Attached files
file | filename |
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EX-23.1 - EX-23.1 - CENTRAL BANCORP INC /MA/ | g23792exv23w1.htm |
EX-21 - EX-21 - CENTRAL BANCORP INC /MA/ | g23792exv21.htm |
EX-32 - EX-32 - CENTRAL BANCORP INC /MA/ | g23792exv32.htm |
EX-99.2 - EX-99.2 - CENTRAL BANCORP INC /MA/ | g23792exv99w2.htm |
EX-31.2 - EX-31.2 - CENTRAL BANCORP INC /MA/ | g23792exv31w2.htm |
EX-31.1 - EX-31.1 - CENTRAL BANCORP INC /MA/ | g23792exv31w1.htm |
EX-99.1 - EX-99.1 - CENTRAL BANCORP INC /MA/ | g23792exv99w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-25251
CENTRAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-3447594 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
399 Highland Avenue, Somerville, Massachusetts | 02144 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (617) 628-4000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $1.00 per share, and Related Stock Purchase Rights |
The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the 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 o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant (l) 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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark 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 the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting common equity held by non-affiliates of the
registrant was approximately $6.5 million as of September 30, 2009.
At June 10, 2010, the registrant had 1,667,151 shares of its common stock, $1.00 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
CENTRAL BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Table of Contents
PART I
Note Regarding Forward-Looking Statements
This document, as well as other written communications made from time to time by Central
Bancorp, Inc. (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 Companys 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
bail-out actions by the government; the impact of the Companys participation in the U.S.
Department of Treasurys Troubled Asset Relief Program; a further slowdown in the national and
Massachusetts economies; a further deterioration in asset values locally and nationwide; the
volatility of rate-sensitive deposits; 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; governmental action as a result of our inability to comply with regulatory
orders and agreements; the effect of additional provision for loan losses; the effect of an
impairment charge on our deferred tax asset; fluctuations of our stock price; the success and
timing of our business strategies; 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; and political developments,
wars or other hostilities may disrupt or increase volatility in securities or otherwise affect
economic conditions.
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. Central Bancorp, Inc. (the Company), a Massachusetts corporation, was
organized by Central Co-operative Bank (the Bank) on September 30, 1998, to acquire all of the
capital stock of the Bank as part of its reorganization into the holding company form of ownership,
which was completed on January 8, 1999. Upon completion of the holding company reorganization, the
Companys 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 or liabilities
other than loans to the Central Co-operative Bank Employee Stock Ownership Plan (ESOP) and
subordinated debentures as well as 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. Central Co-operative Bank was organized as a Massachusetts chartered co-operative
bank in 1915 and converted from mutual to stock form in 1986. The primary business of the Bank is
to generate funds in the form of deposits and use the funds to make mortgage loans for the
purchase, refinancing, and construction of residential properties and to make loans on commercial
real estate in its market area. In addition, the Bank makes a limited amount of consumer loans
including secured and unsecured personal loans, and commercial and industrial
1
Table of Contents
loans. The Bank sells some of its residential mortgage loan production in the secondary
mortgage market. The Bank also maintains an investment portfolio of various types of debt
securities, including corporate bonds and mortgage-backed securities, and common and preferred
equity securities. The Bank also offers investment services (including annuities) to its customers
through a third party broker-dealer and its insurance affiliate.
The Bank is headquartered in Somerville, Massachusetts and its operations are conducted
through nine full-service office facilities located in Somerville, Arlington, Burlington, Chestnut
Hill, Malden, Medford, Melrose and Woburn, Massachusetts, a limited service high school branch in
Woburn, Massachusetts, a stand-alone 24-hour automated teller machine (ATM) in Somerville,
Massachusetts, as well as over the Internet. Each full-service branch office also has a 24-hour
ATM. The Bank is a member of the Federal Home Loan Bank (FHLB) of Boston and its deposits are
insured to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation (FDIC). Due to issues associated with the recent economic downturn, FDIC deposit
insurance costs have increased considerably. See Regulation and Supervision of the Bank
Insurance of Deposit Accounts for additional information regarding deposit insurance premiums.
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 had been assessed annually on member banks such as the Bank for this
deposit insurance. However, no premium has been assessed in recent years.
The main offices of the Company and Bank are located at 399 Highland Avenue, Somerville,
Massachusetts 02144 and their telephone number is (617) 628-4000. The Bank also maintains a
website at www.centralbk.com. Information on the Banks website should not be considered a
part of this Annual Report on Form 10-K.
The operations of the Bank are generally influenced by overall economic conditions, the
related monetary and fiscal policies of the federal government and the regulatory policies of
financial institution regulatory authorities, including the Massachusetts Commissioner of Banks
(the Commissioner), the Federal Reserve Board and the FDIC.
Market Area
All of the Banks offices are located in the northwestern suburbs of Boston, which are its
principal market area for deposits. The majority of the properties securing the Banks loans are
located in Middlesex County, Massachusetts. The Banks market area consists of established
suburban areas and includes portions of the Route 128 high-technology corridor.
Competition
The Banks competition for savings deposits has historically come from other co-operative
banks, savings banks, credit unions, savings and loan associations and commercial banks located in
Massachusetts generally, and in the Boston metropolitan area, specifically. With the advent of
interstate banking, the Bank also faces competition from out-of-state banking organizations. In
the past, during times of high interest rates, the Bank has also experienced additional significant
competition for deposits from short-term money market funds and other corporate and government
securities. The Bank has faced continuing competition for deposits from other financial
intermediaries, including those operating over the Internet.
The Bank competes for deposits principally by offering depositors a wide variety of savings
programs, convenient branch locations, 24-hour automated teller machines, Internet banking,
preauthorized payment and withdrawal systems, tax-deferred retirement programs and other
miscellaneous services such as money orders, travelers checks and safe deposit boxes. The Bank
usually does not rely upon any individual, group or entity for a material portion of its deposits.
However, at March 31, 2009, the Bank had certificates of deposit acquired from the Commonwealth of
Massachusetts of $28.7 million, or 7.7% of total deposits. These funds were acquired by the Bank
during fiscal 2009 to reduce funding costs or to strategically provide additional liquidity during
the recent
2
Table of Contents
economic downturn. During fiscal 2010, to reduce excess short-term investments, management
strategically decided to not renew these deposits.
The Banks competition for real estate loans comes principally from mortgage banking
companies, co-operative banks and savings banks, credit unions, savings and loan associations,
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. The competition for
loans encountered by the Bank, as well as the types of institutions with which the Bank competes,
varies from time to time depending upon certain factors, including the general availability of
lendable funds and credit, general and local economic conditions, current interest rate levels,
volatility in the mortgage markets and other factors which are not readily predictable.
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 Banks 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.
Lending Activities
The Banks lending focus is concentrated in real estate secured transactions, including
residential mortgage and home equity loans, commercial mortgage loans and construction loans. For
the year ended March 31, 2010, the Bank originated loans totaling $123.7 million. Of the total
loans originated during fiscal 2010, $112.7 million, or 91.1%, were residential mortgage and home
equity loans; $9.7 million, or 7.8% were commercial real estate loans; and $1.3 million, or 1.1%
were construction, commercial and industrial, and other loans. During the years ended March 31,
2010 and 2009, the Bank sold $39.9 million and $11.0 million, respectively, of residential mortgage
loan originations. The sale of loans in the secondary market allows the Bank to continue to make
loans during periods when savings deposit flows decline or funds are not otherwise available for
lending purposes and to manage interest rate risk.
The Banks loan portfolio increased by $840 thousand, or 0.2%, to $461.5 million at March 31,
2010 from $460.7 million at March 31, 2009. The increase was primarily due to increases in the
residential real estate portfolio, partially offset by decreases in the commercial real estate and
construction loan portfolios. During fiscal 2009 and 2010, management de-emphasized commercial real
estate and construction lending as a result of the current market environment. Commercial and
industrial loans decreased primarily due to the repayment of such loans. During fiscal 2009 and
2010, management focused on increasing the residential real estate portfolios as these loans
generally have less risk compared to commercial and construction lending.
3
Table of Contents
Loan Portfolio Composition. The following table summarizes the composition of the Banks loan
portfolio by type of loan and the percentage each type represents of the total loan portfolio at
the dates indicated:
At March 31, | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
Residential |
$ | 217,053 | 47.03 | % | $ | 183,327 | 39.80 | % | $ | 178,727 | 37.6 | % | $ | 175,259 | 38.1 | % | $ | 160,381 | 38.6 | % | ||||||||||||||||||||
Commercial |
227,938 | 49.39 | 249,941 | 54.25 | 244,496 | 51.5 | 235,535 | 51.1 | 213,935 | 51.5 | ||||||||||||||||||||||||||||||
Construction |
2,722 | 0.59 | 14,089 | 3.06 | 30,950 | 6.5 | 35,011 | 7.6 | 27,680 | 6.7 | ||||||||||||||||||||||||||||||
Home equity |
8,817 | 1.91 | 7,347 | 1.59 | 6,559 | 1.4 | 6,901 | 1.5 | 7,505 | 1.8 | ||||||||||||||||||||||||||||||
Total mortgage loans |
456,530 | 98.92 | 454,704 | 98.70 | 460,732 | 97.0 | 452,706 | 98.3 | 409,501 | 98.6 | ||||||||||||||||||||||||||||||
Other loans: |
||||||||||||||||||||||||||||||||||||||||
Commercial and industrial |
4,037 | 0.88 | 4,834 | 1.05 | 13,173 | 2.8 | 6,605 | 1.4 | 4,457 | 1.1 | ||||||||||||||||||||||||||||||
Consumer |
943 | 0.20 | 1,132 | 0.25 | 1,037 | 0.2 | 1,231 | 0.3 | 1,360 | 0.3 | ||||||||||||||||||||||||||||||
Total other loans |
4,980 | 1.08 | 5,966 | 1.30 | 14,210 | 3.0 | 7,836 | 1.7 | 5,817 | 1.4 | ||||||||||||||||||||||||||||||
Total loans |
461,510 | 100.0 | % | 460,670 | 100.0 | % | 474,942 | 100.0 | % | 460,542 | 100.0 | % | 415,318 | 100.0 | % | |||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
3,038 | 3,191 | 3,613 | 3,881 | 3,788 | |||||||||||||||||||||||||||||||||||
Loans, net |
$ | 458,472 | $ | 457,479 | $ | 471,329 | $ | 456,661 | $ | 411,530 | ||||||||||||||||||||||||||||||
Loan Portfolio Sensitivity. The following table sets forth certain maturity information
as of March 31, 2010 regarding the dollar amount of commercial and industrial loans as well as
construction loans in the Banks portfolio, including scheduled repayments of principal, based on
contractual terms to maturity. Demand loans, loans having no schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
Due After | ||||||||||||||||
Due Within | One Through | Due After | ||||||||||||||
One Year | Five Years | Five Years | Total | |||||||||||||
(In Thousands) | ||||||||||||||||
Commercial and industrial loans |
$ | 2,910 | $ | 743 | $ | 384 | $ | 4,037 | ||||||||
Construction loans |
2,573 | 34 | 115 | 2,722 | ||||||||||||
Total |
$ | 5,483 | $ | 777 | $ | 499 | $ | 6,759 | ||||||||
Residential Lending. Residential mortgage loans at March 31, 2010 totaled $217.1
million, or 47.0%, of the total loan portfolio. Fixed-rate residential mortgages totaled $172.1
million, or 79.3%, of the residential loan portfolio and adjustable-rate loans totaled $45.0
million, or 20.7%, of the residential loan portfolio.
With the implementation of its mortgage banking initiative in fiscal 2003, whereby the Bank
seeks to increase its origination of residential mortgage loans and to generate additional
noninterest income via loan sale gains, management regularly assesses the desirability of holding
newly-originated long-term, fixed-rate residential mortgage loans in its portfolio. A number of
factors are evaluated to determine whether or not to hold such loans including, current and
projected liquidity, current and projected interest rate risk profile, projected growth in other
interest-earning assets, e.g., commercial real estate loans, and projected interest rates. With
the rate on the 30-year fixed-rate residential mortgage loan reaching a 45-year low in 2003, the
Company continued to experience high residential loan refinancing activity during fiscal 2004 and
fiscal 2005. Customers who refinanced their mortgages generally refinanced their existing home
loans with either a 15 or 30-year fixed-rate mortgage loan. This activity slowed during fiscal 2006
and fiscal 2007 as long-term rates increased, presenting homeowners with fewer refinance
opportunities. During fiscal 2008, refinance activity remained low as mortgage rates remained
steady, but the increase in home values slowed, limiting the opportunity for borrowers to take cash
out when they refinanced. During fiscal 2009, the economy slid into a recession that resulted in
declines in home values and high unemployment rates. During fiscal 2010, demand strengthened
somewhat in the residential real estate market and home prices experienced modest increases. Also,
during fiscal 2010, management strategically increased its emphasis on residential lending to
reduce risk and increase regulatory capital levels. As a result, the Companys residential loan
portfolio increased by $33.7 million or 18.4%, during fiscal 2010 as compared to fiscal 2009, and
gains on the sale of loans increased to $329 thousand during fiscal 2010 as compared to $111
thousand during fiscal 2009.
4
Table of Contents
The Banks adjustable-rate residential mortgage loans have a maximum term of 30 years, and
allow for periodic interest rate adjustments. The Bank prices the initial rate competitively, but
generally avoids initial deep discounts from contracted indices and margins. The Bank has adopted
the U.S. Treasury Securities Index, adjusted to a constant maturity of one to three years, as its
primary index. The margin at which adjustable-rate loans is generally set is 2.875 percentage
points over the stated index. Interest rate adjustments on adjustable mortgage loans are capped at
two percentage points per adjustment and six percentage points over the life of the loan.
Residential loans may be granted as construction loans or permanent loans on residential
properties. Construction loans on owner-occupied residential properties may convert to residential
loans at fixed or adjustable rates upon completion of construction. Loans secured by one- to
four-family residential properties are typically written in amounts up to 80% of the appraised
value of the residential property. The Bank generally requires private mortgage insurance for
loans in excess of 80% of appraised value. The maximum loan-to-value ratio on owner occupied
residential properties is 95%. The maximum loan-to-value ratio on non-owner-occupied residential
properties is 80%.
Commercial Real Estate and Construction Lending. The Bank originates permanent commercial
mortgages and construction loans on commercial and residential real estate projects. Commercial
real estate loans are typically secured by income-producing properties such as apartment buildings,
office buildings, industrial buildings and various retail properties and are written with either
fixed or adjustable interest rates. Commercial real estate loans with fixed interest rates have
terms generally ranging from one to five years while the interest rate on adjustable rate loans is
generally set to the five-year FHLB classic advance rate plus a margin of 1.75 to 2.50 percentage
points. As of March 31, 2010, the Banks commercial mortgage portfolio totaled $227.9 million and
constituted 49.4% of the total loan portfolio, compared to a balance of $249.9 million or 54.3% of
total loans at March 31, 2009. The decline in the commercial mortgage loan portfolio during fiscal
2010, which totaled $22.0 million, or 9%, is attributable to managements decreased emphasis on
this type of lending in the current economic environment.
Commercial real estate loans are generally made for up to 75% of the appraised value of the
property. Commercial real estate loans currently offered by the Bank have maturities of up to 20
years. Title insurance, fire, casualty insurance and flood insurance are required in amounts
sufficient to protect the Banks interest, where applicable. In some cases, commercial real estate
loans are granted in participation with other lenders.
The Banks construction loans totaled $2.7 million, or 0.6%, of the Banks loan portfolio at
March 31, 2010, compared to a balance of $14.1 million or 3.1% of total loans at March 31, 2009.
The decline in these loans during fiscal 2010, which totaled $11.4 million, or 80.9%, is
attributable to managements decreased emphasis on this type of lending in the current economic
environment. Construction loans are generally short-term in nature and have maturities of up to
two years. The Bank grants loans to construct residential dwellings and commercial real estate
projects. The Bank also originates loans for the construction of single-family homes for resale by
professional builders. Currently, construction loans are made for up to 75% of the projected value
of the completed property, based on independent appraisals. Funds are disbursed based on a
schedule of completed work presented to the Bank and confirmed by physical inspection of the
property by a construction consultant and after receipt of title updates.
Home Equity Lines of Credit. The Bank offers home equity lines of credit that are secured by
the borrowers equity in his or her primary residence and may take the form of a first or second
mortgage. Equity loans are made in amounts up to 80% of the appraised value less any first
mortgage. Payment of interest is required monthly and the rate is adjusted monthly based on
changes in the prime rate, as quoted in the Wall Street Journal. Loans are not contingent upon
proceeds being used for home improvement. Generally, the loan term is 20 years with interest only
due during the first 10 years, and then principal and interest due for the remaining 10 years. The
Banks home equity loans outstanding totaled $8.8 million, or 1.9% of the Banks loan portfolio at
March 31, 2010.
Commercial and Industrial, Consumer and Other Loans. The Banks commercial and industrial,
consumer, and other loans totaled $5.0 million, or 1.1% of the total loan portfolio on March 31,
2010. The commercial and industrial portfolio consists primarily of time, demand and
line-of-credit loans to a variety of local
5
Table of Contents
small businesses that are generally made on a secured basis.
The decrease in commercial and industrial loans in
fiscal 2010 was primarily attributable to the repayment of loans. The Bank engages in
consumer lending primarily as an accommodation to existing customers.
Risks of Residential and Commercial Real Estate, Construction, and Commercial and Industrial
Lending. Declining home values and default risk are the primary risks associated with residential
lending. However, commercial real estate, construction and commercial and industrial lending
entail significant additional risks compared to residential mortgage lending. The repayment of
loans secured by income-producing properties is typically dependent on the successful operation of
the properties and thus may be subject to a greater extent to adverse conditions in the local real
estate market or in the economy generally. Construction loans involve a higher degree of risk of
loss than long-term financing on improved occupied real estate because of the uncertainties
inherent in estimating construction costs, delays arising from labor problems, material shortages,
and other unpredictable contingencies. Commercial and industrial loans are generally not secured
by real estate and may involve greater risks than other types of lending. Because payments on such
loans are often dependent on the successful operation of the business involved, repayment of such
loans may be subject to a greater extent to adverse conditions in the economy. For more
information see Nonperforming Assets below.
Origination Fees and Other Fees. The Bank currently collects origination fees on some of the
real estate and commercial loan products it offers. Fees to cover the cost of appraisals, credit
reports and other direct costs are also collected. Loan origination fees collected vary in
proportion to the level of lending activity, as well as competitive and economic conditions.
The Bank imposes late charges on all loan products it offers with the exception of equity
lines of credit and loans secured by deposits. The Bank also collects prepayment premiums and
partial release fees on commercial real estate and construction loans where such items are
negotiated as part of the loan agreement.
Loan Solicitation and Processing. Loan originations come from a number of sources and are
attributable to walk-in customers, existing customers, real estate brokers and builders, as well as
the purchase of residential and commercial loans from other financial institutions. The Bank also
utilizes in-house originators in the origination of residential real estate loans. Commercial real
estate loans are originated by the Banks team of commercial loan officers. Consumer loans result
from both walk-in and existing customers.
Each loan originated by the Bank is underwritten by lending personnel of the Bank or, in the
case of certain residential mortgage loans to be sold, qualified independent contract underwriters.
Individual lending officers, a committee of loan officers and the Banks Security Committee have
the authority to approve loans up to various limits. Bank-approved independent certified and
licensed appraisers are used to appraise the property intended to secure real estate loans. The
Banks underwriting criteria are designed to minimize the risks of each loan. There are detailed
guidelines concerning the types of loans that may be made, the nature of the collateral, the
information that must be obtained concerning the loan applicant and follow-up inspections of
collateral after the loan is made.
Nonperforming Assets. The Bank notifies a borrower of a delinquency when any payment becomes
15 days past due. Repeated contacts are made if the loan remains delinquent for 30 days or more.
The Bank will consider working out a payment schedule with a borrower to clear a delinquency, if
necessary. If, however, a borrower is unwilling or unable to resolve such a default after 90 days,
the Bank will generally proceed to foreclose and liquidate the property to satisfy the debt.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are
discontinued either when reasonable doubt exists as to the full and timely collection of interest
or principal, or when a loan becomes contractually past due 90 days with respect to interest or
principal. The accrual on some loans, however, may continue even though they are more than 90 days
past due if management deems it appropriate, provided that the loans are well secured and in the
process of collection. When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Interest accruals are
resumed on such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be fully collectable
as to both principal and interest.
6
Table of Contents
The Bank has instituted additional procedures to closely monitor loans and bring potential
problems to managements attention early in the collection process. The Bank prepares a monthly
watch list of potential problem loans including currently performing loans, and the Banks Senior
Loan Officer reviews delinquencies with the Security Committee of the Board of Directors at least
monthly. Due to the high priority given to monitoring asset quality, senior management is involved
in the early detection and resolution of problem loans. Additionally, the Bank has a workout
committee comprised of the Banks Senior Loan Officer and other lending and Bank personnel that
meets regularly to discuss the ongoing resolution of any loans identified for special review.
The following table sets forth information with respect to the Banks nonperforming assets at
the dates indicated:
At March 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Loans accounted for on a nonaccrual
basis: |
||||||||||||||||||||
Nonperforming loans |
$ | 5,575 | $ | 4,617 | $ | 9,606 | $ | 330 | $ | 1,220 | ||||||||||
Restructured loans |
671 | 150 | | | | |||||||||||||||
Real estate acquired by foreclosure or
deed in lieu of foreclosure |
60 | 2,986 | | | | |||||||||||||||
Total nonperforming assets |
$ | 6,306 | $ | 7,753 | $ | 9,606 | $ | 330 | $ | 1,220 | ||||||||||
Impaired loans, accruing |
$ | 10,597 | $ | | $ | 136 | $ | | $ | | ||||||||||
Nonperforming loans to total loans |
1.35 | % | 1.03 | % | 2.02 | % | 0.07 | % | 0.29 | % | ||||||||||
Nonperforming assets to total assets |
1.16 | % | 1.35 | % | 1.68 | % | 0.06 | % | 0.22 | % |
During the past three fiscal years, the Company has experienced increased levels of
nonperforming assets when compared to fiscal 2007 and fiscal 2006. At March 31, 2008, loans to two
customers totaled $8.3 million, or 86.3% of total nonperforming assets. One relationship was
comprised of residential construction loans to construct two homes, and the other relationship was
a commercial real estate loan secured by a property containing residential and commercial
condominiums. During fiscal 2009, the two residential properties were acquired through a deed in
lieu of foreclosure, and these two properties represented the majority of the balance of other real
estate owned (OREO) at March 31, 2009. Nonperforming assets decreased from $7.8 million at March
31, 2009 to $6.3 million at March 31, 2010 primarily due to the fiscal 2010 sale of the two OREO
properties acquired during fiscal 2009. Partially offsetting the decrease in OREO were increases
in nonperforming and restructured loans which represented eleven customer relationships totaling
$6.2 million at March 31, 2010 compared to seven customer relationships totaling $4.8 million at
March 31, 2009. While bankruptcy filings have extended the time required to resolve some
situations involving nonperforming assets, management continues to work with borrowers and
bankruptcy trustees to resolve these situations as soon as possible. Management believes there are
adequate reserves and collateral securing these loans to cover losses that may result from
nonperforming loans. Impaired loans which were accruing interest at March 31, 2010 totaled $10.6
million, comprised of 16 commercial loans to seven borrowers which totaled $9.7 million, and four
residential loans to four borrowers which totaled $898 thousand. Two customer relationships which
totaled $7.0 million comprised most of the impaired but interest accruing commercial real estate
loans at March 31, 2010. One relationship which totaled $4.6 million was a troubled debt
restructuring (TDR) for which the calculated TDR loss was $0, and for which this customers loans
were accruing interest prior to the restructuring. Managements conclusion that it was appropriate
for this relationship to continue to accrue interest subsequent to the restructuring was based on
the customers satisfactory repayment performance prior to the restructuring and managements
analysis which determined that the remaining contractual principal and interest are expected to be
collected. The other impaired but accruing commercial real estate loan relationship totaled $2.4
million at March 31, 2010. This customers repayment performance was slow but accruing interest
prior the execution of a forbearance agreement with the Bank. In accordance with the forbearance
agreement, the customer brought all loans current, and deposited with the Bank three months of
principal and interest for the five loans.
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Management expects that repayment will occur through the orderly sale of the properties
securing the loans. After an analysis of this customer relationship, management concluded that it
was appropriate to continue to accrue interest as the loans were brought current and it is likely
that the repayment of remaining principal and interest will occur. At March 31, 2010, there were
no loans that are not listed on the table above where known information about possible credit
problems of borrowers caused management to have serious doubts as to the ability of such borrowers
to comply with present loan repayment terms. For more information regarding non-performing loans,
see Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations,
Provision for Loan Losses.
Allowance for Loan Losses. The Company provides for loan losses in order to maintain the
allowance for loan losses at a level that management estimates is adequate to absorb probable
losses based on an evaluation of known and inherent risks in the portfolio. In determining the
appropriate level of the allowance for loan losses, management considers past and anticipated loss
experience, evaluations of underlying collateral, financial condition of the borrower, prevailing
economic conditions, the nature and volume of the loan portfolio and the levels of non performing
and other classified loans. The amount of the allowance is based on estimates and ultimate losses
may vary from such estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly when appropriate to maintain the adequacy of the
allowance. The Company uses a process of portfolio segmentation to calculate the appropriate
reserve level at the end of each quarter. Management analyzes required reserve allocations for
loans considered impaired under Accounting Standards Codification (ASC) 310 Receivables (ASC
310) and the allocation percentages used when calculating potential losses under ASC 450
Contingencies (ASC 450). Although management uses available information to establish the
appropriate level of the allowance for loan losses, future additions or reductions to the allowance
may be necessary based on estimates that are susceptible to change as a result of changes in loan
composition or volume, changes in economic market area conditions or other factors. As a result,
our allowance for loan losses may not be sufficient to cover actual loan losses, and future
provisions for loan losses could materially adversely affect the Companys operating results. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may require the Company
to recognize adjustments to the allowance based on their judgments about information available to
them at the time of their examination. During fiscal year ended March 31, 2010, a $600 thousand
provision was recorded based upon managements quarterly evaluations of the loan portfolio.
Certain loan loss factor ratios were increased during fiscal 2010 due to the continued recessionary
economic conditions. Management currently believes that there are adequate reserves and collateral
securing non-performing loans to cover losses that may result from these loans at March 31, 2010.
See Note 1 to the Consolidated Financial Statements for a detailed description of managements
estimation process and methodology related to the allowance for loan losses.
