Attached files
file | filename |
---|---|
EX-32 - EX-32 - CENTRAL BANCORP INC /MA/ | b84941exv32.htm |
EX-31.2 - EX-31.2 - CENTRAL BANCORP INC /MA/ | b84941exv31w2.htm |
EX-31.1 - EX-31.1 - CENTRAL BANCORP INC /MA/ | b84941exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 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 | (I.R.S. Employer Identification No.) | |
organization) | ||
399 Highland Avenue, Somerville, Massachusetts | 02144 | |
(Address of principal executive offices) | (Zip Code) |
(617) 628-4000
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such 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 shorter period that
the registrant was reported to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Common Stock, $1.00 par value | 1,667,151 | |
Class | Outstanding at February 11, 2011 |
CENTRAL BANCORP, INC.
FORM 10-Q
Table of Contents
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
(Unaudited)
(In Thousands, Except Share and Per Share Data) | December 31, 2010 | March 31, 2010 | ||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,852 | $ | 4,328 | ||||
Short-term investments |
47,267 | 12,208 | ||||||
Cash and cash equivalents |
51,119 | 16,536 | ||||||
Investment securities available for sale, at fair value (Note 2) |
28,253 | 34,368 | ||||||
Stock in Federal Home Loan Bank of Boston, at cost (Note 2) |
8,518 | 8,518 | ||||||
The Co-operative Central Bank Reserve Fund, at cost |
1,576 | 1,576 | ||||||
Total investments |
38,347 | 44,462 | ||||||
Loans held for sale, at fair value |
410 | 392 | ||||||
Loans (Note 3) |
405,180 | 461,510 | ||||||
Less allowance for loan losses |
(3,748 | ) | (3,038 | ) | ||||
Loans, net |
401,432 | 458,472 | ||||||
Accrued interest receivable |
1,416 | 1,896 | ||||||
Banking premises and equipment, net |
2,851 | 2,759 | ||||||
Deferred tax asset, net |
3,302 | 4,681 | ||||||
Other real estate owned |
132 | 60 | ||||||
Goodwill, net |
2,232 | 2,232 | ||||||
Bank owned life insurance (Note 11) |
6,905 | 6,686 | ||||||
Other assets |
4,185 | 4,268 | ||||||
Total assets |
$ | 512,331 | $ | 542,444 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits (Note 4) |
$ | 325,152 | $ | 339,169 | ||||
Federal Home Loan Bank advances |
126,382 | 143,469 | ||||||
Subordinated debentures (Note 5) |
11,341 | 11,341 | ||||||
Advanced payments by borrowers for taxes and insurance |
1,605 | 1,649 | ||||||
Accrued expenses and other liabilities |
1,220 | 1,703 | ||||||
Total liabilities |
465,700 | 497,331 | ||||||
Commitments and Contingencies (Note 7) |
||||||||
Stockholders equity: |
||||||||
Preferred stock Series A Cumulative Perpetual, $1.00 par value;
5,000,000 shares authorized; 10,000 shares issued and outstanding, with a
liquidation preference and redemption value of $10,063,889 at December
31, 2010 and March 31, 2010 |
9,677 | 9,589 | ||||||
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,667,151
shares issued and outstanding at December 31, 2010 and March 31, 2010,
respectively |
1,667 | 1,667 | ||||||
Additional paid-in capital |
4,268 | 4,291 | ||||||
Retained income |
35,279 | 34,482 | ||||||
Accumulated other comprehensive income (Note 6) |
950 | 810 | ||||||
Unearned compensation ESOP |
(5,210 | ) | (5,726 | ) | ||||
Total stockholders equity |
46,631 | 45,113 | ||||||
Total liabilities and stockholders equity |
$ | 512,331 | $ | 542,444 | ||||
See accompanying notes to unaudited consolidated financial statements.
1
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In Thousands, Except Share and Per Share Data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest and dividend income: |
||||||||||||||||
Mortgage loans |
$ | 5,746 | $ | 6,689 | $ | 18,423 | $ | 20,101 | ||||||||
Other loans |
49 | 74 | 183 | 249 | ||||||||||||
Investments |
365 | 317 | 984 | 1,109 | ||||||||||||
Short-term investments |
27 | 8 | 47 | 41 | ||||||||||||
Total interest and dividend income |
6,187 | 7,088 | 19,637 | 21,500 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
573 | 896 | 1,962 | 3,696 | ||||||||||||
Advances from Federal Home Loan Bank of Boston |
1,226 | 1,675 | 3,837 | 4,954 | ||||||||||||
Other borrowings |
140 | 140 | 420 | 440 | ||||||||||||
Total interest expense |
1,939 | 2,711 | 6,219 | 9,090 | ||||||||||||
Net interest and dividend income |
4,248 | 4,377 | 13,418 | 12,410 | ||||||||||||
Provision for loan losses |
300 | 100 | 900 | 350 | ||||||||||||
Net interest and dividend income after
provision for loan losses |
3,948 | 4,277 | 12,518 | 12,060 | ||||||||||||
Noninterest income: |
||||||||||||||||
Deposit service charges |
266 | 265 | 777 | 752 | ||||||||||||
Net gain (loss) from sales and write-downs
of investment securities |
13 | (81 | ) | (170 | ) | (81 | ) | |||||||||
Net gains on sales of loans |
111 | 63 | 241 | 244 | ||||||||||||
Bank owned life insurance |
75 | 76 | 219 | 228 | ||||||||||||
Other |
87 | 56 | 305 | 181 | ||||||||||||
Total noninterest income |
552 | 379 | 1,372 | 1,324 | ||||||||||||
Noninterest expenses: |
||||||||||||||||
Salaries and employee benefits |
2,292 | 2,021 | 6,784 | 5,969 | ||||||||||||
Occupancy and equipment |
523 | 552 | 1,548 | 1,639 | ||||||||||||
Data processing fees |
212 | 222 | 629 | 637 | ||||||||||||
Professional fees |
233 | 201 | 730 | 569 | ||||||||||||
FDIC deposit premiums |
139 | 489 | 426 | 969 | ||||||||||||
Advertising and marketing |
24 | 70 | 121 | 154 | ||||||||||||
Other expenses |
402 | 428 | 1,268 | 1,453 | ||||||||||||
Total noninterest expenses |
3,825 | 3,983 | 11,506 | 11,390 | ||||||||||||
Income before income taxes |
675 | 673 | 2,384 | 1,994 | ||||||||||||
Provision for income taxes |
330 | 307 | 900 | 726 | ||||||||||||
Net income |
$ | 345 | $ | 366 | $ | 1,484 | $ | 1,268 | ||||||||
Net income available to common shareholders |
$ | 191 | $ | 213 | $ | 1,021 | $ | 809 | ||||||||
Earnings per common share basic (Note 9) |
$ | 0.13 | $ | 0.15 | $ | 0.68 | $ | 0.56 | ||||||||
Earnings per common share diluted (Note 9) |
$ | 0.12 | $ | 0.14 | $ | 0.64 | $ | 0.54 | ||||||||
Weighted average common shares outstanding basic |
1,505,873 | 1,457,136 | 1,500,497 | 1,451,780 | ||||||||||||
Weighted average common and equivalent shares
outstanding diluted |
1,633,165 | 1,511,806 | 1,608,120 | 1,487,318 |
See accompanying notes to unaudited consolidated financial statements.
2
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Number of | ||||||||||||||||||||||||||||||||||||
Shares of | Number of | Accumulated | ||||||||||||||||||||||||||||||||||
Series A | Series A | Shares of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||
Preferred | Preferred | Common | Common | Paid-In | Retained | Comprehensive | Compensation- | Stockholders | ||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Capital | Income | Income | ESOP | Equity | ||||||||||||||||||||||||||||
Nine Months Ended December 31, 2009 |
||||||||||||||||||||||||||||||||||||
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 |
| | | | | 1,268 | | | 1,268 | |||||||||||||||||||||||||||
Other comprehensive gain, net of tax expense of $1,503: |
||||||||||||||||||||||||||||||||||||
Unrealized gain on securities, net
of reclassification adjustment (Note 6) |
| | | | | | 2,302 | | 2,302 | |||||||||||||||||||||||||||
Comprehensive income |
3,570 | |||||||||||||||||||||||||||||||||||
Dividends paid to common stockholders
($0.15 per share) |
| | | | | (219 | ) | | | (219 | ) | |||||||||||||||||||||||||
Preferred stock accretion of discount and
issuance costs |
| 83 | | | | (83 | ) | | | | ||||||||||||||||||||||||||
Dividends paid on preferred stock |
| | | | (375 | ) | | | (375 | ) | ||||||||||||||||||||||||||
Forfeiture of restricted common stock |
| | (2,800 | ) | (3 | ) | 3 | | | | | |||||||||||||||||||||||||
Stock-based compensation (Note 10) |
| | | | 237 | | | | 237 | |||||||||||||||||||||||||||
Amortization of unearned compensation ESOP |
| | | | (397 | ) | | | 517 | 120 | ||||||||||||||||||||||||||
Balance at December 31, 2009 |
10,000 | $ | 9,559 | 1,637,151 | $ | 1,637 | $ | 4,214 | $ | 33,984 | $ | 76 | $ | (5,898 | ) | $ | 43,572 | |||||||||||||||||||
Nine Months Ended December 31, 2010 |
||||||||||||||||||||||||||||||||||||
Balance at March 31, 2010 |
10,000 | $ | 9,589 | 1,667,151 | $ | 1,667 | $ | 4,291 | $ | 34,482 | $ | 810 | $ | (5,726 | ) | $ | 45,113 | |||||||||||||||||||
Net income |
| | | | | 1,484 | | | 1,484 | |||||||||||||||||||||||||||
Other
comprehensive gain, net of tax expense of $90: |
||||||||||||||||||||||||||||||||||||
Unrealized gain on securities, net
of reclassification adjustment (Note 6) |
| | | | | | 140 | | 140 | |||||||||||||||||||||||||||
Comprehensive income |
1,623 | |||||||||||||||||||||||||||||||||||
Dividends paid to common stockholders
($0.15 per share) |
| | | | | (224 | ) | | | (224 | ) | |||||||||||||||||||||||||
Preferred stock accretion of discount and
issuance costs |
| 88 | | | | (88 | ) | | | |||||||||||||||||||||||||||
Dividends paid on preferred stock |
| | | | | (375 | ) | | | (375 | ) | |||||||||||||||||||||||||
Stock-based compensation (Note 10) |
| | | | 302 | | | | 302 | |||||||||||||||||||||||||||
Amortization of unearned compensation ESOP |
| | | | (325 | ) | | | 516 | 191 | ||||||||||||||||||||||||||
Balance at December 31, 2010 |
10,000 | $ | 9,677 | 1,667,151 | $ | 1,667 | $ | 4,268 | $ | 35,279 | $ | 950 | $ | (5,210 | ) | $ | 46,631 | |||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,484 | $ | 1,268 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
470 | 597 | ||||||
Amortization of premiums |
179 | 250 | ||||||
Provision for loan losses |
900 | 350 | ||||||
Deferred tax provision |
1,289 | 92 | ||||||
Stock-based compensation and amortization of unearned compensation ESOP |
493 | 357 | ||||||
Net losses from sales and write-downs of investment securities |
170 | 81 | ||||||
Bank-owned life insurance income |
(219 | ) | (228 | ) | ||||
(Gain) loss on sale of OREO |
(2 | ) | 60 | |||||
Gains on sales of loans held for sale |
(241 | ) | (244 | ) | ||||
Originations of loans held for sale |
(20,621 | ) | (31,673 | ) | ||||
Proceeds from sale of loans originated for sale |
20,844 | 31,913 | ||||||
Decrease in accrued interest receivable |
480 | 93 | ||||||
Decrease (increase) in other assets, net |
83 | (1,494 | ) | |||||
(Decrease) increase in advance payments by borrowers for taxes and insurance |
(44 | ) | 127 | |||||
Decrease in accrued expenses and other liabilities, net |
(483 | ) | (184 | ) | ||||
Net cash provided by operating activities |
4,782 | 1,365 | ||||||
Cash flows from investing activities: |
||||||||
Loan principal collections (originations), net |
56,008 | (7,758 | ) | |||||
Principal payments on mortgage-backed securities |
7,129 | 10,412 | ||||||
Proceeds from sales of investment securities |
2,090 | | ||||||
Purchases of investment securities |
(3,223 | ) | (11,026 | ) | ||||
Maturities and calls of investment securities |
| 1,500 | ||||||
Proceeds from sales of OREO |
62 | 2,926 | ||||||
Purchase of banking premises and equipment |
(562 | ) | (81 | ) | ||||
Net cash provided (used in) by investing activities |
61,504 | (4,027 | ) | |||||
Cash flows from financing activities: |
||||||||
Net decrease in deposits |
(14,017 | ) | (30,593 | ) | ||||
(Repayment of) proceeds from advances from FHLB of Boston |
(17,087 | ) | 10,915 | |||||
Repayments of short-term borrowings |
| (1,014 | ) | |||||
Cash dividends paid |
(599 | ) | (594 | ) | ||||
Net cash used in financing activities |
(31,703 | ) | (21,286 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
34,583 | (23,948 | ) | |||||
Cash and cash equivalents at beginning of period |
16,536 | 42,422 | ||||||
Cash and cash equivalents at end of period |
$ | 51,119 | $ | 18,474 | ||||
Cash paid during the period for: |
||||||||
Interest |
$ | 6,312 | $ | 9,097 | ||||
Income taxes |
| | ||||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Loans transferred to other real estate owned |
132 | 77 | ||||||
Accretion of Series A preferred stock issuance costs |
88 | 83 |
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
December 31, 2010
(1) Basis of Presentation
The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly owned
subsidiary, Central Co-operative Bank (the Bank) (collectively referred to as the Company),
presented herein should be read in conjunction with the consolidated financial statements of the
Company as of and for the year ended March 31, 2010, included in the Companys Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (SEC) on June 18, 2010. The
accompanying unaudited consolidated financial statements were prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include all of the information or footnotes
necessary for a complete presentation of financial position, results of operations, changes in
stockholders equity or cash flows in conformity with accounting principles generally accepted in
the United States of America. However, in the opinion of management, the accompanying unaudited
consolidated financial statements reflect all normal recurring adjustments that are necessary for a
fair presentation. The results for the nine months ended December 31, 2010 are not necessarily
indicative of the results that may be expected for the fiscal year ending March 31, 2011 or any
other period.
