advances from the FHLB are secured by certain unencumbered residential mortgage loans held by the Bank. At March 31, 2013, the Bank had $1.0 million in outstanding borrowings from the FHLB of Boston. Additional established sources of liquidity include the Federal Reserve System and The Co-operative Central Bank Reserve Fund. For further information concerning the Bank’s borrowings and available lines of credit, see Note H of Notes to Consolidated Financial Statements.

Subsidiary Activities

The Bank has a wholly owned subsidiary, MFLR Securities Corporation (“MFLR”), incorporated under the laws of Massachusetts as a securities corporation to invest in securities. As a Massachusetts securities corporation, MFLR is limited to buying, selling and holding investment securities for its own account which would not differ from the Bank’s ability to invest in the same types of securities. Massachusetts securities corporations are afforded a substantially lower state tax rate than the Bank on investment income earned on securities held in their portfolios.

 

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Table of Contents

At March 31, 2013, the Bank’s investment in MFLR totaled $20.2 million, all of which was used to buy, sell and hold investment securities.

The Bank has a second wholly owned subsidiary, Mayflower Plaza, LLC, incorporated under the laws of Massachusetts as a limited liability corporation. This entity was formed to take ownership of a small retail plaza in Lakeville, Massachusetts, on which the Bank has constructed its Lakeville office. The approximate investment in this entity is currently $354,000.

Performance Ratios

The table below sets forth certain performance ratios of the Bank at or for the dates indicated.

 

     At or for the
Year Ended
March 31
    At or for the
Eleven Months
Ended

March 31,
    At or for the
Year Ended April 30,
 
     2013     2012     2011     2010  

Return on average assets (net earnings divided by average total assets)

     0.58     0.53     0.54     0.47

Return on average stockholders’ equity (net earnings divided by average stockholder’s equity)

     6.56        6.15        6.41        5.83   

Dividend payout ratio (dividends declared per share divided by net earnings per share)

     33.75        40.87        37.37        50.21   

Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)

     3.39        3.62        3.77        3.53   

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

     102.58        101.44        100.36        99.93   

Ratio of noninterest expense to average total assets

     3.10        2.91        3.30        3.16   

 

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Table of Contents

Interest Rate Sensitivity Gap Analysis

The following table presents the Bank’s interest sensitivity gap between interest-earning assets and interest-bearing liabilities at March 31, 2013. In addition the table indicates the Bank’s interest sensitivity gap at various periods and the ratio of the Bank’s interest-earning assets to interest-bearing liabilities at various periods. Term certificates are based upon contractual maturities.

 

     One Year
or Less
    Over One
Through

Three
Years
    Over Three
Through

Five
Years
    Over Five
Through

Ten
Years
    Over Ten
Through

Twenty
Years
    Over
Twenty
Years
    Total  

Interest-sensitive assets:

              

Interest-bearing deposits in banks

   $ 8,931      $ —        $ —        $ —        $ —        $ —        $ 8,931   

Investment securities (1)

     2,964        389        22,015        10,722        49,072        9,038        94,200   

Federal Home Loan Bank stock

     1,252        —          —          —          —          —          1,252   

Deposits with The Co-operative Central Bank

     449        —          —          —          —          —          449   

Fixed-rate mortgages

     6,295        5,108        2,540        9,099        15,894        37,443        76,379   

Adjustable-rate residential and commercial mortgage loans

     19,815        10,331        8,619        2,209        1,588        —          42,562   

Commercial loans

     3,102        279        407        552        —          —          4,340   

Home equity lines of credit

     14,736        774        203        —          —          —          15,713   

Consumer loans

     704        276        286        195        —          —          1,461   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     44,652        16,768        12,055        12,055        17,482        37,443        140,455   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive assets

   $ 58,248      $ 17,157      $ 34,070      $ 22,777      $ 66,554      $ 46,481      $ 245,287   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-sensitive liabilities:

              

Money market accounts

   $ 39,324      $ —        $ —        $ —        $ —        $ —        $ 39,324   

Certificates of deposit

     52,269        22,725        3,083        —          —          —          78,077   

NOW accounts (2)

     43,972        —          —          —          —          —          43,972   

Regular savings (2)

     51,676        —          —          —          —          —          51,676   

Borrowed funds

     —          —          1,000        —          —          —          1,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-sensitive liabilities

   $ 187,241      $ 22,725      $ 4,083      $ —        $ —        $ —        $ 214,049   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

   $ (128,993   $ (5,568   $ 29,987      $ 22,777      $ 66,554      $ 46,481      $ 31,238   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative interest sensitivity gap

   $ (128,993   $ (134,561   $ (104,574   $ (81,797   $ (15,243   $ 31,238     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Ratio of interest-sensitive assets to interest-sensitive liabilities

     31.11     75.50     834.44     N/A        N/A        N/A        114.59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative rate of interest-sensitive assets to interest-sensitive liabilities

     31.11     35.91     51.14     61.79     92.88     114.59  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Equity securities, including preferred stocks that have no maturity date are shown in one year or less. Trust preferred securities are shown in the “Over Twenty Years” column. Fixed-rate mortgage-backed and asset-backed securities are shown on their final maturity date. Adjustable-rate mortgage-backed securities are shown on the next repricing date.
(2) Subject to repricing on a monthly basis.

 

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Table of Contents

Rate/Volume Analysis

The effect on net interest income as a result of changes in interest rates and in the amount of interest-earning assets and interest-bearing liabilities is shown in the following table. Information is provided on changes for the periods indicated attributable to (1) changes in volume (change in average balance multiplied by prior period yield), (2) changes in interest rates (changes in yield multiplied by prior period average balance), and (3) the combined effect of changes in interest rates and volume (changes in yield multiplied by changes in average balance).

 

     Year Ended March 31, 2013
vs. Eleven Months Ended March 31, 2012
     Eleven Months Ended March 31, 2012
vs. Year Ended April 30, 2011
    Year Ended April 30, 2011
vs. 2010
 
     Changes Due to Increase (Decrease)      Changes Due to Increase (Decrease)     Changes Due to Increase (Decrease)  
     Total     Volume     Rate     Rate/
Volume
    Short
Period
     Total     Volume     Rate     Rate/
Volume
    Short
Period
    Total     Volume     Rate     Rate/
Volume
 
     (In thousands)  

Interest income:

                             

Loans

   $ 603      $ 664      $ (585   $ (56   $ 580       $ (818   $ 39      $ (276   $ (1     (580   $ (211   $ 113      $ (319   $ (5

Investments

     (565     (177     (666     40        238         (597     67        (418     (8     (238     (653     (115     (555     17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     38        487        (1,251     (16     818         (1,415     106        (694     (9     (818     (864     (2     (874     12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

                             

Deposits

     (224     14        (344     (4     110         (504     51        (432     (13     (110     (1,194     67        (1,233     (28

Borrowings

     (54     (62     (3     2        9         (107     (113     32        (17     (9     (227     (228     2        (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (278     (48     (347     (2     119         (611     (62     (400     (30     (119     (1,421     (161     (1,231     (29
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest and dividend income

   $ 316      $ 535      $ (904   $ (14   $ 699       $ (804   $ 168      $ (294   $ 21      $ (699   $ 557      $ 159      $ 357      $ 41   

 

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Table of Contents

Average Balance Sheet

The following table sets forth certain information relating to the Bank’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid at the dates indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived using average daily balances.