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The following table presents activity in the allowance for loan losses during the years
indicated:
At or for the Years Ended March 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Balance at beginning of year |
$ | 3,191 | $ | 3,613 | $ | 3,881 | $ | 3,788 | $ | 3,681 | ||||||||||
Provision (reduction of provision) |
600 | 2,125 | (70 | ) | 80 | 100 | ||||||||||||||
Charge-offs: |
||||||||||||||||||||
Construction |
| (2,201 | ) | | | | ||||||||||||||
Residential mortgage |
(250 | ) | (144 | ) | | | | |||||||||||||
Commercial mortgage |
(469 | ) | (178 | ) | (173 | ) | | | ||||||||||||
Other loans |
(54 | ) | (36 | ) | (76 | ) | (48 | ) | (39 | ) | ||||||||||
Total charge-offs |
(773 | ) | (2,559 | ) | (249 | ) | (48 | ) | (39 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Residential mortgage |
| 3 | | | | |||||||||||||||
Commercial mortgage |
| | 37 | 43 | 37 | |||||||||||||||
Other loans |
20 | 9 | 14 | 18 | 9 | |||||||||||||||
Total recoveries |
20 | 12 | 51 | 61 | 46 | |||||||||||||||
Net (charge-offs) recoveries |
(753 | ) | (2,547 | ) | (198 | ) | 13 | 7 | ||||||||||||
Balance at end of year |
$ | 3,038 | $ | 3,191 | $ | 3,613 | $ | 3,881 | $ | 3,788 | ||||||||||
Average loans outstanding during the
year* |
$ | 461,592 | $ | 464,288 | $ | 462,164 | $ | 433,935 | $ | 406,474 | ||||||||||
Ratio of net charge-offs to average loans |
0.16 | % | 0.55 | % | 0.04 | % | n/a | n/a | ||||||||||||
Total loans outstanding at end of year |
$ | 461,510 | $ | 460,670 | $ | 474,942 | $ | 460,542 | $ | 415,318 | ||||||||||
Ratio of allowance for loan losses to
loans at end of year |
0.66 | % | 0.69 | % | 0.76 | % | 0.84 | % | 0.91 | % |
n/a | means either not applicable or not meaningful | |
* | Does not include loans held for sale |
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The allowance for loan losses is available for offsetting credit losses in connection with any
loan, but is internally allocated among loan categories as part of the process for evaluating the
adequacy of the allowance for loan losses. The following table presents the allocation of the
Banks allowance for loan losses, by type of loan, at the dates indicated:
At March 31, | ||||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Loans to | Loans to | Loans to | Loans to | Loans to | ||||||||||||||||||||||||||||||||||||
Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | |||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||||||||||||||
Residential |
$ | 721 | 47.03 | % | $ | 655 | 39.80 | % | $ | 520 | 37.60 | % | $ | 456 | 38.10 | % | $ | 443 | 38.60 | % | ||||||||||||||||||||
Commercial |
2,023 | 49.39 | 1,941 | 54.25 | 1,616 | 51.50 | 2,642 | 51.10 | 2,653 | 51.50 | ||||||||||||||||||||||||||||||
Construction |
14 | 0.59 | 406 | 3.06 | 1,246 | 6.50 | 587 | 7.60 | 523 | 6.70 | ||||||||||||||||||||||||||||||
Home equity |
133 | 1.91 | 114 | 1.59 | 86 | 1.40 | 84 | 1.50 | 88 | 1.80 | ||||||||||||||||||||||||||||||
Total mortgage loans |
2,891 | 98.92 | 3,116 | 98.70 | 3,468 | 97.00 | 3,769 | 98.30 | 3,707 | 98.60 | ||||||||||||||||||||||||||||||
Other loans |
147 | 1.08 | 75 | 1.30 | 145 | 3.00 | 112 | 1.70 | 81 | 1.40 | ||||||||||||||||||||||||||||||
Total |
$ | 3,038 | 100.00 | % | $ | 3,191 | 100.00 | % | $ | 3,613 | 100.00 | % | $ | 3,881 | 100.00 | % | $ | 3,788 | 100.00 | % | ||||||||||||||||||||
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Investment Activities
The primary objectives of the investment portfolio are to achieve a competitive rate of return
over a reasonable period of time and to provide liquidity. As a Massachusetts chartered bank, the
Bank is authorized to invest in various obligations of federal and state governmental agencies,
corporate bonds and other obligations and, within certain limits, common and preferred stocks. The
Banks investment policy requires that corporate debt securities be rated as investment grade at
the time of purchase. A security that is downgraded below investment grade will require additional
analysis relative to perceived credit quality, market price, and overall impact on capital/earnings
before a decision is made as to hold or sell. For all sub-investment grade corporate holdings,
additional analysis of creditworthiness is required. The Banks investment in common and preferred
stock is generally limited to large, well-known corporations whose shares are actively traded. The
size of the Banks holdings in an individual companys stock is also limited by policy. A portion
of the Banks investment portfolio consists of mortgage-backed securities which represent interests
in pools of residential mortgages. Such securities include securities issued and guaranteed by the
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC)
and the Government National Mortgage Association (GNMA) as well as collateralized mortgage
obligations (CMOs) issued primarily by FNMA and FHLMC.
Investments are classified as held to maturity, available for sale, or trading.
Investments classified as trading securities are reported at fair value with unrealized gains and
losses included in earnings. Investments classified as available for sale are reported at fair
value, with unrealized gains and losses, net of taxes, reported as a separate component of
stockholders equity. Securities held to maturity are carried at amortized cost. At March 31,
2010, all of the Banks marketable investments were classified as available for sale.
As previously reported, the Companys investments in the perpetual preferred stock of the FNMA
and FHLMC were significantly impacted by the September 2008 conservatorship of FNMA and FHLMC,
giving control of their management to the Federal Housing Finance Agency and prohibiting FNMA and
FHLMC from paying dividends on their existing common and preferred stock. This event resulted in a
$9.4 million impairment of the value of the Companys investment in these entities during the
quarter ended September 30, 2008. These impairment changes were partially offset by a tax benefit
of approximately $3.5 million due to the October 2008 enactment of the Emergency Economic
Stabilization Act of 2008, which permitted the Company to treat losses incurred on the FNMA and
FHLMC preferred stock as ordinary losses for federal income tax purposes.
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The following table sets forth a summary of the Banks investment securities, as well as the
percentage such investments comprise of the Banks total assets, at the dates indicated:
At March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in Thousands) | ||||||||||||
U.S. Government and agency obligations |
$ | | $ | 1,503 | $ | 3,547 | ||||||
Corporate bonds |
1,752 | 701 | 8,312 | |||||||||
Mortgage-backed securities |
24,993 | 28,353 | 22,450 | |||||||||
Trust preferred securities |
1,045 | 750 | 1,012 | |||||||||
Total debt securities |
27,790 | 31,307 | 35,321 | |||||||||
Preferred stock |
3,255 | 1,650 | 11,422 | |||||||||
Common stock |
3,323 | 2,258 | 6,217 | |||||||||
Total investment securities |
$ | 34,468 | $ | 35,215 | $ | 52,960 | ||||||
Percentage of total assets |
6.35 | % | 6.12 | % | 9.27 | % |
There were no investment holdings, other than those of the U.S. government and its agencies,
for which the Companys aggregate holding of one issuer exceeded 10% of stockholders equity as of
March 31, 2010.
The following table sets forth the scheduled maturities, amortized cost, fair values and
average yields for the Banks debt securities at March 31, 2010:
One Year or Less | One to Five Years | Five to Ten Years | More than Ten Years | Total Investment Portfolio | ||||||||||||||||||||||||||||||||||||||||
Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Fair | Average | ||||||||||||||||||||||||||||||||||
Cost | Yield | Cost | Yield | Cost | Cost | Cost | Yield | Cost | Value | Yield | ||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds |
$ | | | % | $ | | | % | $ | 1,752 | 7.02 | % | $ | | | % | $ | 1,752 | $ | 1,752 | 7.02 | % | ||||||||||||||||||||||
Mortgage-backed securities |
| | 5,118 | 4.19 | 6 | 1.50 | 19,129 | 5.30 | 24,253 | 24,993 | 5.06 | |||||||||||||||||||||||||||||||||
Trust preferred securities |
| | | | | | 1,002 | 7.78 | 1,002 | 1,045 | 7.78 | |||||||||||||||||||||||||||||||||
Total |
$ | | $ | 5,118 | $ | 1,758 | $ | 20,131 | $ | 27,007 | $ | 27,790 | ||||||||||||||||||||||||||||||||
Deposits, Borrowed Funds, and Other Sources of Funds
General. Savings accounts and other types of deposits have traditionally been an important
source of the Banks funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, loan sales, borrowings and from other
operations. The availability of funds is influenced by the general level of interest rates and
other market conditions. Scheduled loan repayments are a relatively stable source of funds while
deposit inflows and outflows vary widely and are influenced by prevailing interest rates and 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 activities. During fiscal 2003, the Bank entered into a retail CD brokerage
agreement with a major brokerage firm. Since entering into the agreement, the Bank has not
obtained brokered deposits but rather maintains the relationship as a potential secondary source of
liquidity.
Deposits. Consumer, business and municipal deposits are attracted principally from within the
Banks market area through the offering of a broad selection of deposit instruments including
demand deposit accounts, NOW accounts, money market deposit accounts, regular savings accounts,
term deposit accounts and retirement savings plans. The Bank has historically not actively
solicited or advertised for deposits outside of its market area or solicited brokered deposits.
The Bank attracts deposits through its branch office network, automated teller machines, the
Internet and by paying rates competitive with other financial institutions in its market area.
From time to time, the Bank bids on short-term certificates of deposit from the Commonwealth of
Massachusetts, which periodically awards deposits to financial institution bidders throughout the
State.
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Deposit Accounts. The following table shows the distribution of the average balance of
the Banks deposit accounts at the dates indicated and the weighted average rate paid for each
category of account for the years indicated:
Years Ended March 31, | ||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||||||||||||||
Average | % of | Rate | Average | % of | Rate | Average | % of | Rate | ||||||||||||||||||||||||||||
Balance | Deposits | Paid | Balance | Deposits | Paid | Balance | Deposits | Paid | ||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
Demand deposit accounts |
$ | 42,247 | 12.04 | % | | % | $ | 38,807 | 10.92 | % | | % | $ | 37,863 | 10.38 | % | | % | ||||||||||||||||||
NOW accounts |
27,856 | 7.93 | 0.29 | 26,029 | 7.32 | 0.37 | 28,384 | 7.78 | 0.63 | |||||||||||||||||||||||||||
Passbook and other savings
accounts |
51,577 | 14.69 | 0.45 | 50,240 | 14.13 | 0.51 | 52,071 | 14.28 | 0.60 | |||||||||||||||||||||||||||
Money market deposit
accounts |
79,583 | 22.67 | 1.32 | 67,111 | 18.88 | 2.30 | 58,211 | 15.97 | 3.64 | |||||||||||||||||||||||||||
Term deposit certificates |
149,814 | 42.67 | 2.08 | 173,303 | 48.75 | 2.95 | 188,101 | 51.59 | 4.34 | |||||||||||||||||||||||||||
Total deposits |
$ | 351,077 | 100.00 | % | 1.45 | % | $ | 355,490 | 100.00 | % | 1.97 | % | $ | 364,630 | 100.00 | % | 2.96 | % | ||||||||||||||||||
Time Deposits in Excess of $100,000. The following table indicates the amount of the
Banks time deposits of $100,000 or more by time remaining until maturity as of March 31, 2010 (In
Thousands):
Maturity Period: |
||||
Three months or less |
$ | 16,733 | ||
Three through six months |
7,881 | |||
Six through twelve months |
20,531 | |||
Over twelve months |
6,550 | |||
Total |
$ | 51,695 | ||
Borrowings. From time to time, the Bank borrows funds from the FHLB of Boston. All advances
from the FHLB of Boston are secured by a blanket lien on residential first mortgage loans, certain
investment securities and commercial real estate loans, and all of the Banks stock in the FHLB of
Boston. At March 31, 2010, the Bank had advances outstanding from the FHLB of Boston of $143.5
million and unused borrowing capacity, based on available collateral, of approximately $62.9
million. Proceeds from these advances were primarily used to fund the Banks loan growth.
Additional sources of borrowed funds include The Co-operative Central Bank Reserve Fund, the
Federal Reserve Bank, and a line of credit with a correspondent bank.
The following table sets forth certain information regarding borrowings from the FHLB of
Boston, including short-term FHLB of Boston borrowings under a line of credit, at the dates and for
the periods indicated:
At or for the | ||||||||||||
Years Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Amounts outstanding at end of period |
$ | 143,469 | $ | 144,583 | $ | 156,691 | ||||||
Weighted average rate at end of period |
3.98 | % | 4.52 | % | 4.57 | % | ||||||
Maximum amount of borrowings outstanding at any month end |
$ | 161,509 | $ | 156,682 | $ | 161,700 | ||||||
Approximate average amounts outstanding at any month end |
$ | 146,210 | $ | 147,117 | $ | 140,925 | ||||||
Approximate weighted average rate during the year |
4.43 | % | 4.59 | % | 4.97 | % |
Troubled Asset Relief Program Capital Purchase Program. On December 5, 2008, the Company sold
$10.0 million in Series A preferred stock (the Series A Preferred Stock) to the U.S. Department
of Treasury (U.S. Treasury) as a participant in the federal governments Troubled Asset Relief
Program (TARP) Capital Purchase Program. This represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for healthy U.S. financial
institutions designed to
13
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encourage these institutions to build capital to increase the flow of
financing to U.S. businesses and consumers and to support the weakened U.S. economy. Participation
in this program provided an additional source of funds during the fiscal year ended March 31, 2009.
Subsidiaries
In September 2004, the Company established Central Bancorp Capital Trust I (the Trust), a
Delaware statutory trust. The Trust issued and sold $5.1 million of trust preferred securities in
a private placement and issued $158,000 of trust common securities to the Company. The Trust used
the proceeds of these issuances to purchase $5.3 million of the Companys floating rate junior
subordinated debentures due September 16, 2034 (the Trust I Debentures). The interest rates on
the Trust I Debentures and trust preferred securities are variable and adjustable quarterly at
2.44% over the three month LIBOR. At March 31, 2010, the interest rate was 2.70%.
On January 31, 2007, the Company completed a trust preferred securities financing in the
amount of $5.9 million. In the transaction, the Company formed a Connecticut statutory trust,
known as Central Bancorp Statutory Trust II (Trust II). Trust II issued and sold $5.9 million of
trust preferred securities in a private placement and issued $183,000 of trust common securities to
the Company. Trust II used the proceeds of these issuances to purchase $6.1 million of the
Companys floating rate junior subordinated debentures due March 15, 2037 (the Trust II
Debentures). From January 31, 2007 until March 15, 2017 (the Fixed Rate Period), the interest
rate on the Trust II Debentures and the trust preferred securities is fixed at 7.015% per annum.
Upon the expiration of the Fixed Rate Period, the interest rate on the Trust II Debentures and the
trust preferred securities will be at a variable per annum rate, reset quarterly, equal to three
month LIBOR plus 1.65%. The Trust II Debentures are the sole assets of Trust II. The Trust II
Debentures and the trust preferred securities each have 30-year lives. The trust preferred
securities and the Trust II Debentures will each be callable by the Company or Trust II, at their
respective option, after ten years, and sooner in certain specific events, including in the event
that the securities are not eligible for treatment as Tier 1 capital, subject to prior approval by
the Federal Reserve Board, if then required. Interest on the trust preferred securities and the
Trust II Debentures may be deferred at any time or from time to time for a period not exceeding 20
consecutive quarterly payments (five years), provided there is no event of default.
The Trust I Debentures and the Trust II Debentures are the sole assets of Trust I and Trust
II, respectively, and are subordinate to all of the Companys existing and future obligations for
borrowed money.
The trust preferred securities generally rank equal to the trust common securities in priority
of payment, but will rank prior to the trust common securities if and so long as the Company fails
to make principal or interest payments on the Trust I Debentures and the Trust II Debentures.
Concurrently with the issuance of the Trust I and Trust II Debentures and the trust preferred
securities, the Company issued guarantees related to each trusts securities for the benefit of the
holders of Trust I and Trust II.
In April 1998 and July 2003, the Bank established Central Securities Corporation and Central
Securities Corporation II, respectively, Massachusetts corporations, as wholly-owned subsidiaries
of the Bank for the purpose of engaging exclusively in buying, selling and holding, on their own
behalf, securities that may be held directly by the Bank. From time to time these subsidiaries
hold securities such as government agency obligations, corporate bonds, mortgage-backed securities,
preferred stocks, and trust preferred securities, and qualify under Section 38B of Chapter 63 of
the Massachusetts General Laws as Massachusetts securities corporations.
During January 2009, the Bank established a wholly-owned subsidiary, Metro Real Estate
Holdings, LLC. The subsidiary was formed to, among other things, hold, maintain, and dispose of
certain foreclosed properties acquired from the Bank.
14
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REGULATION AND SUPERVISION
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.
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 is
not a bank or a bank holding company, or from engaging 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 Boards 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 whose financial institution subsidiaries are well capitalized and well
managed and have satisfactory 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. 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.
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 generally are 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. 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.
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
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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. See Regulation and
Supervision of the BankCapital Requirements.
Dividends. The Federal Reserve Board has the power to prohibit dividends by bank holding
companies if their actions are believed to 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 Boards view that a bank holding company should pay
cash dividends only to the extent that the companys 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
companys 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 companys bank subsidiary is classified as
undercapitalized or worse. See Regulation and Supervision of the BankPrompt Corrective
Regulatory Action.
In addition, under the terms of the TARP Capital Purchase program, prior to the earlier of (1)
December 5, 2011, or (ii) the date on which all of the Companys preferred shares held by the U.S.
Department of Treasury have been redeemed in full, the Company cannot increase its quarterly cash
dividend above $0.18 per common share.
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
Companys 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.
The Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address corporate
and accounting fraud. The Sarbanes-Oxley Act restricts 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 companys audit committee. In
addition, the Sarbanes-Oxley Act requires 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
companys financial statements are now 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 accelerates the time
frame for disclosures by public companies of changes in ownership in a companys securities by
directors and executive officers.
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The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the companys
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. Although the Company has incurred
additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not believe that such compliance has had a material impact on the
Companys results of operations or financial condition.
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 during the fiscal year
ending March 31, 2010 in this annual report on Form 10-K. We have performed reviews regarding our
internal controls over financial reporting during the fiscal year ended March 31, 2010, and we
believe that such internal controls are adequate. The Company is currently considered a smaller
reporting company with the SEC and will be required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 requirements regarding external auditor attestation of internal controls
over financial reporting for its fiscal year ending March 31, 2011.
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 regulatory requirements. The Commissioner and FDIC periodically examine the
Bank for compliance with these requirements. The Bank must 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 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. 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 approval of the Commissioner is
required prior to any merger or consolidation, or the establishment or relocation of any branch
office. Massachusetts co-operative 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 offices operations. The cost of state
examination fees and assessments for the fiscal year ended March 31, 2010 totaled $48 thousand.
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 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 and non-mortgage servicing assets and purchased
credit card relationships) minus identified losses, disallowed deferred tax assets, investments in
financial subsidiaries and certain non-financial equity investments.
In addition to the leverage ratio (the ratio of Tier 1 capital to total 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, term
subordinated debt, certain other capital instruments, and up to 45% of pre-tax net unrealized
holding gains on equity securities. The includable
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amount of Tier 2 capital cannot exceed the institutions Tier 1 capital. Qualifying total
capital is further reduced by the amount of the banks 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-weighting system, all of a banks balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of five broad risk weight
categories from 0% to 200%, based on the risks inherent in the type of assets or item. The
aggregate dollar amount of each category is multiplied by the risk weight assigned to that
category. The sum of these weighted values equals the banks risk-weighted assets.
At March 31, 2010, the Banks ratio of Tier 1 capital to average assets was 8.09%, its ratio
of Tier 1 capital to risk-weighted assets was 12.49% and its ratio of total risk-based capital to
risk-weighted assets was 13.37%.
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. The approval of the Commissioner is necessary for the payment of any dividend which
exceeds the total net profits for the year combined with retained net profits for the prior two
years.
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. 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 Banks 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 be undercapitalized within the meaning of the Prompt
Corrective Action regulations. See Regulation and Supervision of the BankPrompt Corrective
Regulatory Action.
In addition, as previously mentioned, under the terms of the TARP Capital Purchase program,
prior to the earlier of (1) December 5, 2011 or (ii) the date on which all of the Companys
preferred shares held by the U.S. Department of Treasury have been redeemed in full, the Company
cannot increase its quarterly cash dividend above $0.18 per common share.
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 institutions that meet
all applicable capital requirements to engage in state authorized activities or investments that do
not meet this standard (other than non-subsidiary equity investments) if it is determined that such
activities or investments do not pose a significant risk to the Deposit Insurance Fund. All
non-subsidiary equity investments, unless otherwise authorized or approved by 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 has 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 FDICs regulations, or the maximum amount permitted by
Massachusetts Banking Law, whichever is less. Such grandfathering authority may be terminated upon
the FDICs 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, 2010, the Bank had
common stocks, preferred stocks, and money market mutual funds, with a market value of $6.6
million, which were held under such grandfathering authority.
Insurance of Deposit Accounts. The Banks deposits are insured
up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is
the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006 under the Federal Deposit Insurance Reform Act of 2005 (the Reform Act). Under the
FDICs risk-based assessment system, insured institutions are assigned to
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one of four risk categories based on supervisory evaluations, regulatory capital levels and certain
other factors, with less risky institutions paying lower assessments. An institutions assessment
rate depends upon the category to which it is assigned, and certain potential adjustments
established by FDIC regulations. Effective April 1, 2009, assessment rates range from seven to
77.5 basis points of assessable deposits. The Federal Deposit Insurance may adjust the scale
uniformly from one quarter to the next, except that no adjustment can deviate more than three basis
points from the base scale without notice and comment. No institution may pay a dividend if in
default of the federal deposit insurance assessment.
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
institutions deposit assessment base), in order to cover losses to the Deposit Insurance Fund.
That special assessment was collected on September 30, 2009. The FDIC provided for similar
assessments during the final two quarters of 2009, if deemed necessary. However, 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. The
estimated assessments, which include 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 will be 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 until January 1, 2014. In addition, the FDIC adopted
an optional Temporary Liquidity Guarantee Program (TLGP) under which, for a fee,
noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30,
2010, subsequently extended to December 31, 2010, with an additional possible extension up to
December 31, 2011. The TLGP also included a debt component under which certain senior unsecured
debt issued by institutions and their holding companies between October 13, 2008 and October 31,
2009 would be guaranteed by the FDIC through June 30, 2012, or in some cases, December 31, 2012.
The Bank opted to participate in the unlimited noninterest-bearing transaction account coverage and
the Bank and Company also opted to participate in the unsecured debt guarantee program.
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. This payment is established quarterly and during the calendar
year ended March 31, 2010 averaged 1.0 basis points of assessable deposits.
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 in recent years.
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
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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 institutions 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
institutions 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 does 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 may 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 provisions.
Under the implementing regulations, the federal banking regulators generally measure an
institutions capital adequacy on the basis of its 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 core capital to adjusted
total assets). The following table shows the capital ratios required for the various prompt
corrective action categories:
Adequately | Significantly | |||||||
Well Capitalized | Capitalized | Undercapitalized | 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 the institution has a composite 1 CAMELS rating. |
If an institutions capital falls below the critically undercapitalized level, it is
subject to conservatorship or receivership within specified time frames. 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 intangible assets other than 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 institutions 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
savings 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.
Loans to Executive Officers, Directors and Principal Stockholders. 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 related interests, generally may not
exceed 15% of the banks unimpaired capital and surplus, and aggregate loans to all such persons
may not exceed the institutions unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective related interests, in excess of
the greater of $25,000 or 5% of capital and surplus (and any loans 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 generally
prohibited from paying the overdrafts of any of their executive officers or directors unless
payment is
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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 are restricted as to type, amount and terms of credit. Massachusetts law also
contains restrictions on lending to directors and officers which are, in some cases, stricter than
federal law. In addition, federal law 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.
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 banks 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 certain covered transactions such as loans 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
(such as the Company) 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 institutions 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 institutions capital with no reasonable prospect
of replenishment without federal assistance.
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 $55.2 million less an exemption of $10.7 million (which may be adjusted
annually by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than
$55.2 million, the reserve requirement is 10% (which may be adjusted annually by the Federal
Reserve Board between 8% and 14%) of the portion in excess of $55.2 million. The Bank is in
compliance with these requirements.
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 institutions discretion
to develop the types of products and services that it believes are best
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suited to its particular community. The Community Reinvestment Act requires the FDIC, in
connection with its examination of an institution, to assess the institutions 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 institutions
Community Reinvestment Act rating. The Banks latest Community Reinvestment Act rating received
from the FDIC was Satisfactory.
The Bank is also subject to similar obligations under Massachusetts Law. The Massachusetts
Community Reinvestment Act requires the Massachusetts Banking Commissioner to consider a banks
Massachusetts Community Reinvestment Act rating when reviewing a banks application to engage in
certain transactions, including mergers, asset purchases and the establishment of branch offices or
automated teller machines, and provides that such assessment may serve as a basis for the denial of
such application. The Banks latest Massachusetts Community Reinvestment Act rating received from
the Massachusetts Division of Banks was High Satisfactory.
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, 2010 of $8.5 million.
During February 2009, the FHLB of Boston announced that unprecedented market stresses affected
the values of certain securities held in its portfolio, resulting in impairment losses. As a
result, the FHLB of Boston had annual net losses for 2008 and 2009. To preserve capital, the FHLB
of Boston suspended dividend payments, and it is likely that this suspension of dividends will
remain in effect for at least the first six months of 2010.
For the years ended March 31, 2010, 2009 and 2008, cash dividends from the Federal Home Loan
Bank of Boston to the Bank amounted to approximately $0, $202 thousand and $482 thousand,
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.
Regulatory Restructuring Legislation. The Obama Administration proposed, and the House of
Representatives and Senate have adopted, legislation that would restructure the regulation of
depository institutions and financial services in general. Both the House and Senate bills would
merge the Office of Thrift Supervision, which regulates federal thrifts, into the Office of the
Comptroller of the Currency, which regulates national banks. Savings and loan holding companies
would become regulated by the Federal Reserve Board. The bills contain various provisions designed
to enhance the regulation of depository institutions and prevent the recurrence of a financial
crisis such as occurred in 2008-2009. Also proposed is the creation of a new federal agency to
administer and enforce consumer and fair lending laws, a function that is now performed by the
depository institution regulators. Any final legislation is subject to a House/Senate Conference
Committee, which would resolve differences between the two bills, and the signature of the
President.
Enactment of any such legislation would revise the regulatory structure imposed on the Bank
and the Company and/or could result in more stringent regulation. At this time, management has no
way of predicting the contents of any final legislation.
Employees
At March 31, 2010, the Company and the Bank employed 85 full-time and 36 part-time employees.
The Companys and Banks employees are not represented by any collective bargaining agreement.
Management of the Company and Bank considers its relations with its employees to be good.
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Item 1A. Risk Factors
An investment in shares of our common stock involves various risks. Before deciding to invest
in our common stock, you should carefully consider the risks described below in conjunction with
the other information in this Annual Report on Form 10-K and information incorporated by reference
into this Annual Report on Form 10-K, including our consolidated financial statements and related
notes. Our business, financial condition and results of operations could be harmed by any of the
following risks or by other risks that have not been identified or that we may believe are
immaterial or unlikely. The value or market price of our common stock could decline due to any of
these risks, and you may lose all or part of your investment. The risks discussed below also
include forward-looking statements and our actual results may differ substantially from those
discussed in these forward-looking statements.
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, 2010, nonresidential real estate and construction loans totaled
$230.7 million, which represented 50.0% of total loans. If we increase the level of our
nonresidential real estate and construction loans, we will increase our credit risk profile
relative to other financial institutions that have higher concentrations of one to four-family
residential mortgage loans.
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 propertys 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 management believes that the Banks 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.
The recent negative events in the housing market, including significant and continuing home
price reductions coupled with the upward trends in delinquencies and foreclosures, have resulted
and will likely continue to result in poor performance of mortgage and construction loans and in
significant asset write-downs by many financial institutions. Reduced availability of commercial
credit and increasing unemployment 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
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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 will 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 will 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. | ||
| 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. |
Recent legislative and regulatory initiatives to address difficult market and economic conditions
may not stabilize the U.S. banking system. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience an adverse effect, which
may be material, on our ability to access capital and on our business, financial condition, results
of operations, and cash flows.
The legislation that established the U.S. Treasurys Troubled Assets Relief Program (TARP)
was signed into law on October 3, 2008. As part of TARP, the U.S. Treasury established the TARP
Capital Purchase Program (CPP) to provide up to $700 billion of funding to eligible financial
institutions through the purchase of capital stock and other financial instruments for the purpose
of stabilizing and providing liquidity to the U.S. financial markets. Subsequently, on February
17, 2009, the American Recovery and Reinvestment Act of 2009 (the ARRA) was signed into law as a
sweeping economic recovery package intended to stimulate the economy and provide for broad
infrastructure, energy, health, and education needs. There can be no assurance as to the actual
impact any of this legislation will have on the national economy or financial markets. The failure
of these significant legislative measures to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could materially and adversely
affect our business, financial condition, results of operations, access to credit or the trading
price of our common stock.