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 Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 860 Transfers and Servicing, neither Trust I nor
Trust II are included in the Companys consolidated financial statements (See Note 5).
The Companys significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended
March 31, 2010. For interim reporting purposes, the Company follows the same significant
accounting policies. The following policies have been included below as an update to the Companys
existing policies included on Form 10-K for the year ended March 31, 2010.
Loans. Loans that management has the intent and ability to hold for the foreseeable future are
reported at the principal amount outstanding, adjusted by unamortized discounts, premiums,
write-downs, 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.
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.
Interest income on loans is recognized on an accrual basis using the simple interest method
only if deemed collectible. 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 collectible as to both principal and interest.
5
Table of Contents
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 such as
loans held for sale, 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 and other
costs, or the recorded amount of the loan. In evaluating collateral values for impaired loans,
management obtains new appraisals or opinions of value when deemed necessary and may discount those
appraisals depending on the likelihood of foreclosure, generally by 20 percent to 30 percent.
Other factors considered by mangagement when discounting appraisals are the age of the appraisal,
availability of comparable properties, geographic considerations, and property type. 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. For all loans, charge-offs occur when management believes that the
collectibility of a portion or all of the loans principal balance is remote. Management considers
nonaccrual loans, except for certain nonaccrual residential loans, to be impaired. However,
troubled debt restructurings (TDRs) are also considered to be impaired. A TDR occurs when the
Bank grants a concession to a borrower with financial difficulties that it would not otherwise
consider. The majority of the Banks TDRs involve a modification in loan terms such as a temporary
reduction in the interest rate or a temporary period of interest only, and escrow (if required).
TDRs are accounted for as set forth in ASC 310 Receivables (ASC 310). A TDR may be on
non-accrual or it may accrue interest. A TDR is typically on non-accrual until the borrower
successfully performs under the new terms for six consecutive months. However, a TDR may be placed
on accrual immediately following the TDR in those instances where a borrowers payments are current
prior to the modification and management determines that principal and interest under the new terms
are fully collectible.
Existing performing loan customers who request a loan (non-TDR) modification and who meet the
Banks underwriting standards may, usually for a fee, modify their original loan terms to terms
currently offered. The modified terms of these loans are similar to the terms offered to new
customers with similar credit, income, and collateral. The fee assessed for modifying the loan is
deferred and amortized over the life of the modified loan using the level-yield method and is
reflected as an adjustment to interest income. Each modification is examined on a loan-by-loan
basis and if the modification of terms represents more than a minor change to the loan, then the
unamortized balance of the pre-modification deferred fees or costs associated with the mortgage
loan are recognized in interest income at the time of the modification. If the modification of
terms does not represent more than a minor change to the loan, then the unamortized balance of the
pre-modification deferred fees or costs continue to be deferred.
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 Bank 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.
Regarding impaired loans, the Bank individually evaluates each loan and documents what
management believes to be an appropriate reserve level in accordance with ASC 310. If management
does not believe that any separate reserve for such loans are deemed necessary at the evaluation
date, they would continue to be evaluated separately and will not be returned to be included in the
normal ASC 450 Contingencies (ASC 450) formula based reserve calculation. In evaluating impaired
loans, all related management discounts of appraised values, selling and resolution costs are taken
into consideration in determining the level of reserves required when appropriate.
6
Table of Contents
The methodology employed in calculating the allowance for loan losses is portfolio
segmentation. For the commercial real estate (CRE) portfolio, this is further refined through
stratification within each segment based on loan-to-value (LTV) ratios. The CRE portfolio is
further segmented by type of properties securing those loans. This approach allows the Bank to
take into consideration the fact that the various sectors of the real estate market change value at
differing rates and thereby present different risk levels. CRE loans are segmented into the
following categories:
n Apartments | ||
n Offices | ||
n Retail | ||
n Mixed Use | ||
n Industrial/Other |
Monthly, CRE loans are segmented using the above collateral-types and three LTV ratio
categories: <40%, 40%-60%, and >60%. While these ranges are somewhat arbitrary, management
feels that each category represents a significantly different degree of risk from the other.
Annually, for the CRE portfolio, management adjusts the appraised values which flow into the three
LTV ratio categories of our allowance for loan losses calculation. The data is provided by an
independent appraiser and it indicates annual changes in value for each property type in the Banks market area for the last
ten years. Management then adjusts the appraised or most recent appraised values based on the year
the appraisal was made. These adjustments are believed to be appropriate based on the Banks own
experience with collateral values in its market area in recent years.
In developing ASC 450 reserve levels, recent regulatory guidance focuses on the Banks history
as a starting point. The Banks charge-off history in recent years has been minimal, therefore,
management continues to utilize more conservative historical loss ratios which are believed to be
appropriate. Those ratios are then adjusted based on trends in delinquent and impaired loans,
trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff,
national and local economic trends, industry conditions, and changes in credit concentrations.
There is a concentration in CRE loans, but the concentration is decreasing. Managements efforts to
reduce the levels of commercial real estate and construction loans are reflected in changes in the
Banks commercial real estate concentration ratio, which is calculated as total non-owner occupied
commercial real estate and construction loans divided by the Banks risk-based capital. At
December 31, 2010, the commercial real estate concentration ratio was 402%, compared to a ratio of
466% at March 31, 2010, and 600% at March 31, 2009.
Residential loans, home equity loans and consumer loans, other than TDRs and loans in the
process of foreclosure or repossession, are collectively evaluated for impairment. Factors
considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and
impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in
underwriting practices, experience of loan staff, national and local economic trends, industry
conditions, and changes in credit concentrations. TDRs and loans that are in the process of
foreclosure or repossession are evaluated under ASC 310.
Commercial and Industrial and construction loans that are not impaired are evaluated under ASC
450 and factors considered in determining the appropriate reserve levels include trends in
delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and
recoveries, trends in underwriting practices, experience of loan staff, national and local economic
trends, industry conditions, and changes in credit concentrations. Those loans that are
individually reviewed for impairment are evaluated according to ASC 310.
During the nine months ended December 31, 2010,
management increased the ASC 450 loss factors related to trends in delinquent and impaired loans
for residential real estate, commercial real estate, and commercial and industrial loans, and
increased loss factors related to national and local economic conditions for commercial real estate
and commercial and industrial loans. As a result of the aforementioned ASC 450 factor changes, the
impact to the allowance for loan losses were increases in ASC 450 reserves of $35 thousand for
residential loans, $51 thousand for CRE loans, and $1 thousand for commercial and industrial loans.
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. Management currently believes that
there are adequate reserves and collateral securing non-performing loans to cover losses that
may result from these loans at December 31, 2010.
7
Table of Contents
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 and the Company consists of a single reporting unit. 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, 2010 utilizing average
earnings and average book and tangible book multiples of sales transactions of banks considered to
be comparable to the Company, and management determined that no impairment existed at that date.
Management utilized 2010 sales transaction data of financial institutions in the New England area
of similar size, credit quality, net income, and return on average assets levels and management
feels that the overall assumptions utilized in the testing process were reasonable. During the
December 31, 2010 impairment testing using market capitalization was considered, however,
management concluded that it was not an appropriate measure of the Companys value due to the
overall depressed valuations in the financial sector and the significance of the Companys insider
ownership and the lack of volume in trading in the Companys shares of common stock. Management
also feels that this measure does not generally reflect the premium that a buyer would typically
pay for a controlling interest.
(2) Investments
The amortized cost and fair value of investment securities available for sale at December 31,
2010, are summarized as follows:
December 31, 2010 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
( In Thousands) | ||||||||||||||||
Government agency and government sponsored
agency mortgage-backed securities |
$ | 20,176 | $ | 868 | $ | (41 | ) | $ | 21,003 | |||||||
Trust preferred securities |
1,002 | 71 | | 1,073 | ||||||||||||
Total debt securities |
21,178 | 939 | (41 | ) | 22,076 | |||||||||||
Preferred stock |
3,073 | 60 | (133 | ) | 3,000 | |||||||||||
Common stock |
2,780 | 514 | (117 | ) | 3,177 | |||||||||||
Total |
$ | 27,031 | $ | 1,513 | $ | (291 | ) | $ | 28,253 | |||||||
The amortized cost and fair value of investment securities available for sale at March 31, 2010 are
as follows:
March 31, 2010 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Corporate bonds |
$ | 1,752 | $ | | $ | | $ | 1,752 | ||||||||
Government agency and government sponsored
agency 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 | |||||||
8
Table of Contents
During the nine-month period ended December 31, 2010, three common stock holdings were
determined to be other-than-temporarily impaired and their book values were reduced through an
impairment charge of $118 thousand. Also during the nine month period ended, December 31, 2010,
two preferred stock holdings were determined to be other-than-temporarily impaired and their book
values were reduced through an impairment charge of $226 thousand. This impairment charge is
reflected in Net loss from sales and write-downs of investment securities in the Companys
consolidated statements of income.