 

     Year Ended March 31,     Eleven Months Ended March 31,     Year Ended April 30,  
     2013     2012     2011     2010  
     Average
Balance
     Interest      Average
Yield/
Cost
    Average
Balance
     Interest      Average
Yield/
Cost
    Average
Balance
     Interest      Average
Yield/
Cost
    Average
Balance
     Interest      Average
Yield/
Cost
 
     (Dollars in thousands)  

Interest-earning assets:

                                

Loans receivable

   $ 138,048       $ 6,978         5.05   $ 126,006       $ 6,375         5.52   $ 125,333       $ 7,193         5.74   $ 123,447       $ 7,404         6.00

Investments

     97,529         2,060         2.11        105,782         2,625         2.48        100,176         3,222         3.22        101,731         3,875         3.81   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

   $ 235,577         9,038         3.84      $ 231,788         9,000         4.24      $ 225,509         10,415         4.62      $ 225,178         11,279         5.01   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Interest-bearing liabilities:

                                

Deposits

   $ 228,651       $ 983         0.43      $ 226,181       $ 1,207         0.58      $ 219,644         1,711         0.78      $ 214,700         2,905         1.35   

Borrowings

     1,000         46         4.60        2,309         100         4.72        5,051         207         4.10        10,634         434         4.08   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

   $ 229,651         1,029         0.45      $ 228,490         1,307         0.62      $ 224,695         1,918         0.85      $ 225,334         3,339         1.48   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income

      $ 8,009            $ 7,693            $ 8,497            $ 7,940      
     

 

 

         

 

 

         

 

 

         

 

 

    

Interest rate spread

           3.39           3.62           3.77           3.53
        

 

 

         

 

 

         

 

 

         

 

 

 

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

           102.58           101.44           100.36           99.93
        

 

 

         

 

 

         

 

 

         

 

 

 

 

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Table of Contents

Regulation and Supervision of the Company

General. The Company is a bank holding company subject to regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”). As a result, the activities of the Company are subject to certain limitations, which are described below. In addition, as a bank holding company, the Company is required to file annual and quarterly reports with the Federal Reserve Board and to furnish such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Company is also subject to regular examination by and the enforcement authority of the Federal Reserve Board.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly changed the current bank regulatory structure and affected the lending, investment, trading and operating activities of financial institutions and their holding companies. Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators. Many of the provisions of the Dodd-Frank Act require the issuance of regulations before their impact on operations can be fully assessed by management. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden and compliance costs for the Company and the Bank.

Certain of the regulatory requirements that are applicable to the Company and the Bank are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on us.

Activities. With certain exceptions, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that engages directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the related Federal Reserve Board regulations. Notwithstanding the Federal Reserve Board’s prior approval of specific nonbanking activities, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

Effective with the enactment of the Gramm-Leach-Bliley Act (the “G-L-B Act”) on November 12, 1999, bank holding companies that are well capitalized and well managed and whose financial institution subsidiaries are well capitalized and well managed and have satisfactory or better Community Reinvestment Act (“CRA”) records can elect to become “financial holding companies” which are permitted to engage in a broader range of financial activities than are permitted to bank holding companies, including investment banking and insurance companies. Financial holding companies are authorized to engage in, directly or indirectly, financial activities. A financial activity is an activity that is: (i) financial in nature; (ii) incidental to an activity that is financial in nature; or (iii) complementary to a financial activity and that does not pose a safety and soundness risk. Such activities can include insurance underwriting and investment banking. The G-L-B Act includes a list of activities that are deemed to be financial in nature. Other activities also may be decided by the Federal Reserve Board to be financial in nature or incidental thereto if they meet specified criteria. A financial holding company that intends to engage in a new activity or to acquire a company to engage in such an activity is required to give prior notice to the Federal Reserve Board. If the activity is not either specified in the G-L-B Act as being a financial activity or one that the Federal Reserve Board has determined by rule or regulation to be financial in nature, the prior approval of the Federal Reserve Board is required. The Company has not, up to this time, opted to become a financial holding company.

 

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Acquisitions. Under the BHCA, a bank holding company must obtain the prior approval of the Federal Reserve Board before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory CRA ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions.

Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to acquiring control of the Company or the Bank. For purposes of the BHCA, “control” is defined as ownership of more than 25% of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank. In addition, the Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before such person or persons may acquire control of the Company or the Bank. The Change in Bank Control Act defines “control” as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank. There is a presumption of “control” where the acquiring person will own, control or hold with power to vote 10% or more of any class of voting security of a bank holding company or insured bank if, like the Company, the company involved has registered securities under Section 12 of the Securities Exchange Act of 1934.

Under Massachusetts banking law, prior approval of the Massachusetts Division of Banks is also required before any person may acquire control of a Massachusetts bank or bank holding company. Massachusetts law generally prohibits a bank holding company from acquiring control of an additional bank if the bank to be acquired has been in existence for less than three years or, if after such acquisition, the bank holding company would control more than 30% of the FDIC-insured deposits in the Commonwealth of Massachusetts.

Capital Requirements. The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. The Dodd-Frank Act requires the Federal Reserve Board to adopt consolidated capital requirements for holding companies that are equally as stringent as those applicable to the depository institution subsidiaries. That means that certain instruments that had previously been includable in Tier 1 capital for bank holding companies, such as trust preferred securities, will no longer be included. The revised capital requirements are subject to certain grandfathering and transition rules. See “Regulation and Supervision of the Bank—Capital Requirements.”

Dividends. The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations adopted by the Federal Reserve Board pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized” or worse.” See “Regulation and Supervision of the Bank — Prompt Corrective Regulatory Action.” The Federal Reserve Board has a policy under which bank holding companies are required to serve as a source of strength for their depository subsidiaries by providing capital, liquidity and other resources in times of financial distress. The Dodd-Frank Act codified the source of strength doctrine and requires the issuance of implementing regulations.

Stock Repurchases. Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive or any condition imposed by, or written agreement with, the Federal Reserve Board. This requirement does not apply to bank holding companies that are “well-capitalized,” received one of the two highest examination ratings at their last examination and are not the subject of any unresolved supervisory issues.

 

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The Sarbanes Oxley Act of 2002 implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act restricted the scope of services that may be provided by accounting firms to their public company audit clients and any non-audit services being provided to a public company audit client will require pre-approval by the company’s audit committee. In addition, the Sarbanes-Oxley Act required chief executive officers and chief financial officers, or their equivalents, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement.

Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company’s financial statements are subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerated the time frame for disclosures by public companies of changes in ownership in a company’s securities by directors and executive officers.

The Sarbanes-Oxley Act also increased the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm.” Among other requirements, companies must disclose whether at least one member of the audit committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not.

Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to report on our assessment of the effectiveness of our internal controls over financial reporting in this Annual Report on Form 10-K. The Company is currently considered a smaller reporting company with the SEC and is not required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 requirements regarding external auditor attestation of internal controls over financial reporting.

Regulation and Supervision of the Bank

General. The Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks (“Commissioner”) and the FDIC. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The Commissioner and FDIC periodically examine the Bank for compliance with these regulatory requirements and the Bank must regularly file reports with the Commissioner and the FDIC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). This supervision and regulation is intended primarily for the protection of depositors.

Massachusetts State Law. As a Massachusetts-chartered co-operative bank, the Bank is subject to the applicable provisions of Massachusetts law and the regulations of the Commissioner adopted thereunder. The Bank derives its lending and investment powers from these laws, and is subject to periodic examination and reporting requirements by and of the Commissioner. Certain powers granted under Massachusetts law may be constrained by federal regulation. In addition, the Bank is required to make periodic reports to The Co-operative Central Bank, the Bank’s excess deposit insurer. The approval of the Commissioner is required prior to any merger or consolidation, or the establishment or relocation of any branch office. Massachusetts cooperative banks are subject to the enforcement authority of the Commissioner who may suspend or remove directors or officers, issue cease and desist orders and appoint conservators or receivers in appropriate circumstances. Co-operative banks are required to pay fees and assessments to the Commissioner to fund that office’s operations. The cost of state examination fees and assessments for the year ended March 31, 2013 was $30,000.

Capital Requirements. Under FDIC regulations, state-chartered banks that are not members of the Federal Reserve System are required to maintain a minimum leverage capital requirement consisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset

 

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quality, high liquidity, good earnings and in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the CAMELS rating system) established by the Federal Financial Institutions Examination Council. For all but the most highly rated institutions meeting the conditions set forth above, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than certain mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill) minus identified losses, disallowed deferred tax assets and investments in financial subsidiaries and certain non-financial equity investments.