There have been numerous actions undertaken in connection with or following the recent
legislation by the Federal Reserve, Congress, U.S. Treasury, the Securities and Exchange Commission
and the federal bank regulatory agencies in efforts to address the current liquidity and credit
crisis in the financial industry that followed the sub-prime mortgage market meltdown which began
in late 2007. These measures include homeowner relief that encourages loan restructuring and
modification; the temporary increase in FDIC deposit insurance from $100,000 to
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$250,000; the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate; emergency action against
short selling practices; a temporary guaranty program for money market funds; the establishment of
a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses in the banking
sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S.
banking system. The recent legislation and the other regulatory initiatives described above may
not have their desired effects. If the volatility in the markets continues and economic conditions
fail to improve or worsen, our business, financial condition and results of operations could be
materially and adversely affected.
U.S. and international financial markets and economic conditions, particularly in our market area,
could adversely affect our liquidity, results of operations and financial condition.
Recent turmoil and downward economic trends have been particularly acute in the financial
sector. We are considered well-capitalized under the FDICs prompt corrective action regulations.
While our management has taken aggressive measures to maintain and increase our liquidity, the
cost and availability of funds may be adversely affected by illiquid credit markets and the demand
for our products and services may decline as our borrowers and customers experience the impact of
an economic slowdown and recession. In view of the concentration of our operations and the
collateral securing our loan portfolio in the metropolitan Boston area, we may be particularly
susceptible to adverse economic conditions in the metropolitan Boston area, where our business is
concentrated. In addition, the severity and duration of these adverse conditions is unknown and may
exacerbate our exposure to credit risk and adversely affect the ability of borrowers to perform
under the terms of their lending arrangements with us. In addition, the severity and duration of
these adverse conditions is unknown and may exacerbate our exposure to credit risk and adversely
affect the ability of borrowers to perform under the terms of their lending arrangements with us.
Accordingly, continued turbulence in the U.S. and international markets and economy may adversely
affect our liquidity, financial condition, results of operations and profitability.
Proposed regulatory reform may have a material impact on our operations.
The Obama administration has proposed, and Congress is considering, comprehensive legislation
intended to modernize regulation of the United States financial system. The legislation passed by
the House of Representatives contains several provisions that would have a direct impact on our
operations. The House legislation would create a new federal agency, the Consumer Financial
Protection Agency, that would be dedicated to administering fair lending and consumer compliance
laws with respect to financial products and services, which could result in new regulatory
requirements and increased regulatory costs for us. The Senate bill would also establish a
consumer protection agency housed in, but independent from, the Federal Reserve Board. Both the
House and Senate bills would also merge the Office of Thrift Supervision, which regulates federal
thrifts, into the Office of the Comptroller of the Currency, which regulates national banks. As a
result, savings and loan holding companies would become regulated by the Federal Reserve Board.
Any such legislation may have a substantial impact on our operations. However, because the
contents of any final legislation cannot be provided, the specific effects of the legislation
cannot be evaluated at this time
Liquidity is essential to our businesses and we rely on external sources to finance a
significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be substantially affected in a
negative fashion by an inability to raise funding in the long-term or short-term debt capital
markets or the equity capital markets or an inability to access the secured lending markets.
Current conditions in the capital markets are such that traditional sources of capital may not be
available to us on reasonable terms if it needed to raise capital. As previously reported, the
Companys investments in the perpetual preferred stock of the FNMA and FHLMC were significantly
impacted by the September 2008 conservatorship of FNMA and FHLMC, giving control of their
management to the Federal Housing Finance Agency and prohibiting FNMA and FHLMC from paying
dividends on their existing common and preferred stock. This impairment to the Companys
securities portfolio caused the Company to be adequately capitalized under the federal prompt
corrective action regulations as of September 30, 2008. On December 5, 2008, the Company sold
$10.0 million in preferred shares to the U.S. Treasury as a participant in the TARP Capital
Purchase Program, which represented approximately 2.6% of the Companys risk-weighted assets as of
September 30, 2008. With the U.S. Treasurys $10.0 million investment in the Company, the Company
and the
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Bank met all regulatory requirements to be considered well capitalized under the federal
prompt corrective action regulations at both March 31, 2009 and March 31, 2010. In the event that
the Company needs to raise additional capital in the future, there is no guarantee that we will be
able to borrow funds or successfully raise additional capital at all or on terms that are favorable
or otherwise not dilutive to existing shareholders. If we are unable to raise funding using the
methods described above, we would likely need to finance or liquidate unencumbered assets to meet
maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets
at a discount from market value, either of which could adversely affect our results of operations
and financial condition.
The limitations on executive compensation imposed through our participation in the TARP Capital
Purchase Program may restrict our ability to attract, retain and motivate key employees, which
could adversely affect our operations.
As part of our participation in the TARP Capital Purchase Program, we agreed to be bound by
certain executive compensation restrictions, including limitations on severance payments and the
clawback of any bonus and incentive compensation that were based on materially inaccurate financial
statements or any other materially inaccurate performance metric criteria. Subsequent to the
issuance of the preferred stock, the ARRA was enacted, which provides more stringent limitations on
severance pay and the payment of bonuses. To the extent that any of these compensation
restrictions do not permit us to provide a comprehensive compensation package to our key employees
that is competitive in our market area, we have difficulty in attracting, retaining and motivating
our key employees, which could have an adverse effect on our results of operations.
Future dividend payments and common stock repurchases are restricted by the terms of the U.S.
Treasurys equity investment in us.
Under the terms of the TARP Capital Purchase Program, until the earlier of the third
anniversary of the date of issuance of the Companys Series A Preferred Stock and the date on which
the Series A Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of
the Series A Preferred Stock to third parties, we are prohibited from increasing dividends on our
common stock from the last quarterly cash dividend per share ($0.18) declared on the common stock
prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions,
and from making certain repurchases of equity securities, including our common stock, without the
consent of the U.S. Treasury. Furthermore, as long as the Series A Preferred Stock is outstanding,
dividend payments and repurchases or redemptions relating to certain equity securities, including
our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred
stock, subject to certain limited exceptions.
The terms governing the issuance of the preferred stock to the U.S. Treasury may be changed, the
effect of which may have an adverse effect on our operations.
The terms of the Securities Purchase Agreement in which we entered into with U.S. Treasury
pursuant to the TARP Capital Purchase Program provides that the U.S. Treasury may unilaterally
amend any provision of the Purchase Agreement to the extent required to comply with any changes in
applicable federal law that may occur in the future. We have no assurances that changes in the
terms of the transaction will not occur in the future. Such changes may place restrictions on our
business or results of operation, which may adversely affect the market price of our common stock.
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 the northwestern suburbs of Boston, 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 the Commonwealth of Massachusetts
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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 northwestern suburbs of Boston 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 the northwestern suburbs of Boston, a decline in local
economic conditions could adversely affect the value of the real estate collateral securing our
loans. Generally, it appears that the local commercial real estate market remains weak, while the
local residential real estate has shown some recent signs of improvement. Commercial real estate
prices have generally declined by 10% during calendar 2009 compared to a 2% decline during calendar
2008. Residential property values have increased slightly during calendar 2009, compared to a
decline of approximately 8% to 9% during calendar 2008. Further declines 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.
Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are required by regulatory authorities to maintain adequate levels of capital to support
our operations. We anticipate our capital resources will satisfy our capital requirements for the
foreseeable future. We may at some point, however, need to raise additional capital to support our
continued growth. If we raise capital through the issuance of additional shares of our common
stock or other securities, it would dilute the ownership interests of current investors and may
dilute the per share book value of our common stock. New investors may also have rights,
preferences and privileges senior to our current stockholders, which may adversely impact our
current shareholders.
Our ability to raise additional capital, if needed, will depend on conditions in the capital
markets at that time, which are outside our control, and on our financial performance.
Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when needed, our ability to further expand
our operations through internal growth and acquisitions could be materially impaired.
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 successful.
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Future FDIC assessments will reduce our earnings.
On September 29,, 2009, the FDIC adopted an Amended Restoration Plan to enable the
Deposit Insurance Fund to return to its minimum reserve ratio of 1.15% over eight years. Under
this plan, the FDIC did not impose a previously-planned second special assessment (on September 30,
2009, the Bank paid the first special assessment which totaled $270 thousand). Also, the plan
calls for deposit insurance premiums to increase by 3 basis points effective January 1, 2011.
Additionally, to meet bank failure cash flow needs, the FDIC assessed a three year insurance
premium prepayment, which was paid by banks in December 2009 and will cover the period of January
1, 2010 through December 31, 2012. The FDIC estimates that bank failures will total approximately
$100 billion during the next three years, but only projects revenues of approximately $60 billion.
The shortfall will be met through the collection of prepaid premiums, which is estimated to be $45
billion. The Banks prepaid premium totaled $2.3 million and was paid during the quarter ended
December 31, 2009, and it is being amortized monthly over the three year period. This prepaid
deposit premium is carried on the balance sheet in the other assets category and amounted to $2.1
million. Any additional emergency special assessment imposed by the FDIC will further reduce the
Companys 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 fiscal years 2006, 2007, 2008, 2009 and 2010 our
interest rate spread was 2.72%, 2.21%, 2.06%, 2.63% and 2.92%, respectively. In addition, the U.S.
Federal Reserve has decreased the federal funds target rate from 5.25% in September 2007 to a rate
of 0.25% at March 31, 2010. 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.
For more information on how changes in interest rates could impact us, see Item 7A,
Quantitative and Qualitative Disclosures About Market Risk.
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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, quality of underwriting standards, current
general market collateral valuations, trends apparent in loan concentrations, loan to value ratios,
lenders experience, past due and nonaccrual loans, 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.
At March 31, 2010, our allowance for loan losses as a percentage of total loans was 0.66%.
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 will be
successful in attracting or retaining such personnel. 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.
Our failure to continue to recruit and retain qualified loan originators could adversely affect our
ability to compete successfully and affect our profitability.
Our continued success and future growth depend heavily on our ability to attract and retain
highly skilled and motivated loan originators and other banking professionals. We compete against
many institutions with greater financial resources, both within our industry and in other
industries, to attract these qualified individuals. Our failure to recruit and retain adequate
talent could reduce our ability to compete successfully and adversely affect our business and
profitability.
We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
Central 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. 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 depositors of Central Co-operative Bank and are not intended to protect
the interests of investors in our common stock. Regulatory authorities have
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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.
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.
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 service our debt, pay dividends and otherwise pay our obligations as they come due
is substantially dependent on capital distributions from Central Co-operative Bank, and these
distributions are subject to regulatory limits and other restrictions.
A substantial source of our income from which we service our debt, pay our obligations and
from which we can pay dividends is the receipt of dividends from Central Co-operative Bank. The
availability of dividends from Central Co-operative Bank is limited by various statutes and
regulations. It is also possible, depending upon the financial condition of Central 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 Central
Co-operative Bank is unable to pay dividends to us, we may not be able to service our debt, pay our
obligations or pay dividends on our common stock. The inability to receive dividends from Central
Co-operative Bank would adversely affect our business, financial condition, results of operations
and prospects.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
The Bank owns all its offices, except the Burlington, Malden and Woburn High School branch
offices, the stand-alone ATM, the loan centers located in Somerville and the branch and operations
center located in Medford. Net book value includes the cost of land, buildings and improvements as
well as leasehold improvements, net of depreciation and amortization. At March 31, 2010, all of
the Banks offices were in reasonable condition and met the business needs of the Bank. The
following table sets forth the location of the Banks offices, as well as certain information
relating to these offices as of March 31, 2010:
Net Book | ||||||||
Value at | ||||||||
Year | March 31, 2010 | |||||||
Office Location | Opened | (In Thousands) | ||||||
Main Office 399 Highland Avenue Somerville, MA (owned) |
1974 | $ | 264 | |||||
Branch Offices: 175 Broadway Arlington, MA (owned) |
1982 | 106 | ||||||
85 Wilmington Road Burlington, MA (leased) |
1978 | (a) | 27 | |||||
1192 Boylston Street Chestnut Hill (Brookline), MA (owned) |
1954 | 159 | ||||||
137 Pleasant Street Malden, MA (leased) |
1975 | (b) | 27 | |||||
846 Main Street Melrose, MA (owned) |
1994 | 189 | ||||||
275 Main Street Woburn, MA (owned) |
1980 | 444 | ||||||
198 Lexington Street Woburn, MA (owned) |
1974 | 175 | ||||||
Woburn High School Woburn, MA (leased) |
2002 | (c) | 16 | |||||
Stand-Alone ATM 94 Highland Avenue Somerville, MA (leased) |
2004 | (d) | | |||||
Loan Center 401 Highland Avenue Somerville, MA (leased) |
2002 | (e) | 200 | |||||
Operations Center/Branch Office 270 Mystic Avenue Medford, MA (leased) |
2006 | (f) | 455 |
(a) | The lease for the Burlington branch expires October 31, 2012 with a five-year renewal option. | |
(b) | The lease for the Malden branch expires August 31, 2015. | |
(c) | The lease for the Woburn High School branch is for one year, renewable annually on an automatic basis. | |
(d) | The lease for the stand-alone ATM expires November 30, 2010 with an option to extend for three three-year terms. | |
(e) | The lease for the Commercial Loan Center expires May 1, 2015 with two five-year renewal options. | |
(f) | In March 2005, the Bank signed a lease for a combined retail branch and operations center to be located at 270 Mystic Avenue, Medford. The lease was subsequently renegotiated and the Bank took occupancy in May 2006. The initial rent under the lease is for $150,000 per year and the initial term is 10 years. There are options to extend the lease by two five-year terms. |
At March 31, 2010, the aggregate net book value of the Banks premises and equipment was
$2.8 million.
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Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Company, such as
claims to enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and other issues
incident to our business. We are not party to any pending legal proceedings that we believe would
have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. (Removed and Reserved)
PART II
Item 5. Market for the Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Securities
The Companys common stock is quoted on the NASDAQ Global MarketSM under the symbol
CEBK. At March 31, 2010, there were 1,667,151 shares of the Companys common stock outstanding
and approximately 200 holders of record. The foregoing number of holders does not reflect the
number of persons or entities who held the stock in nominee or street name through various
brokerage firms. In October 1996, the Company established a quarterly cash dividend policy and
made its first dividend distribution on November 15, 1996; it has paid cash dividends on a
quarterly basis since initiating the dividend program.
The following tables list the high and low prices for the Companys common stock during each
quarter of fiscal 2010 and fiscal 2009 as reported by NASDAQ, and the amounts and payable dates of
the cash dividends paid during each quarter of fiscal 2010 and fiscal 2009. The stock quotations
constitute interdealer prices without retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
Common Stock Prices | ||||||||
Fiscal 2010 | High | Low | ||||||
June 30, 2009 |
$ | 8.00 | $ | 4.05 | ||||
September 30, 2009 |
9.40 | 5.60 | ||||||
December 31, 2009 |
10.80 | 7.96 | ||||||
March 31, 2010 |
10.09 | 8.11 | ||||||
Fiscal 2009 | High | Low | ||||||
June 30, 2008 |
$ | 21.15 | $ | 11.00 | ||||
September 30, 2008 |
14.27 | 8.32 | ||||||
December 31, 2008 |
31.50 | 3.04 | ||||||
March 31, 2009 |
6.80 | 4.27 | ||||||
Cash Dividends(payable dates) | ||||||||
Fiscal 2010 | Amount | |||||||
May 15, 2009 | $ | 0.05 | ||||||
August 21, 2009 | 0.05 | |||||||
November 20, 2009 | 0.05 | |||||||
February 19, 2010 | 0.05 | |||||||
Fiscal 2009 | Amount | |||||||
May 16, 2008 | $ | 0.18 | ||||||
August 15, 2008 | 0.18 | |||||||
November 21, 2008 | 0.18 | |||||||
February 20, 2009 | 0.18 |
The Company did not repurchase any shares of its common stock during the fourth quarter of
fiscal year 2010.
32
Table of Contents
Item 6. Selected Financial Data
The Company has derived the following selected consolidated financial and other data in part
from its Consolidated Financial Statements and Notes appearing elsewhere in this Annual Report on
Form 10-K:
At or for the Year Ended March 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||||||||||
Balance Sheet |
||||||||||||||||||||
Total assets |
$ | 542,444 | $ | 575,827 | $ | 571,245 | $ | 566,140 | $ | 547,275 | ||||||||||
Total loans |
461,510 | 460,670 | 474,942 | 460,542 | 415,318 | |||||||||||||||
Investments available for sale |
34,368 | 35,215 | 52,960 | 65,763 | 97,195 | |||||||||||||||
Deposits |
339,169 | 375,074 | 361,089 | 388,573 | 393,413 | |||||||||||||||
Total borrowings |
154,810 | 156,938 | 168,173 | 137,053 | 111,290 | |||||||||||||||
Total stockholders equity |
45,113 | 40,239 | 38,816 | 37,702 | 39,189 | |||||||||||||||
Shares outstanding |
1,667,151 | 1,639,951 | 1,639,951 | 1,639,951 | 1,590,951 | |||||||||||||||
Statements of Operations |
||||||||||||||||||||
Net interest and dividend income |
$ | 17,013 | $ | 15,862 | $ | 13,596 | $ | 14,449 | $ | 16,317 | ||||||||||
Provision for loan losses (reduction of provision) |
600 | 2,125 | (70 | ) | 80 | 100 | ||||||||||||||
Net (loss) gain from sales and write-downs of
investment securities |
(465 | ) | (9,796 | ) | 645 | 581 | 419 | |||||||||||||
Gain on sales of loans |
329 | 111 | 158 | 99 | 208 | |||||||||||||||
Other noninterest income |
1,547 | 1,640 | 1,429 | 1,314 | 1,370 | |||||||||||||||
Total noninterest expenses |
15,146 | 15,159 | 13,859 | 14,856 | 14,183 | |||||||||||||||
Net income (loss) |
1,993 | (6,205 | ) | 1,447 | 1,020 | 2,643 | ||||||||||||||
Earnings (loss) per common share diluted |
0.92 | (4.58 | ) | 1.07 | 0.70 | 1.83 | ||||||||||||||
Selected Ratios |
||||||||||||||||||||
Interest rate spread |
2.92 | % | 2.63 | % | 2.06 | % | 2.21 | % | 2.72 | % | ||||||||||
Net yield on interest-earning assets |
3.21 | 2.96 | 2.51 | 2.68 | 3.11 | |||||||||||||||
Noninterest expenses to average assets |
2.73 | 2.73 | 2.49 | 2.69 | 2.64 | |||||||||||||||
Book equity-to-assets |
8.32 | 6.99 | 6.79 | 6.66 | 7.16 | |||||||||||||||
Return on average assets |
0.36 | (1.12 | ) | 0.26 | 0.18 | 0.49 | ||||||||||||||
Return on average stockholders equity |
4.66 | (16.68 | ) | 3.76 | 2.59 | 6.78 | ||||||||||||||
Dividend payout ratio for common shares |
21.74 | n/a | 67.29 | 100.00 | 35.68 | |||||||||||||||
Book value per common share |
$ | 21.31 | $ | 18.76 | $ | 23.67 | $ | 22.99 | $ | 24.64 | ||||||||||
Tangible book value per common share |
$ | 19.97 | $ | 17.40 | $ | 22.31 | $ | 21.63 | $ | 23.24 |
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Table of Contents
Quarterly Results of Operations (In Thousands, Except Per Share Data)
The following tables summarize the Companys operating results on a quarterly basis for the
years ended March 31, 2010 and 2009:
2010 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Interest and dividend income |
$ | 7,188 | $ | 7,225 | $ | 7,088 | $ | 7,037 | ||||||||
Interest expense |
3,340 | 3,039 | 2,711 | 2,435 | ||||||||||||
Net interest and dividend income |
3,848 | 4,186 | 4,377 | 4,602 | ||||||||||||
Provision for loan losses |
50 | 200 | 100 | 250 | ||||||||||||
Noninterest income |
534 | 410 | 379 | 87 | ||||||||||||
Noninterest expenses |
3,922 | 3,485 | 3,983 | 3,756 | ||||||||||||
Income before income taxes |
410 | 911 | 673 | 683 | ||||||||||||
Income tax provision (benefit) |
112 | 307 | 307 | (42 | ) | |||||||||||
Net income |
$ | 298 | $ | 604 | $ | 366 | $ | 725 | ||||||||
Earnings per common share basic |
$ | 0.10 | $ | 0.31 | $ | 0.15 | $ | 0.39 | ||||||||
Earnings per common share diluted |
$ | 0.10 | $ | 0.31 | $ | 0.14 | $ | 0.37 | ||||||||
2009 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Interest and dividend income |
$ | 7,865 | $ | 7,800 | $ | 7,418 | $ | 7,208 | ||||||||
Interest expense |
3,940 | 3,602 | 3,503 | 3,384 | ||||||||||||
Net interest and dividend income |
3,925 | 4,198 | 3,915 | 3,824 | ||||||||||||
Provision for loan losses |
200 | 900 | | 1,025 | ||||||||||||
Noninterest income |
428 | (9,094 | ) | 432 | 189 | |||||||||||
Noninterest expenses |
3,608 | 3,606 | 3,791 | 4,153 | ||||||||||||
Income (loss) before income taxes (benefit) |
545 | (9,402 | ) | 556 | (1,165 | ) | ||||||||||
Income tax provision (benefit) |
144 | 64 | (3,361 | ) | (108 | ) | ||||||||||
Net income (loss) |
$ | 401 | $ | (9,466 | ) | $ | 3,917 | $ | (1,057 | ) | ||||||
Earnings (loss) per common share basic |
$ | 0.29 | $ | (6.80 | ) | $ | 2.76 | $ | (0.86 | ) | ||||||
Earnings (loss) per common share diluted |
$ | 0.29 | $ | (6.80 | ) | $ | 2.76 | $ | (0.86 | ) | ||||||
34
Table of Contents
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
The operations of the Company and its subsidiary, the Bank, are generally influenced by
overall economic conditions, the related monetary and fiscal policies of the federal government and
the regulatory policies of financial institution regulatory authorities, including the
Massachusetts Commissioner of Banks, the Federal Reserve Board and the FDIC.
The Bank monitors its exposure to earnings fluctuations resulting from market interest rate
changes. Historically, the Banks earnings have been vulnerable to changing interest rates due to
differences in the terms to maturity or repricing of its assets and liabilities. For example, in a
rising interest rate environment, the Banks net interest income and net income could be negatively
affected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to
rising interest rates than the Banks interest-sensitive assets (loans and investments).
The following is a discussion and analysis of the Companys results of operations for the last
two fiscal years and its financial condition at the end of fiscal years 2010 and 2009.
Managements discussion and analysis of financial condition and results of operations should be
read in conjunction with the consolidated financial statements and accompanying notes included in
this Annual Report on Form 10-K.
Application of Critical Accounting Policies
Managements discussion and analysis of the Companys financial condition and results of
operations are based on the consolidated financial statements which are prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of such
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates, including those related
to the allowance for loan losses, fair value of investments, income taxes, impairment of
securities, impairment of goodwill, valuation of other real estate owned and valuation of stock
options under ASC 718 Compensation Stock Compensation and other equity based instruments.
Management bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis in making
judgments about the carrying values of assets that are not readily apparent from other sources.
Actual results could differ from the amount derived from managements estimates and assumptions
under different assumptions or conditions.
Allowance for Loan Losses. Arriving at an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal
analysis of the allowance each quarter, which considers, among other factors, the character and
size of the loan portfolio, business and economic conditions, loan growth, delinquency trends,
nonperforming loan trends, charge-off experience and other asset quality factors. Regular reviews
of the loan portfolio are performed to identify loans for which specific allowance allocations are
considered prudent. Specific allocations are made based upon evaluations that we believe to be
appropriate in accordance with ASC 310, and such allocations are determined by reviewing current
collateral values, financial information, cash flows, payment histories and trends and other
relevant facts surrounding the particular credits. Provisions for losses on the remaining
commercial and commercial real estate loans are based on pools of similar loans using a combination
of historical loss experience, loan to value ratios and qualitative adjustments. For the
residential real estate and consumer loan portfolios, the range of reserves is calculated by
applying historical charge-off and recovery experience and other pertinent data to the current
outstanding balance in each loan category. Loans not individually reviewed for impairment in
accordance with ASC 310 are analyzed in accordance with ASC 450. Although management uses
available information to establish the appropriate level of the allowance for loan losses, future
additions or reductions to the allowance may be necessary based on estimates that are susceptible
to change as a result of changes in economic conditions and other factors. As a result, our
allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions
for loan losses could materially adversely affect the Companys operating results. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review
the Companys allowance for loan losses. Such
35
Table of Contents
agencies may require the Company to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.
Other Real Estate Owned. OREO is recorded at the lower of book value, or fair market value
less estimated selling costs. Property insurance is obtained for each parcel, and each property is
properly maintained and secured during the holding period. Property management vendors may be
utilized in those instances when a direct sale does not seem probable during a reasonable period of
time, or if the property requires additional oversight. It is the Companys policy and strategy to
sell all OREO as soon as possible consistent with maximizing value and return to the Company.
Fair Value of Investments. Debt securities that management has the positive intent and
ability to hold to maturity are classified as held-to-maturity and reported at cost, adjusted for
amortization of premiums and accretion of discounts, both computed by a method that approximates
the effective yield method. Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity securities not classified
as either held-to-maturity or trading are classified as available-for-sale and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a separate component
of stockholders equity and comprehensive income.
Gains and losses on sales of securities are recognized when realized with the cost basis of
investments sold determined on a specific-identification basis. Premiums and discounts on
investments and mortgage-backed securities are amortized or accreted to interest income over the
actual or expected lives of the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment is judged to be
other-than-temporary, the cost basis of the investment is written down to fair value as a new cost
basis and the amount of the write-down is included in the results of operations.
The Companys investments in the Federal Home Loan Bank of Boston and the Co-operative Central
Bank Reserve Fund are accounted for at cost.
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the tax basis of the
Banks assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The Banks deferred tax asset is reviewed periodically and
adjustments to such asset are recognized as deferred income tax expense or benefit based on
managements judgments relating to the realizability of such asset.
Accounting for Goodwill and Impairment. ASC 350, Intangibles Goodwill and Other, (ASC
350) addresses the method of identifying and measuring goodwill and other intangible assets having
indefinite lives acquired in a business combination, eliminates further amortization of goodwill
and requires periodic impairment evaluations of goodwill using a fair value methodology prescribed
in the statement. In accordance with ASC 350, the Company does not amortize the goodwill balance of
$2.2 million. Impairment testing is required at least annually or more frequently as a result of
an event or change in circumstances (e.g., recurring operating losses by the acquired entity) that
would indicate an impairment adjustment may be necessary. The Company adopted December 31 as its
assessment date. Annual impairment testing was performed during each year and in each analysis, it
was determined that an impairment charge was not required. The most recent testing was performed
as of December 31, 2009 and management determined that no impairment existed as of December 31,
2009.
Stock-Based Compensation. The Company accounts for stock based compensation pursuant to ASC
718 Compensation-Stock Compensation (ASC 718). The Company uses the Black-Scholes option pricing
model as its method for determining fair value of stock option grants. The Company has previously
adopted two qualified stock option plans for the benefit of officers and other employees under
which an aggregate of 281,500 shares have been reserved for issuance. One of these plans expired
in 1997 and the other plan expired in 2009. All awards under the plan that expired in 2009 were
granted by the end of 2005. Awards outstanding at the time the plans expire will continue to
remain outstanding according to their terms.