Temporarily impaired securities as of December 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 loss position.
Less Than or Equal to | Greater Than | |||||||||||||||
12 Months | 12 Months | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||||||
Value | Losses | Value | Losses | |||||||||||||
(In Thousands) | ||||||||||||||||
Government agency and government
sponsored enterprise mortgage-backed
securities |
$ | 3,188 | $ | (35 | ) | $ | 317 | $ | (6 | ) | ||||||
Preferred stock |
1,008 | (15 | ) | 903 | (118 | ) | ||||||||||
Common stock |
390 | (76 | ) | 512 | (41 | ) | ||||||||||
Total temporarily impaired securities |
$ | 4,586 | $ | (126 | ) | $ | 1,732 | $ | (165 | ) | ||||||
During the three month period ended December 31, 2010, the Company sold one series of Federal
Home Loan Mortgage Corporation (Freddie Mac) preferred stock securities for a gain of $22
thousand.
The Company had one preferred stock investment currently in an unrealized loss position for
longer than twelve months for which the fair value has increased during the nine months ended
December 31, 2010. The fair value of this security totaled $903 thousand with an unrealized loss
of $118 thousand at December 31, 2010, compared to a fair value of $894 thousand and an unrealized
loss of $128 thousand at March 31, 2010. The Company also has one other preferred stock investment
in an unrealized loss position for less than twelve months. The fair value of this security totaled
$1 million and an unrealized loss of $15 thousand. Based on managements analysis of this preferred
stock investment, management has determined that these securities are not considered to be
other-than- temporarily impaired at December 31, 2010.
The Company had one debt security in an unrealized loss position as of December 31, 2010,
which has been in a continuous unrealized loss position for a period greater than twelve months.
This debt security has a total fair value of $317 thousand and an unrealized loss of $6 thousand as
of December 31, 2010. This debt security is a government agency mortgagebacked security.
Management currently does not have the intent to sell this security and it is more likely than not
that it will not have to sell this security before recovery of its cost basis. Based on
managements analysis of this security, it has been determined that this security is not considered
to be other than temporarily impaired as of December 31, 2010.
The Company had nine equity securities with a fair value of $902 thousand and unrealized
losses of $117 thousand which were temporarily impaired at December 31, 2010. The total unrealized
losses relating to these securities represent approximately 11% of book value. This is a decrease
when compared to the ratio of unrealized losses to book value of 16% at March 31, 2010. Of these
nine securities, two have been in a continuous unrealized loss position for greater than twelve
months aggregating $18 thousand at December 31, 2010. 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 has the intent to and
ability to hold sell these securities to recovery of cost basis. Management has determined, after
a review of investment survey reports and a review of the Companys ability to hold these
securities, that the associated unrealized losses are not other-than-temporary as of December 31,
2010.
9
Table of Contents
The maturity distribution (based on contractual maturities) and annual yields of debt
securities at December 31, 2010 are as follows:
Amortized | Fair | Annual | ||||||||||
Cost | Value | Yield | ||||||||||
(Dollars in Thousands) | ||||||||||||
Government agency and government sponsored
enterprise mortgage-backed securities |
||||||||||||
Due after one year but within five years |
$ | 3,486 | $ | 3,629 | 4.18 | % | ||||||
Due after five years but within ten years |
11 | 11 | 4.40 | |||||||||
Due after ten years |
16,679 | 17,363 | 4.78 | |||||||||
20,176 | 21,003 | |||||||||||
Trust preferred securities: |
||||||||||||
Due after ten years |
1,002 | 1,073 | 7.78 | % | ||||||||
Total |
$ | 21,178 | $ | 22,076 | ||||||||
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.
As a member of the Federal Home Loan Bank of Boston (FHLBB), the Bank was required to invest
in stock of the FHLBB 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 FHLBB, whichever was higher. In April 2004,
the FHLBB amended its capital structure at which time the Companys FHLBB stock was converted to
Class B stock.
The Company views its investment in the FHLBB stock as a long-term investment. Accordingly,
when evaluating for impairment, the value is determined based on the ultimate recovery of the par
value rather than recognizing temporary declines in value. The determination of whether a decline
affects the ultimate recovery is influenced by criteria such as: (1) the significance of the
decline in net assets of the FHLBB as compared to the capital stock amount and length of time a
decline has persisted; (2) impact of legislative and regulatory changes on the FHLBB and (3) the
liquidity position of the FHLBB. The FHLBB suspended its dividend for the first quarter of 2009
and has not subsequently declared a dividend. On October 28, 2010, the FHLBB announced that it has
recorded positive net income for the four consecutive quarters ended September 30, 2010. However,
the FHLBB stated that it remains cautious regarding additional potential credit losses in future
periods due to the continued slow economic growth and less-than robust recovery in the housing
market.
The Company does not believe that its investment in the FHLBB is impaired as of December 31,
2010. However, this estimate could change in the near term in the event that: (1) additional
significant impairment losses are incurred on the mortgage-backed securities causing a significant
decline in the FHLBBs regulatory capital status; (2) the economic losses resulting from credit
deterioration on the mortgage-backed securities increases significantly; or (3) capital
preservation strategies being utilized by the FHLBB become ineffective.
10
Table of Contents
(3) Loans
Loans, excluding loans held for sale, as of December 31, 2010 and March 31, 2010 are
summarized below (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Real estate loans: |
||||||||
Residential real estate (1- 4 family) |
$ | 186,678 | $ | 217,053 | ||||
Commercial real estate |
205,832 | 227,938 | ||||||
Construction |
891 | 2,722 | ||||||
Home equity lines of credit |
8,460 | 8.817 | ||||||
Total real estate loans |
401,861 | 456,530 | ||||||
Commercial loans |
2,454 | 4,037 | ||||||
Consumer loans |
865 | 943 | ||||||
Total loans |
405,180 | 461,510 | ||||||
Less: allowance for loan losses |
(3,748 | ) | (3,038 | ) | ||||
Total loans, net |
$ | 401,432 | $ | 458,472 | ||||
A summary of changes in the allowance for loan losses for the three and nine months ended
December 31, 2010 and 2009 follows (in thousands):
Three Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 3,633 | $ | 2,719 | ||||
Provision charged to expense |
300 | 100 | ||||||
Less: charge-offs |
(185 | ) | (44 | ) | ||||
Add: recoveries |
| 13 | ||||||
Balance at end of period |
$ | 3,748 | $ | 2,788 | ||||
Nine Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 3,038 | $ | 3,191 | ||||
Provision charged to expense |
900 | 350 | ||||||
Less: charge-offs |
(193 | ) | (770 | ) | ||||
Add: recoveries |
3 | 17 | ||||||
Balance at end of period |
$ | 3,748 | $ | 2,788 | ||||
At December 31, 2010 there were twenty-eight impaired loans to twenty borrowers which totaled
$16.6 million compared to thirty impaired loans to twenty-one borrowers at March 31, 2010 which
totaled $16.5 million. Impaired loans are evaluated separately and measured utilizing guidance set
forth by ASC 310 described in Note 1.
At December 31, 2010 there were twelve impaired loans to seven borrowers totaling $7.2 million
which were accruing interest. At March 31, 2010, there were twenty impaired, accruing loans
totaling $10.3 million which represented eleven customer relationships. All loans modified in
troubled debt restructurings are included in impaired loans.
Non-accrual loans totaled $9.9 million as of December 31, 2010 and were comprised of five CRE
customer relationships which totaled $7.0 million and twelve residential customers which totaled
$2.9 million of which there were four residential customer relationships totaling $490 thousand which were not impaired. Nonaccrual loans totaled $6.2 million as of March 31, 2010 and were comprised of
three CRE customer relationships which
totaled $4.7 million and eight residential customer relationships which totaled $1.5 million.
Total non-accrual loans includes non-accrual impaired loans as well as certain non-accrual
residential loans that are not considered impaired.
Financing Receivables on Nonaccrual Status
As of:
As of:
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Commercial real estate: |
||||||||
Mixed Use |
$ | 4,440 | $ | 4,729 | ||||
Industrial-Other |
1,547 | | ||||||
Retail |
773 | | ||||||
Residential: |
||||||||
Residential-1-4 family |
2,405 | 1,199 | ||||||
Condominium |
494 | 318 | ||||||
Commercial: |
225 | | ||||||
$ | 9,884 | $ | 6,246 | |||||
11
Table of Contents
During the nine months ended December 31, 2010, loans modified in troubled debt restructurings
were comprised of five residential real estate loan relationships which totaled $1.8 million as of
December 31, 2010, and four commercial real estate loan relationships which totaled $7.9 million as
of December 31, 2010. There was one residential TDR charge-off of $117 thousand related to the
TDRs which occurred during the nine months ended December 31, 2010. At December 31, 2010 total
TDRs amounted to $10.9 million and were comprised of nine residential real estate loan
relationships which totaled $2.7 million and five commercial real estate loan relationships which
totaled $8.2 million. Additionally, at December 31, 2010, total accruing TDRs amounted to $7.5
million and total non-accruing TDRs amounted to $3.4 million.
The following is a summary of information pertaining to impaired loans for the dates and
periods specified (in thousands):
At December 31, | At March 31, | |||||||
2010 | 2010 | |||||||
Impaired loans with a valuation allowance |
$ | 4,666 | $ | 3,009 | ||||
Impaired loans without a valuation allowance |
11,907 | 13,506 | ||||||
Total impaired loans |
$ | 16,573 | $ | 16,515 | ||||
Specific valuation allowance related to impaired loans |
$ | 1,382 | $ | 354 | ||||
Following
is an age analysis of past due loans as of December 31, 2010 by loan portfolio classes (in thousands):
Age Analysis of Past Due Financing Receivables
As of December 31, 2010
As of December 31, 2010
Greater | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | than | Total | |||||||||||||||||||||
Past Due | Past Due | 90 Days | Past Due | Current | Total | |||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Mixed Use |
$ | | $ | | $ | 4,440 | $ | 4,440 | $ | 36,542 | $ | 40,982 | ||||||||||||
Apartments |
1,016 | | 1,016 | 79,797 | 80,813 | |||||||||||||||||||
Industrial-Other |
| | 1,547 | 1,547 | 36,740 | 38,287 | ||||||||||||||||||
Retail |
| | 773 | 773 | 28,984 | 29,757 | ||||||||||||||||||
Offices |
729 | | | 729 | 15,264 | 15,993 | ||||||||||||||||||
Commercial real estate-construction |
| | | | 891 | 891 | ||||||||||||||||||
Residential: |
||||||||||||||||||||||||
Residential-1-4 family |
23 | 196 | 2,405 | 2,624 | 158,018 | 160,642 | ||||||||||||||||||
Residential -Condominium |
191 | | 494 | 685 | 25,351 | 26,036 | ||||||||||||||||||
Residential- HELOC |
| | | | 8,460 | 8,460 | ||||||||||||||||||
Commercial: |
9 | | 225 | 234 | 2,220 | 2,454 | ||||||||||||||||||
Consumer: |
| | | | 865 | 865 | ||||||||||||||||||
Consumer-other |
||||||||||||||||||||||||
$ | 1,968 | $ | 196 | $ | 9,884 | $ | 12,048 | $ | 393,132 | $ | 405,180 | |||||||||||||
There were no loans which were past due 90 days or more and still accruing interest as of
December 31, 2010.