In addition to the leverage ratio (the ratio of Tier 1 capital to total average assets), state-chartered nonmember banks must maintain a minimum ratio of qualifying total capital to risk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2 capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and preferred stock with a maturity of over 20 years, certain other capital instruments and up to 45% of pre-tax net unrealized holding gains on equity securities. The includable amount of Tier 2 capital cannot exceed the institution’s Tier 1 capital. Qualifying total capital is further reduced by the amount of the bank’s investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings of capital securities issued by other banks, most intangible assets and certain other deductions. Under the FDIC risk-weighted system, all of a bank’s balance sheet assets and the credit equivalent amounts of certain off-balance sheet items are assigned to one of four broad risk weight categories from 0% to 100%, based on the risks inherent in the type of assets or item. The aggregate dollar amount of each category is multiplied by risk weight assigned to that category. The sum of these weighted values equals the Bank’s risk-weighted assets.

At March 31, 2013, the Bank’s ratio of core Tier 1 capital to total average assets was 8.6%, its ratio of Tier 1 capital to risk-weighted assets was 16.7% and its ratio of total risk-based capital to risk-weighted assets was 17.7%. Capital ratios for the Company were 8.6%, 16.7% and 17.7%, respectively.

The current risk-based capital guidelines that apply to the Bank are based on the 1988 capital accord of the International Basel Committee on Banking Supervision (“Basel Committee”), a committee of central banks and bank supervisors, as implemented by the Federal Reserve Board. In 2004, the Basel Committee published a new capital accord, which is referred to as “Basel II,” to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk: an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines, which became effective in 2008 for large international banks (total assets of $250 billion or more or consolidated foreign exposure of $10 billion or more). Other U.S. banking organizations can elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they are not required to apply them. Basel II emphasizes internal assessment of credit, market and operational risk, as well as supervisory assessment and market discipline in determining minimum capital requirements.

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity, which is referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States. Basel III will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. The implementation of the Basel III final framework was to occur on January 1, 2013. The Federal Reserve and other government agencies responsible for implementing the Basel III framework announced in November 2012 that the originally proposed timeframe for the implementation of the rules was not achievable. No new deadline has been proposed. On January 1, 2013, banking institutions were going to be required to meet the following minimum capital ratios: (i) 3.5% Common Equity Tier 1 (generally consisting of common shares and retained earnings) to risk-weighted assets; (ii) 4.5% Tier 1 capital to risk-weighted assets; and (iii) 8.0% Total capital to risk-weighted assets. When fully phased-in on January 1, 2019, and if implemented by the U.S. banking agencies, Basel III will require banks to maintain:

 

   

a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer,”

 

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a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer,

 

   

a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, and

 

   

a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.

Basel III also includes the following significant provisions:

 

   

An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.

 

   

Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

 

   

Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

 

   

For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement that the instrument must be written off or converted to common equity if a triggering event occurs, either pursuant to applicable law or at the direction of the banking regulator. A triggering event is an event that would cause the banking organization to become nonviable without the write off or conversion, or without an injection of capital from the public sector.

Since the Basel III framework is not self-executing, the rules and standards promulgated under Basel III require that the U.S. federal banking regulators adopt them prior to becoming effective in the U.S. Although U.S. federal banking regulators have expressed support for Basel III, the timing and scope of its implementation, as well as any potential modifications or adjustments that may result during the implementation process, are not yet known.

Dividend Limitations. The Bank may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of its conversion to stock form.

Earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See “Federal and State Taxation.” The Bank intends to make full use of this favorable tax treatment and does not contemplate use of any earnings in a manner which would limit the Bank’s bad debt deduction or create federal tax liabilities.

Under FDIC regulations, the Bank is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a leverage ratio of less than 4%.

Investment Activities. Under federal law, all state-chartered FDIC-insured banks have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance Corporation Improvement Act and the FDIC permit exceptions to these limitations. For example, state chartered banks, such as the Bank, may, with FDIC approval, continue to exercise grandfathered state authority to invest in common or preferred stocks listed on a national securities exchange or the NASDAQ Global Market and in the shares of an investment company registered under federal law. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments that do not meet this standard (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund. All nonsubsidiary equity investments, unless otherwise authorized or approved by

 

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the FDIC, must have been divested by December 19, 1996, under a FDIC-approved divestiture plan, unless such investments were grandfathered by the FDIC. The Bank received grandfathering authority from the FDIC to invest in listed stocks and/or registered shares. The maximum permissible investment is 100% of Tier 1 capital, as specified by the FDIC’s regulations, or the maximum amount permitted by Massachusetts Banking Law, whichever is less. Such grandfathering authority may be terminated upon the FDIC’s determination that such investments pose a safety and soundness risk to the Bank or if the Bank converts its charter or undergoes a change in control. As of March 31, 2013, the Bank had no equity securities that were held under such grandfathering authority.

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. The initial base assessment rates range from five to 35 basis points. The rate schedules will automatically adjust in the future when the Deposit Insurance Fund reaches certain milestones. No institution may pay a dividend if in default of the federal deposit insurance assessment. In February 2011, the FDIC adopted new rules that amend its current deposit insurance assessment regulations. The new rules implement a provision in the Dodd-Frank Act that changed the assessment base for deposit insurance premiums from one based on domestic deposits to one based on average consolidated total assets minus average tangible equity.

The FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base), in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. In lieu of further special assessments, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. That pre-payment, which included an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings was recorded for each regular assessment with an offsetting credit to the prepaid asset.

Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts. That limit was made permanent by the Dodd-Frank Act.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the year ended March 31, 2013 averaged approximately 0.65 of a basis point of assessable deposits.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

All Massachusetts chartered co-operative banks are required to be members of the Share Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all deposits in member banks which are not covered by federal insurance. In past years, a premium of 1/24 of 1% of insured deposits has been assessed annually on member banks such as the Bank for this deposit insurance. However, no premium has been assessed since 1985.

 

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Prompt Corrective Regulatory Action. Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution’s holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions.

Under regulations jointly adopted by the federal banking regulators, an institution’s capital adequacy on the basis of the institution’s total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its Tier 1 or core capital to adjusted total average assets). The following table shows the capital ratio requirements for each prompt corrective action category:

 

    

Well

Capitalized

  

Adequately

Capitalized

  

Undercapitalized

  

Significantly
Undercapitalized

Total risk-based capital ratio

   10.0% or more    8.0% or more    Less than 8.0%    Less than 6.0%

Tier 1 risk-based capital ratio

   6.0% or more    4.0% or more    Less than 4.0%    Less than 3.0%

Leverage ratio

   5.0% or more    4.0% or more *    Less than 4.0% *    Less than 3.0%

 

* 3.0% if institution has a composite 1 CAMELS rating.

If an institution’s capital falls below the “critically undercapitalized” level, the institution is subject to conservatorship or receivership within specified timeframes. A “critically undercapitalized” institution is defined as an institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The FDIC may reclassify a well capitalized depository institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to associations in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. For information regarding the position of the Bank with respect to the prompt corrective action rules, see Note P of Notes to Consolidated Financial Statements.

Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the “CDRI Act”), each federal banking agency is required to establish safety and soundness standards for institutions under its authority. In 1995, these agencies, including the FDIC,

 

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released interagency guidelines establishing such standards and adopted rules with respect to safety and soundness compliance plans. The guidelines require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the agency determines that a savings institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution must submit an acceptable compliance plan to the agency within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Bank has met substantially all the standards adopted in the interagency guidelines.

Additionally under FDICIA, as amended by the CDRI Act, the federal banking agencies established standards relating to asset and earnings quality. Under the guidelines a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the asset quality and earnings standards do not have a material effect on the operations of the Bank.

Federal Reserve System. The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating to $79.5 million less an exemption of $12.4 million (which may be adjusted annually by the FRB), the reserve requirement is 3%; and for accounts greater than $71.0 million, the reserve requirement is 10% (which may be adjusted annually by the FRB between 8% and 14%) of the portion in excess of $79.5 million. The Bank is in compliance with these requirements.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit facility primarily for member institutions, and provide funds for certain other purposes including affordable housing programs. The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLB of Boston”), is required to acquire and hold shares of capital stock in the FHLB of Boston. The Bank was in compliance with this requirement with an investment in FHLB of Boston stock at March 31, 2013 of $1.3 million.

For the years ended April 30, 2011 and 2010, the eleven months ended March 31, 2012 and the year ended March 31, 2013, cash dividends from the FHLB of Boston to the Bank amounted to $1,000, $0, $6,000 and $7,000 respectively. Further, there can be no assurance that the impact of economic events or recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the Federal Home Loan Bank stock held by the Bank.