36
Table of Contents
On July 31, 2006, the Companys stockholders approved the Central Bancorp, Inc. 2006 Long-Term
Incentive Plan (the Incentive Plan). Under the Incentive Plan, 150,000 shares have been reserved
for issuance as options to purchase stock, restricted stock, or other stock awards. The exercise
price of an option may not be less than the fair market value of the Companys common stock on the
date of grant of the option and may not be exercisable more than ten years after the date of grant.
However, awards may become available again if participants forfeit awards under the plan prior to
its expiration. As of March 31, 2010, 63,800 shares remained available for issue under the
Incentive Plan.
Forfeitures of awards granted under the incentive plan are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in
order to derive the Companys best estimate of awards ultimately expected to vest. Forfeitures
represent only the unvested portion of a surrendered option and are typically estimated based on
historical experience. Based on an analysis of the Companys historical data, the Company applied
a forfeiture rate of 0% to stock options outstanding in determining stock compensation expense for
each of the years ended March 31, 2010 and 2009.
Troubled Asset Relief Program Capital Purchase Program
On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department
of Treasury as a participant in the federal governments Troubled Asset Relief Program (TARP)
Capital Purchase Program. This represented approximately 2.6% of the Companys risk-weighted
assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for
healthy U.S. financial institutions designed to encourage these institutions to build capital to
increase the flow of financing to U.S. businesses and consumers and to support the weakened U.S.
economy. In connection with the investment, the Company entered into a Letter Agreement and
related Securities Purchase Agreement with the U.S. Treasury pursuant to which the Company issued
(i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation
preference $1,000 per share (the Series A Preferred Stock) and (ii) a warrant (the Warrant) to
purchase 234,742 shares of the Companys common stock for an aggregate purchase price of $10.0
million in cash. The warrant term is 10 years and it is immediately exercisable, in whole or in
part, at an exercise price of $6.39 per share. With the U.S. Treasurys $10.0 million investment
in the Company, the Company and the Bank met all regulatory requirements to be considered
well-capitalized under the federal prompt corrective action regulations as of March 31, 2010. For
more information on the Series A Preferred Stock and Warrant issued to the U.S. Treasury in
connection with the TARP Capital Purchase Program, see Note 14 to the Companys Consolidated
Financial Statements included in this Annual Report.
Results of Operations
Overview. Net income available to common shareholders for the year ended March 31, 2010 was
$1.4 million, or $0.92 per diluted share, as compared to a net loss available to common
shareholders of $6.4 million, or ($4.58) per diluted share, during the year ended March 31, 2009.
In addition to the absence of losses of $9.2 million relating to sales and write-downs on Fannie
Mae and Freddie Mac preferred stock, items primarily affecting the Companys earnings for the year
ended March 31, 2010 when compared to the year ended March 31, 2009 were: (1) an increase in net
interest income of $1.2 million; (2) a decrease in the provision for loan losses of $1.5 million;
(3) a net loss in sales and write-downs on other securities of $269 thousand during the year ended
March 31, 2010 compared to $402 thousand during the year ended March 31, 2009, and (4) a decrease
in noninterest expenses of $13 thousand. Additionally, for the years ended March 31, 2010 and
2009, net income was reduced by $613 thousand and $198 thousand, respectively, as a result of
dividends and accretion allocated to preferred shareholders related to the Companys December 2008
sale of $10.0 million of preferred stock and warrant to purchase common stock to the U.S. Treasury
Department as a participant in the federal governments TARP Capital Purchase Program.
Net interest and dividend income increased by $1.2 million during fiscal 2010 as compared to
fiscal 2009 primarily due to a $2.9 million decline in interest expense, offset by a $1.7 million
decline in interest income.
The provision for loan losses decreased by $1.5 million during fiscal 2010 as compared to
fiscal 2009. The decline was primarily associated with additional provisions required for one
large customer relationship in 2009.
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Table of Contents
Losses on the sales and write-downs on FNMA and FHLMC preferred stock during fiscal 2009
totaled $9.4 million compared to losses on the sales and write-downs on FNMA and FHLMC preferred
stock of $196 thousand during fiscal 2010. The reduction of such losses in fiscal 2010 along with
an increase in gains on the sales of loans resulted in an improvement in noninterest income.
Noninterest expenses decreased by $13 thousand during fiscal 2010 when compared to fiscal 2009
primarily due to decreases in foreclosure and collection, advertising and marketing, professional
fees, and occupancy and equipment expenses, offset by a $1 million increase in deposit insurance
premium expense.
The Company recognized an income tax expense of $685 thousand during fiscal 2010, compared to
a $3.3 million income tax benefit in fiscal 2009, which included a $3.5 million tax benefit related
to the Fannie Mae and Freddie Mac impairment write-downs. The increase in 2010 income tax expense
also resulted from the Companys increased net income of $1.4 million compared to a net loss of
$6.4 million in 2009.
Net Interest Rate Spread and Net Interest Margin. The Companys and the Banks operating
results are significantly affected by the net interest rate spread, which is the difference between
the yield on loans and investments and the interest cost of deposits and borrowings. The net
interest rate spread is affected by economic conditions and market factors that influence interest
rates, loan demand and deposit flows. The net interest margin reflects the relationship of net
interest income to interest earning assets and it is calculated by dividing net interest income
before the provision for loan losses by average interest earning assets. The net interest spread
and net interest margin improved from 2.63% and 2.96%, respectively, for the fiscal year ended
March 31, 2009 to 2.92% and 3.21%, respectively, for the fiscal year ended March 31, 2010 due to
several factors. The cost of funds decreased by 56 basis points during fiscal 2010 mainly due to
decreases in the average rates paid on deposits resulting from aggressive liability management as
some maturing certificates of deposit were either not renewed or were replaced with lower cost
deposits or FHLB borrowings. During the fiscal year ended March 31, 2010, the yield on
interest-earning assets declined by 27 basis points primarily due to a 218 basis point reduction in
interest income on investments securities. The reduced yield on investments during the fiscal year
ended March 31, 2010 was primarily due to the combined effect of: (1) the elimination of dividends
on certain preferred stock investments, (2) a reduction of $202 thousand in FHLB stock dividends as
the FHLB of Boston gradually reduced its dividend rate during fiscal years 2008 and 2009 and then
announced the elimination of its dividend entirely in February 2009; and (3) a shift in the
investment mix as maturing higher-yielding corporate debt and agency bonds were either reinvested
in lower-yielding mortgage-backed securities or they were not reinvested at all. The average
balance of short-term investments decreased from $25.8 million during the fiscal year ended March
31, 2009 to $20.5 million during the fiscal year ended March 31, 2010, resulting in interest income
on these investments declining by $100 thousand. This decline was primarily due to recessionary
economic conditions which resulted in the Federal Reserves lowering of the fed funds to a target
range of 225 to 0 basis points during the fiscal year ended March 31, 2009. The fed funds target
rate range of 25 to 0 basis points has remained in effect throughout fiscal 2010. This decrease in
the fed funds target rate had a corresponding effect on the interest earned on the Companys
short-term investments which is closely tied to the target fed funds rate.
38
Table of Contents
The following table presents average balances, interest income and expense and yields
earned or rates paid on interest-earning assets and interest-bearing liabilities for the years
indicated. Note that average loans include non-performing loans.
Years Ended March 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average/ | Average/ | |||||||||||||||||||||||
Average | Yield | Average | Yield | |||||||||||||||||||||
Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 458,214 | $ | 26,694 | 5.83 | % | $ | 455,782 | $ | 27,141 | 5.95 | % | ||||||||||||
Other loans |
5,560 | 320 | 5.76 | 8,507 | 533 | 6.28 | ||||||||||||||||||
Total loans |
463,774 | 27,014 | 5.82 | 464,289 | 27,674 | 5.96 | ||||||||||||||||||
Short-term investments |
20,504 | 50 | 0.24 | 25,812 | 150 | 0.58 | ||||||||||||||||||
Investment securities |
45,185 | 1,473 | 3.26 | 45,374 | 2,467 | 5.44 | ||||||||||||||||||
Total investments |
65,689 | 1,523 | 2.32 | 71,186 | 2,617 | 3.68 | ||||||||||||||||||
Total interest-earnings assets |
529,463 | 28,537 | 5.39 | 535,475 | 30,291 | 5.66 | ||||||||||||||||||
Allowance for loan losses |
(2,962 | ) | (4,066 | ) | ||||||||||||||||||||
Noninterest-earning assets |
28,537 | 23,331 | ||||||||||||||||||||||
Total assets |
$ | 555,038 | $ | 554,740 | ||||||||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 308,830 | 4,468 | 1.45 | $ | 316,683 | 6,984 | 2.21 | ||||||||||||||||
Other borrowings |
11,892 | 578 | 4.86 | 12,126 | 689 | 5.68 | ||||||||||||||||||
Advances from FHLB of Boston |
146,210 | 6,478 | 4.43 | 147,108 | 6,756 | 4.59 | ||||||||||||||||||
Total interest-bearing liabilities |
466,932 | 11,524 | 2.47 | 475,917 | 14,429 | 3.03 | ||||||||||||||||||
Noninterest-bearing deposits |
42,247 | 38,807 | ||||||||||||||||||||||
Other liabilities |
3,056 | 2,818 | ||||||||||||||||||||||
Total liabilities |
512,235 | 517,542 | ||||||||||||||||||||||
Stockholders equity |
42,803 | 37,198 | ||||||||||||||||||||||
Total liabilities and
stockholders
equity |
$ | 555,038 | $ | 554,740 | ||||||||||||||||||||
Net interest and dividend income |
$ | 17,013 | $ | 15,862 | ||||||||||||||||||||
Interest rate spread |
2.92 | % | 2.63 | % | ||||||||||||||||||||
Net yield on interest-earning assets |
3.21 | % | 2.96 | % | ||||||||||||||||||||
39
Table of Contents
Rate/Volume Analysis. The effect on net interest income of changes in interest rates and
changes in the amounts of interest-earning assets and interest-bearing liabilities is shown in the
following table. Information is provided on changes for the fiscal years indicated attributable to
changes in interest rates and changes in volume. Changes due to combined changes in interest rates
and volume are allocated between changes in rate and changes in volume proportionally to the change
due to volume and the change due to rate.
2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
Changes due to | Changes due to | |||||||||||||||||||||||
Increase (decrease) in: | Increase (decrease) in: | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Mortgage loans |
$ | 136 | $ | (583 | ) | $ | (447 | ) | $ | 361 | $ | (432 | ) | $ | (71 | ) | ||||||||
Other loans |
(173 | ) | (40 | ) | (213 | ) | (238 | ) | (108 | ) | (346 | ) | ||||||||||||
Total income from loans |
(37 | ) | (623 | ) | (660 | ) | 123 | (540 | ) | (417 | ) | |||||||||||||
Short-term investments |
(26 | ) | (74 | ) | (100 | ) | 312 | (585 | ) | (273 | ) | |||||||||||||
Investment securities |
(10 | ) | (984 | ) | (994 | ) | (1,313 | ) | 211 | (1,102 | ) | |||||||||||||
Total income from investments |
(36 | ) | (1,058 | ) | (1,094 | ) | (1,001 | ) | (374 | ) | (1,375 | ) | ||||||||||||
Total interest and dividend income |
(73 | ) | (1,681 | ) | (1,754 | ) | (878 | ) | (914 | ) | (1,792 | ) | ||||||||||||
Interest expense: |
||||||||||||||||||||||||
Deposits |
(170 | ) | (2,346 | ) | (2,516 | ) | (324 | ) | (3,425 | ) | (3,749 | ) | ||||||||||||
Other borrowings including
short-term
advances from FHLB |
(13 | ) | (98 | ) | (111 | ) | 19 | (168 | ) | (149 | ) | |||||||||||||
Long-term advance FHLB of Boston |
(41 | ) | (237 | ) | (278 | ) | 386 | (546 | ) | (160 | ) | |||||||||||||
Total interest expense |
(224 | ) | (2,681 | ) | (2,905 | ) | 81 | (4,139 | ) | (4,058 | ) | |||||||||||||
Net interest and dividend income |
$ | 151 | $ | 1,000 | $ | 1,151 | $ | (959 | ) | $ | 3,225 | $ | 2,266 | |||||||||||
Interest and Dividend Income. Interest and dividend income decreased by $1.8 million, or
5.8%, to $28.5 million for the year ended March 31, 2010 compared to $30.3 million for the year
ended March 31, 2009 primarily due to decreases in the average yield on investments and loans,
partially offset by increased average loan balances. The average balance of loans increased
primarily due to increases in the average balances of residential real estate loans partially
offset by decreases in the average balances for commercial real estate and construction loans as
the Bank continued to shift its focus from those loan types to originating residential real estate
loans. The average balance of investment securities decreased as maturities and principal
repayments were used to fund loan growth, deposit withdrawals and repayment of borrowings. The
yield on short-term investments was 0.24% during the year ended March 31, 2010 as compared to 0.58%
for the year ended March 31, 2009 as the average yields on these investments are closely tied to
the federal funds target rate, which averaged approximately 0.25% during the year ended March 31,
2010, and ranged from 225 to 0 basis points during the year ended March 31, 2009.
Interest Expense. Interest expense decreased by $2.9 million, or 20.1%, to $11.5 million for
the year ended March 31, 2010 compared to $14.4 million for the year ended March 31, 2009. The
cost of deposits decreased by 76 basis points from 2.21% during the year ended March 31, 2009 to
1.45% during the year ended March 31, 2010, as some high-cost certificates of deposit were replaced
by lower-costing deposits. The average balance of certificates of deposit totaled $173.3 million
during the year ended March 31, 2009, compared to $149.8 million for the year ended March 31, 2010,
a decline of $23.5 million. The average balance of lower-costing non-maturity deposits increased
by $19.1 million to $201.3 million for the year ended March 31, 2010, as compared to an average
balance of $182.2 million for the year ended March 31, 2009. The average balance of FHLB of Boston
borrowings decreased by $900 thousand, from $147.1 million during the year ended March 31, 2009 to
$146.2 million during the year ended March 31, 2010. The decrease in the average cost of these
funds was the result of a decrease in market interest rates. The average cost of other borrowings
decreased as a portion of these borrowings are adjustable and the average rate paid during the year
ended March 31, 2010 was 4.86%, compared to an average rate of 5.68% during the year ended March
31, 2009.
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Provision for Loan Losses. The Company provides for loan losses in order to maintain the
allowance for loan losses at a level that management estimates is adequate to absorb probable
losses based on an evaluation of known and inherent risks in the portfolio. In determining the
appropriate level of the allowance for loan losses, management considers past and anticipated loss
experience, evaluations of underlying collateral, financial condition of the borrower, prevailing
economic conditions, the nature and volume of the loan portfolio and the levels of non-performing
and other classified loans. The amount of the allowance is based on estimates and ultimate losses
may vary from such estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly when appropriate to maintain the adequacy of the
allowance. The Company uses a process of portfolio segmentation to calculate the appropriate
reserve level at the end of each quarter. Periodically, the Company evaluates the allocations used
in these calculations. During the years ended March 31, 2010 and 2009, management analyzed
required reserve allocations for loans considered impaired under ASC 310 and the allocation
percentages used when calculating potential losses under ASC 450. Based on these analyses, the
Company recorded a provision of $600 thousand for the year ended March 31, 2010 compared to a
provision for loan losses of $2.1 million during the year ended March 31, 2009.
Senior management continues to give high priority to monitoring and managing the Companys
asset quality. At March 31, 2010, nonperforming loans totaled $6.2 million as compared to $4.8
million on March 31, 2009. Of the eleven loans constituting this category at March 31, 2010, all
are secured by real estate collateral that is predominantly located in the Banks market area. Ten
of these real estate secured loans have an active plan for resolution in place from either the sale
of the real estate directly by the borrower, through foreclosure or repossession, or through loan
workout efforts. The borrower for the other nonperforming real estate secured loan has entered
into a bankruptcy court approved resolution program with the ongoing net cash flow generated from
apartment rents from the property collateral being paid to the Bank. While bankruptcy filings have
extended the time required to resolve some nonperforming loans, management continues to work with
borrowers to resolve these situations as soon as possible.
Noninterest Income (Loss). Noninterest income increased by $9.5 million from $(8.0) million
for the year ended March 31, 2009 to $1.4 million for the year ended March 31, 2010. As previously
mentioned, the Company recorded a $9.4 million impairment on Fannie Mae and Freddie Mac preferred
stock during the quarter ended September 30, 2008. Additionally, net loss on the sales or
write-downs on other securities totaled $402 thousand during the year ended March 31, 2009 compared
to $269 thousand during the year ended March 31, 2010. Gains on the sale of loans increased from
$111 thousand during the year ended March 31, 2009 to $329 thousand during the year ended March 31,
2010 due to increased loan origination and sale activity during fiscal 2010. Other noninterest
income decreased by $101 thousand during the year ended March 31, 2010 primarily due to a $138
thousand loss on the sale of OREO property. Income on bank-owned life insurance policies purchased
during fiscal 2008 totaled $309 thousand during the year ended March 31, 2009 compared to $300
thousand during the year ended March 31, 2010.
Noninterest Expenses. Noninterest expenses decreased by $13 thousand, or 0.1%, to $15.1
million during the year ended March 31, 2010 as compared to $15.2 million during the year ended
March 31, 2009. This decrease is due to decreases in salaries and benefits of $297 thousand,
marketing costs of $253 thousand, other expenses of $365 thousand, occupancy and equipment costs of
$141 thousand, and professional fees of $30 thousand, offset by increases in FDIC insurance
premiums of $1.0 million and data processing costs of $52 thousand. Management continues to
closely monitor operating expenses throughout the Company.
Salaries and employee benefits decreased by $297 thousand, or 3.6%, to $8.0 million during the
year ended March 31, 2010 as compared $8.3 million during the year ended March 31, 2009 primarily
due to fewer full-time equivalent employees due to a temporary reduction in loan area personnel, a
reduction in employee stock option plan compensation expenses, and the receipt of a
benefits-related legal settlement.
FDIC insurance premiums increased by $1.0 million to $1.2 million during the year ended March
31, 2010 compared to $130 thousand during the year ended March 31, 2009. This increase was
primarily related to an increase in deposit insurance premium assessments.
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Table of Contents
Advertising and marketing expenses decreased by $253 thousand to $163 thousand during the year
ended March 31, 2010 as compared to $416 thousand during the year ended March 31, 2009 as
management strategically decided to decrease these expenses during 2010.
Office occupancy and equipment expenses decreased by $141 thousand, or 6.1%, to $2.2 million
during the year ended March 31, 2010 as compared $2.3 million during the year ended March 31, 2009
primarily due to decreases in the amortization of leasehold improvements and depreciation of
furniture, fixtures and equipment, decreases on certain utility costs, as well as decreases in
other maintenance and repair costs partially offset by increases in computer maintenance costs
and security related expenses.
Data processing costs increased by $52 thousand, or 6.5%, to $854 thousand during the year
ended March 31, 2010 as compared to $802 thousand during the year ended March 31, 2009 due to the
increase in certain processing costs.
Income Taxes. The effective income tax rates for the years ended March 31, 2010 were 25.6%
and (34.5)%, respectively. The effective income tax rate for fiscal 2010 was affected by a $271
thousand reduction in state income taxes associated with the Banks sale of an investment security
previously held by a subsidiary. The investment security was transferred to the Bank prior to the
sale of the investment, which occurred during the fourth quarter of fiscal 2010. Regarding fiscal
2009, the Company recognized during the quarter ended December 31, 2008, a tax benefit of
approximately $3.5 million as a result of Fannie Mae and Freddie Mac impairment charges recorded
during the quarter ended September 30, 2008, as previously mentioned.
Comparison of Financial Condition at March 31, 2010 and March 31, 2009
Total assets were $542.4 million at March 31, 2010 compared to $575.8 million at March 31,
2009, representing a decrease of $33.4 million, or 5.8%. Total loans (excluding loans held for
sale) were $461.5 million at March 31, 2010, compared to $460.7 million at March 31, 2009,
representing an increase of $840 thousand, or 0.2%. This increase was primarily due to increases
in residential and home equity loans of $33.7 million and $1.3 million, respectively, substantially
offset by decreases in construction and commercial real estate loans of $33.0 million.
Construction and commercial real estate loans declined as management de-emphasized these types of
lending in the current economic environment. Residential and home equity loans increased from
$185.8 million at March 31, 2009 to $220.8 million at March 31, 2010 due to managements increased
emphasis on these types of lending. Commercial and industrial loans decreased from $5.1 million at
March 31, 2009 to $4.1 million at March 31, 2010.
The allowance for loan losses totaled $3.0 million at March 31, 2010 compared to $3.2 million
at March 31, 2009, representing a net decrease of $153 thousand, or 4.8%. This net decrease was
primarily due to decreases of $753 thousand related to charge-offs on twelve loans, and increases
in the provision for loan losses of $600 thousand resulting from managements review of the
adequacy of the allowance for loan losses. Of the $773 thousand in charge-offs, $21 thousand was
related to a mixed-use condominium loan which was written down to fair value less estimated selling
costs, $115 thousand was related to the partial charge-off of a hotel loan, $125 thousand resulted
from the partial charge-off of a commercial real estate loan secured by residential apartments, $89
thousand resulted from the partial charge-off of a residential property which secured a residential
real estate loan, and $34 thousand resulted from the charge-off of two commercial and industrial
loans. The remaining $369 thousand of charge-offs related to six impaired residential loans and
other consumer loans. Based upon managements regular analysis of the adequacy of the allowance
for loan losses, management considered the allowance for loan losses to be adequate at both March
31, 2010 and March 31, 2009. See Provision for Loan Losses.
Management regularly assesses the desirability of holding newly originated residential
mortgage loans in the Banks portfolio or selling such loans in the secondary market. A number of
factors are evaluated to determine whether or not to hold such loans in the Banks portfolio
including current and projected liquidity, current and projected interest rates, projected growth
in other interest-earning assets and the current and projected interest rate risk profile. Based
on its consideration of these factors, management determined that most long-term residential
mortgage loans originated during the year ended March 31, 2010 should be retained, rather than
being sold in the secondary market. The decision to sell or hold loans is made at the time the
loan commitment is issued. Upon making a determination not to retain a loan, the Bank
simultaneously enters into a best efforts forward commitment
to sell the loan to manage the interest rate risk associated with the decision to sell the
loan. Loans are sold servicing released.
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Cash and cash equivalents totaled $16.5 million at March 31, 2010 compared to $42.4 million at
March 31, 2009, representing a decrease of $25.9 million, or 61.0%, due to a $25.1 million decrease
in short-term investments. Management utilized excess cash and short-term investments to fund
certain maturing high-cost certificates of deposit in an effort to improve the Companys net
interest rate spread and net interest margin. Investment securities totaled $44.5 million at March
31, 2010 compared to $45.3 million at March 31, 2009, representing a decrease of $847 thousand, or
1.9%. The decrease in investment securities is primarily due to the repayment of $14.2 million in
principal on mortgage-back securities, partially offset by the purchase of $11.0 million in
mortgage-backed securities during the year ended March 31, 2010 and a net increase of $2.4 million
in the market value of available for sale securities. Stock in the Federal Home Loan Bank of
Boston totaled $8.5 million at both March 31, 2010 and March 31, 2009.
Banking premises and equipment, net, totaled $2.8 million at March 31, 2010 compared to $3.3
million at March 31, 2009, primarily reflecting the amortization of leasehold improvements and
depreciation for the period.
Other real estate owned totaled $60 thousand at March 31, 2010, compared to $3.0 million at
March 31, 2009, a net decrease of $2.9 million. This decrease is primarily due to the sale of two
residential properties and one commercial condominium property during fiscal 2010. At March 31,
2010, this category consists of one property recorded at fair market value less estimated selling
costs.
Deferred tax asset totaled $4.7 million at March 31, 2010 compared to $7.6 million at March
31, 2009. The decrease in the deferred tax asset is primarily the result of the fourth quarter of
fiscal 2010 sale of certain Fannie Mae preferred stocks which were written-down in fiscal 2009.
During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one
executive which totaled $6.0 million. The cash surrender value of these policies is carried as an
asset titled Bank-Owned Life Insurance and totaled $6.7 million at March 31, 2010 as compared to
$6.4 million as of March 31, 2009.
Total deposits amounted to $339.2 million at March 31, 2010 compared to $375.1 million at
March 31, 2009, representing a decrease of $35.9 million, or 9.6%. The decrease was a result of
the combined effect of a $45.1 million, or 25.1%, decrease in certificates of deposit, which
included $4.6 million of short-term municipal deposits, partially offset by a $9.2 million, or
4.7%, increase in core deposits (consisting of all non-certificate accounts). Management utilized
excess cash and short-term investments to fund certain maturing high-cost certificates of deposit
in an effort to improve the Companys net interest rate spread and net interest margin.
Federal Home Loan Bank advances amounted to $143.5 million at March 31, 2010 compared to
$144.6 million at March 31, 2009, representing a decrease of $1.1 million, or 0.8%. During fiscal
2010, maturities of approximately $27.0 million were strategically renewed at favorable rates to
reduce the cost of these borrowings to an average of 4.86% from 5.68%.
The net increase in stockholders equity from $40.2 million at March 31, 2009 to $45.1 million
at March 31, 2010 is primarily the result of a $3.0 million decrease in accumulated other
comprehensive loss resulting from net increases in the market values of available for sale
securities, net income of $2.0 million, and $689 thousand related to the allocation of Company
common stock to participants in the ESOP.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term
nature. The Banks principal sources of liquidity are customer deposits, short-term investments,
repayments of loans, FHLB of Boston advances, maturities and repayments of various other
investments. These various sources of liquidity, as well as the Banks
ability to sell residential mortgage loans in the secondary market, are used to fund deposit
withdrawals, loan originations and investment purchases and funds from operations. In addition,
the Company has access to the capital markets to raise additional equity. On December 5, 2008, the
Company sold $10.0 million of its preferred stock and issued a warrant to purchase common stock to
the U.S. Department of
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Treasury under the TARP Capital Purchase Program See Troubled Asset Relief Program Capital
Purchase Program above.
During fiscal year 2010, the Bank decreased deposits by $35.9 million, or 9.6%. Differences
in deposit levels are primarily the result of managements decision to focus at various times on
the use of deposits to fund growth while at other times to instead utilize FHLB of Boston advances.
These decisions are based on the relative interest rates of the various sources of funds at any
particular time. Core deposits, consisting of noninterest-bearing demand deposits, saving
accounts, NOW accounts and money market accounts, represented approximately 60% of the Banks total
deposits in fiscal 2005, but declined to under 44% at March 31, 2006 and 2007, as depositors funds
moved from money market and other core accounts to certificate accounts, to a great extent as a
result of certificate of deposit promotions. Money market deposits had been the fastest growing
component of core deposits but, as a result of the increase in the rates paid on all deposits by
both the Bank and its competitors as shorter term interest rates increased, there was a shift out
of the money market accounts, as well as regular savings and NOW accounts into higher rate
certificates. Core to total deposit ratios increased to 52.1% at March 31, 2009 and to 60.3% at
March 31, 2010 as management strategically replaced maturing CDs with low-cost deposits and FHLB
borrowings. Total deposits were $339.2 million at March 31, 2010, which included core deposits of
$204.6 million.
On September 29, 2009, the FDIC adopted an Amended Restoration Plan to enable the
Deposit Insurance Fund to return to its minimum reserve ratio of 1.15% over eight years. Under
this plan, the FDIC did not impose a previously-planned second special assessment. On June 30,
2009, the Bank accrued the first special assessment which totaled $270 thousand and was paid on
September 30, 2009. Also, the plan calls for deposit insurance premiums to increase by 3 basis
points effective January 1, 2011. Additionally, to meet bank failure cash flow needs, the FDIC
assessed a three year insurance premium prepayment, which was paid by banks in December 2009 and
will cover the period of January 1, 2010 through December 31, 2012. The FDIC estimates that bank
failures will total approximately $100 billion during the next three years, but only projects
revenues of approximately $60 billion. The shortfall will be met through the collection of prepaid
premiums, which is estimated to be $45 billion. The Banks prepaid premium totaled $2.3 million
and was paid during the quarter ended December 31, 2009, and will be amortized monthly over the
three year period. This prepaid deposit premium is carried on the consolidated balance sheet in
the other assets category.