Credit Quality Indicators. Management regularly reviews the problem loans in the Banks
portfolio to determine whether any assets require classification in accordance with Bank policy and
applicable regulations. The following table sets forth the balance of loans classified as pass,
special mention, or substandard at December 31, 2010 by loan class. Pass are those loans not
classified as special mention or lower risk rating. Special mention loans are performing loans on
which known information about the collateral pledged or the possible credit problems of the
borrowers have caused management to have doubts as to the ability of the borrowers to comply with
present
12
Table of Contents
loan repayment terms and which may result in the future inclusion of such loans in the
non-performing loan categories. A loan is considered substandard if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard loans include those characterized by the distinct possibility the Bank will sustain
some loss if the deficiencies are not corrected. Loans classified as doubtful have all the
weaknesses inherent as those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full on the basis of currently existing facts
and conditions and values, highly questionable and improbable. Loans classified as loss are
considered uncollectible and of such little value that their continuance as loans without the
establishment of specific loss allowance is not warranted. Loans classified as substandard,
doubtful or loss are individually evaluated for impairment. At December 31, 2010, there were no
loans classified as doubtful or loss.
The
following table displays the
loan portfolio by credit quality indicators as of December 31, 2010
(in thousands):
Home | ||||||||||||||||||||||||||||
Residential | Equity | |||||||||||||||||||||||||||
Commercial | Real | Lines of | Commercial | Commercial | Consumer | |||||||||||||||||||||||
Loans | Estate | Credit | Real Estate | Construction | Loans | Total | ||||||||||||||||||||||
Pass |
$ | 2,454 | $ | 183,677 | $ | 8,425 | $ | 191,135 | $ | 666 | $ | 865 | $ | 387,222 | ||||||||||||||
Special mention |
| 1,843 | 35 | 7,103 | | | 8,981 | |||||||||||||||||||||
Substandard |
| 1,158 | | 7,594 | 225 | | 8,977 | |||||||||||||||||||||
$ | 2,454 | $ | 186,678 | $ | 8,460 | $ | 205,832 | $ | 891 | $ | 865 | $ | 405,180 | |||||||||||||||
The following table displays the balances of non-impaired CRE loans with various Loan-to-Value
(LTV) ratios by collateral type. The Bank considers this an additional credit quality indicator
specifically as it relates to the CRE loan porfolio (in thousands):
Apartments | Offices | Mixed Use | Industrial - Other | Retail | Total | |||||||||||||||||||
< 40% LTV |
$ | 12,606 | $ | 1,327 | $ | 10,554 | $ | 6,740 | $ | 5,478 | $ | 36,705 | ||||||||||||
40% - 60% LTV |
24,544 | 8,450 | 12,104 | 10,909 | 17,528 | 73,535 | ||||||||||||||||||
> 60% LTV |
31,007 | 5,802 | 16,332 | 9,156 | 3,455 | 65,752 | ||||||||||||||||||
Loan particiations |
4,603 | | | 9,414 | 1,126 | 15,143 | ||||||||||||||||||
$ | 72,760 | $ | 15,579 | $ | 38,990 | $ | 36,219 | $ | 27,587 | $ | 191,135 | |||||||||||||
Following is a summary of the allowance for loan losses and loans at December 31, 2010 by loan
portfolio segment disaggregated by impairment method (in thousands):
Commercial | ||||||||||||||||||||||||
& | ||||||||||||||||||||||||
Residential | Construction | Commercial | Consumer | |||||||||||||||||||||
Real Estate | Real Estate | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Allowance for loan
losses ending
balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 202 | $ | 1,180 | | | | $ | 1,382 | |||||||||||||||
Collectively
evaluated for
impairment |
728 | 1,569 | 24 | 18 | 27 | 2,366 | ||||||||||||||||||
$ | 930 | $ | 2,749 | $ | 24 | $ | 18 | $ | 27 | $ | 3,748 | |||||||||||||
Loans ending balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 3,039 | $ | 13,309 | $ | 225 | | | $ | 16,573 | ||||||||||||||
Collectively
evaluated for
impairment |
192,099 | 193,414 | 2,229 | 865 | | 388,607 | ||||||||||||||||||
$ | 195,138 | $ | 206,723 | $ | 2,454 | $ | 865 | | $ | 405,180 | ||||||||||||||
13
Table of Contents
Following is a summary of impaired loans and their related allowances within the allowance for
loan losses at December 31, 2010 (in thousands):
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment * | Balance | Allowance | ||||||||||
With no related allowance recorded: |
||||||||||||
Residential 1-4 Family |
$ | 1,428 | $ | 1,427 | $ | | ||||||
Commercial Real Estate and Multi-Family |
$ | 10,307 | $ | 10,492 | $ | | ||||||
Commercial Loans |
$ | 225 | $ | 225 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Residential 1-4 Family |
$ | 1,618 | $ | 1,787 | $ | 202 | ||||||
Commercial Real Estate and Multi-Family |
$ | 3,041 | $ | 3,217 | $ | 1,180 | ||||||
Total |
||||||||||||
Residential 1-4 Family |
$ | 3,046 | $ | 3,214 | $ | 202 | ||||||
Commercial Real Estate and Multi-Family |
$ | 13,348 | $ | 14,235 | $ | 1,180 | ||||||
Commercial Loans |
$ | 225 | $ | 225 | |
* | Includes accrued interest, specific reserves and net unearned deferred fees and costs. |
(4) Deposits
Deposits at December 31, 2010 and March 31, 2010 are summarized as follows (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Demand deposit accounts |
$ | 42,764 | $ | 41,959 | ||||
NOW accounts |
30,703 | 29,358 | ||||||
Passbook and other savings accounts |
54,184 | 53,544 | ||||||
Money market deposit accounts |
75,163 | 79,745 | ||||||
Total non-certificate accounts |
202,814 | 204,606 | ||||||
Term deposit certificates: |
||||||||
Certificates of $100,000 and above |
48,408 | 51,695 | ||||||
Certificates of less than $100,000 |
73,930 | 82,868 | ||||||
Total term deposit certificates |
122,338 | 134,563 | ||||||
Total deposits |
$ | 325,152 | $ | 339,169 | ||||
(5) 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 December 31, 2010 the interest rate was
2.74%. 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 Trust I, the trust
preferred securities and debentures each have 30-year lives and may be callable by the Company or
Trust I, 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.
14
Table of Contents
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.
(6) Other Comprehensive Income
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, stockholders. Net
income is a component of comprehensive income, with all other components referred to, in the
aggregate, as other comprehensive income.
The Companys other comprehensive income and related tax effect for the three and nine months
ended December 31, 2010 and 2009 are as follows (in thousands):
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||
December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Before | After | Before | After | |||||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Amount | Effect | Amount | Amount | Effect | Amount | |||||||||||||||||||
Unrealized gains on securities: |
||||||||||||||||||||||||
Unrealized net holding gains during
period |
$ | 187 | $ | 68 | $ | 119 | $ | 162 | $ | 55 | $ | 107 | ||||||||||||
Less: reclassification adjustment for
Net gains (losses) included in net
income |
13 | 5 | 8 | (81 | ) | (33 | ) | (48 | ) | |||||||||||||||
Other comprehensive gain |
$ | 174 | $ | 63 | $ | 111 | $ | 243 | $ | 88 | $ | 155 | ||||||||||||
15
Table of Contents
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Before | After | Before | After | |||||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Amount | Effect | Amount | Amount | Effect | Amount | |||||||||||||||||||
Unrealized (losses) gains on securities: |
||||||||||||||||||||||||
Unrealized net holding gains during
period |
$ | 60 | $ | 20 | $ | 40 | $ | 3,724 | $ | 1,470 | $ | 2,254 | ||||||||||||
Less: reclassification adjustment for
net losses included in net income |
(170 | ) | (70 | ) | (100 | ) | (81 | ) | (33 | ) | (48 | ) | ||||||||||||
Other comprehensive gain |
$ | 230 | $ | 90 | $ | 140 | $ | 3,805 | $ | 1,503 | $ | 2,302 | ||||||||||||
(7) Contingencies
Legal Proceedings. The Company from time to time is involved in various legal actions
incident to its business. At December 31, 2010, none of these actions is believed to be material,
either individually or collectively, to the results of operations and financial condition of the
Company.
(8) Subsequent Events
On January 20, 2011, the Companys Board of Directors approved the payment of a quarterly cash
dividend of $0.05 per common share. The dividend is payable on or about February 18, 2011 to
common stockholders of record as of February 4, 2011. Also on January 20, 2011, the Companys
Board of Directors approved the payment of a quarterly cash dividend of $125 thousand to the U.S.
Department of Treasury, as the Companys sole preferred stockholder, in connection with the
Companys participation in the federal governments Troubled Asset Relief Program (TARP) Capital
Purchase Program. See Note 14 below for additional information.
Management has reviewed events through the issuance of the interim financial statements,
concluding that no other subsequent events occurred requiring accrual or disclosure.
(9) Earnings Per Share (EPS)
Unallocated shares of Company 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 earnings per share (EPS). At December 31, 2010 and 2009, there were
approximately 159,000 and 181,000 unallocated ESOP shares, respectively.
16
Table of Contents
The following depicts a reconciliation of earnings per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Amounts in thousands except | (Amounts in thousands except | |||||||||||||||
per share amounts) | per share amounts) | |||||||||||||||
Net income as reported |
$ | 345 | $ | 366 | $ | 1,484 | $ | 1,268 | ||||||||
Less preferred dividends and accretion |
(154 | ) | (153 | ) | (463 | ) | (459 | ) | ||||||||
Net income available to common stockholders |
$ | 191 | $ | 213 | $ | 1,021 | $ | 809 | ||||||||
Weighted average number of common shares
outstanding |
1,667,151 | 1,639,921 | 1,667,151 | 1,639,941 | ||||||||||||
Weighted average number of unallocated ESOP shares |
(161,278 | ) | (182,785 | ) | (166,654 | ) | (188,161 | ) | ||||||||
Weighted average number of common shares
outstanding
used in calculation of basic earnings per share |
1,505,873 | 1,457,136 | 1,500,497 | 1,451,780 | ||||||||||||
Incremental shares from the assumed exercise of
dilutive
securities |
127,292 | 54,670 | 107,623 | 35,538 | ||||||||||||
Weighted average number of common shares
outstanding
used in calculating diluted earnings per share |
1,633,165 | 1,511,806 | 1,608,120 | 1,487,318 | ||||||||||||
Earnings per common share |
||||||||||||||||
Basic |
$ | 0.13 | $ | 0.15 | $ | 0.68 | $ | 0.56 | ||||||||
Diluted |
$ | 0.12 | $ | 0.14 | $ | 0.64 | $ | 0.54 | ||||||||
At December 31, 2010, 34,458 stock options were anti-dilutive and therefore excluded from
the above calculation for the three and nine-month periods ended December 31, 2010. At December
31, 2009, 53,608 stock options were anti-dilutive and, therefore, excluded from the above
calculation for the three and nine-month periods ended December 31, 2009.