Loans to Executive Officers, Directors and Principal Stockholders. Under federal law, loans to directors, executive officers and principal stockholders of a state non-member bank, like the Bank, must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the Bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder, together with all other outstanding loans to such person and affiliated interests, generally may not exceed 15% of the bank’s unimpaired capital and surplus, and aggregate loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $25,000 or 5% of capital and surplus (and any loan or loans aggregating $500,000 or more) must be approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. State non-member banks are prohibited from paying the overdrafts of any of their executive officers or directors unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or transfer of funds from another account at the bank. Loans to executive officers may not be

 

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made on terms more favorable than those afforded other borrowers and are restricted as to type, amount and terms of credit. In addition, Section 106 of the BHCA prohibits extensions of credit to executive officers, directors and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Massachusetts law also contains restrictions on loans to directors and officers, some of which are more strict than federal law. The Bank does not lend to its directors, officers or employees, except on the basis of loans secured by deposits held by the Bank.

Transactions with Affiliates. A state non-member bank or its subsidiaries may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates a state non-member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. Specified collateral requirements apply to covered transactions such as loans to and guarantees issued on behalf of an affiliate. An affiliate of a state non-member bank is any company or entity which controls or is under common control with the state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a state non-member bank and any companies which are controlled by such parent holding company are affiliates of the state non-member bank. Federal law further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.

Enforcement. The FDIC has extensive enforcement authority over insured non-member banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.

The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” See “Prompt Corrective Regulatory Action.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC regulations, a state non-member bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific lending requirements or programs for financial institutions nor limits an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the FDIC, in connection with its examination of an institution, to assess the institution’s record of meeting the credit needs of its community and to consider such record when it evaluates applications made by such institution. The Community Reinvestment Act requires public disclosure of an institution’s Community Reinvestment Act rating. The Bank’s latest Community Reinvestment Act rating received in March 2009 from the FDIC was “Outstanding.”

The Bank is also subject to similar obligations under Massachusetts Law, which has an additional CRA rating category. The Massachusetts Community Reinvestment Act requires the Massachusetts Banking Commissioner to consider a bank’s Massachusetts Community Reinvestment Act rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch

 

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offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of such application. The Bank’s latest Massachusetts Community Reinvestment Act rating received in March 2009 from the Massachusetts Division of Banks was “Outstanding.”

Federal and State Taxation

Federal Taxation. In August 1996, Congress enacted the Small Business Protection Act of 1996. This legislation, effective for taxable years beginning after 1995, repealed the special tax treatment accorded thrift institutions, such as the Bank, which allowed for special provisions in calculating bad debt deductions for income tax purposes.

The most significant effect of this legislation is to suspend the Bank’s tax bad debt reserve as of its base year (April 30, 1988). The legislation required the Bank to recognize any tax bad debt reserves in excess of this base year amount into taxable income over a six-year recapture period. The suspended base year amount would continue to be subject to recapture only upon the occurrence of specific events, such as complete or partial redemption of the Bank’s stock or if the Bank failed to qualify as a bank for income tax purposes.

Prior to 1997, thrift institutions such as the Bank, were generally taxed as corporations. However, banks which met certain definitional tests and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the “Code”) were allowed to establish a bad debt reserve and make annual additions thereto which may be taken as a deduction in computing net taxable income for federal income tax purposes. The Bank had generally elected to base its respective deductions on the percentage of taxable income method as it had resulted in the Bank taking the maximum allowable deduction.

Under the percentage of taxable income method, the bad debt reserve deduction for qualifying loans was computed as a percentage (which Congress had gradually reduced to a current level of 8%) of the Bank’s taxable income, with certain adjustments such as the exclusion of capital gains before computing such deduction. The bad debt deduction under the percentage of taxable income method was limited to the extent that (i) the amount accumulated in reserves for qualifying real estate loans does not exceed 6% of such loans outstanding at the end of the taxable year and (ii) the amount, when added to the bad debt reserve for losses on nonqualifying loans, equals the amount by which 12% of total deposits or withdrawable accounts of depositors at year-end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. The percentage for bad debt deduction was reduced by the deduction for losses on nonqualifying loans.

In order to qualify for this special tax treatment, the Bank was required to meet certain definitional tests primarily relating to its assets and the nature of its business. The allowable deduction under the percentage of taxable income method, was scaled according to the ratio of “qualifying assets” of the Bank to total assets. Specifically, to establish the maximum bad debt deduction as a savings bank, at least 60% of the Bank’s assets must constitute “qualifying assets”, which generally include cash, obligations of the United States or an agency or instrumentality thereof, or of a state or political subdivision thereof, real estate-related loans, loans secured by savings accounts and property used by the Bank in the conduct of its business. In the event that the Bank’s qualifying assets total less than 60% of total assets, the Bank would not be permitted to utilize the percentage of taxable income method in computing its bad debt reserve deduction.

Income and profits (apart from amounts appropriated to the bad debt reserve) to the extent otherwise available generally may be distributed in cash to stockholders without any federal income tax being imposed on the Bank due to such distribution. However, if income appropriated to the bad debt reserve and deducted for federal income tax purposes is used to pay cash dividends or other distributions to stockholders, including distributions on redemptions, dissolution or liquidation, then the Bank would generally be taxed at then current corporate tax rates on approximately 34% of the amount which would be deemed removed from such reserves by the Bank due to any such distribution.

The Bank is subject to an alternative minimum tax which is imposed to the extent it exceeds the Bank’s regular income tax for the year. The alternative minimum tax is imposed at the rate of 20% of a specially computed tax base. Included in this base is a number of preference items, including the following: (i) 100% of the excess of an institution’s bad debt deduction over the amount that would have been allowable on the basis of actual experience;

 

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(ii) interest on certain tax-exempt bonds issued after August 7, 1986; and (iii) for years beginning in 1987, 1988 and 1989, an amount equal to one-half of the amount by which a bank’s “book income” (as specially defined) exceeds its taxable income with certain adjustments, including the addition of preferred items. For taxable years commencing after 1989, this preference item is replaced with a new preference item related to “adjusted current earnings” as specifically computed. In addition, for purposes of the alternative minimum tax, the amount of alternative minimum taxable income that may be offset by net operating losses is limited to 90% of alternative minimum taxable income.

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

State Taxation. Currently, the Massachusetts excise tax rate for co-operative banks is 9.0% of federal taxable income, adjusted for certain items. Taxable income includes income from all sources, without exclusion, less deductions, but not the credits, allowable under the provisions of the Code, as amended. No deductions however, are allowed for dividends received. In addition, carryforwards and carrybacks of net operating losses are not allowed.

Audits. See Note I of the Notes to Consolidated Financial Statements for information regarding income taxes payable by the Bank.

Competition

The Bank’s competition for savings deposits has historically come from other co-operative banks and savings banks, savings and loan associations and commercial banks located in Massachusetts generally, and in Southeastern Massachusetts specifically, some of which have greater financial resources than the Bank. The Bank also experiences significant competition from tax exempt, state and federally chartered credit unions and from Internet-based entities. In the past, during times of high interest rates, however, the Bank has experienced additional significant competition for deposits from short-term money market funds and other corporate and government securities and the Bank anticipates that it will face continuing competition from other financial intermediaries for deposits.

The Bank competes for deposits principally by offering depositors a wide variety of savings programs, convenient branch locations, access to 24-hour automated teller machines, preauthorized payment and withdrawal systems, tax-deferred retirement programs, debit cards, on-line banking, telephone banking and other ancillary services. The Bank does not rely upon any individual, group or entity for a material portion of its deposits. The Bank’s competition for real estate loans comes principally from mortgage banking companies, co-operative banks and savings banks, credit unions, commercial banks, insurance companies and other institutional lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers and builders.

In addition to competing with other banks and financial services organizations based in Massachusetts, the Bank has and is expected to face increased competition from major commercial banks and other entities headquartered outside of Massachusetts as a result of interstate banking laws which currently permit banks nationwide to enter the Bank’s market area and to compete with it for deposits and loan originations.

