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Note on Forward-Looking Statements
When used in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including changes in regional and national economic conditions, changes in local demographics, unfavorable judicial decisions, substantial changes in levels of market interest rates, technological innovations, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
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. Mayflower Co-operative 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, various types of corporate debt and equity securities, and other authorized investments.
The Bank considers its primary market area to be southeastern Massachusetts including Plymouth County, Bristol County and Barnstable County. The Bank’s deposits are insured by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”), up to $100,000 per individual insured depositor and $250,000 for certain retirement plan deposit accounts, with additional insurance to the total amount of the deposit provided by the Share Insurance Fund of The Co-operative Central Bank, a deposit-insuring entity chartered by the Commonwealth of Massachusetts. The Bank converted from a mutual co-operative bank to a stock form co-operative bank in December 1987. 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 full-service offices in Plymouth, Wareham, Rochester, Bridgewater, Lakeville, and West Wareham, 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.
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Lending Activities
General. With a softening housing market holding down home purchase and construction borrowing, and a flat interest rate environment limiting incentives to refinance, the Bank saw its residential first mortgage and net construction loan balances decline by $875,000 and $9.0 million, respectively during fiscal 2008. Home equity loans and lines of credit balances also decreased by $506,000.
The Bank’s loan portfolio totaled $125.3 million as of April 30, 2008, which represented 51.4% 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 including one which features a fixed-rate of interest for the first three or five years, and is then adjustable on an annual basis. The Bank also originates adjustable-rate mortgages which include an annual interest rate adjustment. During the year ended April 30, 2008, the Bank originated residential and commercial mortgage loans (including construction loans committed) totaling $27.9 million, compared to $37.5 million in such loans originated during the year ended April 30, 2007. 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 to facilitate later sale, if necessary or deemed appropriate or advantageous. As of April 30, 2008, the Bank had retained in its portfolio fixed-rate residential first mortgage loans totaling $26.4 million and adjustable-rate residential first mortgage loans totaling $25.5 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 April 30, 2008, the Bank did not have any concentration of loans exceeding 10% of total loans.
| At April 30, | ||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Mortgage loans: |
||||||||||||||||||||||||||||||||
| Residential conventional |
$ | 51,897 | 40.5 | % | $ | 52,772 | 36.7 | % | $ | 54,893 | 36.5 | % | $ | 53,391 | 37.8 | % | $ | 53,256 | 41.9 | % | ||||||||||||
| Commercial real estate |
37,319 | 29.1 | 37,704 | 26.2 | 34,032 | 22.6 | 30,976 | 21.9 | 29,519 | 23.2 | ||||||||||||||||||||||
| Construction |
8,239 | 6.4 | 20,601 | 14.3 | 29,824 | 19.8 | 29,078 | 20.6 | 20,370 | 16.0 | ||||||||||||||||||||||
| Home equity loans |
5,634 | 4.4 | 5,875 | 4.1 | 3,396 | 2.3 | 2,785 | 2.0 | 2,352 | 1.9 | ||||||||||||||||||||||
| Home equity lines of credit |
19,033 | 14.8 | 19,298 | 13.4 | 20,237 | 13.5 | 18,041 | 12.8 | 13,782 | 10.9 | ||||||||||||||||||||||
| Total mortgage loans |
122,122 | 95.2 | 136,250 | 94.7 | 142,382 | 94.7 | 134,271 | 95.1 | 119,279 | 93.9 | ||||||||||||||||||||||
| Commercial business loans |
4,036 | 3.1 | 5,104 | 3.6 | 5,580 | 3.7 | 4,597 | 3.3 | 5,046 | 4.0 | ||||||||||||||||||||||
| Consumer loans: |
||||||||||||||||||||||||||||||||
| Personal |
1,272 | 1.0 | 1,408 | 1.0 | 1,608 | 1.1 | 1,575 | 1.1 | 2,053 | 1.6 | ||||||||||||||||||||||
| Passbook |
855 | 0.7 | 1,045 | 0.7 | 707 | 0.5 | 732 | 0.5 | 651 | 0.5 | ||||||||||||||||||||||
| Total consumer loans |
2,127 | 1.7 | 2,453 | 1.7 | 2,315 | 1.6 | 2,307 | 1.6 | 2,704 | 2.1 | ||||||||||||||||||||||
| Total loans |
128,285 | 100.0 | % | 143,807 | 100.0 | % | 150,277 | 100.0 | % | 141,175 | 100.0 | % | 127,029 | 100.0 | % | |||||||||||||||||
| Less: |
||||||||||||||||||||||||||||||||
| Due borrowers on construction and other loans |
1,639 | 5,141 | 9,314 | 8,865 | 7,086 | |||||||||||||||||||||||||||
| Net deferred loan origination fees |
(65 | ) | (10 | ) | 29 | 40 | 42 | |||||||||||||||||||||||||
| Allowances for possible loan losses |
1,375 | 1,673 | 1,704 | 1,606 | 1,473 | |||||||||||||||||||||||||||
| Total |
2,949 | 6,804 | 11,047 | 10,511 | 8,601 | |||||||||||||||||||||||||||
| Net loans |
$ | 125,336 | $ | 137,003 | $ | 139,230 | $ | 130,664 | $ | 118,428 | ||||||||||||||||||||||
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Loan Maturity Analysis. The following table sets forth certain information at April 30, 2008, 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 April 30, 2008 |
Due after 1 through 5 years after April 30, 2008 |
Due after 5 years after April 30, 2008 |
Total | |||||||||
| (In thousands) | ||||||||||||
| Real estate mortgage loans: Residential conventional |
$ | 277 | $ | 569 | $ | 51,051 | $ | 51,897 | ||||
| Commercial |
8,476 | 6,316 | 22,527 | 37,319 | ||||||||
| Construction |
4,828 | 219 | 1,553 | 6,600 | ||||||||
| Home equity loans |
59 | 778 | 4,797 | 5,634 | ||||||||
| Home equity lines of credit |
— | — | 19,033 | 19,033 | ||||||||
| Total mortgage loans |