(10) 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 the 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. However, 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, however, a
maximum of 100,000 restricted shares may be granted under the plan. 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. As of
December 31, 2010, 63,800 shares remained unissued and available for award under the Incentive
Plan, of which 23,800 are available as restricted stock.
17
Table of Contents
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. Estimated forfeiture rates 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
the nine months ended December 31, 2010 and 2009.
The Company awarded options to purchase 10,000 shares and granted 49,000 restricted shares in
the year ended March 31, 2007 and granted no stock options or stock grants in the years ended March
31, 2008 and 2009. During the fiscal year ended March 31, 2010, 30,000 restricted shares were
issued and 2,800 vested restricted shares were forfeited. Additionally, the Company did not grant
any stock options or stock grants during the nine months ended December 31, 2010. The options and
restricted shares granted in fiscal 2007 vest over a five-year life. The restricted shares granted
in fiscal 2010 vest over a two-year life. Stock-based compensation totaled $101,000 and $73,000
for the three months ended December 31, 2010 and 2009, respectively, and $302,000 and $234,000 for
the nine months ended December 31, 2010 and December 31, 2009, respectively.
Stock option activity was as follows for the nine months ended December 31, 2010:
Number of | Weighted Average | |||||||
Shares | Exercise Price | |||||||
Outstanding at March 31, 2010 |
53,608 | $ | 26.62 | |||||
Exercised |
| | ||||||
Forfeited |
(12,466 | ) | $ | 23.64 | ||||
Expired |
(6,684 | ) | $ | 16.63 | ||||
Outstanding at December 31, 2010 |
34,458 | $ | 29.63 | |||||
Exercisable at December 31, 2010 |
32,458 | $ | 29.53 | |||||
As of December 31, 2010, the expected future compensation costs related to options and
restricted stock vesting is as follows: $101 thousand during the period of January 1, 2011 through
March 31, 2011, and $272 thousand during the first seven months of the fiscal year ending March 31,
2012.
The range of exercise prices, weighted average remaining contractual lives of outstanding
stock options and aggregate intrinsic value at December 31, 2010 were as follows:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Number | Contractual | Aggregate | ||||||||||||||
Exercise | of Shares | Life | Intrinsic | |||||||||||||
Price | Outstanding | (Years) | Value (1) | |||||||||||||
28.99 | 24,458 | (2) | 4.2 | | ||||||||||||
31.20 | 10,000 | (3) | 5.7 | | ||||||||||||
Average/Total |
$ | 29.63 | 34,458 | 4.7 | $ | | ||||||||||
(1) | Represents the total intrinsic value, based on the Companys closing stock price of $13.78 on December 31, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. As of December 31, 2010, the intrinsic value of outstanding stock options and exercisable stock options was $0. | |
(2) | Fully vested and exercisable at the time of grant. | |
(3) | Subject to vesting over five years, 80% vested at December 31, 2010. |
18
Table of Contents
A summary of restricted stock activity under all Company plans for the nine months ended
December 31, 2010 is as follows:
Number | Weighted Average | |||||||
of Restricted | Grant Date | |||||||
Shares | Fair Value | |||||||
Non-vested at March 31, 2010 |
46,800 | $ | 16.51 | |||||
Granted |
||||||||
Vested |
(8,400 | ) | $ | 31.20 | ||||
Forfeited |
||||||||
Non-vested at December 31, 2010 |
38,400 | $ | 13.30 | |||||
(11) Bank-Owned Life Insurance
The Bank follows ASC 325 Investments Other (ASC 325) in accounting for bank-owned life
insurance. 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 carriers prior
to the purchase of the policies, and continues to conduct such reviews on an annual basis.
Bank-owned life insurance totaled $6.9 million at December 31, 2010.
(12) Recent Accounting Pronouncements
In June 2009, the FASB issued guidance on Accounting for Transfers of Financial Assets, now
incorporated into ASC 860 Transfers and Servicing, which amends prior accounting guidance to
enhance reporting about transfers of financial assets, including securitizations, and where
companies have continuing exposure to the risks related to transferred financial assets. The new
guidance eliminates the concept of a qualifying special-purpose entity and changes the
requirements for derecognizing financial assets. The guidance also requires additional disclosures
about all continuing involvements with transferred financial assets including information about
gains and losses resulting from transfers during the period. The guidance was adopted as of April
1, 2010 and has not had a material impact on the Companys consolidated financial statements. The
guidance may impact the accounting for loan participations entered into by the Bank after April 1,
2010.
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 thereafter. The adoption of this standard on April 1, 2010 did not have a material impact
on our consolidated financial statements.
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. The adoption of this standard on April 1, 2010 did not have a
material impact on our consolidated financial statements, but has required disaggregation of
certain fair-value measurements as well as additional disclosures.
In July 2010, the FASB issued ASU 2010-20, Disclosures About the Credit Quality of Financing
Receivables, which amends Accounting Standards Codification Topic 310, Receivables. The purpose of
the Update is to improve transparency by companies that hold financing receivables, including
loans, leases and other long-term
19
Table of Contents
receivables. The Update requires such companies to disclose more information about the credit
quality of their financing receivables and the credit reserves against them. The disclosures as of
the end of a reporting period are effective for interim and annual reporting periods ending on or
after December 15, 2010. The disclosure requirements as of December 31, 2010 of ASU 2010-20 have
been incorporated in the notes to the Companys consolidated financial statements. Disclosures
about activity that occurs during a reporting period will be required beginning April 1, 2011.
In January 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-01,
Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt
Restructurings in Update No. 2010-20. The amendments in ASU 2011-01 temporarily delay the effective
date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic
310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, for public entities. The delay is intended to allow the FASB time to complete its
deliberations on what constitutes a troubled debt restructuring. The effective date of the new
disclosures about troubled debt restructurings for public entities and the guidance for determining
what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance
is anticipated to be effective for interim and annual periods ending after June 15, 2011. The
deferral in ASU 2011-01 was effective January 19, 2011 (date of issuance).
(13) Fair Value Disclosures
The Company follows ASC 820 Fair Value Measurements and Disclosures (ASC 820) which defines
fair value as the exchange price that would be received for 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.
20
Table of Contents
The only assets of the Company recorded at fair value on a recurring basis at December 31,
2010 and March 31, 2010 were securities available for sale. The assets of the Company recorded at
fair value on a nonrecurring basis at December 31, 2010 and March 31, 2010 were collateral
dependent loans and other real estate owned. 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 December 31, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets recorded at fair value on a recurring basis: |
||||||||||||||||
Securities available for sale |
||||||||||||||||
Government agency and government sponsored
agency mortgage-backed securities |
$ | | $ | 21,003 | $ | | $ | 21,003 | ||||||||
Trust preferred securities |
| 1,073 | | 1,073 | ||||||||||||
Preferred stock |
| 3,000 | | 3,000 | ||||||||||||
Common stock |
3,177 | | | 3,177 | ||||||||||||
Assets recorded at fair value on a nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value: |
||||||||||||||||
CRE |
| | 5,051 | 5,051 | ||||||||||||
Residential |
| | 544 | 544 | ||||||||||||
OREO |
| | 132 | 132 |
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 |
||||||||||||||||
Corporate bonds |
$ | | $ | 1,752 | $ | | $ | 1,752 | ||||||||
Government agency and government sponsored
agency mortgage-backed securities |
| 24,993 | | 24,993 | ||||||||||||
Trust preferred securities |
| 1,045 | | 1,045 | ||||||||||||
Preferred stock |
| 3,255 | | 3,255 | ||||||||||||
Common stock |
3,323 | | | 3,323 | ||||||||||||
Assets recorded at fair value on a nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value: |
||||||||||||||||
CRE |
| | 6,604 | 6,604 | ||||||||||||
Residential |
| | 599 | 599 | ||||||||||||
OREO |
| | 60 | 60 |
There were no Level 3 securities at December 31, 2010 or March 31, 2010. 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 December 31, 2010, impaired loans measured at fair value
using Level 3 inputs amounted to $5.6 million, which represents seven customer relationships,
compared to six customer relationships which totaled $7.2 million at March 31, 2010. There were no
impaired loans measured at fair value using Level 2 inputs at December 31, 2010 or March 31, 2010.
Level 3 inputs utilized to determine the fair value of the impaired loan relationships at December
31, 2010 and March 31, 2010 consist of appraisals, which may be discounted by management using
non-observable inputs, as well as estimated costs to sell.
OREO is measured at fair value less selling costs. Fair value is based upon independent
market prices, appraised values of the collateral, or managements estimation of the value of the
collateral. As of December 31, 2010, the Company had one residential parcel of OREO which totaled
$132 thousand.
21
Table of Contents
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 table 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
financial assets and liabilities:
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.
Investment Securities Available for Sale The fair values presented for investment securities
available for sale 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.
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.
Accrued Interest Receivable The carrying amount reported in the balance sheet for accrued
interest receivable approximates its fair value due to the short maturity of these accounts.
Stock in FHLBB The carrying amount reported in the balance sheet for FHLBB stock
approximates its fair value based on the redemption features 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 FHLBB Fair values of non-callable advances from the FHLBB are estimated based
on the discounted cash flows of scheduled future payments using the respective quarter-end
published rates for advances with similar terms and remaining maturities. Fair values of callable
advances from the FHLBB are estimated using indicative pricing provided by the FHLBB.
Subordinated Debentures The fair value of one subordinated debenture totaling $5.2 million
whose interest rate is adjustable quarterly 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 an adjustable rate which will adjust 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.
22
Table of Contents
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 to lend 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.
The estimated carrying amounts and fair values of the Companys financial instruments are as
follows:
December 31, 2010 | March 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 3,852 | $ | 3,852 | $ | 4,328 | $ | 4,328 | ||||||||
Short-term investments |
47,267 | 47,267 | 12,208 | 12,208 | ||||||||||||
Investment securities |
28,253 | 28,253 | 34,368 | 34,368 | ||||||||||||
Loans held for sale |
410 | 410 | 392 | 392 | ||||||||||||
Net loans |
401,432 | 404,111 | 458,472 | 458,557 | ||||||||||||
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 |
1,416 | 1,416 | 1,896 | 1,896 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 325,152 | $ | 325,987 | $ | 339,169 | $ | 329,749 | ||||||||
Advances from FHLB of Boston |
126,382 | 135,180 | 143,469 | 150,949 | ||||||||||||
Subordinated debentures |
11,341 | 8,689 | 11,341 | 8,226 | ||||||||||||
Advance payments by borrowers for taxes and insurance |
1,605 | 1,605 | 1,649 | 1,649 | ||||||||||||
Accrued interest payable |
433 | 433 | 517 | 517 | ||||||||||||
Off-Balance Sheet Instruments |
$ | 22,245 | $ | 22,245 | $ | 27,257 | $ | 27,257 |
(14) 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 (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 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.
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.