Changes in bank regulation, such as changes in the products and services banks can offer and involvement in non-banking activities by bank holding companies, as well as bank mergers and acquisitions, can affect the Bank’s ability to compete successfully. Legislation and regulations have also expanded the activities in which depository institutions may engage. The ability of the Bank to compete successfully will depend upon how successfully it can respond to the evolving competitive, regulatory, technological and demographic developments affecting its operations.

 

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The Bank is headquartered in Middleboro, Massachusetts, and operates seven additional full-service branch offices located in Plymouth, Wareham, Rochester, Bridgewater, and Lakeville, Massachusetts. The Bank’s primary market area, wherein are located the majority of the properties securing loans originated by the Bank, encompasses the southern portion of Plymouth County and the eastern portion of Bristol County and the western portion of Barnstable County.

Employees

At March 31, 2013, the Bank employed 57 full-time and 14 part-time employees. The Bank’s employees are not represented by any collective bargaining agreement. Management of the Bank considers its relations with its employees to be good.

Item 1A. Risk Factors

Our pending Merger with Independent is not guaranteed to occur. Compliance with the terms of the Merger Agreement in the interim could adversely affect our business. If the Merger does not occur, it could have a material and adverse effect on our business, results of operations and our stock price.

On May 14, 2013, the Company entered into the Merger Agreement and related agreements with Independent and Rockland, pursuant to which (i) the Company would be merged with and into Independent, (ii) the Bank would be merged with and into Rockland and (iii) each share of the Company’s common stock would be converted into the right to receive either (i) $17.50 in cash or (ii) 0.565 shares of Independent common stock. Consummation of the merger is subject to the satisfaction of a number of conditions, including but not limited to (i) approval of the merger by the holders of at least two-thirds of the outstanding shares of the Company’s common stock; (ii) the receipt of all required regulatory approvals, without significant adverse or burdensome conditions; and (iii) the absence of a material adverse change with respect to the Company, as well as other conditions to closing as are customary in transactions such as the Merger.

As a result of the pending merger: (i) the attention of management and employees may be diverted from day to day operations as they focus on matters relating to preparation for integrating the Company’s operations with those of Independent; (ii) the restrictions and limitations on the conduct of the Company’s business pending the merger may disrupt or otherwise adversely affect its business and our relationships with its customers, and may not be in the best interests of the Company if it were to have to act as an independent entity following a termination of the Merger Agreement; (iii) the Company’s ability to retain its existing employees may be adversely affected due to the uncertainties created by the merger; and (iv) the Company’s ability to maintain existing customer relationships, or to establish new ones, may be adversely affected. Any delay in consummating the Merger may exacerbate these issues.

There can be no assurance that all of the conditions to closing will be satisfied, or where possible, waived, or that the Merger will become effective. If the Merger does not become effective because all conditions to closing are not satisfied, or because one of the parties, or all of the parties mutually, terminate the Merger Agreement, then, among other possible adverse effects: (i) the Company’s shareholders will not receive the consideration which Independent has agreed to pay; (ii) the Company’s stock price may decline significantly; (iii) the Company’s business may have been adversely affected; (iv) the Company will have incurred significant transaction costs; and (v) under certain circumstances, the Company may have to pay Independent a termination fee of $1.5 million.

Our nonresidential real estate and construction lending may expose us to a greater risk of loss and hurt our earnings and profitability.

Our business strategy centers, in part, on offering nonresidential real estate and construction loans in order to expand our net interest margin. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one—to four-family residential mortgage loans. At March 31, 2013, nonresidential real estate and construction loans totaled $49.6 million, which represented 34.7% of total loans.

 

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Loans secured by commercial or nonresidential real estate properties are generally for larger amounts and involve a greater degree of risk than one-to four-family residential mortgage loans. Payments on loans secured by nonresidential real estate buildings generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. While we seek to minimize these risks in a variety of ways, including limiting the size of our nonresidential real estate loans, generally restricting such loans to our primary market area and attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

Construction financing typically involves a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although the Bank’s underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations.

Severe, adverse and precipitous economic and market conditions have adversely affected us and our industry.

A weak economic recovery and further deterioration in the housing market, including significant and continuing home price reductions coupled with the upward trends in delinquencies and foreclosures, have resulted and may continue to result in poor performance of mortgage and construction loans and with further deterioration, in significant asset write-downs by many financial institutions. Reduced availability of commercial credit and elevated levels of unemployment may further contribute to deteriorating credit performance of commercial and consumer credit, resulting in additional write-downs. Financial market and economic instability have caused financial institutions to severely restrict their lending to customers and each other. This market turmoil and credit tightening has exacerbated commercial and consumer deficiencies, the lack of consumer confidence, market volatility and widespread reduction in general business activity. Financial institutions also have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets has and may continue to adversely affect our business, financial condition, results of operations and stock price. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. In particular, we may face the following risks in connection with these events:

 

   

We potentially face increased regulation of our industry including heightened legal standards and regulatory requirements or expectations imposed in connection with recent and anticipated legislation. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

 

   

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process.

 

   

We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. Also, our current risk profile may cause us to pay higher premiums.

 

   

The number of our borrowers that may be unable to make timely repayments of their loans, or the decrease in value of real estate collateral securing the payment of such loans could continue to escalate and result in significant credit losses, increased delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on our operating results.

 

   

Further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or on any terms from other financial institutions.

 

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Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions, the conversion of certain investment banks to bank holding companies and the favorable governmental treatment afforded to the largest of the financial institutions may adversely affect our ability to market our products and services and continue to obtain market share.

Our business is subject to the success of the local economy in which we operate.

Because the majority of our borrowers and depositors are individuals and businesses located and doing business in southeastern Massachusetts and western Cape Cod, our success depends to a significant extent upon economic conditions in that market area. Adverse economic conditions in our market area could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas.

If the value of real estate in our market area were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us.

With most of our loans concentrated in southeastern Massachusetts and western Cape Cod, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters.

Competition from financial institutions and other financial service providers may adversely affect our growth and profitability.

The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller resources and smaller lending limits, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successfully in the future.

Increased FDIC and/or special assessments will hurt our earnings.

The recent economic downturn has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted

 

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our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $114,000. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $1.1 million. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., prime) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability.

During fiscal 2006, short-term market interest rates (which we use as a guide to price our deposits) had risen from historically low levels, while longer-term market interest rates (which we use as a guide to price our longer-term loans) did not. This “flattening” of the market yield curve existed during fiscal 2007 and for part of 2008 and had a negative impact on our interest rate spread and net interest margin as rates on our deposits repriced upwards faster than the rates on our longer-term loans and investments. For the fiscal years ended April 30, 2008, 2009, 2010 and 2011, our interest rate spread was 2.91%, 3.22%, 3.53% and 3.77%, respectively. For the eleven months ended March 31, 2012, our interest rate spread was 3.62% and for the year ended March 31, 2013, our interest rate spread was 3.39%. During September 2007, the U.S. Federal Reserve started decreasing the federal funds target rate from 5.25% to a range of 0 – 0.25% at April 30, 2009. However, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

 

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At March 31, 2013, our allowance for loan losses as a percentage of total loans was 0.84%. Regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

We are dependent upon the services of our management team.

Our future success and profitability is substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. We are especially dependent on a limited number of key management personnel and the loss of our chief executive officer or other senior executive officers could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we would be successful in attracting or retaining such personnel, if necessary. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

Mayflower Co-operative Bank is subject to regulation, supervision and examination by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation, as insurer of its deposits. The Company is also subject to regulation by the Federal Reserve Board. Such regulation and supervision govern the activities in which a co-operative bank and its holding company may engage and are intended primarily for the protection of the deposit insurance funds and for the Bank’s depositors and are not intended to protect the interests of investors in our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and NASDAQ that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audit and maintaining our internal controls.

Additionally, the federal banking regulatory agencies issued rules that implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III and regulations of the federal banking regulatory agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards. Compliance with these rules will impose additional costs on banking entities and their holding companies.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.

Security breaches in our Internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business. Additionally, we outsource our data processing to a third party. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations.

 

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We may have fewer resources than many of our competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

Our ability to pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Mayflower Co-operative Bank, and these distributions are subject to regulatory limits and other restrictions.