At March 31, 2010, the Company had commitments to originate loans, unused outstanding lines of
credit and undisbursed proceeds of loans totaling $23.8 million. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. At March 31, 2010, the Company believes it has sufficient funds available to
meet its current loan commitments.
The Bank is a voluntary member of the FHLB of Boston and has the ability to borrow up to the
value of its qualified collateral that has not been pledged to others. Qualified collateral
generally consists of residential first mortgage loans, commercial real estate loans, U.S.
Government and agencies securities, mortgage-backed securities and funds on deposit at the FHLB of
Boston. At March 31, 2010 and 2009, the Bank had outstanding FHLB of Boston advances of $143.5 and
$144.6 million, respectively. At March 31, 2010, the Bank had approximately $62.9 million in
unused borrowing capacity at the FHLB of Boston.
The Bank also may obtain funds from the Federal Reserve Bank of Boston, the Co-operative
Central Bank Reserve Fund and through a retail CD brokerage agreement with a major brokerage firm.
The Bank views these borrowing facilities as secondary sources of liquidity and has had no
immediate need to use them.
Commitments, Contingencies and Off-Balance Sheet Risk
In the normal course of operations, the Company engages in a variety of financial transactions
that, in accordance with generally accepted accounting principles are not recorded in its
consolidated financial statements. These transactions involve, to varying degrees, elements of
credit, interest rate and liquidity risk. Such transactions are used primarily to manage
customers requests for funding and take the form of loan commitments and lines of credit.
For the year ended March 31, 2010, the Company engaged in no off-balance sheet transactions
reasonably likely to have a material effect on its financial condition, results of operations or
cash flows.
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Table of Contents
Commitments to originate new loans or to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Loan commitments
generally expire within 30 to 45 days. Most home equity line commitments are for a term of 15
years, and commercial lines of credit are generally renewable on an annual basis. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. At March 31, 2010, the Company had commitments to originate loans, unused outstanding lines
of credit and undisbursed proceeds of loans totaling $23.8 million. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the borrower.
Commitments to sell loans held for sale are agreements to sell loans on a best efforts
delivery basis to a third party at an agreed upon price. Additionally, these loans are sold
servicing released and without recourse.
On September 16, 2004 the Company completed a $5.1 million trust preferred securities
financing through Central Bancorp Capital Trust I. On January 31, 2007, the Company completed a
trust preferred securities financing in the amount of $5.9 million through Central Bancorp
Statutory Trust II. Central Bancorp Capital Trust I and Central Bancorp Statutory Trust II are the
Companys only special purpose subsidiaries. The Company, within the financing transactions and
concurrent with the issuance of the junior subordinated debentures and the trust preferred
securities, issued guarantees related to the trust securities of both trusts for the benefit of
their respective holders. Refer to Note 1, Subordinated Debentures, in Notes to the Consolidated
Financial Statements for more detail.
Management believes that, at March 31, 2010, the Company and Bank have adequate sources of
liquidity to fund these commitments.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this Annual Report on Form
10-K have been prepared in conformity with accounting principles generally accepted in the United
States of America, which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike many industrial companies, substantially all of the assts and
liabilities of the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Banks performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
Capital Resources
The Company and the Bank are required to maintain minimum capital ratios pursuant to the
federal prompt corrective action regulations. These regulations establish a risk-adjusted ratio
relating capital to different categories of balance sheet assets and off-balance sheet obligations.
Two categories of capital are defined: Tier 1 or core capital (stockholders equity) and Tier 2 or
supplementary capital. Total capital is the sum of both Tier 1 and Tier 2 capital. According to the
federal prompt corrective action regulations, Tier 1 capital must represent at least 50% of
qualifying total capital. At March 31, 2010, the minimum total risk-based capital ratio required to
be well-capitalized was 10.00%. The Companys and the Banks total risk-based capital ratios at
March 31, 2010 were 15.12% and 13.37%, respectively.
To complement the risk-based standards, the FDIC has also adopted a leverage ratio (adjusted
stockholders equity divided by total average assets) of 3.00% for the most highly rated banks and
4.00% for all others. The leverage ratio is to be used in tandem with the risk-based capital
ratios as the minimum standards for banks. The Companys and the Banks leverage ratios were 9.22%
and 8.09%, respectively, at March 31, 2010.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Companys earnings are largely dependent on its net interest income, which is the
difference between the yield on interest-earning assets and the cost of interest-bearing
liabilities. The Company seeks to reduce its exposure to changes in interest rates, or market
risk, through active monitoring and management of its interest-rate risk exposure. The policies and
procedures for managing both on- and off-balance sheet activities are established by the Banks
asset/liability management committee (ALCO). The Board of Directors reviews and approves the ALCO
policy annually and monitors related activities on an ongoing basis.
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys
market risk arises primarily from interest rate risk inherent in its lending, borrowing and deposit
taking activities.
The main objective in managing interest rate risk is to minimize the adverse impact of changes
in interest rates on the Banks net interest income and preserve capital, while adjusting the
Banks asset/liability structure to control interest-rate risk. However, a sudden and substantial
increase or decrease in interest rates may adversely impact earnings to the extent that the
interest rates borne by assets and liabilities do not change at the same speed, to the same
extent, or on the same basis.
The Company quantifies its interest-rate risk exposure using a sophisticated simulation model.
Simulation analysis is used to measure the exposure of net interest income to changes in interest
rates over a specific time horizon. Simulation analysis involves projecting future interest income
and expense under various rate scenarios. The simulation is based on forecasted cash flows and
assumptions of management about the future changes in interest rates and levels of activity (loan
originations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and,
therefore, actual results will differ from simulated results due to timing, magnitude and frequency
of interest rate changes as well as changes in market conditions and strategies. The net interest
income projection resulting from the use of forecasted cash flows and managements assumptions is
compared to net interest income projections based on immediate shifts of 300 basis points upward
and 50 basis points downward for fiscal 2010, and 300 basis points upward and 100 basis points
downward for fiscal year 2009. Internal guidelines on interest rate risk state that for every 100
basis points immediate shift in interest rates, estimated net interest income over the next twelve
months should decline by no more than 5%. Managements decision to utilize different rate shift
scenarios at March 31, 2010 as compared to those used at March 31, 2009, is based on the overall
lower interest rate environment that existed at March 31, 2010 when compared to March 31, 2009.
The following table indicates the projected change in net interest income, and sets forth such
change as a percentage of estimated net interest income, for the twelve-month period following the
date indicated assuming an immediate and parallel shift for all market rates with other rates
adjusting to varying degrees in each scenario based on both historical and expected spread
relationships:
At March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Amount | % Change | Amount | % Change | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
300 basis point increase in rates |
$ | (1,631 | ) | (9.00 | )% | $ | (1,006 | ) | (6.16 | )% | ||||||
50 basis point decrease in rates |
(131 | ) | (0.72 | )% | (155 | ) | (0.95 | ) |
As noted, this policy provides broad, visionary guidance for managing the Banks balance
sheet, not absolute limits. When the simulation results indicate a variance from stated
parameters, ALCO will intensify its scrutiny of the reasons for the variance and take whatever
actions are deemed appropriate under the circumstances.
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Item 8. Financial Statements and Supplementary Data
Page | ||||
48 | ||||
49 | ||||
50 | ||||
52 | ||||
53 | ||||
83 |
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
March 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 4,328 | $ | 5,099 | ||||
Short-term investments |
12,208 | 37,323 | ||||||
Cash and cash equivalents |
16,536 | 42,422 | ||||||
Investment securities available for sale (Note 2) |
34,368 | 35,215 | ||||||
Stock in Federal Home Loan Bank of Boston, at cost (Notes 2 and 8) |
8,518 | 8,518 | ||||||
The Co-operative Central Bank Reserve Fund, at cost (Note 2) |
1,576 | 1,576 | ||||||
Total investments |
44,462 | 45,309 | ||||||
Loans held for sale (Note 1) |
392 | 3,208 | ||||||
Loans (Note 3) |
461,510 | 460,670 | ||||||
Less allowance for loan losses (Note 4) |
(3,038 | ) | (3,191 | ) | ||||
Loans, net |
458,472 | 457,479 | ||||||
Accrued interest receivable |
1,896 | 1,859 | ||||||
Banking premises and equipment, net (Note 5) |
2,759 | 3,323 | ||||||
Deferred tax asset, net (Note 9) |
4,681 | 7,585 | ||||||
Other real estate owned (Note 6) |
60 | 2,986 | ||||||
Goodwill, net (Note 1) |
2,232 | 2,232 | ||||||
Bank owned life insurance (Note 1) |
6,686 | 6,391 | ||||||
Other assets |
4,268 | 3,033 | ||||||
Total assets |
$ | 542,444 | $ | 575,827 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits (Note 7) |
$ | 339,169 | $ | 375,074 | ||||
Short-term borrowings |
| 1,014 | ||||||
Federal Home Loan Bank advances (Notes 2 and 8) |
143,469 | 144,583 | ||||||
Subordinated debentures (Note 1) |
11,341 | 11,341 | ||||||
Advance payments by borrowers for taxes and insurance |
1,649 | 1,532 | ||||||
Accrued expenses and other liabilities |
1,703 | 2,044 | ||||||
Total liabilities |
497,331 | 535,588 | ||||||
Commitments and Contingencies (Notes 9, 10 and 13) |
||||||||
Stockholders equity (Note 11): |
||||||||
Preferred stock Series A Fixed Rate Cumulative Perpetual, $1.00 par value;
5,000,000 shares authorized; 10,000 shares issued and outstanding at March
31,
2010 and 2009, with a liquidation preference and redemption value of
$10,063,889 at March 31, 2010 and 2009 |
9,589 | 9,476 | ||||||
Common stock $1.00 par value; 15,000,000 shares authorized; 1,667,151 and
1,639,951 shares issued and outstanding at March 31, 2010 and 2009,
respectively |
1,667 | 1,640 | ||||||
Additional paid-in capital |
4,291 | 4,371 | ||||||
Retained income |
34,482 | 33,393 | ||||||
Accumulated other comprehensive income (loss) (Notes 1, 2 and 12) |
810 | (2,226 | ) | |||||
Unearned compensation Employee Stock Ownership Plan (Note 12) |
(5,726 | ) | (6,415 | ) | ||||
Total stockholders equity |
45,113 | 40,239 | ||||||
Total liabilities and stockholders equity |
$ | 542,444 | $ | 575,827 | ||||
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands, Except Share And Per Share Data)
Years Ended March 31, | ||||||||
2010 | 2009 | |||||||
Interest and dividend income: |
||||||||
Mortgage loans |
$ | 26,694 | $ | 27,141 | ||||
Other loans |
320 | 533 | ||||||
Short-term investments |
50 | 150 | ||||||
Investments |
1,473 | 2,467 | ||||||
Total interest and dividend income |
28,537 | 30,291 | ||||||
Interest expense: |
||||||||
Deposits |
4,468 | 6,984 | ||||||
Advances from Federal Home Loan Bank of Boston |
6,478 | 6,756 | ||||||
Other borrowings |
578 | 689 | ||||||
Total interest expense |
11,524 | 14,429 | ||||||
Net interest and dividend income |
17,013 | 15,862 | ||||||
Provision for loan losses (Note 4) |
600 | 2,125 | ||||||
Net interest and dividend income after
provision for loan losses |
16,413 | 13,737 | ||||||
Noninterest income: |
||||||||
Deposit service charges |
985 | 981 | ||||||
Net loss from sales and write-downs of Fannie Mae and
Freddie Mac securities (Note 2) |
(196 | ) | (9,394 | ) | ||||
Net loss from sales and write-downs of investment securities other than
Fannie Mae and Freddie Mac (Note 2) |
(269 | ) | (402 | ) | ||||
Net gains on sales of loans |
329 | 111 | ||||||
Bank-owned life insurance income |
300 | 309 | ||||||
Brokerage income |
137 | 151 | ||||||
Other income |
125 | 199 | ||||||
Total noninterest income (loss) |
1,411 | (8,045 | ) | |||||
Noninterest expenses: |
||||||||
Salaries and employee benefits (Note 12) |
7,991 | 8,288 | ||||||
Occupancy and equipment (Note 5) |
2,184 | 2,325 | ||||||
Data processing fees |
854 | 802 | ||||||
Professional fees (Note 13) |
895 | 925 | ||||||
FDIC deposit premiums |
1,151 | 130 | ||||||
Advertising and marketing |
163 | 416 | ||||||
Other expenses (Note 1) |
1,908 | 2,273 | ||||||
Total noninterest expenses |
15,146 | 15,159 | ||||||
Income (loss) before income taxes (benefit) |
2,678 | (9,467 | ) | |||||
Provision (benefit) for income taxes (Note 1) |
685 | (3,262 | ) | |||||
Net income (loss) |
$ | 1,993 | $ | (6,205 | ) | |||
Net income (loss) available to common stockholders |
$ | 1,380 | $ | (6,403 | ) | |||
Earnings (loss) per common share (Note 1) |
||||||||
Basic |
$ | 0.95 | $ | (4.58 | ) | |||
Diluted |
$ | 0.92 | $ | (4.58 | ) | |||
Weighted average common shares outstanding basic |
1,457,232 | 1,398,175 | ||||||
Weighted average common and equivalent shares outstanding diluted |
1,499,912 | 1,398,175 |
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
(In Thousands, except per share data)
Number of | ||||||||||||||||||||||||||||||||||||
Shares of | Accumulated | |||||||||||||||||||||||||||||||||||
Series A | Series A | Number of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||
Preferred | Preferred | Shares of | Common | Paid-In | Retained | Comprehensive | Compensation | Stockholders | ||||||||||||||||||||||||||||
Stock | Stock | Common Stock | Stock | Capital | Income | Income (Loss) | ESOP | Equity | ||||||||||||||||||||||||||||
Balance at March 31, 2008 |
| $ | | 1,639,951 | $ | 1,640 | $ | 3,690 | $ | 40,825 | $ | (236 | ) | $ | (7,103 | ) | $ | 38,816 | ||||||||||||||||||
Net loss |
| | | | | | | (6,205 | ) | |||||||||||||||||||||||||||
Other comprehensive loss, net of
$1.3 million tax benefit: |
||||||||||||||||||||||||||||||||||||
Unrealized loss on securities, net
of reclassification
adjustment (Note 2) |
| | | | | | (1,990 | ) | | (1,990 | ) | |||||||||||||||||||||||||
Comprehensive loss |
(8,195 | ) | ||||||||||||||||||||||||||||||||||
Dividends paid to common shareholders
($0.72 per share) |
| | | | | (1,030 | ) | | | (1,030 | ) | |||||||||||||||||||||||||
Issuance of preferred stock and
warrants, net of $30 issuance costs |
10,000 | 9,376 | | | 594 | | | | 9,970 | |||||||||||||||||||||||||||
Preferred stock accretion of
discount and issuance costs |
| 36 | | | | (36 | ) | | | | ||||||||||||||||||||||||||
Dividends accrued/paid on preferred
stock |
| 64 | | | | (161 | ) | | | (97 | ) | |||||||||||||||||||||||||
Stock-based compensation (Note 1) |
| | | | 322 | | | | 322 | |||||||||||||||||||||||||||
Amortization of unearned
compensation ESOP |
| | | | (235 | ) | | | 688 | 453 | ||||||||||||||||||||||||||
Balance at March 31, 2009 |
10,000 | 9,476 | 1,639,951 | 1,640 | 4,371 | 33,393 | (2,226 | ) | (6,415 | ) | 40,239 | |||||||||||||||||||||||||
Net income |
| | | | | 1,993 | | | 1,993 | |||||||||||||||||||||||||||
Other comprehensive income, net of
taxes of
$2.0 million: |
||||||||||||||||||||||||||||||||||||
Unrealized gain on post retirement
benefits, net of
taxes of $17 thousand |
| | | | | | 24 | | 24 | |||||||||||||||||||||||||||
Unrealized gain on securities, net
of reclassification
adjustment (Note 2) and taxes of
$2.0 million |
| | | | | | 3,012 | | 3,012 | |||||||||||||||||||||||||||
Comprehensive income |
5,029 | |||||||||||||||||||||||||||||||||||
Dividends paid to common stockholder
($0.20 per share) |
| | | | | (291 | ) | | | (291 | ) | |||||||||||||||||||||||||
Preferred stock accretion of
discount and issuance costs |
| 113 | | | | (113 | ) | | | | ||||||||||||||||||||||||||
Dividends paid on preferred stock |
| | | | | (500 | ) | | | (500 | ) | |||||||||||||||||||||||||
Grant of restricted common stock |
| | 30,000 | 30 | (30 | ) | | | | | ||||||||||||||||||||||||||
Forfeiture of restricted common stock |
| | (2,800 | ) | (3 | ) | 3 | | | | | |||||||||||||||||||||||||
Stock-based compensation (Note 1) |
| | | | 321 | | | | 321 | |||||||||||||||||||||||||||
Amortization of unearned
compensation ESOP |
| | | | (374 | ) | | | 689 | 315 | ||||||||||||||||||||||||||
Balance at March 31, 2010 |
10,000 | $ | 9,589 | 1,667,151 | $ | 1,667 | $ | 4,291 | $ | 34,482 | $ | 810 | $ | (5,726 | ) | $ | 45,113 | |||||||||||||||||||
See accompanying notes to consolidated financial statements
50
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (continued)
(In Thousands)
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (continued)
(In Thousands)
The Companys other comprehensive income (loss) and related tax effect for the years ended
March 31, 2010 and 2009 are as follows:
Before Tax | Tax Expense | After-Tax | ||||||||||
Amount | (Benefit) | Amount | ||||||||||
Year ending March 31, 2010 |
||||||||||||
Unrealized gain on post-retirement benefits |
$ | 41 | $ | 17 | $ | 24 | ||||||
Unrealized gains on securities: |
||||||||||||
Unrealized net holding gains during period |
4,553 | 1,816 | 2,737 | |||||||||
Less: reclassification adjustment for net losses
included in net income |
(465 | ) | (190 | ) | (275 | ) | ||||||
Other comprehensive income |
$ | 5,059 | $ | 2,023 | $ | 3,036 | ||||||
Before-Tax | Tax Expense | After-Tax | ||||||||||
Amount | (Benefit) | Amount | ||||||||||
Year ending March 31, 2009 |
||||||||||||
Unrealized gain on post-retirement benefits |
$ | 115 | $ | 115 | $ | | ||||||
Unrealized losses on securities: |
||||||||||||
Unrealized net holding losses during period |
(13,163 | ) | (4,752 | ) | (8,411 | ) | ||||||
Less: reclassification adjustment for net losses
included in net income |
(9,796 | ) | (3,375 | ) | (6,421 | ) | ||||||
Other comprehensive loss |
$ | (3,252 | ) | $ | (1,262 | ) | $ | (1,990 | ) | |||
See accompanying notes to consolidated financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Years Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 1,993 | $ | (6,205 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
773 | 905 | ||||||
Amortization of premiums |
369 | 58 | ||||||
Provision for loan losses |
600 | 2,125 | ||||||
Stock-based compensation and amortization of unearned
compensation ESOP |
636 | 775 | ||||||
Decrease (increase) in deferred tax asset |
896 | (3,650 | ) | |||||
Net losses from sales and write-downs of investment securities |
465 | 9,796 | ||||||
Bank-owned life insurance income |
(300 | ) | (309 | ) | ||||
Gains on sales of loans held for sale |
(329 | ) | (111 | ) | ||||
Originations of loans held for sale |
(36,052 | ) | (13,909 | ) | ||||
Proceeds from the sale of loans originated for sale |
39,197 | 11,007 | ||||||
Loss (gain) on sale of other real estate |
60 | (27 | ) | |||||
Gain on sale of equipment |
(5 | ) | | |||||
(Increase) decrease in accrued interest receivable |
(37 | ) | 122 | |||||
Increase in other assets, net |
(1,230 | ) | (912 | ) | ||||
Increase in advance payments by borrowers for taxes and insurance |
117 | 224 | ||||||
(Increase) decrease in accrued expenses and other liabilities, net |
(317 | ) | 185 | |||||
Net cash provided by operating activities |
6,836 | 74 | ||||||
Cash flows from investing activities: |
||||||||
Loan (originations) principal collections, net |
(1,670 | ) | 8,488 | |||||
Principal payments on mortgage-backed securities |
14,225 | 5,510 | ||||||
Purchases of investment securities |
(11,026 | ) | (13,108 | ) | ||||
Proceeds from sales of investment securities |
335 | 3,621 | ||||||
Maturities and calls of investment securities |
1,500 | 8,500 | ||||||
Purchases of banking premises and equipment |
(214 | ) | (259 | ) | ||||
Net expenditures on foreclosed real estate |
16 | 60 | ||||||
Proceeds from sale of equipment |
10 | | ||||||
Proceeds from sales of OREO |
2,926 | 218 | ||||||
Net cash provided by investing activities |
6,102 | 13,030 | ||||||
Cash flows from financing activities: |
||||||||
Net (decrease) increase in deposits |
(35,905 | ) | 13,985 | |||||
Proceeds from advances from FHLB of Boston |
26,000 | | ||||||
Repayment of advances from FHLB of Boston |
(27,114 | ) | (12,108 | ) | ||||
(Repayments) net proceeds (of) from short-term borrowings |
(1,014 | ) | 873 | |||||
Cash dividends, paid |
(791 | ) | (1,127 | ) | ||||
Issuance of Series A preferred stock and warrants |
| 9,970 | ||||||
Net cash (used in) provided by financing activities |
(38,824 | ) | 11,593 | |||||
Net (decrease) increase in cash and cash equivalents |
(25,886 | ) | 24,697 | |||||
Cash and cash equivalents at beginning of year |
42,422 | 17,725 | ||||||
Cash and cash equivalents at end of year |
$ | 16,536 | $ | 42,422 | ||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 11,610 | $ | 14,468 | ||||
Income taxes |
(813 | ) | 935 | |||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Loans transferred to other real estate owned |
$ | 77 | $ | 3,237 | ||||
Accretion of Series A preferred stock discount and issuance costs |
113 | 36 |
See accompanying notes to consolidated financial statements
52
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Year Ended March 31, 2010
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Central Bancorp,
Inc. (the Company), a Massachusetts corporation, and its wholly owned subsidiary, Central
Co-operative Bank (the Bank), as well as the wholly owned subsidiaries of the Bank, Central
Securities Corporation, Central Securities Corporation II, Metro Real Estate Holdings, LLC.
The Company was organized at the direction of the Bank in September 1998 to acquire all of the
capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding
company form of ownership. This reorganization was completed in January 1999. The Bank was
organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock
form in 1986. The primary business of the Bank is to generate funds in the form of deposits and use
the funds to make mortgage loans for the construction, purchase and refinancing of residential
properties, and to make loans on commercial real estate in its market area. The Bank is subject to
competition from other financial institutions. The Company is subject to the regulations of, and
periodic examinations by, the Federal Reserve Bank (FRB). The Bank is also subject to the
regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (FDIC) and
the Massachusetts Division of Banks. The Banks deposits are insured by the Deposit Insurance Fund
of the FDIC for deposits up to $250,000 for most accounts and up to $250,000 for retirement
accounts and the Share Insurance Fund (SIF) for deposits in excess of the FDIC limits.
The Company conducts its business through one operating segment, the Bank. Most of the Banks
activities are with customers located in eastern Massachusetts. As set forth in Note 3 herein, the
Bank concentrates in real estate lending. Management believes that the Bank does not have any
significant concentrations in any one customer or industry.
The accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All significant
intercompany balances and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the balance sheet and
income and expenses for the year. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to the determination of the allowance
for loan losses.
The Company owns 100% of the common stock of Central Bancorp Capital Trust I (Trust I) and
Central Bancorp Statutory Trust II (Trust II), which have issued trust preferred securities to
the public in private placement offerings. In accordance with Accounting Standards Codification
(ASC) 860 Transfers and Servicing, neither Trust I nor Trust II are included in the Companys
consolidated financial statements (See Subordinated Debentures).
53
Table of Contents
The following is a summary of the significant accounting policies adopted by the Company and
the Bank:
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from
banks, money market mutual fund investments, federal funds sold and other short-term investments
having an original maturity at date of purchase of 90 days or less.
The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Such
required reserves are calculated based upon deposit levels and amounted to approximately $2.7
million at March 31, 2010.
Fair Value of Investments
Debt securities that management has the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at cost, adjusted for amortization of premiums and
accretion of discounts, both computed by a method that approximates the effective yield method.
Debt and equity securities that are bought and held principally for the purpose of selling them in
the near term are classified as trading and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not classified as either held-to-maturity
or trading are classified as available-for-sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of stockholders equity and
comprehensive income. At March 31, 2010 and 2009, all of the Banks investment securities were
classified as available for sale.
Gains and losses on sales of securities are recognized when realized with the cost basis of
investments sold determined on a specific-identification basis. Premiums and discounts on
investment and mortgage-backed securities are amortized or accreted to interest income over the
actual or expected lives of the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment is judged to be
other-than-temporary, the cost basis of the investment is written down to fair value as a new cost
basis and the amount of the write-down is included in the results of operations.
The Companys investments in the Federal Home Loan Bank of Boston and the Co-operative Central
Bank Reserve Fund are accounted for at cost. Such investments are reviewed for impairment when
impairment indications are present. Factors considered in determining impairment include a current
financial analysis of the issuer and an assessment of future financial performance.
Loans
Loans are reported at the principal amount outstanding, adjusted by unamortized discounts,
premiums, and net deferred loan origination costs and fees.
Loans classified as held for sale are stated at the lower of aggregate cost or fair value.
The Company enters into forward commitments (generally on a best efforts delivery basis) to sell
loans held for sale in order to reduce market risk associated with the origination of such loans.
Market value is estimated based on outstanding investor commitments. Net unrealized losses, if any,
are provided for in a valuation allowance by charges to operations. Loans held for sale are sold
on a servicing released basis. As of March 31, 2010 and 2009, the aggregate cost of loans held for
sale approximated fair value.
Loan origination fees, net of certain direct loan origination costs, are deferred and are
amortized into interest income over the contractual loan term using the level-yield method. At
March 31, 2010 and 2009, net deferred loan fees balances of $88 thousand and $26 thousand,
respectively, were included with the related loan balances for financial presentation purposes.
Interest income on loans is recognized on an accrual basis using the simple interest method.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.
Accrual of interest on loans and amortization of net deferred loan fees or costs are discontinued
either when reasonable doubt exists as to the full and timely collection of interest or principal,
or when a loan becomes contractually past due 90 days with respect to
54
Table of Contents
interest or principal. The accrual on some loans, however, may continue even though they are
more than 90 days past due if management deems it appropriate, provided that the loans are well
secured and in the process of collection. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period interest income. Interest
accruals are resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest. The Bank records interest income on nonaccrual and
impaired loans on the cash basis of accounting.
Loans are classified as impaired when it is probable that the Bank will not be able to collect
all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans,
except those loans that are accounted for at fair value or at lower of cost or fair value, are
accounted for at the present value of the expected future cash flows discounted at the loans
effective interest rate or as a practical expedient in the case of collateral dependent loans, the
lower of the fair value of the collateral less selling costs, or the recorded amount of the loan.
Management considers the payment status, net worth and earnings potential of the borrower, and the
value and cash flow of the collateral as factors to determine if a loan will be paid in accordance
with its contractual terms. Management does not set any minimum delay of payments as a factor in
reviewing for impaired classification. Impaired loans are charged off when management believes that
the collectibility of the loans principal is remote. Management considers nonaccrual loans, except
for non-accrual consumer loans, to be impaired. However, troubled debt restructurings are also
considered to be impaired. Troubled debt restructurings are accounted for as set forth in ASC 310
Receivables (ASC 310).