23
Table of Contents
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 $594,000 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 (ACS 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 $594,000. 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 above assumptions, 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.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements discussion and analysis of the financial condition and results of operations is
intended to assist in understanding the financial condition and results of operations of Central
Bancorp, Inc. (the Company or Central Bancorp). The information contained in this section
should be read in conjunction with the unaudited consolidated financial statements and footnotes
appearing in Part I, Item 1 of this Form 10-Q.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe
future plans, strategies and expectations of the Company. These forward-looking statements are
generally identified by use of the words believe, expect, intend, anticipate, estimate,
project or similar expressions. The Companys ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of the Company and its subsidiaries 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 TARP Capital Purchase 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
24
Table of Contents
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. Additionally, other risks and uncertainties may be described in reports the Company
files with the SEC, including the Companys Annual Report on Form 10-K for the year ended March 31,
2010, as filed with the Securities and Exchange Commission on June 18, 2010, and the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the SEC on August
13, 2010 which are available through the SECs website at www.sec.gov. These risks and
uncertainties should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Except as required by applicable law or regulation, the
Company does not undertake, and specifically disclaims any obligation, to release publicly the
result of any revisions that may be made to any forward-looking statements to reflect events or
circumstances after the date of the statements or to reflect the occurrence of anticipated or
unanticipated events.
General
The Company is a Massachusetts bank holding company established in 1998 to be the holding
company for Central Co-operative Bank (the Bank). The Companys primary business activity is the
ownership of all of the outstanding capital stock of the Bank. Accordingly, the information set
forth in this report, including the consolidated financial statements and related data, relates
primarily to the Bank.
The Bank is a Massachusetts co-operative bank headquartered in Somerville, Massachusetts with
nine full-service facilities, a limited service high school branch in suburban Boston, and a
stand-alone 24-hour automated teller machine in Somerville. The Company primarily generates funds
in the form of deposits and uses 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 operations of the Company and its subsidiary 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 Board of Governors of the Federal Reserve System (the Federal Reserve Board) and
the Federal Deposit Insurance Corporation (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
declining interest rate environment, the Banks net interest income and net income could be
positively impacted as interest-sensitive liabilities (deposits and borrowings) could adjust more
quickly to declining interest rates than the Banks interest-sensitive assets (loans and
investments). Conversely, 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
three and nine months ended December 31, 2010 and 2009 and its financial condition at December 31,
2010 compared to March 31, 2010. Managements discussion and analysis of financial condition and
results of operations should be read in conjunction with the consolidated financial statements and
accompanying notes.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by management, which have,
or could have, a material impact on the carrying value of certain assets and impact income, are
considered critical accounting policies. The Company considers the allowance for loan losses, fair
value of other real estate owned, fair value of investments, income taxes, accounting for goodwill
and impairment, and stock-based compensation to be its critical accounting policies. There have
been no significant changes in the methods or assumptions used in the accounting policies that
require material estimates and assumptions.
25
Table of Contents
Loans. Loans that management has the intent and ability to hold for the foreseeable future are
reported at the principal amount outstanding, adjusted by unamortized discounts, premiums,
write-downs, 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.
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.
Interest income on loans is recognized on an accrual basis using the simple interest method
only if deemed collectible. 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 collectible as to both principal and interest.
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 such as
loans held for sale, 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 and other
costs, or the recorded amount of the loan. In evaluating collateral values for impaired loans,
management obtains new appraisals or opinions of value when deemed necessary and may discount those
appraisals depending on the likelihood of foreclosure, generally by 20 percent to 30 percent.
Other factors considered by mangagement when discounting appraisals are the age of the appraisal,
availability of comparable properties, geographic considerations, and property type. 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. For all loans, charge-offs occur when management believes that the
collectibility of a portion or all of the loans principal balance is remote. Management considers
nonaccrual loans, except for certain nonaccrual residential loans, to be impaired. However,
troubled debt restructurings (TDRs) are also considered to be impaired. A TDR occurs when the
Bank grants a concession to a borrower with financial difficulties that it would not otherwise
consider. The majority of the Banks TDRs involve a modification in loan terms such as a temporary
reduction in the interest rate or a temporary period of interest only, and escrow (if required).
TDRs are accounted for as set forth in ASC 310 Receivables (ASC 310). A TDR may be on
non-accrual or it may accrue interest. A TDR is typically on non-accrual until the borrower
successfully performs under the new terms for six consecutive months. However, a TDR may be placed
on accrual immediately following the TDR in those instances where a borrowers payments are current
prior to the modification and management determines that principal and interest under the new terms
are fully collectible.
Existing performing loan customers who request a loan (non-TDR) modification and who meet the
Banks underwriting standards may, usually for a fee, modify their original loan terms to terms
currently offered. The modified terms of these loans are similar to the terms offered to new
customers with similar credit, income, and collateral. The fee assessed for modifying the loan is
deferred and amortized over the life of the modified loan using the level-yield method and is
reflected as an adjustment to interest income. Each modification is examined on a loan-by-loan
basis and if the modification of terms represents more than a minor change to the loan, then the
unamortized balance of the pre-modification deferred fees or costs associated with the mortgage
loan are recognized in interest income at the time of the modification. If the modification of
terms does not represent more than a minor
change to the loan, then the unamortized balance of the pre-modification deferred fees or costs continue to be deferred.
26
Table of Contents
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 Bank 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.
Regarding impaired loans, the Bank individually evaluates each loan and documents what
management believes to be an appropriate reserve level in accordance with ASC 310. If management
does not believe that any separate reserve for such loans are deemed necessary at the evaluation
date, they would continue to be evaluated separately and will not be returned to be included in the
normal ASC 450 Contingencies (ASC 450) formula based reserve calculation. In evaluating impaired
loans, all related management discounts of appraised values, selling and resolution costs are taken
into consideration in determining the level of reserves required when appropriate.
The methodology employed in calculating the allowance for loan losses is portfolio
segmentation. For the commercial real estate (CRE) portfolio, this is further refined through
stratification within each segment based on loan-to-value (LTV) ratios. The CRE portfolio is
further segmented by type of properties securing those loans. This approach allows the Bank to
take into consideration the fact that the various sectors of the real estate market change value at
differing rates and thereby present different risk levels. CRE loans are segmented into the
following categories:
n Apartments | ||
n Offices | ||
n Retail | ||
n Mixed Use | ||
n Industrial/Other |
Monthly, CRE loans are segmented using the above collateral-types and three LTV ratio
categories: <40%, 40%-60%, and >60%. While these ranges are somewhat arbitrary, management
feels that each category represents a significantly different degree of risk from the other.
Annually, for the CRE portfolio, management adjusts the appraised values which flow into the three
LTV ratio categories of our allowance for loan losses calculation. The data is provided by an
independent appraiser and it indicates annual changes in value for each property type for the last
ten years. Management then adjusts the appraised or most recent appraised values based on the year
the appraisal was made. These adjustments are believed to be appropriate based on the Banks own
experience with collateral values in its market area in recent years.
In developing ASC 450 reserve levels, recent regulatory guidance focuses on the Banks history
as a starting point. The Banks charge-off history in recent years has been minimal, therefore,
management continues to utilize more conservative historical loss ratios which are believed to be
appropriate. Those ratios are then adjusted based on trends in delinquent and impaired loans,
trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff,
national and local economic trends, industry conditions, and changes in credit concentrations.
There is a concentration in CRE loans, but the concentration is decreasing. Managements efforts to
reduce the levels of commercial real estate and construction loans are reflected in changes in the
Banks commercial real estate concentration ratio, which is calculated as total non-owner occupied
commercial real estate and
construction loans divided by the Banks risk-based capital. At December 31, 2010, the commercial real
estate concentration ratio was 402%, compared to a ratio of 466% at March 31, 2010, and 600% at March 31, 2009.
27
Table of Contents
Residential loans, home equity loans and consumer loans, other than TDRs and loans in the
process of foreclosure or repossession, are collectively evaluated for impairment. Factors
considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and
impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in
underwriting practices, experience of loan staff, national and local economic trends, industry
conditions, and changes in credit concentrations. TDRs and loans that are in the process of
foreclosure or repossession are evaluated under ASC 310.
Commercial and Industrial and construction loans that are not impaired are evaluated under ASC
450 and factors considered in determining the appropriate reserve levels include trends in
delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and
recoveries, trends in underwriting practices, experience of loan staff, national and local economic
trends, industry conditions, and changes in credit concentrations. Those loans that are
individually reviewed for impairment are evaluated according to ASC 310.
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. Management currently believes that there are adequate reserves and collateral
securing non-performing loans to cover losses that may result from these loans at December 31,
2010.
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 and the Company consists of a single reporting unit. 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, 2010 utilizing average
earnings and average book and tangible book multiples of sales transactions of banks considered to
be comparable to the Company, and management determined that no impairment existed at that date.
Management utilized 2010 sales transaction data of financial institutions in the New England area
of similar size, credit quality, net income, and return on average assets levels and management
feels that the overall assumptions utilized in the testing process were reasonable. During the
December 31, 2010 impairment testing using market capitalization was considered, however,
management concluded that it was not an appropriate measure of the Companys value due to the
overall depressed valuations in the financial sector and the significance of the Companys insider
ownership and the lack of volume in trading in the Companys shares of common stock. Management
also feels that this measure does not generally reflect the premium that a buyer would typically
pay for a controlling interest
Fair Value of Other Real Estate Owned. OREO is recorded at the lower of book value, or fair
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.
28
Table of Contents
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.
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. 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 December 31, 2010, 63,800 shares remained available for issue under the
Incentive Plan, of which 23,800 were available to be issued in the form of stock grants.
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
the year ended March 31, 2010, which it believes is a reasonable forfeiture estimate for the
current period.
Comparison of Financial Condition at December 31, 2010 and March 31, 2010
Total assets were $512.3 million at December 31, 2010 compared to $542.4 million at March 31,
2010, representing a decrease of $30.1 million, or 5.6%. The decrease in total assets reflected
strategic actions taken by management to reduce risk and increase capital ratios in accordance with
the Companys business plan, including the use of loan repayment, and investment maturity and
repayment proceeds to fund certain maturing deposits and borrowings. Total loans (excluding loans
held for sale) were $405.2 million at December 31, 2010, compared to
29
Table of Contents
$461.5 million at March 31, 2010, representing a decrease of $56.3 million, or 12.2%. This
decrease was primarily due to decreases in residential and home equity loans of $30.4 million and
$357 thousand, respectively, as well as decreases in construction and commercial real estate loans
of $23.9 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 decreased from $225.9 million at March 31, 2010 to $195.1 million at December 31, 2010
due to higher than expected residential loan payoffs. Commercial and industrial loans decreased
from $4.0 million at March 31, 2010 to $2.5 million at December 31, 2010 primarily due to the
scheduled repayment of principal. Managements efforts to reduce the levels of commercial real
estate and construction loans are reflected in changes in the Banks commercial real estate
concentration ratio, which is calculated as total non-owner occupied commercial real estate and
construction loans divided by the Banks risk-based capital. At December 31, 2010, the commercial
real estate concentration ratio was 402%, compared to a ratio of 466% at March 31, 2010 and 600% at
March 31, 2009.
The allowance for loan losses totaled $3.7 million at December 31, 2010 compared to $3.0
million at March 31, 2010, representing a net increase of $710 thousand, or 23.4%. This net
increase was primarily due to a provision of $900 thousand resulting from managements review of
the adequacy of the allowance for loan losses. 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 December 31, 2010 and March 31, 2010. See Comparison of Operating Results for
the Quarters Ended December 31, 2010 and 2009 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 three months ended December 31, 2010 should be sold in the
secondary market, rather than being retained in the Banks portfolio. 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.