A substantial source of our income from which we pay our obligations and from which we can pay dividends is the receipt of dividends from Mayflower Co-operative Bank. The availability of dividends from Mayflower Co-operative Bank is limited by various statutes and regulations. It is also possible, depending upon the financial condition of Mayflower Co-operative Bank, and other factors, that the applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event that Mayflower Co-operative Bank is unable to pay dividends to us, we may not be able to pay our obligations or pay dividends on our common stock. The inability to receive dividends from Mayflower Co-operative Bank would adversely affect our business, financial condition, results of operations and prospects.

Financial regulatory reform may have a material impact on our operations.

The Dodd-Frank Act enacted in 2010 has significantly changed the current bank regulatory structure and affected the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets will be examined by their applicable bank regulators.

In addition, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring certain public companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow shareholders to nominate and solicit votes for their own candidates using a company’s proxy materials.

It remains difficult to predict what impact this legislation and implementing regulations will have on institutions such as Mayflower Co-operative Bank, including on our lending and credit practices. Moreover, significant provisions of the Dodd-Frank Act are not yet effective, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations may increase our operating and compliance costs in the future.

 

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Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Bank owns six of its offices and leases its Bridgewater and Rochester, Massachusetts locations. The following table sets forth the location of the Bank’s offices, as well as certain information relating to these offices as of March 31, 2013:

 

Office Location

   Year
Opened
     Net Book Value at
March 31, 2013
 
            (Dollars in thousands)  

Main Office

     1889       $ 3,106   

30 South Main Street

     

Middleboro, MA

     

94 Court Street

     1974         110   

Plymouth, MA

     

Great Neck Road and Onset Avenue

     1981         398   

Wareham, MA

     

565 Rounseville Road (1)

     1995         —     

Rochester, MA

     

5 Scotland Boulevard (2)

     1998         297   

Bridgewater, MA

     

166 County Street

     

Lakeville, MA

     2005         847   

2420 Cranberry Highway

     

Wareham, MA

     2007         2,349   

57-59 Obery Street

     

Plymouth, MA

     2009         2,786   

 

(1) The lease for the Rochester location expires August 2016.
(2) The lease for the Bridgewater location is a land only lease for a term of thirty years through November 2027.

At March 31, 2013, the total net book value of the Bank’s premises and equipment was $10.5 million. For further information, see Note F of Notes to Consolidated Financial Statements.

Item 3. Legal Proceedings

The Company from time to time is involved as a plaintiff or defendant in various legal actions incidental to its business, none of which are believed to be material, either individually or collectively, to the results of operations and financial condition of the Company.

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock prices are quoted on the NASDAQ Global Market under the symbol MFLR.

High and low sales prices and dividends paid during the year ended March 31, 2013 and the eleven months ended March 31, 2012:

 

Quarterly Sales Prices

   High      Low      Dividends
Paid
 

2012

        

1st Quarter ended July 31, 2011

   $ 9.18       $ 8.40       $ 0.06   

2nd Quarter ended October 31, 2011

   $ 8.88       $ 7.00       $ 0.06   

3rd Quarter ended January 21, 2013

   $ 8.76       $ 7.40       $ 0.06   

Two months ended March 31, 2012

   $ 8.50       $ 7.57       $ 0.06   

2013

        

1st Quarter ended June 30, 2012

   $ 10.86       $ 8.00       $ .0.6   

2nd Quarter ended September 30, 2012

   $ 11.20       $ 9.86       $ .0.6   

3rd Quarter ended December 31, 2012

   $ 10.97       $ 9.85       $ .0.6   

4th Quarter ended March 31, 2013

   $ 11.25       $ 9.75       $ .0.6   

The Company may not declare or pay dividends on its capital stock if the effect would cause its capital to be reduced below regulatory requirements or otherwise violate applicable regulatory requirements. As of March 31, 2013, the Company had approximately 219 shareholders of record of 2,058,422 outstanding shares of common stock. This does not reflect the number of persons or entities who hold their common stock in nominee or “street” name through various brokerage firms.

The Company did not repurchase any shares during the fourth quarter of the year ended March 31, 2013.

 

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Item 6. Selected Financial Data

 

      March 31
2013
    March 31,
2012
    April 30,
2011
    April 30,
2010
    April 30,
2009
 

(Dollars In Thousands, Except Per Share Data)

          

Balance Sheet and Other Data:

          

Total assets

   $ 261,344      $ 251,555      $ 246,883      $ 255,530      $ 249,545   

Interest-bearing deposits in banks

     8,931        8,602        6,256        15,914        6,184   

Investment securities, including mortgage-backed securities

     94,200        88,264        91,904        94,369        90,261   

Loans, net

     139,321        134,331        124,497        120,545        131,111   

Stock in the FHLB of Boston

     1,252        1,449        1,650        1,650        1,650   

Deposits

     235,683        226,562        221,023        225,317        213,957   

Advances and borrowings

     1,000        1,000        3,500        7,500        13,888   

Stockholders’ equity

     22,626        21,884        21,777        20,480        19,338   

Book value per share

     10.99        10.61        10.21        9.85        9.27   
      Year Ended
March 31
2013
    11 Months
Ended

March 31,
2012
    Year Ended
April 30,
2011
    Year Ended
April 30,
2010
    Year Ended
April 30,
2009
 

(Dollars In Thousands, Except Per Share Data)

          

Operating Data:

          

Interest income

   $ 9,038      $ 9,000      $ 10,415      $ 11,279      $ 12,406   

Interest expense

     1,029        1,307        1,918        3,339        5,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     8,009        7,693        8,497        7,940        7,338   

Provision for loan losses

     40        228        201        215        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     7,969        7,465        8,296        7,725        7,338   

Noninterest income:

          

Loan origination and other loan fees

     102        84        145        123        136   

Customer service fees

     548        583        666        719        695   

Gain (loss) on sales and writedowns of investment securities and loans, net

     1,114        670        766        691        (1,399

Other

     365        350        344        264        245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,129        1,687        1,921        1,797        (323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

     7,840        7,317        8,142        7,802        7,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     2,258        1,835        2,075        1,720        (170

Provision (benefit) for income taxes

     790        618        737        557        (205
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,468      $ 1,217      $ 1,338      $ 1,163      $ 35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Price Share Data:

          

Basic earnings per share

   $ 0.71      $ 0.59      $ 0.64      $ 0.56      $ 0.02   

Diluted earnings per share

   $ 0.71      $ 0.59      $ 0.64      $ 0.56      $ 0.02   

Weighted average basic shares outstanding

     2,059        2,069        2,082        2,083        2,090   

Dividends paid per share

     2,064        2,072        2,082        2,088        2,176   
   $ 0.24      $ 0.24      $ 0.24      $ 0.28        0.40   

Selected Ratios:

          

Annualized return on average assets

     0.58     0.53     0.54     0.47     0.02

Annualized return on average stockholders’ equity

     6.56     6.15     6.41     5.83     0.19

Stockholders’ equity to assets (1)

     8.66     8.70     8.58     8.01     7.75

Tier 1 capital to average assets

     8.60     8.43     8.35     7.90     7.56

Interest rate spread

     3.39     3.62     3.77     3.53     3.22

Dividend payout ratio

     33.72     40.87     37.37     50.21     2,385.71

 

(1) This ratio is based on year-end balances

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Change in Year-End:

Effective February 2012, Mayflower Bancorp, Inc. changed its fiscal year-end from April 30 to March 31. The financial statements presented are for the year ended March 31, 2013 as compared to the eleven month period ended March 31, 2012.

Recent Accounting Pronouncements:

For a discussion of recent accounting pronouncements, see Note A of the Company’s Consolidated Financial Statements included in this Annual Report.

Critical Accounting Policies:

The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. As such the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of income and expense during the reporting periods. Actual amounts could differ from such estimates. The Company believes that the following accounting policies are among the most critical because they involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

Allowance for loan losses:

The provision for loan losses represents a charge or credit against current earnings and an addition or deduction from the allowance for loan losses. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing an adequate allowance for loan losses. The methodology includes three elements: (1) an analysis of individual loans currently delinquent or deemed to be impaired, (2) general loss allocations for various types of loans based on historic loss experience factors, and (3) an unallocated allowance. The general and unallocated allowances are maintained based on management’s assessment of many factors including the risk characteristics of the loan portfolio, concentrations of credit, current and anticipated economic conditions that may affect borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.