Allowance for Loan Losses
The allowance for loan losses is maintained at a level determined to be adequate by management
to absorb probable losses based on an evaluation of known and inherent risks in the portfolio.
This allowance is increased by provisions charged to operating expense and by recoveries on loans
previously charged-off, and reduced by charge-offs on loans or reductions in the provision credited
to operating expense.
The Company provides for loan losses in order to maintain the allowance for loan losses at a
level that management estimates is adequate to absorb probable losses based on an evaluation of
known and inherent risks in the portfolio. In determining the appropriate level of the allowance
for loan losses, management considers past and anticipated loss experience, evaluations of
underlying collateral, financial condition of the borrower, prevailing economic conditions, the
nature and volume of the loan portfolio and the levels of non performing and other classified
loans. The amount of the allowance is based on estimates and ultimate losses may vary from such
estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for
loan losses monthly when appropriate to maintain the adequacy of the allowance. The Company uses a
process of portfolio segmentation to calculate the appropriate reserve level at the end of each
quarter. Management analyzed required reserve allocations for loans considered impaired under ASC
310 and the allocation percentages used when calculating potential losses under ASC 450
Contingencies (ASC 450). Although management uses available information to establish the
appropriate level of the allowance for loan losses, future additions or reductions to the allowance
may be necessary based on estimates that are susceptible to change as a result of changes in loan
composition or volume, changes in economic market area conditions or other factors. As a result,
our allowance for loan losses may not be sufficient to cover actual loan losses, and future
provisions for loan losses could materially adversely affect the Companys operating results. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may require the Company
to recognize adjustments to the allowance based on their judgments about information available to
them at the time of their examination. During fiscal 2009, a $2.1 million provision was recorded
which was comprised of $1.6 million related to one customer relationship, and $525 thousand related
to managements evaluation of various loss evaluation factors. Certain loan loss factor ratios
were increased during the fourth quarter of fiscal 2009 primarily due to recessionary economic
conditions. Management currently believes that there are adequate reserves and collateral securing
non-performing loans to cover losses that may result from these loans at March 31, 2010.
55
Table of Contents
Subordinated Debentures
On September 16, 2004, the Company completed a trust preferred securities financing in the
amount of $5.1 million. In the transaction, the Company formed a Delaware statutory trust, known as
Central Bancorp Capital Trust I (Trust I). Trust I issued and sold $5.1 million of trust
preferred securities in a private placement and issued $158,000 of trust common securities to the
Company. Trust I used the proceeds of these issuances to purchase $5.3 million of the Companys
floating rate junior subordinated debentures due September 16, 2034 (the Trust I Debentures). The
interest rate on the Trust I Debentures and the trust preferred securities is variable and
adjustable quarterly at 2.44% over three-month LIBOR. At March 31, 2010 the interest rate was
2.70%. The Trust I Debentures are the sole assets of Trust I and are subordinate to all of the
Companys existing and future obligations for borrowed money. With respect to Capital Trust I, the
trust preferred securities and debentures each have 30-year lives and may be callable by the
Company or the Trust, at their respective option, after five years, and sooner in the case of
certain specific events, including in the event that the securities are not eligible for treatment
as Tier 1 capital, subject to prior approval by the Federal Reserve Board, if then required.
Interest on the trust preferred securities and the debentures may be deferred at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods (five years), provided
there is no event of default.
On January 31, 2007, the Company completed a trust preferred securities financing in the
amount of $5.9 million. In the transaction, the Company formed a Connecticut statutory trust,
known as Central Bancorp Statutory Trust II (Trust II). Trust II issued and sold $5.9 million of
trust preferred securities in a private placement and issued $183,000 of trust common securities to
the Company. Trust II used the proceeds of these issuances to purchase $6.1 million of the
Companys floating rate junior subordinated debentures due March 15, 2037 (the Trust II
Debentures). From January 31, 2007 until March 15, 2017 (the Fixed Rate Period), the interest
rate on the Trust II Debentures and the trust preferred securities is fixed at 7.015% per annum.
Upon the expiration of the Fixed Rate Period, the interest rate on the Trust II Debentures and the
trust preferred securities will be at a variable per annum rate, reset quarterly, equal to three
month LIBOR plus 1.65%. The Trust II Debentures are the sole assets of Trust II. The Trust II
Debentures and the trust preferred securities each have 30-year lives. The trust preferred
securities and the Trust II Debentures will each be callable by the Company or Trust II, at their
respective option, after ten years, and sooner in certain specific events, including in the event
that the securities are not eligible for treatment as Tier 1 capital, subject to prior approval by
the Federal Reserve Board, if then required. Interest on the trust preferred securities and the
Trust II Debentures may be deferred at any time or from time to time for a period not exceeding
20 consecutive quarterly payments (five years), provided there is no event of default.
The trust preferred securities generally rank equal to the trust common securities in priority
of payment, but will rank prior to the trust common securities if and so long as the Company fails
to make principal or interest payments on the Trust I and/or the Trust II Debentures. Concurrently
with the issuance of the Trust I and the Trust II Debentures and the trust preferred securities,
the Company issued guarantees related to each trusts securities for the benefit of the respective
holders of Trust I and Trust II.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the accounting basis and the tax basis of the Banks assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
realized or settled. The Banks deferred tax asset is reviewed periodically and adjustments to such
asset are recognized as deferred income tax expense or benefit based on managements judgments
relating to the realizability of such asset.
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Banking Premises and Equipment
Land is stated at cost. Buildings, leasehold improvements and equipment are stated at cost,
less allowances for depreciation and amortization. Depreciation and amortization are computed on
the straight-line method over the estimated useful lives of the assets or terms of the leases, if
shorter.
Other Real Estate Owned
Other real estate owned (OREO) is recorded at the lower of book value, or fair market value
less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by
management and asset values are adjusted downward if necessary.
Accounting for Goodwill and Impairment
ASC 350 Intangibles Goodwill and Other (ASC 350), addresses the method of identifying and
measuring goodwill and other intangible assets having indefinite lives acquired in a business
combination, and requires periodic impairment evaluations of goodwill using a fair value
methodology prescribed in the topic. In accordance with ASC 350, impairment testing is required at
least annually or more frequently as a result of an event or change in circumstances (e.g.,
recurring operating losses by the acquired entity) that would indicate an impairment adjustment may
be necessary. The Company adopted December 31 as its assessment date. Annual impairment testing
was performed during each year and in each analysis, it was determined that an impairment charge
was not required. The most recent testing was performed as of December 31, 2009 utilizing 2009
average earnings and average book multiples of bank sales transactions, and management determined
that no impairment existed. No events have occurred during the three months ending March 31, 2010
which indicate that the impairment test would need to be re-performed.
Pension Benefits
The Bank provides pension benefits for its employees in a multi-employer pension plan through
membership in the Co-operative Banks Employees Retirement Association. Pension costs are funded as
they are accrued and are accounted for on a defined contribution plan basis.
The Bank also maintains a post-retirement medical insurance plan and life insurance plan for
certain individuals. The Bank recognizes the over funded or under funded status of the plan as an
asset or liability in its statement of financial condition and recognizes changes in that funded
status in the year in which the changes occur through other comprehensive income (loss) as set
forth by ASC 715 Compensation Retirement Benefits (ASC 715).
Stock-Based Compensation
The Company accounts for stock based compensation pursuant to ASC 718 Compensation-Stock
Compensation (ASC 718). The Company uses the Black-Scholes option pricing model as its method
for determining fair value of stock option grants. The Company has previously adopted two
qualified stock option plans for the benefit of officers and other employees under which an
aggregate of 281,500 shares have been reserved for issuance. One of these plans expired in 1997
and the other plan expired in 2009. All awards under the plan that expired in 2009 were granted by
the end of 2005. Awards outstanding at the time the plans expire will continue to remain
outstanding according to their terms.
On July 31, 2006, the Companys stockholders approved the Central Bancorp, Inc. 2006 Long-Term
Incentive Plan (the Incentive Plan). Under the Incentive Plan, 150,000 shares have been reserved
for issuance as options to purchase stock, restricted stock, or other stock awards. The exercise
price of an option may not be less than the fair market value of the Companys common stock on the
date of grant of the option and may not be exercisable more than ten years after the date of grant.
However, awards may become available again if participants forfeit awards under the plan prior to
its expiration. As of March 31, 2010, 63,800 shares remained unissued under the Incentive Plan.
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Forfeitures of awards granted under the incentive plan are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in
order to derive the Companys best estimate of awards ultimately expected to vest. Forfeitures
represent only the unvested portion of a surrendered option and are typically estimated based on
historical experience. Based on an analysis of the Companys historical data, the Company applied
a forfeiture rate of 0% to stock options outstanding in determining stock compensation expense for
each of the years ended March 31, 2010 and 2009.
The Company granted no stock options or restricted stock in the year ended March 31, 2009.
During the fiscal year ended March 31, 2010, 30,000 restricted shares were issued and 2,800
unvested restricted shares were forfeited. The options and restricted shares granted in fiscal
2007 vest over a five-year life. The restricted shares granted in fiscal 2010 vest over two years.
Stock-based compensation totaled $321 thousand for the year ended March 31, 2010 and $322 thousand
for the year ended March 31, 2009.
The number of shares and weighted average exercise prices of outstanding stock options at
March 31, 2010 and 2009 are as follows:
Number of | Weighted Average | |||||||
Shares | Exercise Price | |||||||
Balance at March 31, 2008 |
68,218 | $ | 25.36 | |||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
Granted |
| | ||||||
Balance at March 31, 2009 |
68,218 | $ | 25.36 | |||||
Exercised |
| | ||||||
Forfeited |
(865 | ) | 28.99 | |||||
Expired |
(13,745 | ) | 20.25 | |||||
Balance at March 31, 2010 |
53,608 | $ | 26.62 | |||||
Exercisable at March 31, 2010 |
49,608 | $ | 26.25 | |||||
As of March 31, 2010, the Company expects all non-vested stock options to vest over their
remaining vesting periods.
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As of March 31, 2010, the unrecognized compensation costs related to options and restricted
stock vesting totaled $675 thousand of which $403 thousand will be recognized during fiscal 2011
and $272 thousand will be recognized during fiscal 2012.
The range of exercise prices, weighted average remaining contractual lives of outstanding
stock options and aggregate intrinsic value at March 31, 2010 are as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||
Remaining | Remaining | |||||||||||||||||||||||||||
Number | Contractual | Weighted Average | Aggregate | Contractual | Weighted Average | |||||||||||||||||||||||
Exercise | of Shares | Life | Exercise | Intrinsic | Number of Shares | Life | Exercise | |||||||||||||||||||||
Price | Outstanding | (Years) | Price | Value (1) | Outstanding | (Years) | Price | |||||||||||||||||||||
$16.625 |
12,077 | (2) | 0.7 | $ | 16.63 | $ | | 12,077 | (2) | 0.7 | $ | 16.63 | ||||||||||||||||
28.990 |
31,531 | (2) | 4.9 | 28.99 | | 31,531 | (2) | 4.9 | 28.99 | |||||||||||||||||||
31.200 |
10,000 | (3) | 6.5 | 31.20 | | 6,000 | (3) | 6.5 | 31.20 | |||||||||||||||||||
53,608 | 4.3 | 26.62 | | 49,608 | 4.3 | 26.25 | ||||||||||||||||||||||
(1) | Represents the total intrinsic value, based on the Companys closing stock price of $9.11 as of March 31, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. | |
(2) | Fully vested and exercisable at the time of grant. | |
(3) | Subject to vesting over five years, 60% vested at March 31, 2010. |
A summary of non-vested restricted stock activity under all Company plans for the year ended
March 31, 2010 is as follows:
Weighted Average | ||||||||
Number of | Grant Date | |||||||
Non-Vested Shares | Shares | Fair Value | ||||||
Balance at March 31, 2008 |
39,200 | $ | 31.20 | |||||
Granted |
| | ||||||
Vested |
(9,800 | ) | 31.20 | |||||
Forfeited |
| | ||||||
Balance at March 31, 2009 |
29,400 | 31.20 | ||||||
Granted |
30,000 | 8.28 | ||||||
Vested |
(9,800 | ) | 31.20 | |||||
Forfeited |
(2,800 | ) | 31.20 | |||||
Non-vested at March 31, 2010 |
46,800 | 16.51 | ||||||
Earnings Per Share
Regarding earnings per share, the Company adheres to guidance as set forth by ASC 360,
Earnings Per Share (ASC 360). Basic earnings per share (EPS) is computed by dividing income
available to common stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock, such as stock options, were exercised or converted into common
stock. Unallocated shares of common stock held by the Central Co-operative Bank Employee Stock
Ownership Plan Trust (the ESOP) are not treated as being outstanding in the computation of either
basic or diluted EPS. At March 31, 2010 and 2009, there were approximately 176,000 and 197,000
unallocated ESOP shares, respectively.
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The following depicts a reconciliation of basic and diluted earnings per share:
2010 | 2009 | |||||||
(Amounts in thousands, except | ||||||||
per share amounts) | ||||||||
Net income (loss) as reported |
$ | 1,993 | $ | (6,205 | ) | |||
Less preferred dividends and accretion |
(613 | ) | (198 | ) | ||||
Net income (loss) available to common stockholders |
$ | 1,380 | $ | (6,403 | ) | |||
Weighted average number of common shares outstanding |
1,643 | 1,640 | ||||||
Weighted average number of unallocated ESOP and
unvested restricted shares |
(186 | ) | (242 | ) | ||||
Weighted average number of common shares
outstanding used in calculation of basic earnings per
share |
1,457 | 1,398 | ||||||
Incremental shares from the assumed exercise of
dilutive common stock equivalents |
43 | | ||||||
Weighted average number of common shares
outstanding used in calculating diluted earnings per
share |
1,500 | 1,398 | ||||||
Earnings (loss) per share: |
||||||||
Basic |
$ | 0.95 | $ | (4.58 | ) | |||
Diluted |
$ | 0.92 | $ | (4.58 | ) | |||
At March 31, 2010 and 2009, respectively, 53,608 and 68,218 stock options were anti-dilutive
and were excluded from the above calculation. At March 31, 2009, 234,742 warrants were
anti-dilutive and were excluded from the above calculation.
Bank-Owned Life Insurance
During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one
executive which totaled $6.0 million. The Bank follows ASC 325 Investments Other (ASC 325) in
accounting for this asset. Increases in the cash value are recognized in other noninterest income
and are not subject to income taxes. The Bank reviewed the financial strength of the insurance
carrier prior to the purchase of the policies, and continues to conduct such reviews on an annual
basis. Bank-owned life insurance totaled $6.7 million at March 31, 2010 and $6.4 million at March
31, 2009.
Other Comprehensive Income (Loss)
The Company has established standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by, and distributions to, shareholders. Net
income is a component of comprehensive income, with all other components referred to, in the
aggregate, as other comprehensive income. Other comprehensive income consists of unrealized gains
or losses on available for sale securities, net of taxes, and unrealized gain or loss on
post-retirement benefits, net of taxes.
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Recent Accounting Pronouncements
FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
157-2) became effective for the Company on April 1, 2009. This Standard is now included in the
Codification as part of ASC 820-10 Financial Instruments (ASC 820-10). This Standard amended FASB
Statement No. 157, Fair Value Measurements (SFAS 157), to delay the effective date of SFAS 157
for all non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). The
Companys non-financial asset within the scope of SFAS 157, goodwill, is reported at fair value on
a nonrecurring basis (generally as the result of an impairment assessment) during the period in
which the fair value measurement is recorded. The Company currently has no non-financial
liabilities required to be reported at fair value on a recurring basis. The adoption of ASC 820-10
did not have a material effect on the Companys financial position or results of operations.
FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS
161) became effective for the Company on April 1, 2009. This Standard is now included in the
Codification as part of ASC 815-10 Derivatives and Hedging (ASC 815-10). The Statement expands
disclosure requirements for derivative instruments and hedging activities. The new disclosures
address how derivative instruments are used, how derivatives and the related hedged items are
accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), how derivative instruments and related hedged items affect an entitys
financial position, financial performance and cash flows. In addition, companies are required to
disclose the fair values of derivative instruments and their gains and losses in a tabular format.
The adoption of ASC 815-10 did not have a material effect on the Companys financial position or
results of operations.
FSP Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP 03-6-1) became effective for
the Company on April 1, 2009. This Standard is now included in the Codification as part of ASC
260-10 Earnings Per Share (ASC 260-10). The Standard states that all outstanding unvested
share-based payment awards that contain nonforfeitable rights to dividends (whether paid or unpaid)
are considered participating securities under EITF 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings per Share (EITF 03-6). As such, the
issuing entity is required to apply the two-class method of computing basic and diluted earnings
per share. The Company grants restricted shares under a share-based compensation plan that
qualifies as participating securities. The adoption of ASC 260-10 did not have a material effect on
the Companys financial position, results of operations, or the computation of earnings per share.
On April 9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP 107-1), now included in the Codification as part of ASC 825-10
Financial Instruments (ASC 825-10). FSP 107-1 amended FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments in interim financial statements of publicly traded companies as well as in annual
financial statements. The FSP also amends APB opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim reporting periods. FSP
107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. In periods after initial adoption, the FSP
requires comparative disclosures only for periods ending after initial adoption. Adoption of ASC
825-10 did not have a material effect on the Companys financial position or results of operations.
On April 9, 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and
Presentation of Other- Than-Temporary Impairments (FSP 115-2), now included in the Codification
as part of ASC 320-10 Investments-Debt and Equity Securities (ASC 320-10). This Standard amends
the other-than-temporary impairment guidance for debt securities as it modifies the intent and
ability indicator for recognizing other-than-temporary impairment, and changes the trigger used to
assess the collectability of cash flows from probable that the investor will be unable to collect
all amounts due to the entity does not expect to recover the entire amortized cost basis of the
security. ASC 320-10 changes the total amount recognized in earnings when there are credit losses
associated with an impaired debt security and management asserts that it does not have the intent
to sell the security and it is more likely than not that it will not have to sell the security
before recovery of its cost basis. In those situations, impairment shall be separated into (a) the
amount representing a credit loss and (b) the amount related to non-credit factors. The amount of
impairment related to credit losses should be recognized in earnings. The credit loss
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component of an other-than-temporary impairment, representing an increase in credit risk, shall be
determined by the reporting entity using its best estimate of the present value of cash flows
expected to be collected from the debt security. The amount of impairment related to non-credit
factors shall be recognized in other comprehensive income. The previous cost basis less impairment
recognized in earnings becomes the new cost basis of the security and shall not be adjusted for
subsequent recoveries in fair value. However, the cost basis shall be adjusted for accretion of the
difference between the new cost basis and the present value of cash flows expected to be collected
(portion of impairment in other comprehensive income). The total other-than-temporary impairment is
presented in the consolidated statements of income with a reduction for the amount of the
other-than-temporary impairment that is recognized in other comprehensive income, if any. ASC
320-10 requires the Company to account for prior period impairment losses as a cumulative effect;
however, no cumulative effects are necessary as the impairment losses were considered the result of
credit deteriorations. These pronouncements were effective for the Company as of April 1, 2009.
The adoption of ASC 320-10 did not have a material effect on the Companys financial position or
results of operations.
On April 9, 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions
that are not Orderly (FSP 157-4), now included in the Codification as part of ASC 820-10 Fair
Value Measurements and Disclosures (ASC 820-10). The Standard identifies several factors that a
reporting entity should evaluate to determine whether there has been a significant decrease in the
volume and level of activity for an asset or liability. If the reporting entity concludes there has
been a significant decrease in the volume and level of activity for the asset or liability in
relation to normal market activity, transactions or quoted prices may not be determinative of fair
value (for example, there may be increased instances of transactions that are not orderly), further
analysis of the transactions or quoted prices is needed, and a significant adjustment to the
transactions or quoted prices may be necessary to estimate fair value. The Standard reiterates that
even in circumstances where there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the measurement date under
current market conditions. This pronouncement became effective for the Company as of April 1,
2009. The adoption of ASC 820-10 did not have a material effect on the Companys financial
position or results of operations.
In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS 165), now included in the
Codification as part of ASC 855-10 Subsequent Events (ASC 855-10). This Statement establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date, but before financial statements are issued or are available to be issued. The Statement was
effective for interim and annual fiscal periods ending after June 15, 2009. The Company has
evaluated the effect of the adoption of this standard and has concluded that it has no material
effect on the Companys financial position or results of operations. Management has determined
that no subsequent events have occurred which would require accrual or disclosure other than those
disclosed in the notes included in this Annual Report on Form 10-K.
In June 2009, the FASB issued SFAS No. 166 (now incorporated into ASC 860-10-65), Accounting for
Transfers of Financial Assets an amendment of FASB Statement No. 140, to improve the reporting
for the transfer of financial assets resulting from 1) practices that have developed since the
issuance of certain guidance in ASC 860, Transfers and Servicing, that are not consistent with the
original intent and key requirements of that guidance and 2) concerns of financial statement users
that many of the financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. This Statement must be applied
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The Company is
currently evaluating the impact these may have on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167 (now incorporated into ASC 810-10), Amendments to FASB
Interpretation No. 46(R), to amend certain requirements of FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by
enterprises involved with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The Statement is effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and annual reporting
periods
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thereafter. Earlier application is prohibited. The Company is currently evaluating the impact these
may have on its consolidated financial statements.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles A replacement of FASB Statement No. 162.
The change initiated by this statement is now included in the Codification as FASB ASC 105-10
Generally Accepted Accounting Principles (ASC 105-10) and establishes the Financial Accounting
Standards Board Accounting Standards Codification (Codification) as the source for authoritative
principles and standards recognized by the FASB to be applied to nongovernmental entities in the
preparation of financial statements in conformity with generally accepted accounting principles, or
GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of this standard, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative. This standard is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. The Company
adopted FASB ASC 105-10 effective for the quarter ended September 30, 2009 and concluded that it
did not have a material effect on the Companys financial position or results of operations.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-6, Improving Disclosures
About Fair Value Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant transfers into and out of
Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6
is effective for annual reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods beginning after December 15,
2010. We do not expect the adoption of ASU 2010-6 to have a material impact on our consolidated
financial statements.
Note 2. Investments (In Thousands)
The amortized cost and fair value of investments securities available for sale are summarized
as follows:
March 31, 2010 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Corporate bonds |
$ | 1,752 | $ | | $ | | $ | 1,752 | ||||||||
Mortgage-backed securities |
24,253 | 752 | (12 | ) | 24,993 | |||||||||||
Trust preferred securities |
1,002 | 43 | | 1,045 | ||||||||||||
Total debt securities |
27,007 | 795 | (12 | ) | 27,790 | |||||||||||
Preferred Stock |
3,394 | 56 | (195 | ) | 3,255 | |||||||||||
Common stock |
2,967 | 508 | (152 | ) | 3,323 | |||||||||||
Total |
$ | 33,368 | $ | 1,359 | $ | (359 | ) | $ | 34,368 | |||||||
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March 31, 2009 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
U.S. Government and agency obligations |
$ | 1,500 | $ | 3 | $ | | $ | 1,503 | ||||||||
Corporate bonds |
1,984 | | (1,283 | ) | 701 | |||||||||||
Mortgage-backed securities |
27,813 | 572 | (32 | ) | 28,353 | |||||||||||
Trust preferred securities |
1,003 | | (253 | ) | 750 | |||||||||||
Total debt securities |
32,300 | 575 | (1,568 | ) | 31,307 | |||||||||||
Preferred Stock |
3,775 | | (2,125 | ) | 1,650 | |||||||||||
Common stock |
3,158 | 3 | (903 | ) | 2,258 | |||||||||||
Total |
$ | 39,233 | $ | 578 | $ | (4,596 | ) | $ | 35,215 | |||||||
Management considers the credit worthiness of the issuer in evaluating its impairment.
Impairment write-downs during the fiscal year ended March 31, 2010 were as follows: $81 thousand
was recognized on one common stock, $26 thousand was recognized on one Federal National Mortgage
Association (Fannie Mae) preferred stock, and $234 thousand was recognized on one corporate bond
as these three securities were deemed to be other-than-temporarily impaired based on managements
periodic analysis of the investment portfolio. The preferred stock impairment of $26 thousand was
a required write-down associated with the partial sale of a certain series of Fannie Mae preferred
stock. The transaction for the sold portion occurred during the quarter ended March 31, 2010 and
resulted in a loss of $38 thousand. Current other-than-temporary guidance required that the unsold
portion of that investment had to be written-down to its market value as of date of the sale
transaction. The Company has one corporate bond with a fair value of $1.8 million and no
unrealized losses at March 31, 2010. This security matures in December 2017. At March 31, 2010, as
part of managements periodic analysis of the investment portfolio, management determined that this
security was impaired based upon a recent credit rating downgrade and the issuers negative
outlook. The impairment resulted in a $234 thousand write-down which reduced this investments
book value to equal its market value at March 31, 2010. This corporate bond was sold subsequent to
March 31, 2010. The remaining gross unrealized losses in the remaining investment portfolio were
also considered to be temporary and primarily due to changes in market conditions and interest
rates. These temporarily impaired securities as of March 31, 2010 are presented in the following
table and are aggregated by investment category and length of time that individual securities have
been in a continuous gross unrealized loss position:
Less Than or Equal to | Greater Than | |||||||||||||||
12 Months | 12 Months | |||||||||||||||
Fair | Unrealized | Unrealized | ||||||||||||||
Value | Losses | Fair Value | Losses | |||||||||||||
(In Thousands) | ||||||||||||||||
Mortgage-backed securities |
$ | | $ | | $ | 570 | $ | (12 | ) | |||||||
Preferred stock |
240 | (62 | ) | 1,914 | (133 | ) | ||||||||||
Common stock |
129 | (10 | ) | 992 | (142 | ) | ||||||||||
Total temporarily impaired securities |
$ | 369 | $ | (72 | ) | $ | 3,476 | $ | (287 | ) | ||||||
The Company has thirteen government agency mortgage-backed securities in loss positions as of
March 31, 2010 which have been in continuous loss positions for a period greater than twelve
months. These debt securities have a total fair value of $570 thousand and unrealized losses of $12
thousand as of March 31, 2010. Management currently does not have the intent to sell these
securities and it is more likely than not that it will not have to sell these securities before
recovery of their cost basis. Based on managements analysis of these securities, it has been
determined that none of the securities are other-than-temporarily impaired as of March 31, 2010.
The Company has five preferred stock securities with a fair value of $2.2 million and
unrealized losses of $195 thousand which were temporarily impaired at March 31, 2010. The
unrealized losses on the Companys investment in Fannie Mae and Freddie Mac preferred stock
securities decreased to $62 thousand at March 31, 2010, compared to unrealized losses of $472
thousand at March 31, 2009. The preferred stocks in a loss position for
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greater than twelve months are two securities which had a total loss to book value ratio of
6.6% at March 31, 2010 compared to a loss to book to value ratio of 37.6% at March 31, 2009.
Management currently does not have the intent to sell these securities and it is more likely than
not that it will not have to sell these securities before recovery of their cost basis. Based on
available information, management has determined that the unrealized losses on the Companys
investment in preferred stock are not other-than-temporary.
The Company has eleven equity securities with a fair value of $1.1 million and unrealized
losses of $152 thousand which were temporarily impaired at March 31, 2010. The total unrealized
losses relating to these securities represent 11.9% of book value. This is an improvement when
compared to the ratio of unrealized losses to book value of 48.7% at March 31, 2009. Of these
eleven securities, nine have been in a continuous loss position for greater than twelve months.
Data indicates that, due to current economic conditions, the time for many stocks to recover may be
substantially lengthened. Managements investment approach is to be a long-term investor. The
Company currently does not have the intent to sell these securities and it is more likely than not
that it will not have to sell these securities before recovery of their cost basis. The Company
has determined that the unrealized losses associated with these securities are not indicative of
other-than-temporary impairment as of March 31, 2010.