$ | 13,640 | $ | 7,882 | $ | 98,961 | $ | 120,483 | ||||
| Other: Consumer |
1,090 | 1,037 | — | 2,127 | ||||||||
| Commercial business |
3,049 | 832 | 155 | 4,036 | ||||||||
| Total |
$ | 4,139 | $ | 1,869 | $ | 155 | $ | 6,163 | ||||
The next table shows at April 30, 2008, the dollar amount of all the Bank’s loans due one year or more after April 30, 2008, 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 |
$ | 26,120 | $ | 25,500 | ||
| Commercial |
6,105 | 22,738 | ||||
| Construction |
1,553 | 219 | ||||
| Home equity loans |
5,575 | — | ||||
| Home equity lines of credit |
— | 19,033 | ||||
| Total mortgage loans |
$ | 39,353 | $ | 67,490 | ||
| Other: Consumer |
1,037 | — | ||||
| Commercial business |
672 | 315 | ||||
| Total other loans |
$ | 1,709 | $ | 315 | ||
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 $26.4 million, or 21.6%, of the Bank’s total mortgage loan portfolio as of April 30, 2008. As of that date, the Bank’s one, three and five-year adjustable-rate residential mortgages totaled $25.5 million, or 20.9%, of the total mortgage loan portfolio.
Residential mortgages are generally made in amounts of up to 80% of the appraised value of the property securing the loan. Loans up to 97% of appraised value are available if private mortgage insurance can be obtained
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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 or to other institutions on a servicing-released basis. During the year ended April 30, 2008, the Bank originated adjustable-rate mortgage loans amounting to $4.1 million, and fixed-rate mortgage loans amounting to $14.2 million. During the year ended April 30, 2008, the Bank sold $13.8 million of fixed-rate loans in the secondary mortgage market. At April 30, 2008, the Bank held $26.4 million in fixed-rate mortgages of which $1.4 million 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 upon the payment of a rate lock fee which guarantees the locked rate to the applicant for a period of 60 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 April 30, 2008, the Bank had 25 construction loans outstanding, with $8.2 million committed in construction loan financing, representing 6.4% of the total loan portfolio. On that date, $1.6 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 made 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 April 30, 2008, the Bank’s average construction loan balance was $300,000 and the single largest construction loan with a commitment outstanding as of April 30, 2008, was for $900,000 ($874,000 advanced as of April 30, 2008), representing the Bank’s 50% participation in the net infrastructure financing for a residential condominium development in Hingham, Massachusetts. Collateral for this construction loan consists of a first mortgage on the real estate which has an appraised value of $10.8 million, second mortgage on a Hingham marina with net equity of $1.6 million and the personal guarantee of the principal.
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. Construction loans representing up to 85% of completed value are available if private mortgage insurance can be obtained in order to reduce the Bank’s exposure. 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
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of the note (typically twelve months), the note would generally be extended for an additional six-month period at an adjusted market rate of interest, if the borrower were 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.
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 April 30, 2008, the Bank had $37.3 million in commercial real estate loans outstanding, representing 29.1% of the Bank’s total loans. At that date, the average commercial real estate loan balance was $314,000. The largest commercial real estate exposure at April 30, 2008, was $3.35 million and was secured by residential building lots in Nantucket, Massachusetts, and the personal guarantees of the principals. Appraised value of this parcel is approximately $9.5 million. The second largest commercial real estate loan as of April 30, 2008, was for $1.74 million, and was secured by an office plaza in Wareham, Massachusetts and personal guarantees of the principals. Appraised value of the real estate is approximately $2.7 million. These loans were current at April 30, 2008.
Commercial real estate loans are currently made in an amount up to 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 or a treasury index. Prepayment penalties are usually 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 is also conducted.
Commercial Business Loans. Commercial business loans are of potential benefit to the Bank due to their higher yields and shorter terms and, although entailing greater risk than conventional mortgage loans, such loans allow the Bank to further diversify its loan portfolio. The Bank’s commercial business loan portfolio at April 30, 2008 totaled $4.0 million, or 3.1%, of the Bank’s loan portfolio. At that date, 102 commercial business loans were outstanding with an average balance of $40,000, while the largest commercial business loan at that date was a $300,000 credit line, of which $300,000 was advanced at April 30, 2008.
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 2-3%) 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 $326,000 in fiscal year 2008 and totaled $2.1 million on April 30, 2008, representing 1.7% of the total loan portfolio on that date. These loans had a weighted average yield of 8.3% at April 30, 2008. The Bank offers both secured and unsecured personal loans, automobile loans, boat 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 90% 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%, $100,000 for loan-to-value ratios up to 80% and $50,000 for those up to 90%. Fixed-rate home equity loans are
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