Management believes that the Company’s current allowance for loan losses is adequate. While the allowance for loan losses is evaluated by management based upon available information, future additions to the allowance may be necessary based on changes in local economic conditions. Any significant changes in these assumptions and/or conditions could result in higher than estimated losses that could adversely affect the Company’s earnings. Additionally, regulatory agencies review the Company’s allowance for loan losses as part of their examination process. Such agencies may require the Company to recognize additions to the allowance based on judgments which may be different from those of management. Refer to the discussion of Allowance for Loan Losses in Item 1. “Business” of this Annual Report on 10-K and Note A to Consolidated Financial Statements for a further description of the allowance for loan losses.

Other-than-temporarily impaired investment securities:

Management judgment is involved in the evaluation of declines in value of individual investment securities held by the Company. Declines in value that are deemed other-than-temporary are recognized in the income statement through a write-down in the recorded value of the affected security. Management considers many factors in its analysis of other-than-temporarily impaired securities including industry analyst reports, performance according to terms, sector credit ratings, volatility in market price and other relevant information such as financial condition, earnings capacity and near term prospects of the company and the length of time and extent to which the fair value has been less than cost.

 

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Whenever a debt or equity security is deemed to be other-than-temporarily impaired, as determined by management’s analysis, it is written-down to its current fair value. Any unfavorable change in general market conditions or the condition of a specific issuer could cause an increase in the Company’s impairment write-downs on investment securities, which would have an adverse effect on the Company’s earnings.

Financial Condition:

At March 31, 2013, the Company’s total assets were $261.3 million as compared to $251.6 million at March 31, 2012, an increase of $9.7 million or 3.9%. During the year ended March 31, 2013, net loans receivable increased by $5.0 million and total investment securities increased by $5.9 million. Also, during the year ended March 31, 2013, total deposits increased by $9.1 million.

Net loans receivable were $139.3 million at March 31, 2013, compared to $134.3 million at March 31, 2012, representing an increase of $5.0 million, or 3.7%. This increase was primarily due to an increase of $8.6 million in residential mortgages outstanding, partially a result of Mayflower Co-operative Bank electing to retain a larger percentage of fixed-rate mortgage originations. During the year ended March 31, 2013, historically low interest rates spurred continued strong residential mortgage financing activity, as the Company originated $43.4 million in residential mortgages as compared to $29.4 million originated for the eleven months ended March 31, 2012. Also during the year, the Company purchased $11.6 million of newly-originated 30-year fixed-rate mortgages, yielding approximately 3.27%, from financial institutions in eastern Massachusetts, as compared to $11.0 million in such purchases during the prior year period. Additionally, during the year, the Company sold $29.1 million of fixed-rate residential loans in the secondary mortgage market, producing gains of $772,000, compared to sales of $19.4 million for the prior eleven month period, which resulted in gains of $376,000. This activity, combined with other mortgage payoffs and regularly scheduled amortization, resulted in a $8.6 million increase in residential loan balances as compared to March 31, 2012.

Offsetting this increase in residential mortgages was a decrease of $1.6 million in commercial loans and mortgages, a decrease of $1.8 million in home equity loans and lines of credit, and a decrease of $284,000 in consumer loans. Finally, net construction loans outstanding increased by $75,000.

During the year ended March 31, 2013, total investment securities increased by $5.9 million, primarily a result of increases in U.S. Government agency obligations and mortgage-backed and related securities, which increased by $4.6 million and $1.7 million, respectively.

Non-performing assets are comprised of non-accrual loans and real estate acquired by foreclosure. Non-performing loans typically consist of loans that are more than 90 days past due and loans less than 90 days past due on which the Company has ceased accruing interest. As of March 31, 2013, non-performing assets totaled $584,000, compared to $506,000 at March 31, 2012. The increase in non-performing assets is comprised of an increase of $133,000 in non-performing loans, offset by a decrease of $55,000 in real estate acquired by foreclosure. During the period, the Company was able to resolve certain previously classified non-performing loans, although additional loans were classified as non-performing, including one commercial mortgage with a current outstanding balance of $298,000 and one home equity line of credit with a current outstanding balance of $118,000. As of March 31, 2013, non-performing assets represented 0.22% of total assets compared to 0.20% of total assets at March 31, 2012.

At March 31, 2013, the Company’s allowance for loan losses was $1,208,000, which represented 0.87% of net loans receivable and 271.5% of non-performing loans at that date. This compares to a loan loss reserve balance of $1,217,000 at March 31, 2012, which represented 0.91% of net loans receivable and 390.1% of non-performing loans. During the period, the Company provided $40,000 to replenish the reserve and recorded net charge offs of $56,000 in home equity loans and lines of credit, offset by net recoveries of $6,000 in commercial loans and $1,000 in residential mortgages. Management continues to closely monitor the loan portfolio and will continue to provide for potential losses as they become likely. The Company’s loan portfolio continues to rely heavily on the strength of the local economy and the real estate market and a significant deterioration in that market or other negative economic conditions could have a negative impact on the Company’s results. In addition, commercial business, construction, and commercial real estate financing are generally considered to involve a higher degree of credit risk

 

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than long-term financing of residential properties due to their higher potential for default and the possible difficulty of disposing of the underlying collateral. As management continues to monitor the Company’s loan portfolio, higher provisions for loan losses and foreclosed property expense may be required should economic conditions worsen or the levels of non-performing assets increase.

The Company also maintains an allowance for loan losses on off-balance sheet credit exposures (included in other liabilities on the balance sheet). This allowance totaled $110,000 at March 31, 2013 and 2012. This allowance is intended to protect the Company against losses on undrawn or unfunded loan commitments made to customers.

At March 31, 2013, total deposits, after interest credited, increased by $9.1 million when compared to March 31, 2012. This increase was comprised of growth of $17.6 million in checking and savings accounts, partially offset by a reduction of $8.5 million in certificates of deposit. These fluctuations are the result of a management decision to reduce interest rates paid on certificates of deposit, which the Company considers non-core. Additionally, during the year, advances and borrowings remained constant at $1.0 million.

Total stockholders’ equity increased by $742,000 when compared to March 31, 2012. The increase in total equity is due to net income for the year of $1,468,000 and stock-based compensation credits totaling $74,000. Those increases in total equity were partially offset during the year by dividends paid of $0.24 per share totaling $495,000 and Company stock repurchases totaling $65,000. Additionally, total equity decreased by $240,000 due to a decrease in the net unrealized gain on securities classified as available-for-sale.

RESULTS OF OPERATIONS

Comparison of the year ended March 31, 2013 with the eleven months ended March 31, 2012

General:

Net income for the year ended March 31, 2013 was $1,468,000 compared with $1,217,000 for the eleven months ended March 31, 2012, an increase of $251,000. Net interest income was $8.0 million, the provision for loan losses was $40,000, total non-interest income was $2.1 million, and total non-interest expense was $7.8 million.

In February 2012, Mayflower Bancorp, Inc. changed its fiscal year-end from April 30 to March 31. Certain fluctuations between the year ended March 31, 2013 and the eleven months ended March 31, 2012 are a result of the shortened prior-year period.

The Company’s results largely depend upon its net interest margin, which is the difference between the income earned on loans and investments, and the interest paid on deposits and borrowings as a percentage of average interest-earning assets. During the year ended March 31, 2013, the Company’s net interest margin decreased from 3.62% to 3.40%. This reduction is primarily a result of a decrease in yields on average interest-earning assets, which declined from 4.24% during the fiscal period ended March 31, 2012 to 3.84% during the fiscal year ended March 31, 2013.

The effect on net interest income as a result of changes in interest rates and in the amount of interest-earning assets and interest-bearing liabilities is shown in the following table. Information is provided on changes for the period indicated attributable to (1) changes in volume (change in average balance multiplied by prior period yield), (2) changes in interest rates (changes in yield multiplied by prior period average balance) and (3) the combined effect of changes in interest rates and volume (change in yield multiplied by change in average balance).