Cash and cash equivalents totaled $51.1 million at December 31, 2010 compared to $16.5 million
at March 31, 2010, representing an increase of $34.6 million, or 209%. During the nine months
ended December 31, 2010, in general, proceeds from loan and investment pay-downs and maturities
were utilized to fund deposit withdrawals and maturing borrowings, with the remaining funds
contributing to the increase in cash and cash equivalents.
Investment securities totaled $38.3 million at December 31, 2010 compared to $44.5 million at
March 31, 2010, representing a decrease of $6.1 million, or 13.8%. The decrease in investment
securities is primarily due to the repayment of $7.1 million in principal on mortgage-backed
securities, the sale of $2.1 million in corporate bonds, partially offset by the purchase of two
government sponsored mortgage backed securities totaling $3.2 million and a net increase of $230
thousand in the fair value of available for sale securities. Stock in the Federal Home Loan Bank
of Boston (FHLBB) totaled $8.5 million at both December 31, 2010 and March 31, 2010,
respectively.
Banking premises and equipment, net, totaled $2.9 million and $2.8 million at December 31,
2010 and March 31, 2010, respectively.
Other real estate owned totaled $132 thousand at December 31, 2010, compared to $60 thousand
at March 31, 2010 as one parcel of foreclosed property was sold during the quarter ended June 30,
2010 and another parcel was acquired during the quarter ended December 31, 2010.
Deferred tax asset totaled $3.3 million at December 31, 2010 compared to $4.7 million at March
31, 2010. The decrease in deferred tax asset is primarily due to the sale of previously
written-down preferred stock investments during the quarter ended December 31, 2010.
30
Table of Contents
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 $6.9 million at December 31, 2010 as compared
to $6.7 million as of March 31, 2010.
Total deposits amounted to $325.2 million at December 31, 2010 compared to $339.2 million at
March 31, 2010, representing a decrease of $14 million, or 4.1%. The decrease was a result of the
combined effect of a $12.2 million decrease in certificates of deposit and a net decrease in core
deposits of $1.8 million (consisting of all non-certificate accounts). Management utilized cash
and short-term investments to fund certain maturing higher-cost certificates of deposit in an
effort to improve the Companys net interest rate spread and net interest margin.
FHLBB advances amounted to $126.4 million at December 31, 2010 compared to $143.5 million at
March 31, 2010, representing a decrease of $17.1 million, or 11.9%, as maturing advances were not
renewed but were instead funded with available cash.
The net increase in stockholders equity from $45.1 million at March 31, 2010 to $46.6 million
at December 31, 2010 is primarily the result of net income of $1.5 million, partially offset by
$598 thousand of dividends paid to common and preferred shareholders.
Comparison of Operating Results for the Quarters Ended December 31, 2010 and 2009
Net income available to common shareholders for the quarter ended December 31, 2010 was $191
thousand, or $0.12 per diluted common share, as compared to net income available to common
shareholders of $213 thousand, or $0.14 per diluted common share, for the comparable prior year
quarter. The decrease was primarily due to a $200 thousand increase in the provision for loan
losses, a $129 thousand decrease in net interest income and a $23 thousand increase in the
provision for income taxes, partially offset by a $173 thousand increase in non-interest income and
a $158 thousand decrease in non-interest expenses. Additionally, for each of the quarters ended
December 31, 2010 and 2009, net income available to common shareholders was reduced by $125
thousand for allocated dividends paid to preferred shareholders related to the Companys December
2008 sale of $10.0 million of preferred stock and a warrant to purchase 234,732 shares of the
Companys common stock to the U.S. Treasury Department as a participant in the federal governments
TARP Capital Purchase Program.
Interest and Dividend Income. Interest and dividend income decreased by $901 thousand, or
12.7%, to $6.2 million for the quarter ended December 31, 2010 as compared to $7.1 million during
the same period of 2009. During the quarter ended December 31, 2010, the yield on interest-earning
assets decreased by 46 basis points primarily due to a 31 basis point reduction in the yield on
mortgage loans. Contributing to the reduced yield on mortgage loans were decreases in commercial
real estate and construction loans as management refocused its lending emphasis in the current
market environment in an effort to reduce risk and increase regulatory capital ratios in accordance
with the Companys business plan, and a general decline in the market interest rates on loans.
Included in interest and dividend for the quarter ended December 31, 2010 was the receipt of a
Share Insurance Fund special dividend of $133 thousand compared to $0 during the quarter ended
December 31, 2009.
Interest Expense. Interest expense decreased by $772 thousand, or 28.5%, to $1.9 million for
the quarter ended December 31, 2010 as compared to $2.7 million for the same period of 2009
primarily due to decreases in the average rates paid on deposits and FHLBB borrowings. The cost of
deposits decreased by 41 basis points from 1.20% for the quarter ended December 31, 2009 to 0.79%
for the quarter ended December 31, 2010, as some higher-cost certificates of deposit were either
not renewed or were replaced by lower-costing deposits. The average balance of certificates of
deposit totaled $126.7 million for the quarter ended December 31, 2010, compared to $137.2 million
for the same period in 2009, a decline of $10.5 million. The average balance of lower-costing
non-maturity deposits increased by $1.2 million to $162.7 million for the quarter ended December
31, 2010, as compared to an average balance of $161.5 million during the same period of 2009. The
average balance of FHLBB borrowings decreased by $21.2 million, from $149.3 million for the quarter
ended December 31, 2009 to $128.1 million for the quarter ended December 31, 2010. The average
cost of these funds declined as management utilized short-term investments to fund maturing,
relatively higher-rate advances during the quarter ended December 31, 2010.
31
Table of Contents
The following table presents average balances and average rates earned/paid by the
Company for the three months ended December 31, 2010 compared to the three months ended December
31, 2009:
Three Months Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 416,517 | $ | 5,746 | 5.52 | % | $ | 458,887 | $ | 6,689 | 5.83 | % | ||||||||||||
Other loans |
3,955 | 49 | 4.96 | 5,199 | 74 | 5.69 | ||||||||||||||||||
Investment securities |
28,333 | 365 | 5.15 | 38,619 | 317 | 3.28 | ||||||||||||||||||
Federal Home Loan Bank Stock |
8,518 | | | 8,518 | | | ||||||||||||||||||
Short-term investments |
41,606 | 27 | 0.26 | 12,063 | 8 | 0.27 | ||||||||||||||||||
Total interest-earning assets |
498,929 | 6,187 | 4.96 | 523,286 | 7,088 | 5.42 | ||||||||||||||||||
Allowance for loan losses |
(3,733 | ) | (2,756 | ) | ||||||||||||||||||||
Noninterest-earning assets |
27,624 | 27,691 | ||||||||||||||||||||||
Total assets |
$ | 522,820 | $ | 548,221 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 289,535 | 573 | 0.79 | $ | 298,688 | 896 | 1.20 | ||||||||||||||||
Advances from FHLB of Boston |
128,134 | 1,226 | 3.83 | 149,334 | 1,675 | 4.49 | ||||||||||||||||||
Other borrowings |
11,341 | 140 | 4.94 | 11,357 | 140 | 4.93 | ||||||||||||||||||
Total interest-bearing liabilities. |
429,010 | 1,939 | 1.81 | 459,379 | 2,711 | 2.36 | ||||||||||||||||||
Noninterest-bearing liabilities |
47,332 | 45,473 | ||||||||||||||||||||||
Total liabilities |
476,342 | 504,852 | ||||||||||||||||||||||
Stockholders equity |
46,478 | 43,369 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 522,820 | $ | 548,221 | ||||||||||||||||||||
Net interest and dividend income |
$ | 4,248 | $ | 4,377 | ||||||||||||||||||||
Net interest spread |
3.15 | % | 3.06 | % | ||||||||||||||||||||
Net interest margin |
3.41 | % | 3.35 | % | ||||||||||||||||||||
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 level
at the end of each quarter. Periodically, the Company evaluates the allocations used in these
calculations. During the quarters ended December 31, 2010 and 2009, management analyzed required
allowance allocations for loans considered impaired under ASC 310 and the allocation percentages
used when calculating potential losses under ASC 450. Management made no changes to ASC 450 loss
factors during the quarters ended December 31, 2010 and December 31, 2009; however, certain ASC 450
factors were increased during the nine months ended December 31, 2010 and December 31, 2009 see
Comparison of Operating Results for the Nine Months Ended December 31, 2010 and 2009 Provision
for Loan Losses. Based on these analyses, a provision for loan losses of $300 thousand was
recorded during the quarter
ended December 31, 2010 and a provision for loan losses of $100 thousand was recorded during the
quarter ended December 31, 2009.
32
Table of Contents
Management continues to give high priority to monitoring and managing the Companys asset
quality. At December 31, 2010, nonperforming loans totaled $9.9 million as compared to $6.2
million on March 31, 2010. All twenty of the loans included in this category at December 31, 2010
are secured by real estate collateral that is predominantly located in the Banks market area.
Nineteen 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 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. Noninterest income increased by $173 thousand from $379
thousand during the quarter ended December 31, 2009 to $552 thousand during the quarter ended
December 31, 2010. The increase of $173 thousand was primarily due to: (1) a $72 thousand
reduction in other-than-temporary impairment on available-for-sale investment securities, which
totaled $9 thousand during the quarter ended December 31, 2010 compared to $81 thousand during the
prior year quarter, (2) a $48 thousand increase in gains on the sale of loans due to increased loan
sale activity, and (3) a decrease in losses on the sale of foreclosed property, which totaled $0
during the quarter ended December 31, 2010 compared to $48 thousand during the prior year quarter.
Also included in the aforementioned $552 thousand of non-interest income during the quarter ended
December 31, 2010 were gains on sale of investment securities of $22 thousand compared to $0 during
the prior year quarter.
Noninterest Expenses. Noninterest expenses decreased by $158 thousand, or 4%, to $3.8 million
for the quarter ended December 31, 2010 as compared to $4.0 million during the quarter ended
December 31, 2009. This net decrease was primarily due to a $350 thousand decrease in FDIC deposit
insurance premiums, a $46 thousand decrease in marketing expenses, decreases in occupancy and
equipment related expenses of $29 thousand, and a decrease of $17 thousand in foreclosure and
collection expenses, partially offset by a $271 thousand increase in salary and employee benefits,
a $32 thousand increase in professional fees, and a $10 thousand increase in data processing costs.
Management continues to closely monitor operating expenses throughout the Company.
Salaries and employee benefits increased by $271 thousand, or 13.4%, to $2.3 million during
the quarter ended December 31, 2010 as compared to $2.0 million during the quarter ended December
31, 2009 primarily due to increases of $51 thousand for non-deposit investment product and loan
origination commissions, $45 thousand for incentive compensation related accruals, and a $90
thousand recovery from a vendor for a benefits related settlement that was recorded during the
quarter ended September 30, 2009.
FDIC deposit insurance premiums decreased by $350 thousand to $139 thousand during the quarter
ended December 31, 2010 compared to $489 thousand during the same quarter of 2009 due to an
adjustment to the deposit insurance estimation process, and lower deposit insurance costs due to
declining average balances of deposits.
Advertising and marketing expenses decreased by $46 thousand to $24 thousand during
the quarter ended December 31, 2010 as compared to $70 thousand during the same period of 2009 as
the Company strategically decided to decrease advertising and marketing efforts on a limited basis.