The maturity distribution (based on contractual maturities) and annual yields of debt
securities at March 31, 2010 are as follows:
Amortized | Fair | Annual | ||||||||||
Cost | Value | Yield | ||||||||||
(Dollars in Thousands) | ||||||||||||
Due within one year |
$ | | $ | | | % | ||||||
Due after one year but within five years |
5,118 | 5,260 | 4.19 | |||||||||
Due after five years but within ten years |
1,758 | 1,758 | 7.00 | |||||||||
Due after ten years |
20,131 | 20,772 | 5.42 | |||||||||
Total |
$ | 27,007 | $ | 27,790 | ||||||||
Mortgage-backed securities are shown at their contractual maturity dates but actual maturities
may differ as borrowers have the right to prepay obligations without incurring prepayment
penalties.
Proceeds from sales of investment securities and related gains and losses for the years ended
March 31, 2010 and 2009 (all classified as available for sale) were as follows:
2010 | 2009 | |||||||
(Dollars in Thousands) | ||||||||
Proceeds from sales, maturities,
redemptions |
$ | 1,835 | $ | 12,121 | ||||
Gross gains |
46 | 415 | ||||||
Gross losses |
(170 | ) | (77 | ) | ||||
Other than temporary impairments |
(341 | ) | (10,134 | ) | ||||
Net realized loss |
$ | (465 | ) | $ | (9,796 | ) | ||
Mortgage-backed securities with an amortized cost of $1.8 million and a fair value of $1.9
million at March 31, 2010, were pledged to provide collateral for certain customers. Investment
securities carried at $15.9 million were pledged under a blanket lien to partially secure the
Banks advances from the FHLB of Boston. Additionally, investment securities carried at $6.7
million were pledged to maintain borrowing capacity at the Federal Reserve Bank of Boston.
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As a member of the FHLB of Boston, the Bank was required to invest in stock of the FHLB of
Boston in an amount which, until April 2004, was equal to 1% of its outstanding home loans or
1/20th of its outstanding advances from the FHLB of Boston, whichever was higher. In April 2004,
the FHLB of Boston amended its capital structure at which time the Companys FHLB of Boston stock
was converted to Class B stock. Such stock is redeemable at par value five years after filing for
redemption or upon termination of membership. The FHLB of Boston may, but is not obligated to,
repurchase Class B stock prior to expiration of the five-year redemption notice. Under the current
capital structure, the Banks stock investment requirement is an amount equal to the sum of 0.35%
of certain specified assets (such assets totaled $265.0 million at the time of the change in
capital structure) plus 4.5% of the Banks advances and certain other specified items. In
connection with the adoption of the new capital structure, the Bank was not required to increase
its investment in FHLB of Boston stock.
The Co-operative Central Bank Reserve Fund (the Fund) was established for liquidity purposes
and consists of deposits required of all insured co-operative banks in Massachusetts. The Fund is
used by The Co-operative Central Bank to advance funds to member banks or to make other
investments.
Note 3. Loans (In Thousands)
Loans as of March 31, 2010 and 2009 are summarized below:
2010 | 2009 | |||||||
Real estate loans: |
||||||||
Residential real estate (1-4 family) |
$ | 217,053 | $ | 183,327 | ||||
Commercial real estate |
227,938 | 249,941 | ||||||
Construction |
2,722 | 14,089 | ||||||
Home equity lines of credit |
8,817 | 7,347 | ||||||
Total real estate loans |
456,530 | 454,704 | ||||||
Commercial loans |
4,037 | 4,834 | ||||||
Consumer loans |
943 | 1,132 | ||||||
Total loans |
461,510 | 460,670 | ||||||
Less: allowance for losses |
(3,038 | ) | (3,191 | ) | ||||
Total loans, net |
$ | 458,472 | $ | 457,479 | ||||
The Bank had eleven loans to eleven borrowers on nonaccrual status totaling $6.2 million as of
March 31, 2010 and eight loans to seven borrowers on nonaccrual status totaling $4.8 million as of
March 31, 2009. At March 31, 2010 there were 20 impaired, accruing loans totaling $10.6 million.
At March 31, 2009, there were no impaired loans other than nonaccrual loans. Impaired loans are
evaluated separately and measured utilizing guidance as set forth by ASC 310.
Loans serviced by the Bank for others amounted to $8.9 million and $9.1 million at March 31,
2010 and 2009, respectively.
During fiscal 2010, the Bank did not purchase any residential or commercial loans. During
fiscal 2009, the Bank purchased no residential loans and participated in $347 thousand of
commercial real estate loans.
The following is a summary of information pertaining to impaired loans for the dates and
periods specified (In Thousands):
At March 31, | ||||||||
2010 | 2009 | |||||||
Impaired loans with a valuation allowance |
$ | 3,009 | $ | 690 | ||||
Impaired loans without a valuation allowance |
13,506 | 3,335 | ||||||
Total impaired loans |
$ | 16,515 | $ | 4,025 | ||||
Specific valuation allowance related to impaired loans |
$ | 354 | $ | 300 | ||||
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Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Average recorded investment in impaired loans |
$ | 8,175 | $ | 8,597 | ||||
Cash receipts applied to reduce principal balance |
1,777 | 1,228 | ||||||
Interest income recognized for cash payments |
386 | 33 |
Impaired loans at March 31, 2010 totaled $16.5 million and were comprised of thirty loans to
twenty one borrowers, consisting of sixteen residential and fourteen commercial real estate loans.
Impaired loans at March 31, 2009 totaled $4.0 million and were comprised of five loans to four
borrowers, consisting of three residential loans, and two commercial real estate loans.
At March 31, 2010, all nonaccrual loans were considered to be impaired. At March 31, 2009,
three nonaccrual residential loans totaling $441 thousand were not considered to be impaired due to
their low loan-to-value ratios.
If the interest on nonaccrual loans had been recognized in accordance with original interest
rates, interest income would have increased by $682 thousand for fiscal year 2010 and $588 thousand
for fiscal 2009.
At March 31, 2010 and March 31, 2009 there were no loans that were past due 90 days or more in
interest or principal which were still accruing interest. During the fiscal year ended March 31,
2010, there were five residential troubled debt restructurings which totaled $1.1 million.
Restructuring charge-offs associated with those residential loans totaled $19 thousand. In
addition, during fiscal 2010 there were three commercial troubled debt restructurings which totaled
$5.2 million, with associated restructuring losses of $16 thousand. There was one troubled debt
restructuring during the year ended March 31, 2009, which was a residential loan with a recorded
investment of $184 thousand. The restructuring created a charge-off of $34 thousand resulting in a
book balance of $150 thousand at March 31, 2009.
The following summarizes activity with respect to loans made by the Bank to directors and
officers and their related interests for the years ended March 31, 2010 and 2009:
2010 | 2009 | |||||||
Balance at beginning of year |
$ | 390 | $ | 381 | ||||
New loans |
| 42 | ||||||
Repayment of principal |
(22 | ) | (33 | ) | ||||
Reduction of directors and officers |
(63 | ) | | |||||
Balance at end of year |
$ | 305 | $ | 390 | ||||
Loans included above were made in the Banks ordinary course of business, on substantially the
same terms, including interest rates and collateral requirements, as those prevailing at the time
for comparable transactions with unrelated persons. All loans included above are performing in
accordance with the terms of the respective loan agreement.
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Note 4. Allowance for Loan Losses (In Thousands)
A summary of changes in the allowance for loan losses follows:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of year |
$ | 3,191 | $ | 3,613 | ||||
Provision charged to expense |
600 | 2,125 | ||||||
Less: Amounts charged-off |
(773 | ) | (2,559 | ) | ||||
Add: Recoveries on accounts previously
charged-off |
20 | 12 | ||||||
Balance at end of year |
$ | 3,038 | $ | 3,191 | ||||
Note 5. Banking Premises and Equipment (In Thousands)
A summary of cost, accumulated depreciation and amortization of banking premises and equipment
at March 31, 2010 and 2009 follows:
Estimated | ||||||||||||
2010 | 2009 | Useful Lives | ||||||||||
Land |
$ | 589 | $ | 589 | ||||||||
Buildings and improvements |
2,362 | 2,307 | 50 years | |||||||||
Furniture and fixtures |
3,484 | 3,353 | 3-5 years | |||||||||
Leasehold improvements |
1,561 | 1,561 | 5-10 years | |||||||||
7,996 | 7,810 | |||||||||||
Less accumulated depreciation and
amortization |
(5,237 | ) | (4,487 | ) | ||||||||
Total |
$ | 2,759 | $ | 3,323 | ||||||||
Depreciation and amortization for the years ended March 31, 2010 and 2009 amounted to $773
thousand and $905 thousand, respectively, and is included in occupancy and equipment expense in the
accompanying consolidated statements of operations.
Note 6. Other Real Estate Owned (In Thousands)
The following summarizes activity with respect to other real estate owned during the year
ended March 31, 2010 and 2009.
2010 | 2009 | |||||||
Balance at beginning of year |
$ | 2,986 | $ | | ||||
Additions |
77 | 3,237 | ||||||
Valuation adjustments |
(17 | ) | (60 | ) | ||||
Sales |
(2,986 | ) | (191 | ) | ||||
Balance at end of year |
$ | 60 | $ | 2,986 | ||||
During fiscal 2010, one residential property totaling $77 thousand was acquired through
foreclosure. Managements subsequent review of this property resulted in the recording of a
valuation allowance of $17 thousand, which comprised the $60 thousand balance in OREO at March 31,
2010. Also during fiscal 2010, the sales of three properties with book values of approximately
$3.0 million were sold for approximately $2.9 million, resulting in loss on the sale of other real
estate owned of $60 thousand. During fiscal 2009, four residential properties and one commercial
property totaling $3.2 million were acquired through foreclosure or deed in lieu of foreclosure.
During fiscal 2009, the sales of two residential properties with book values of $191 thousand were
sold for $218 thousand, resulting in gains on the sale of other real estate owned of $27 thousand.
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Note 7. Deposits (Dollars in Thousands)
Deposits at March 31, 2010 and 2009 are summarized as follows:
2010 | 2009 | |||||||
Demand deposit accounts |
$ | 41,959 | $ | 46,259 | ||||
NOW accounts |
29,358 | 30,976 | ||||||
Passbook and other savings accounts |
53,544 | 50,737 | ||||||
Money market deposit accounts |
79,745 | 67,398 | ||||||
Total non-certificate accounts |
204,606 | 195,370 | ||||||
Term deposit certificates |
||||||||
Certificates of $100,000 and above |
51,695 | 85,497 | ||||||
Certificates less than $100,000 |
82,868 | 94,207 | ||||||
Total term deposit certificates |
134,563 | 179,704 | ||||||
Total deposits |
$ | 339,169 | $ | 375,074 | ||||
Contractual maturities of term deposit certificates with weighted average interest rates at
March 31, 2010 are as follows:
Weighted Average | ||||||||
Amount | Interest Rate | |||||||
Within 1 year |
$ | 112,223 | 1.41 | % | ||||
Over 1 to 3 years |
21,388 | 1.65 | ||||||
Over 3 years |
952 | 1.96 | ||||||
$ | 134,563 | |||||||
Note 8. Federal Home Loan Bank Advances (Dollars in Thousands)
A summary of the maturity distribution of FHLB of Boston advances (based on final maturity
dates) with weighted average interest rates at March 31, follows:
2010 | 2009 | |||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||
Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Within 1 year |
$ | 26,000 | 5.37 | % | $ | 27,000 | 5.55 | % | ||||||||
1-2 years |
| | 26,000 | 5.37 | ||||||||||||
2-3 years |
29,469 | 3.92 | | | ||||||||||||
3-4 years |
11,000 | 2.98 | 29,583 | 3.92 | ||||||||||||
4-5 years |
22,000 | 2.93 | 2,000 | 5.49 | ||||||||||||
Over 5 to 10 years |
55,000 | 3.99 | 60,000 | 3.94 | ||||||||||||
$ | 143,469 | 3.98 | % | $ | 144,583 | 4.52 | % | |||||||||
At March 31, 2010, advances totaling $107 million are callable during fiscal 2011 prior to
their scheduled maturity. The Bank is subject to a substantial penalty in the event it elects to
prepay any of its FHLB of Boston advances.
The FHLB of Boston is authorized to make advances to its members subject to such regulations
and limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLB
of Boston stock and a blanket lien on certain qualified collateral, defined principally as 90% of
the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of
first mortgage loans on owner-occupied residential property. In addition, certain multi-family
property loans are pledged to secure FHLB of
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Boston advances. The Banks unused borrowing capacity with the FHLB of Boston was
approximately $62.9 million at March 31, 2010.
Note 9. Income Taxes (Dollars in Thousands)
The components of the provision (benefit) for income taxes for the years indicated are as
follows:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Current |
||||||||
Federal |
$ | (176 | ) | $ | 203 | |||
State |
55 | 86 | ||||||
Total current (benefit) provision |
(121 | ) | 289 | |||||
Deferred provision (benefit) |
806 | (3,551 | ) | |||||
Provision (benefit) for income taxes |
$ | 685 | $ | (3,262 | ) | |||
The provision for income taxes for the periods presented is different from the amounts
computed by applying the statutory Federal income tax rate to income before income taxes. The
differences between expected tax rates and effective tax rates are as follows:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Statutory Federal Tax Rate |
34.0 | % | (34.0 | )% | ||||
Items affecting Federal Income tax rate |
||||||||
Dividends received deduction |
(2.7 | ) | (1.6 | ) | ||||
Net state impact of deferred rate change |
(10.3 | ) | | |||||
State income taxes net of federal |
6.3 | (2.1 | ) | |||||
Bank-owned life insurance deduction |
(5.4 | ) | (1.1 | ) | ||||
Stock compensation |
3.1 | 0.8 | ||||||
Valuation allowance |
1.0 | 3.4 | ||||||
Other |
(0.4 | ) | 0.1 | |||||
Effective tax rate |
25.6 | % | (34.5 | )% | ||||
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The components of gross deferred tax assets and gross deferred tax liabilities that have been
recognized at March 31, as follows:
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 1,243 | $ | 1,306 | ||||
Depreciation |
966 | 860 | ||||||
Post-employee retirement benefit accrual |
299 | 221 | ||||||
Write-down of investments securities |
2,778 | 3,888 | ||||||
Unrealized gain on securities, net |
| 1,628 | ||||||
Other |
333 | 350 | ||||||
Gross deferred tax asset |
5,619 | 8,253 | ||||||
Less: Valuation allowance |
(421 | ) | (387 | ) | ||||
Net deferred tax assets |
5,198 | 7,866 | ||||||
Deferred tax liabilities: |
||||||||
Unrealized loss on securities, net |
380 | | ||||||
Deferred loan origination costs |
137 | 281 | ||||||
Gross deferred tax liability |
517 | 281 | ||||||
Net deferred tax assets |
$ | 4,681 | $ | 7,585 | ||||
The Company has recorded a valuation allowance against certain deferred tax assets due to
uncertainty surrounding the realization of these assets. The valuation allowance is related to
certain capital loss carryforwards that are only allowed to be utilized against capital gains. Due
to the uncertainty surrounding future capital gains, management believes it is more likely than not
that these assets will not be realized.
The unrecaptured base year tax bad debt reserves will not be subject to recapture as long as
the Company continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continues to be subject to provisions of present law that require
recapture in the case of certain excess distributions to shareholders. The tax effect of pre-1988
bad debt reserves subject to recapture in the case of certain excess distributions is approximately
$1.3 million.
As of March 31, 2010, the Company provided a liability of $198 thousand of unrecognized tax
benefits related to various federal and state income tax matters. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
Amount | ||||
Unrecognized tax benefits at April 1, 2009 |
$ | 176 | ||
Additions for tax positions related to the current year |
35 | |||
Additions for tax positions of prior years |
| |||
Reductions for tax positions of prior years |
(13 | ) | ||
Unrecognized tax benefits at March 31, 2010 |
$ | 198 | ||
The amount of unrecognized tax benefit that would impact the Companys effective tax rate, if
recognized, is $171 thousand. The difference between the total amount of unrecognized tax benefits
and the amount that would impact the effective tax rate is the federal tax benefit of state income
tax items. The Company does not expect that the amounts of unrecognized tax benefits will change
significantly within the next twelve months. In general, the tax years ended March 31, 2007 through
March 31, 2010 remain open to examination by federal and state taxing jurisdictions to which the
Company is subject. As of April 1, 2009, the Company had accrued interest and penalties of $33
thousand related to uncertain tax positions. As of March 31, 2010, the total amount of accrued
interest and penalties is $41 thousand. The Company accounts for interest and penalties related to
uncertain tax positions as part of its provision for federal and state income taxes.
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Note 10. Financial Instruments with Off-Balance Sheet Risk (In Thousands)
The Bank is a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include
unused lines of credit, unadvanced portions of commercial and construction loans, and commitments
to originate loans. The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the balance sheets. The amounts of those
instruments reflect the extent of the Banks involvement in particular classes of financial
instruments.
The Banks exposure to credit loss in the event of nonperformance by the other party to its
financial instruments is represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risks as of March 31, 2010 and 2009 included the
following:
At March 31, | ||||||||
2010 | 2009 | |||||||
Unused lines of credit |
$ | 16,495 | $ | 15,129 | ||||
Unadvanced portions of construction loans |
126 | 1,439 | ||||||
Unadvanced portions of commercial loans |
1,135 | 1,739 | ||||||
Commitments to originate commercial mortgage loans |
| 1,884 | ||||||
Commitments to originate residential mortgage loans |
6,077 | 23,187 | ||||||
Commitments to sell residential mortgage loans |
4,024 | 11,351 | ||||||
Total off-balance sheet commitments |
$ | 27,857 | $ | 54,729 | ||||
Commitments to originate loans, unused lines of credit and unadvanced portions of commercial
and construction loans are agreements to lend to a customer, provided there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customers credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based
on managements credit evaluation of the borrower.
The Bank is also a party to lease commitments related to premises used to conduct its
business. A summary of minimum rentals of banking premises for future periods under non-cancelable
operating leases follows:
Years Ending | |||||
March 31, | |||||
2011 |
$ | 359 | |||
2012 |
355 | ||||
2013 |
342 | ||||
2014 |
322 | ||||
2015 |
326 | ||||
Thereafter |
333 | ||||
Total |
$ | 2,037 | |||
Certain leases contain renewal options the potential impact of which is not included above.
Rental expense for each of the years ended March 31, 2010 and 2009 totaled $352 thousand and is
included in occupancy and equipment expense in the accompanying consolidated statements of
operations.
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Note 11. Stockholders Equity (Dollars in Thousands, except per share amount)
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Companys and the Banks
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The minimum core (leverage) capital ratio required for banks with the highest overall rating from
bank regulatory agencies is 3.00% and is 4.00% for all others. The Bank must also have a minimum
total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital, consisting of
common stockholders equity). As of March 31, 2010, the Bank met all capital adequacy requirements
to which it is subject.
In December 2008, the U.S. Department of Treasury invested $10.0 million in the Company
through the Troubled Asset Relief Program (TARP) Capital Purchase Program (see Note 14 for
additional information regarding the Companys participation in the TARP Capital Purchase Program).
As a result of this investment, the most recent notification from the FDIC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. The table below
reflects $10.0 million in TARP funds received as a capital contribution from the Company to the
Bank. To be categorized as well capitalized, the Bank must maintain minimum risk-weighted
capital, Tier 1 capital and tangible capital ratios as set forth in the table. There are no
conditions or events, since that notification that management believes would cause a change in the
Banks categorization. No deduction was taken from capital for interest-rate risk. The Companys
and the Banks Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios together with
related regulatory minimum requirements are summarized below:
To Be Well | ||||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2010: |
||||||||||||||||||||||||
Company (consolidated) |
||||||||||||||||||||||||
Total risk-based capital |
$ | 53,569 | 15.12 | % | $ | 29,769 | ³8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital |
50,432 | 14.24 | 14,166 | ³4.00 | N/A | N/A | ||||||||||||||||||
Tier 1 leverage capital |
50,432 | 9.22 | 21,879 | ³4.00 | N/A | N/A | ||||||||||||||||||
Bank |
||||||||||||||||||||||||
Total risk-based capital |
$ | 47,374 | 13.37 | % | $ | 35,433 | ³8.00 | % | $ | 28,346 | ³10.00 | % | ||||||||||||
Tier 1 capital |
44,237 | 12.49 | 21,250 | ³4.00 | 14,167 | ³6.00 | ||||||||||||||||||
Tier 1 leverage capital |
44,237 | 8.09 | 27,340 | ³4.00 | 21,872 | ³5.00 | ||||||||||||||||||
As of March 31, 2009: |
||||||||||||||||||||||||
Company (consolidated) |
||||||||||||||||||||||||
Total risk-based capital |
$ | 46,180 | 12.41 | % | $ | 29,769 | ³8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital |
42,989 | 11.56 | 14,875 | ³4.00 | N/A | N/A | ||||||||||||||||||
Tier 1 leverage capital |
42,989 | 7.77 | 22,130 | ³4.00 | N/A | N/A | ||||||||||||||||||
Bank |
||||||||||||||||||||||||
Total risk-based capital |
$ | 39,815 | 10.69 | % | $ | 29,796 | ³8.00 | % | $ | 37,245 | ³10.00 | % | ||||||||||||
Tier 1 capital |
36,624 | 9.84 | 14,887 | ³4.00 | 22,418 | ³6.00 | ||||||||||||||||||
Tier 1 leverage capital |
36,624 | 6.61 | 22,162 | ³4.00 | 27,810 | ³5.00 |
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The Company and the Bank may not declare or pay cash dividends on their stock if the effect
thereof would cause capital to be reduced below regulatory requirements, or if such declaration and
payment would otherwise violate regulatory requirements.
In October 1991, the Company adopted a Shareholder Rights Agreement (Rights Plan) entitling
each shareholder, other than an Acquiring Person or an Adverse Person as defined below, to
purchase the Companys stock at a discounted price in the event any person or group of persons
exceeded predetermined ownership limitations of the Companys outstanding common stock (an
Acquiring Person) and, in certain circumstances, engaged in specific activities deemed adverse to
the interests of the Companys stockholders (an Adverse Person). The Rights Plan was due to
expire in October 2001, but was renewed by the Board of Directors during fiscal 2002 and is now
scheduled to expire in October 2011.
Note 12. Employee Benefits (Dollars in Thousands, Except Per Share Data)
Pension and Savings Plans
As a participating employer in the Cooperative Banks Employees Retirement Association
(CBERA), a multi-employer plan, the Bank has in effect a non-contributory defined benefit plan
(Pension Plan) and a defined contribution plan (Savings Plan) covering substantially all
eligible employees.
Benefits under the Pension Plan are determined at the rate of 1% and 1.5% of certain elements
of final average pay times years of credited service and are generally provided at age 65 based on
years of service and the average of the participants three highest consecutive years of
compensation from the Bank. Employee contributions are made to a Savings Plan which qualifies under
section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank matches 50% of an
eligible deferral contribution on the first 5% of the deferral amount subject to the maximum
allowable under federal regulations. Pension benefits and employer contributions to the Savings
Plan become vested over six years.
Expenses for the Pension Plan and the Savings Plan were $494 thousand and $465 thousand, for
the years ended March 31, 2010 and 2009, respectively. Forfeitures are used to reduce expenses of
the plans.
Employee Stock Ownership Plan
The Bank maintains an Employee Stock Ownership Plan (ESOP) that is authorized to purchase
shares of outstanding common stock of the Company from time to time in the open market or in
negotiated transactions. The ESOP is a tax-qualified defined contribution plan established for the
exclusive benefit of the Banks employees. All full-time employees who have completed one year of
service with the Bank are eligible to participate in the ESOP.
On January 31, 2007, the ESOP completed the purchase of 109,600 shares of the Companys common
stock, of which 6,100 shares were purchased with cash accumulated through allocations to
participants accounts. The ESOP purchased the shares pursuant to the terms of the Stock Purchase
Agreement, dated January 25, 2007, by and among the Company and the ESOP and Mendon Capital
Advisors Corp., Moors & Mendon Master Fund, L.P., Mendon ACAM Master Fund, Ltd. and Burnham
Financial Services Fund (collectively, Mendon). In conjunction with this transaction, the ESOP
refinanced the above-noted third party loan with a loan from the Company with the same term as the
third party loan. Additionally, the ESOP borrowed $3.42 million from the Company related to this
purchase. This loan will be repaid in quarterly installments of principal and interest of $90,800
over 20 years.
As set forth by ASC 718, compensation expense is recognized as the shares are allocated to
participants based upon the fair value of the shares at the time they are allocated. As a result,
changes in the market value of the Companys stock have an effect on the Companys results of
operations but have no effect on stockholders equity. ESOP compensation expense for fiscal 2010
and 2009 amounted to $153 thousand and $113 thousand, respectively.
Company common stock dividends received by the ESOP on allocated shares that are not
associated with financing are allocated to plan participants. Company common stock dividends
received by the ESOP for allocated shares that are associated with financing provided by the
Company are returned to the Bank for the purpose of reducing expenses.