 

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     March 31, 2013 (12 Months) vs. March 31, 2012 (11  Months)  
     Changes Due to Increase (Decrease)  
(In Thousands)    Total     Volume     Rate     Rate/
Volume
    Short
Period
 

Interest income:

          

Loans receivable

   $ 603      $ 664      $ (585   $ (56   $ 580   

Investment securities

     (561     (171     (666     40        236   

Interest-bearing deposits in banks

     (4     (6     —          —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     38        487        (1,251     (16     818   

Interest expense:

          

Deposits

     (224     14        (344     (4     110   

Advances and borrowings

     (54     (62     (3     2        9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (278     (48     (347     (2     119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 316      $ 535      $ (904   $ (14   $ 699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and dividend income:

Total interest and dividend income increased by $38,000 or 0.4% to $9.0 million for the year ended March 31, 2013. A portion of this increase can be attributed to the shortened prior year eleven month reporting period as compared to the current year. Interest income from loans receivable increased by $603,000, of which $580,000 can be attributed to the shortened prior year period. The remainder of the fluctuation was due to a reduction in the average rate earned on loans from 5.52% in 2012 to 5.05% in 2013, offset by an increase of $12.0 million in the average balance of loans outstanding. Interest and dividend income on investment securities decreased by $561,000 ($236,000 attributable to short prior year period) as a result of decrease in the average yield earned, from 3.04% in 2012 to 2.32% in 2013, coupled with a decrease of $5.6 million in the average balance of investments. Income received from interest-bearing deposits in banks decreased by $4,000, primarily as a result of a decrease of $2.6 million in the average balance of these deposits.

Interest expense:

Total interest expense decreased by $278,000 or 21.3% to $1.0 million for the year ended March 31, 2013. Approximately $119,000 of this decrease can be attributed to the shortened prior year reporting period ended March 31, 2012. Interest expense on deposits decreased by $224,000, of which $110,000 is attributable to the shortened prior year period. The remainder of the decrease was due to a reduction in the average rate paid, from 0.58% in 2012 to 0.43% in 2013, offset by an increase of $2.5 million in the average balance of deposits. Interest expense on advances and borrowings decreased by $54,000 ($9,000 attributable to short prior year period) as a result of a decrease of $1.3 million in the average balance of advances and borrowings, coupled with a decrease in the average rate paid on advances, from 4.72% in 2012 to 4.60% in 2013.

Provision for loan losses:

The provision for loan losses was $40,000 for the year ended March 31, 2013, compared to $228,000 for the eleven months ended March 31, 2012. The allowance for loan losses is maintained at a level that management and the Board considers adequate to provide for probable losses based upon evaluation of known and inherent risks in the loan portfolio. In determining the appropriate level for the allowance for loan loss, the Company considers past loss experience, evaluations of underlying collateral, prevailing economic conditions, the nature of the loan portfolio and levels of non-performing and other classified loans. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on additional increases in non-performing loans, changes in economic conditions, or for other reasons.

 

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Noninterest income:

Non-interest income was $2.1 million for the year ended March 31, 2013, compared to $1.7 million for the eleven months ended March 31, 2012, an increase of $442,000. Some of this increase can be attributed to the shortened eleven month prior year reporting period ended March 31, 2012. During the year ended March 31, 2013, Mayflower Bancorp, Inc. recorded $772,000 in gain on sales of mortgage loans, as compared to $376,000 recorded for the eleven months ended March 31, 2012. This increase is largely due to increased sales of residential fixed rate mortgages into the secondary market. During the fiscal year ended March 31, 2013, those sales totaled $29.1 million, whereas during the eleven months ended March 31, 2012, those sales were $19.4 million. Also, the gain on sales of investment securities was $342,000 for the current year, as compared to $294,000 for the shortened eleven month period ended March 31, 2012. For the year ended March 31, 2013, loan origination and other loan fees were $102,000, compared to $84,000 for the eleven months ended March 31, 2012, an increase of $18,000, some of which is due to the shortened prior year period. Finally, interchange income was $249,000 for the year ended March 31, 2013, compared to $210,000 for the eleven months ended March 31, 2012. For the year ended March 31, 2013, customer service fees totaled $548,000, compared to $583,000 for the eleven months ended March 31, 2012, a decrease of $35,000. This decrease is primarily a result of reduced return check fees collected. Finally, other income was $116,000, as compared to $140,000 for the prior year eleven month period, primarily a result of the elimination of the special dividend received from The Co-operative Central Bank (the Company’s excess deposit insurer) received during the prior period.

Noninterest expense:

Non-interest expense was $7.8 million for the year ended March 31, 2013, compared to $7.3 million for the eleven months ended March 31, 2012. Compensation and fringe benefit expense totaled $4,355,000 for the year ended March 31, 2013, compared to $3,965,000 for the eleven months ended March 31, 2012, an increase of $390,000. Most of the increase relates to the shortened prior year reporting period. The remaining increase is attributable to salary adjustments and increased benefit costs, offset by unpaid personnel absences. For the year ended March 31, 2013, occupancy and equipment expense was $1,052,000, compared to $969,000 for the eleven months ended March 31, 2012. This increase is due to the shortened eleven-month reporting period in the prior year and increased snow removal and heating costs during the winter of 2013. Losses and expenses of other real estate owned were $20,000 for the year ended March 31, 2013, compared to $172,000 for the eleven months ended March 31, 2012. Also, for the year ended March 31, 2013, FDIC assessment expense was $138,000, compared to $148,000 for the eleven months ended March 31, 2012. Finally, other expenses were $2,275,000 for the year ended March 31, 2013, compared to $2,063,000 for the eleven months ended March 31, 2012, an increase of $212,000, most of which relates to the prior year shortened period with the remainder due to increased legal and consulting expense.

Provision for income taxes:

The provision for income taxes was $790,000 for the year ended March 31, 2013 compared to $618,000 for the eleven months ended March 31, 2012. Effective income tax rates were 35.0% and 33.7%, respectively, for the 2013 and 2012 periods. The lower effective tax rate in comparison to statutory rates is reflective of income earned by a non-Bank investment subsidiary, which is taxed, for state purposes, at a lower rate and tax-exempt income earned on municipal securities.

Interest rate risk exposure and interest rate spread:

The Company’s net earnings depend primarily upon the difference between the income (interest and dividends) earned on its loans and investment securities (earning assets) and the interest paid on its deposits and borrowed funds (interest-bearing liabilities), together with other income and other operating expenses. The Company’s investment income and interest paid (cost of funds) are significantly affected by general economic conditions and by policies of regulatory authorities.

The Company does have market risk exposure, which is the risk of loss resulting from adverse changes in market prices and rates, and which arises primarily from interest rate risk inherent in its lending, security investments, and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

 

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Table of Contents

The Company’s primary objective in managing interest rate risk is to minimize the potential adverse impact of changes on its net interest income and capital, while adjusting its rate-sensitive asset and liability structure to obtain the maximum net yield on that relationship. However, a sudden or substantial shift in interest rates may adversely impact the Company’s earnings to the extent that the interest rate earned on interest-earning assets and interest paid on interest-bearing liabilities do not change at the same frequency, to the same extent or on the same basis.

The following table presents the Company’s income, yield and cost of funds by their primary components for the year ended March 31, 2013 and the eleven months ended March 31, 2012. Non-accrual loan and investment balances included in the calculation of the average interest-earning assets reduce the calculated yield.

 

     Year Ended March 31, 2013     Eleven Months Ended March 31, 2012  
     Average
Balance
     Interest      Rate
(Annualized)
    Average
Balance
     Interest      Rate
(Annualized)
 
     (In Thousands)  

Interest-earning assets:

                

Loans receivable

   $ 138,048       $ 6,978         5.05   $ 126,006       $ 6,375         5.52

Investment securities

     87,662         2,037         2.32     93,296         2,598         3.04

Interest –bearing deposits in banks

     9,867         23         0.23     12,486         27         0.24
  

 

 

    

 

 

      

 

 

    

 

 

    

All interest-earning assets

   $ 235,577         9,038         3.84   $ 231,788         9,000         4.24
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Deposits

   $ 228,651         983         0.43   $ 226,181         1,207         0.58

Advances and borrowing

     1,000         46         4.60     2,309         100         4.72
  

 

 

    

 

 

      

 

 

    

 

 

    

All interest-bearing liabilities

   $ 229,651         1,029