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Other Post-Retirement Benefits
The Bank maintains a post-retirement medical insurance plan and life insurance plan for
certain individuals. The following tables summarize the funded status and the actuarial benefit
obligations of these plans for fiscal 2010 and 2009:
Year Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Life | Medical | Life | Medical | |||||||||||||
Actuarial present value of benefits obligation: |
||||||||||||||||
Retirees |
$ | (126 | ) | $ | (145 | ) | $ | (165 | ) | $ | (168 | ) | ||||
Fully eligible participants |
| | | | ||||||||||||
Total |
$ | (126 | ) | $ | (145 | ) | $ | (165 | ) | $ | (168 | ) | ||||
Change in projected benefit obligation: |
||||||||||||||||
Accumulated benefit obligations at prior year-end |
$ | (165 | ) | $ | (168 | ) | $ | (235 | ) | $ | (216 | ) | ||||
Service cost less expense component |
| | | | ||||||||||||
Interest cost |
(7 | ) | (9 | ) | (12 | ) | (11 | ) | ||||||||
Actuarial gain |
60 | 27 | 66 | 26 | ||||||||||||
Amendment |
| | | | ||||||||||||
Assumptions |
(15 | ) | (12 | ) | 15 | 11 | ||||||||||
Benefits paid |
1 | 17 | 1 | 22 | ||||||||||||
Accumulated benefit obligations at year-end |
$ | (126 | ) | $ | (145 | ) | $ | (165 | ) | $ | (168 | ) | ||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at prior year-end |
$ | | $ | | $ | | $ | | ||||||||
Actual return on plan assets |
| | | | ||||||||||||
Employer contribution |
1 | 17 | 1 | 22 | ||||||||||||
Benefits paid and expenses |
(1 | ) | (17 | ) | (1 | ) | (22 | ) | ||||||||
Fair value of plan assets at current year-end |
$ | | $ | | $ | | $ | | ||||||||
Change in Other Comprehensive Income: |
||||||||||||||||
Other Comprehensive Income at prior fiscal
year-end |
$ | (141 | ) | $ | (140 | ) | $ | (62 | ) | $ | (104 | ) | ||||
Loss on actuarial experience |
(60 | ) | (27 | ) | (66 | ) | (26 | ) | ||||||||
Gain (loss) actuarial assumptions |
15 | 12 | (15 | ) | (11 | ) | ||||||||||
Amortization included in Pension Expense |
13 | 6 | 2 | 1 | ||||||||||||
Other Comprehensive Income at current year-end |
$ | (173 | ) | $ | (149 | ) | $ | (141 | ) | $ | (140 | ) | ||||
Amounts with Deferred Recognition |
||||||||||||||||
Reconciliation of accrued pension cost: |
||||||||||||||||
Accrued pension cost at beginning of year |
$ | (305 | ) | $ | (309 | ) | $ | (296 | ) | $ | (321 | ) | ||||
Minus net periodic cost |
6 | (2 | ) | (10 | ) | (9 | ) | |||||||||
Plus employer contributions, net |
1 | 17 | 1 | 22 | ||||||||||||
Accrued cost at end of year |
$ | (298 | ) | $ | (294 | ) | $ | (305 | ) | $ | (308 | ) | ||||
Benefit obligation weighted average assumption as
change in projected benefit obligation: |
||||||||||||||||
Discount rate |
5.00 | % | 5.00 | % | 6.75 | % | 6.75 | % | ||||||||
Expected return on plan assets |
5.00 | 5.00 | 6.75 | 6.75 | ||||||||||||
Rate of compensation increase |
n/a | n/a | n/a | n/a |
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Years Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Life | Medical | Life | Medical | |||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | | $ | | $ | | $ | | ||||||||
Interest cost |
7 | 9 | 12 | 11 | ||||||||||||
Expected return on plan assets |
| | | | ||||||||||||
Amortization of prior service cost |
9 | 13 | 9 | 14 | ||||||||||||
Recognized actuarial gain |
(22 | ) | (20 | ) | (11 | ) | (15 | ) | ||||||||
Net periodic benefit cost |
$ | (6 | ) | $ | 2 | $ | 10 | $ | 10 | |||||||
Periodic benefit cost weighted average
assumptions: |
||||||||||||||||
Discount rate |
6.75 | % | 6.75 | % | 5.75 | % | 5.75 | % | ||||||||
Expected return on plan assets |
6.75 | % | 6.75 | % | 5.75 | % | 5.75 | % | ||||||||
Rate of compensation increase |
n/a | n/a | n/a | n/a | ||||||||||||
Amounts recognized in the statement of
financial position consist of: |
||||||||||||||||
Noncurrent Assets |
$ | | $ | | $ | | $ | | ||||||||
Current Liabilities |
(11 | ) | (15 | ) | (22 | ) | (20 | ) | ||||||||
Noncurrent Liabilities |
(114 | ) | (129 | ) | (143 | ) | (148 | ) | ||||||||
$ | (125 | ) | $ | (144 | ) | $ | (165 | ) | $ | (168 | ) | |||||
Amounts recognized in accumulated other
comprehensive income consist of: |
||||||||||||||||
Net gain |
$ | (198 | ) | $ | (160 | ) | $ | (175 | ) | $ | (165 | ) | ||||
Prior credit |
| (63 | ) | | (74 | ) | ||||||||||
Transition liability |
25 | 74 | 34 | 99 | ||||||||||||
$ | (173 | ) | $ | (149 | ) | $ | (141 | ) | $ | (140 | ) | |||||
Amounts anticipated to be recognized in expense
for fiscal year ending in 2010: |
$ | (21 | ) | $ | (18 | ) | $ | (19 | ) | $ | (18 | ) | ||||
Net gain |
| (11 | ) | | (11 | ) | ||||||||||
Prior service cost |
9 | 25 | 9 | 25 | ||||||||||||
Transition asset |
$ | (12 | ) | $ | (4 | ) | $ | (10 | ) | $ | (4 | ) | ||||
The plan is unfunded and the Company accrues actuarial determined benefit costs over the
estimated service period of the employees in the plan as set forth in ASC 715. It addresses
employers disclosures about pension and other post-retirement benefit plans. It requires
additional information about changes in the benefit obligation and the fair values of plan assets
to be disclosed. It also standardized the requirements for pensions and other postretirement
benefit plans to the extent possible, and illustrates combined formats for the presentation of
pension plan and other post-retirement benefit plan disclosures. ASC 715 also requires an employer
to recognize the over funded or under funded status of a defined benefit post-retirement plan
(other than a multiemployer plan) as an asset or liability in its statement of financial position
and to recognize changes in that funded status in the year in which the changes occur through
comprehensive income.
Note 13. Legal Proceedings
The Company from time to time is involved as plaintiff or defendant in various legal actions
incident to its business. None of these actions are believed to be material, either individually
or collectively, to the results of operations and financial condition of the Company or any
subsidiary.
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Note 14. Troubled Asset Relief Program Capital Purchase Program
On December 5, 2009, the Company sold $10.0 million in preferred shares to the U.S. Department
of Treasury (Treasury) as a participant in the federal governments Troubled Asset Relief Program
(TARP) Capital Purchase Program. This represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2009. The TARP Capital Purchase Program is a voluntary
program for healthy U.S. financial institutions designed to encourage these institutions to build
capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S.
economy. In connection with the investment, the Company entered into a Letter Agreement and the
related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i)
10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference
$1,000 per share (the Series A Preferred Stock), and (ii) a warrant (the Warrant) to purchase
234,742 shares of the Companys common stock for an aggregate purchase price of $10.0 million in
cash. As a result of the Treasurys investment, the Company and the Bank met all regulatory
requirements to be considered well capitalized at March 31, 2010.
The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a
rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will
increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem
shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for
cash at a per share amount equal to the sum of the liquidation preference per share plus any
accrued and unpaid dividends to but excluding the redemption date. The Series A Preferred Stock
may be redeemed, in whole or in part, at any time and from time to time, at the option of the
Company, subject to consultation with the Companys primary federal banking regulator, provided
that any partial redemption must be for at least 25% of the issue price of the Series A Preferred
Stock. Any redemption of a share of Series A Preferred Stock would be at one hundred percent
(100%) of its issue price, plus any accrued and unpaid dividends and the Series A Preferred Stock
may be redeemed without regard to whether the Company has replaced such funds from any other source
or to any waiting period.
The Warrant is exercisable at $6.39 per share at any time on or before December 5, 2018. The
number of shares of the Companys common stock issuable upon exercise of the Warrant and the
exercise price per share will be adjusted if specific events occur. Treasury has agreed not to
exercise voting power with respect to any shares of common stock issued upon exercise of the
Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer, except that Treasury may not transfer a portion of the Warrant with
respect to, or exercise the Warrant for, more than one-half of the shares of common stock
underlying the Warrant prior to the date on which the Company has received aggregate gross proceeds
of not less than $10.0 million from one or more qualified equity offerings.
The Warrant was valued at $594 thousand and was recognized as equity under ASC 815
Derivatives and Hedging, (ASC 815) and is reported within additional paid-in capital in the
accompanying Consolidated Balance Sheets. The Company also performs accounting for the Series A
Preferred Stock and Warrant as set forth in ASC 470 Debt (ASC 470). The proceeds from the sale of
the Series A Preferred Stock was allocated between the Series A Preferred Stock and Warrant on a
relative fair value basis, resulting in the Series A Preferred Stock having a value of $9.4 million
and the Warrant having a value of $594 thousand. Therefore, the fair value of the Warrant has been
recognized as a discount to the Series A Preferred Stock and Warrant and such discount is being
accreted over five years using the effective yield method as set forth by ASC 505 Equity. The
Warrant was valued using the Black-Scholes options pricing model. The assumptions used to compute
the fair value of the Warrant at issuance were:
Expected life in years |
10.00 | |||
Expected volatility |
54.76 | % | ||
Dividend yield |
3.00 | % | ||
Risk-free interest rate |
2.67 | % |
Regarding the assumptions above, the expected term represents the expected period of time the
Company believes the warrant will be outstanding. Estimates of expected future stock price
volatility are based on the historic volatility of the Companys common stock, and the dividend
yield is based on managements estimation of the Companys common stock dividend yield during the
next ten years. The risk-free interest rate is based on the U.S. Treasury 10-year rate.
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Note 15. Fair Values of Financial Instruments (In Thousands)
The Company follows ASC 820 Fair Value Measurements and Disclosures, which defines fair value
as the exchange price that would be received upon sale of an asset or paid to transfer a liability
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. In addition, ASC 820 specifies a hierarchy of
valuation techniques based on whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Companys market assumptions. These two types of inputs have the
following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets | ||
Level 2 Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which all significant inputs and value drivers are observable in active markets | ||
Level 3 Valuation derived from significant unobservable inputs |
The Company uses fair value measurements to record certain assets at fair value on a recurring
basis. Additionally, the Company may be required to record at fair value other assets on a
nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of
lower-of-cost-or market value accounting or write-downs of individual assets.
The only assets of the Company recorded at fair value on a recurring basis at March 31, 2010
were securities available for sale. The assets of the Company recorded at fair value on a
nonrecurring basis at March 31, 2010 were impaired loans and other real estate owned (OREO). The
following table presents the level of valuation assumptions used to determine the fair values of
such securities and loans:
Carrying Value (in thousands) | ||||||||||||||||
At March 31, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets recorded at fair value on a
recurring basis: |
||||||||||||||||
Securities available for sale |
$ | 3,323 | $ | 31,045 | $ | | $ | 34,368 | ||||||||
Assets recorded at fair value on a
nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value |
| | 8,617 | 8,617 | ||||||||||||
OREO |
| | 60 | 60 |
Carrying Value (in thousands) | ||||||||||||||||
At March 31, 2009 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets recorded at fair value on a
recurring basis: |
||||||||||||||||
Securities available for sale |
$ | 2,258 | $ | 31,945 | $ | 1,012 | $ | 35,215 | ||||||||
Assets recorded at fair value on a
nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value |
| | 690 | 690 | ||||||||||||
OREO |
| | 2,986 | 2,986 |
There were no Level 3 securities at March 31, 2010. The three securities classified at March
31, 2009 as Level 3 were transferred to Level 2 during the quarter ended June 30, 2009. The Company
did not have any sales or purchases of Level 3 available for sale securities during the period.
The Company measures the fair value of impaired loans on a periodic basis in periods
subsequent to its initial recognition. At March 31, 2010, impaired loans measured at fair value
using Level 3 inputs amounted to $8.6 million, which represents twelve customer relationships,
compared to three customer relationships which totaled
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Table of Contents
$690 thousand at March 31, 2009. There were no impaired loans measured at fair value using
Level 2 inputs at March 31, 2010 or 2009. Level 3 inputs utilized to determine the fair value of
the impaired loan relationships at March 31, 2010 and March 31, 2009 consisted of expected cash
flows and appraisals which may be discounted based upon managements estimates of fair value.
OREO is measured at fair value less estimated selling costs. Fair value is based upon
independent market prices, appraised values of the collateral, or managements estimation of value
of the collateral. At March 31, 2010, OREO was comprised of one residential parcel totaling $60
thousand. OREO at March 31, 2009 consisted of three properties which totaled $3.0 million. The
three OREO properties at March 31, 2009 were sold during the fiscal year ended March 31, 2010.
The changes in Level 3 investment securities measured at fair value on a recurring basis were
(in thousands):
Investment | ||||
Securities | ||||
Available for Sale | ||||
Balance at March 31, 2009 |
$ | 1,012 | ||
Total realized and unrealized gains (losses) included in income |
| |||
Total unrealized losses included in other comprehensive income |
| |||
Net accretion of discount and repayment of principal |
| |||
Net transfers in/out of Level 3 |
(1,012 | ) | ||
Balance at March 31, 2010 |
$ | | ||
Both observable and unobservable inputs may be used to determine the fair value of positions
classified as Level 3 assets. As a result, the unrealized gains and losses for these assets
presented in the tables above may include changes in fair value that were attributable to both
observable and unobservable inputs.
The following methods and assumptions were used by the Bank in estimating fair values of its
financial instruments:
Cash and Due from Banks The carrying values reported in the balance sheet for cash and due
from banks approximate their fair value because of the short maturity of these instruments.
Short-Term Investments The carrying values reported in the balance sheet for short-term
investments approximate fair value because of the short maturity of these investments.
Investments and Mortgage-Backed Securities The fair values presented for investment and
mortgage-backed securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of comparable instruments.
Fair values determined by level III inputs are based on expected future cash flows discounted using
a rate management believes is representative of current market conditions. Factors in determining
the discount rate include the financial condition of the debtors within the underlying securities,
broker quotes for securities with similar structure and credit risk, interest rate movements, and
pricing of new issuances.
Loans and Loans Held for Sale The fair values of loans are estimated using discounted cash
flow analysis, using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for nonperforming loans has been
considered in the determination of the fair value of loans. The fair value of loans held for sale
is determined based on the unrealized gain or loss on such loans. Regular reviews of the loan
portfolio are performed to identify impaired loans for which specific allowance allocations are
considered prudent. Valuations of impaired loans are made based on evaluations that we believe to
be appropriate in accordance with ASC 310, and such valuations are determined by reviewing current
collateral values, financial information, cash flows, payment histories and trends and other
relevant facts surrounding the particular credits.
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Other Real Estate Owned Other real estate owned is recorded at the lower of book value, or
fair market value less estimated selling costs. Fair value is based upon independent market
prices, appraised values of the collateral, or managements estimation of the value of the
collateral.
Accrued Interest Receivable The carrying value reported in the balance sheet for accrued
interest receivable approximates its fair value because of the short maturity of these accounts.
Stock in FHLB of Boston The carrying amount reported in the balance sheet for FHLB stock
approximates its fair value. If redeemed, the Bank will receive an amount equal to the par value of
the stock.
The Co-operative Central Bank Reserve Fund The carrying amount reported in the balance sheet
for the Co-operative Central Bank Reserve Fund approximates its fair value.
Deposits The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair values for term
deposit certificates are estimated using a discounted cash flow technique that applies interest
rates currently being offered on certificates to a schedule of aggregated monthly maturities on
time deposits with similar remaining maturities.
Advances from FHLB of Boston Fair values of non-callable advances from the FHLB of Boston
are estimated based on the discounted cash flows of scheduled future payments using the respective
year-end published rates for advances with similar terms and remaining maturities. Fair values of
callable advances from the FHLB of Boston are estimated using indicative pricing provided by the
FHLB of Boston.
Subordinated Debentures One subordinated debenture totaling $5.2 million is adjustable
quarterly and its fair value is estimated to be equal to its book value. The other subordinated
debenture totaling $6.1 million has a fixed rate until March 15, 2017, at which time it will
convert to a rate adjusted quarterly. The maturity date is March 15, 2037. The fair value of this
subordinated debenture is estimated based on the discounted cash flows of scheduled future payments
utilizing a discount rate derived from instruments with similar terms and remaining maturities.
Short-Term Borrowings, Advance Payments by Borrowers for Taxes and Insurance and Accrued
Interest Payable The carrying values reported in the balance sheet for short-term borrowings,
advance payments by borrowers for taxes and insurance and accrued interest payable approximate
their fair value because of the short maturity of these accounts.
Off-Balance Sheet Instruments The Banks commitments for unused lines of credit and
unadvanced portions of loans have short remaining disbursement periods or variable interest rates,
and, therefore, no fair value adjustment has been made.
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Table of Contents
The estimated carrying amounts and fair values of the Companys financial instruments are
as follows:
March 31, 2010 | March 31, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 4,328 | $ | 4,328 | $ | 5,099 | $ | 5,099 | ||||||||
Short-term investments |
12,208 | 12,208 | 37,323 | 37,323 | ||||||||||||
Investment securities |
34,368 | 34,368 | 35,215 | 35,215 | ||||||||||||
Loans held for sale |
392 | 392 | 3,208 | 3,208 | ||||||||||||
Net loans |
458,472 | 454,557 | 457,479 | 453,974 | ||||||||||||
Stock in Federal Home Loan Bank of Boston |
8,518 | 8,518 | 8,518 | 8,518 | ||||||||||||
The Co-operative Central Bank Reserve Fund |
1,576 | 1,576 | 1,576 | 1,576 | ||||||||||||
Accrued interest receivable |
1,896 | 1,896 | 1,859 | 1,859 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 339,169 | $ | 329,749 | $ | 375,074 | $ | 366,052 | ||||||||
Short-term borrowings |
| | 1,014 | 1,014 | ||||||||||||
Advances from FHLB of Boston |
143,469 | 150,949 | 144,583 | 153,318 | ||||||||||||
Subordinated debentures |
11,341 | 8,226 | 11,341 | 9,013 | ||||||||||||
Advance payments by borrowers for taxes and insurance |
1,649 | 1,649 | 1,532 | 1,532 | ||||||||||||
Accrued interest payable |
517 | 517 | 619 | 619 | ||||||||||||
Off-Balance Sheet Instruments |
27,257 | 27,257 | 54,729 | 54,729 |
Note 16. Parent Company Only Condensed Financial Statements (In Thousands)
The following are the condensed financial statements for Central Bancorp, Inc. (the Parent
Company) only:
At March 31, | ||||||||
Balance Sheets | 2010 | 2009 | ||||||
Assets |
||||||||
Cash deposit in subsidiary bank |
$ | 342 | $ | 337 | ||||
Investment in subsidiary |
49,467 | 44,005 | ||||||
ESOP loan (Note 11) |
6,254 | 6,819 | ||||||
Investment in unconsolidated subsidiary |
341 | 341 | ||||||
Other assets |
97 | 197 | ||||||
Total assets |
$ | 56,501 | $ | 51,699 | ||||
Liabilities and Stockholders Equity |
||||||||
Subordinated debentures (Note 1) |
$ | 11,341 | $ | 11,341 | ||||
Accrued taxes and other liabilities |
47 | 119 | ||||||
Total stockholders equity |
45,113 | 40,239 | ||||||
Total liabilities and stockholders equity |
$ | 56,501 | $ | 51,699 | ||||
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Table of Contents
Year Ended March 31, | ||||||||
Statements of Operations | 2010 | 2009 | ||||||
Dividends from subsidiary |
$ | 500 | $ | 1,132 | ||||
Interest income |
515 | 564 | ||||||
Interest expense on subordinated debentures |
(586 | ) | (692 | ) | ||||
Noninterest expenses |
(432 | ) | (522 | ) | ||||
(Loss) income before income tax benefit |
(3 | ) | 482 | |||||
Income tax benefit |
206 | 221 | ||||||
Income before equity in undistributed net income of subsidiary |
203 | 703 | ||||||
Equity in undistributed net income (loss) of subsidiary |
1,790 | (6,908 | ) | |||||
Net income (loss) |
$ | 1,993 | $ | (6,205 | ) | |||
Year Ended March 31 | ||||||||
Statements of Cash Flows | 2010 | 2009 | ||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 1,993 | $ | (6,205 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by |
||||||||
operating activities |
||||||||
Equity in undistributed net income of subsidiary |
(1,790 | ) | 6,908 | |||||
Decrease (increase) in other assets |
99 | (84 | ) | |||||
(Decrease) increase in accrued taxes and other liabilities |
(72 | ) | 82 | |||||
Net cash provided by operating activities |
230 | 701 | ||||||
Cash flows from investing activities: |
||||||||
ESOP loans, net of repayment |
566 | 554 | ||||||
Investment in subsidiary |
| (10,000 | ) | |||||
Net cash provided by (used in) by investing activities |
796 | (9,446 | ) | |||||
Cash flows from financing activities: |
||||||||
Issuance of Series A preferred stock and warrants |
| 9,970 | ||||||
Cash dividends paid, net |
(791 | ) | (1,126 | ) | ||||
Net cash provided by financing activities |
5 | 8,844 | ||||||
Net increase in cash in subsidiary bank |
5 | 99 | ||||||
Cash in subsidiary bank at beginning of year |
337 | 238 | ||||||
Cash in subsidiary bank at end of year |
$ | 342 | $ | 337 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Central Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Central Bancorp, Inc. and
subsidiary (the Company) as of March 31, 2010 and 2009, and the related consolidated statements
of operations, changes in stockholders equity and comprehensive income, and cash flows for the
years then ended. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Central Bancorp, Inc. and subsidiary as
of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ CATURANO AND COMPANY, P.C. | ||||
Boston, Massachusetts | ||||
June 18, 2010 |
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Not applicable. |
Item 9A(T). Controls and Procedures
(a) | Disclosure Controls and Procedures | ||
The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. | |||
(b) | Internal Controls Over Financial Reporting | ||
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and management has assessed the effectiveness of the Companys internal control over financial reporting as of March 31, 2010 based upon the criteria set forth in a report entitled Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the Companys management has concluded that the Company maintained effective internal control over financial reporting as of March 31, 2010. | |||
This Annual Report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this Annual Report. | |||
(c) | Changes to Internal Control Over Financial Reporting | ||
Except as indicated herein, there were no changes in the Companys internal control over financial reporting during the twelve months ended March 31, 2010 that have materially affected, or are reasonable likely to materially affect, the Companys internal control over financial reporting. |
Item 9B. Other Information
Not applicable. |
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The information contained under the section captioned Proposal I Election of Directors in
the Companys definitive proxy statement for the Companys 2010 Annual Meeting of Stockholders (the
Proxy Statement) is incorporated herein by reference.
Executive Officers
The information contained under the sections captioned Proposal I Election of Directors
Executive Officers Who Are Not Directors in the Proxy Statement is incorporated herein by
reference.
Compliance with Section 16(a) of the Exchange Act
The information contained under the section captioned Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics that applies to the Companys officers, directors and
employees.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee
financial expert, the sections captioned Meetings and Committees of the Board of Directors Audit
Committee in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
Executive Compensation
The information required by this item is incorporated herein by reference to the sections
titled Executive Compensation and Director Compensation in the Proxy Statement.
Corporate Governance
The information required by this item is incorporated herein by reference to the sections
titled Meetings and Committees of the Board of Directors Compensation Committee in the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
(a) | Security Ownership of Certain Beneficial Owners | ||
The information required by this item is incorporated herein by reference to the section captioned Principal Holders of Voting Securities in the Proxy Statement. | |||
(b) | Security Ownership of Management | ||
The information required by this item is incorporated herein by reference to the section captioned Security Ownership of Management in the Proxy Statement. |
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(c) | Changes in Control | ||
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. | |||
(d) | Equity Compensation Plans | ||
The Company has adopted the 1999 Stock Option and Incentive Plan and the 2006 Long-Term Incentive Plan, pursuant to which equity may be awarded to participants. Both plans have been approved by stockholders. |
The following table sets forth certain information with respect to the Companys equity
compensation plan as of March 31, 2010:
(c) | ||||||||||||
Number of securities | ||||||||||||
(a) | (b) | remaining | ||||||||||
Number of securities to be | Weighted-average exercise | available for future issuance | ||||||||||
issued | price of outstanding | under equity compensation | ||||||||||
upon exercise of outstanding | options, warrants and | plan (excluding securities | ||||||||||
Plan Category | options, warrants and rights | rights | reflected in column (a)) | |||||||||
Equity compensation plans
approved by security holders |
53,608 | $26.617 | 63,800 | |||||||||
Equity compensation plans not
approved by security holders |
| | | |||||||||
Total (1) |
53,608 | $26.617 | 63,800 | |||||||||
(1) | The 1999 Stock Option Plan and the 2006 Long-Term Incentive Plan provides for a proportionate adjustment to the number of shares reserved thereunder in the event of a stock split, stock dividend, reclassification or similar event. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section
titled Transactions with Related Persons in the Proxy Statement.
Director Independence
The information related to director independence required by this item is incorporated herein
by reference to the section titled Proposal 1 Election of Directors in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section
captioned Independent Auditors in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
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(1) | Financial Statements | ||
For the Financial Statements filed as part of this Annual Report on Form 10-K, reference is made to Item 8 Financial Statements and Supplementary Data. | |||
(2) | Financial Statement Schedules | ||
All financial statement schedules have been omitted as not applicable or not required or because they are included in the financial statements appearing at Item 8. | |||
(3) | Exhibits | ||
The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein. |
The following exhibits are filed as exhibits to this Annual Report:
Exhibit No. | Description | |
3.11
|
Articles of Organization of Central Bancorp, Inc. | |
3.210
|
Amended Bylaws of Central Bancorp, Inc. | |
4.12
|
Articles of Amendment to the Articles of Incorporation of Central Bancorp, Inc. Establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A | |
4.22
|
Form of Stock Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of Central Bancorp, Inc. | |
4.32
|
Warrant to Purchase 234,742 Shares of Common Stock of Central Bancorp, Inc. | |
4.43
|
Shareholder Rights Agreement, dated as of October 11, 2001, by and between Central Bancorp, Inc. and Registrar and Transfer Company, as Rights Agent, as amended and restated as of January 29, 2003, and as amended on February 11, 2003, May 22, 2003, July 24, 2003 and August 4, 2003 | |
10.14
|
Employment Agreement by and between Central Co-operative Bank and John D. Doherty | |
10.24
|
Employment Agreement by and between Central Co-operative Bank and William P. Morrissey | |
10.34
|
Executive Salary Continuation Agreement by and between Central Co-operative Bank and John D. Doherty, as amended | |
10.44
|
Executive Salary Continuation Agreement by and between Central Co-operative Bank and William P. Morrissey, as amended | |
10.54
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank and John D. Doherty | |
10.64
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank and John D. Doherty | |
10.74
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank and William P. Morrissey | |
10.81
|
Severance Agreement between the Bank and William P. Morrissey, dated December 14, 1994 | |
10.91
|
Severance Agreement between the Bank and Paul S. Feeley, dated May 14, 1998 | |
10.101
|
Amendments to Severance Agreements between the Bank and Messrs. Feeley and Morrissey, dated January 8, 1999 | |
10.115
|
1999 Stock Option and Incentive Plan | |
10.126
|
Amended and Restated Deferred Compensation Plan for Non-Employee Directors | |
10.133
|
Senior Management Incentive Plan, as amended | |
10.147
|
Severance Agreement between the Bank and Bryan E. Greenbaum dated March 17, 2005 | |
10.158
|
Central Bancorp, Inc. 2006 Long-Term Incentive Plan | |
149
|
Code of Ethics | |
21
|
Subsidiaries of Registrant | |
23.1
|
Consent of Caturano and Company, P.C. | |
31.1
|
Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer | |
32
|
Section 1350 Certifications | |
99.1
|
31 C.F.R. §30.15 Certification of Chief Executive Officer | |
99.2
|
31 C.F.R. §30.15 Certification of Chief Financial Officer |
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| Management contract or compensatory plan. | |
(1) | Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 1999 (File No. 0- 25251) filed with the SEC on June 28, 1999. | |
(2) | Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K (File No. 0-25251) filed with the SEC on December 9, 2010. | |
(3) | Incorporated by reference to the Form 10-K for the fiscal year ended March 31, 2004 (File No. 0-25251) filed with the SEC on June 28, 2004. | |
(4) | Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K (File No. 0-25251) filed with the SEC on December 21, 2007. | |
(5) | Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-87005) filed on September 13, 1999. | |
(6) | Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended December 31, 2009 (File No. 0- 25251) filed with the SEC on February 17, 2010). | |
(7) | Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 filed with the SEC on June 29, 2005 and to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 filed with the SEC on November 14, 2009 (File No. 0-25251). | |
(8) | Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-136234) filed with the SEC on August 2, 2006. | |
(9) | Incorporated by reference to the Current Report on Form 8-K (File No. 0-25251) filed with the SEC on April 13, 2004. | |
(10) | Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K (File No. 0-25251) filed with the SEC on October 22, 2007. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized
CENTRAL BANCORP, INC. |
||||
Date: June 18, 2010 | By: | /s/ John D. Doherty | ||
John D. Doherty | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) (Duly Authorized Representative) |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ John D. Doherty
Chairman and Chief Executive Officer (Principal Executive Officer) |
June 18, 2010 | |
/s/ Paul S. Feeley
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
June 18, 2010 | |
/s/ William P. Morrissey
President and Director |
June 18, 2010 | |
/s/ Robert J. Hardiman
Director |
June 18, 2010 | |
/s/ Raymond Mannos
Director |
June 18, 2010 | |
/s/ James P. McDonough
Director |
June 18, 2010 | |
/s/ Albert J. Mercuri, Jr.
Director |
June 18, 2010 | |
/s/ John J. Morrissey
|
June 18, 2010 | |
Director |
Table of Contents
/s/ Kenneth K. Quigley, Jr.
Director |
June 18, 2010 | |
/s/ Edward F. Sweeney, Jr.
Director |
June 18, 2010 |