Office occupancy and equipment expenses decreased by $28 thousand, or 5.3%, to $523 thousand
during the quarter ended December 31, 2010 as compared to $552 thousand during the same period of
2009 primarily due to decreases in amortization of leasehold improvements, depreciation of
furniture, fixtures and equipment, and maintenance costs, partially offset by increases in
utilities, real estate taxes, security expenses and rents.
Data processing fees decreased by $10 thousand, or 4.5%, to $211 thousand during the quarter
ended December 31, 2010 as compared to $222 thousand during the same period of 2009 due to
decreases in certain processing costs.
33
Table of Contents
Professional fees increased by $32 thousand, or 15.9% to $233 thousand during the quarter
ended December 31, 2010 as compared to $201 thousand during the same period of 2009 primarily due
to increases in loan workout-related expenses and contract labor costs, partially offset by lower
legal fees.
Other expenses decreased by $10 thousand, or 2.9%, to $364 thousand during the quarter ended
December 31, 2010 as compared to $428 thousand during the quarter ended December 31, 2009 primarily
as a result of a decrease in appraisal costs of $24 thousand, OREO expenses of $17 thousand
partially offset by an increase of $14 thousand for escrow tax services and an increase in credit
bureau expenses of $11 thousand.
Income Taxes. The effective income tax rate for the quarter ended December 31, 2010 was
48.8%, compared to an effective income tax rate of 45.6% for the same quarter in 2009. The
difference in the effective tax rate for the two periods was due to differences in the amounts and
the composition of actual pre-tax income as well as differences in managements estimates of
projected pre-tax income for each fiscal year. Overall, the effective rates for both periods were
relatively high compared to other quarters during the fiscal year due to a compensation-related
discrete item which is recorded during each quarter ended December 31st.
Comparison of Operating Results for the Nine Months Ended December 31, 2010 and 2009
Net income available to common shareholders for the nine months ended December 31, 2010 was
$1.0 million, or $0.64 per diluted share, as compared to net income of $809 thousand, or $0.54 per
diluted share, during the nine months ended December 31, 2009. Items primarily affecting the
Companys earnings for the nine months ended December 31, 2010 when compared to the nine months
ended December 31, 2009 were: an overall 69 basis point decrease in the cost of interest-bearing
liabilities, partially offset by an increase in the provision for loan losses of $550 thousand and
non-interest expenses of $116 thousand. Non-interest expense increased primarily due to increases
in salaries and benefits of $815 thousand and professional fees of $161 thousand, partially offset
by decreases in FDIC deposit insurance expense of $543 thousand, foreclosure and collection
expenses of $167 thousand and occupancy and equipment of $91 thousand. Additionally, for the nine
months ended December 31, 2010, net income was reduced by $375 thousand 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.
Interest and Dividend Income. Interest and dividend income decreased by $1.9 million, or
8.7%, to $19.6 million for the nine months ended December 31, 2010 compared to $21.5 million for
the same period of 2009 primarily due to decreases in the average yield and average balance of
mortgage loans. The average balance and average yield decreased primarily due to decreases in the
average balances of commercial real estate and construction loans as the Bank continued to shift
its focus from those loan types to originating residential real estate loans. Also contributing to
the reduced yield on mortgage loans was a general decline in market interest rates. Included in
interest and dividend for the nine months ended December 31, 2010 was the receipt of a Share
Insurance Fund special dividend of $133 thousand compared to $0 during the nine months ended
December 31, 2009.
Interest Expense. Interest expense decreased by $2.9 million, or 31.6%, to $6.2 million for
the nine months ended December 31, 2010 compared to $9.1 million for the same period of 2009. The
cost of deposits decreased by 68 basis points from 1.58% during the quarter ended December 31, 2009
to .90% during the quarter ended December 31, 2010, as some higher-cost certificates of deposit
were replaced by lower-costing deposits. The average balance of certificates of deposit totaled
$153.3 million during the nine months ended December 31, 2009, compared to $128.5 million for the
same period in 2010, a decline of $24.8 million. The average balance of lower-costing non-maturity
deposits increased by $5.4 million to $163.5 million for the nine months ended December 31, 2010,
as compared to an average balance of $158.1 million during the same period of 2009. The average
balance of FHLBB borrowings decreased by $13.0 million, from $145.1 million during the nine months
ended December 31, 2009 to $132.1 million during the same period of 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 increased as a portion of these borrowings are adjustable and the average
rate paid during the nine months ended December 31, 2010 was 4.94%, compared to an average rate of
4.86% during the same period of 2009.
34
Table of Contents
The following table presents average balances and average rates earned/paid by the Company for
the nine months ended December 31, 2010 compared to the nine months ended December 31, 2009:
Nine Months Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 435,555 | $ | 18,423 | 5.64 | % | $ | 457,505 | $ | 20,101 | 5.86 | % | ||||||||||||
Other loans |
4,392 | 183 | 5.56 | 5,746 | 249 | 5.78 | ||||||||||||||||||
Investment securities |
30,654 | 984 | 4.28 | 36,366 | 1,109 | 4.07 | ||||||||||||||||||
Federal Home Loan Bank Stock |
8,518 | | | 8,518 | | | ||||||||||||||||||
Short-term investments |
24,685 | 47 | 0.25 | 21,650 | 41 | 0.25 | ||||||||||||||||||
Total interest-earning assets |
503,804 | 19,637 | 5.20 | 529,785 | 21,500 | 5.41 | ||||||||||||||||||
Allowance for loan losses |
(3,427 | ) | (3,008 | ) | ||||||||||||||||||||
Noninterest-earning assets |
27,380 | 29,400 | ||||||||||||||||||||||
Total assets |
$ | 527,757 | $ | 556,177 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 292,069 | 1,962 | 0.90 | $ | 311,360 | 3,696 | 1.58 | ||||||||||||||||
Advances from FHLB of Boston |
132,084 | 3,837 | 3.87 | 145,125 | 4,954 | 4.55 | ||||||||||||||||||
Other borrowings |
11,341 | 420 | 4.94 | 12,072 | 440 | 4.86 | ||||||||||||||||||
Total interest-bearing liabilities |
435,494 | 6,219 | 1.90 | 468,557 | 9,090 | 2.59 | ||||||||||||||||||
Noninterest-bearing liabilities |
46,363 | 45,287 | ||||||||||||||||||||||
Total liabilities |
481,857 | 513,844 | ||||||||||||||||||||||
Stockholders equity |
45,900 | 42,333 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 527,757 | $ | 556,177 | ||||||||||||||||||||
Net interest and dividend income |
$ | 13,418 | $ | 12,410 | ||||||||||||||||||||
Net interest spread |
3.30 | % | 2.82 | % | ||||||||||||||||||||
Net interest margin |
3.55 | % | 3.12 | % | ||||||||||||||||||||
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
allowance level at the end of each quarter. Periodically, the Company evaluates the allocations
used in these calculations. During the nine month periods ended December 31, 2010 and 2009,
management performed a thorough analysis of the loan portfolio as well as the required allowance
allocations for loans considered impaired under ASC 310 and the allocation percentages used when
calculating potential losses under ASC 450. During the nine months ended December 31, 2010,
management increased the ASC 450 loss factors related to trends in delinquent and impaired loans
for residential real estate, commercial real estate, and commercial and industrial loans, and
increased loss factors related to national and local economic conditions for commercial real estate
and commercial and industrial loans. As a result of the aforementioned ASC 450 factor changes, the
impact to the allowance for loan losses were increases in ASC 450 reserves of $35 thousand for
residential loans, $51 thousand for CRE loans, and $1 thousand for commercial and industrial loans.
35
Table of Contents
Based on these analyses, the Company recorded a provision of $900 thousand for the nine
months ended December 31, 2010 and a provision for loan losses of $350 thousand during the
corresponding 2009 period.
Management continues to give high priority to monitoring and managing the Companys asset
quality. At December 31, 2010, nonperforming loans totaled $9.9 million as compared to $6.2
million at March 31, 2010. Of the twenty loans included in this category at December 31, 2010, all
are secured by real estate collateral that is predominantly located in the Banks market area.
Nineteen 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 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. Noninterest income increased by $48 thousand from $1.3 million during the
nine months ended December 31, 2009 to $1.4 million during the nine months ended December 31, 2010.
The increase was primarily due to increases in brokerage income of $66 thousand, other income of
$53 thousand, and deposit fees of $25 thousand. Partially offsetting the aforementioned increases
were increases in net losses on the sales and write-downs on investments, which totaled $170
thousand during the nine months ended December 31, 2010 compared to $81 thousand during the prior
year period. Additionally, gains on sales of loans decreased by $3 thousand due to decreased loan
origination and sale activity.
Noninterest Expenses. Noninterest expense increased by $116 thousand, or 1.0% to $11.5
million during the nine months ended December 31, 2010 as compared to $11.4 million during the same
period of 2009. This increase is primarily due to increases in salaries and other benefits of $815
thousand, a $161 thousand increase in other professional fees, partially offset by a $543 thousand
decrease in FDIC insurance premiums, a $91 thousand decrease in occupancy and equipment costs and a
$51 thousand decrease in other expenses. Management continues to closely monitor operating
expenses throughout the Company.
Salaries and employee benefits increased by $815 thousand, or 13.7%, to $6.8 million during
the nine months ended December 31, 2010 as compared to $6.0 million during the same period of 2009
primarily due to increases of $163 thousand in contract labor costs, $159 thousand for non-deposit
investment product and loan origination commissions, $140 thousand for incentive compensation
related accruals and a $150 thousand recovery from a vendor for a benefits related settlement
recorded during the nine months ended December 31, 2009.
FDIC deposit insurance premiums decreased by $543 thousand to $426 thousand during the nine
months ended December 31, 2010 compared to $969 thousand during the same period of 2009. This
decrease was primarily due to a $260 thousand special assessment which was recorded during the
quarter ended June 30, 2009 and lower deposit insurance costs due to declining average balances of
deposits.
Advertising and marketing expenses decreased by $33 thousand to $121 thousand during the nine
months ended December 31, 2010 as compared to $154 thousand during the same period of 2009 as
management strategically decided to decrease advertising and marketing efforts on a limited basis.
Office occupancy and equipment expenses decreased by $92 thousand, or 5.6%, to $1.5 million
during the nine months ended December 31, 2010 as compared $1.6 million during the same period of
2009 primarily due to decreases in the amortization of leasehold improvements, depreciation of
furniture, fixtures and equipment and decreases on certain fuel costs, partially offset by
increases in real estate taxes, utilities, bank building expenses and rental income.
36
Table of Contents
Data processing costs decreased by $8 thousand, or 1.4%, to $629 thousand during the nine
months ended December 31, 2010 as compared to $637 thousand during the same period of 2009 due to
increases in certain processing costs.
Income Taxes. The effective income tax rate for the nine months ended December 31, 2010 was
37.8%, compared to an effective income tax rate of 36.4% for the same period of 2009. The
difference in the effective tax rate for the two periods was due to differences in the amounts and
the composition of actual pre-tax income as well as differences in managements estimates of
projected pre-tax income for each fiscal year.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term
nature. The Companys principal sources of liquidity are customer deposits, short-term
investments, loan repayments, and advances from the FHLBB and funds from operations. The Bank is a
voluntary member of the FHLBB and, as such, is entitled 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 FHLBB. At December 31, 2010,
the Company had approximately $43.4 million in unused borrowing capacity at the FHLBB. The Company
also has established borrowing capacity with the Federal Reserve Bank of Boston (FRB). The
unused borrowing capacity at the FRB totaled $8.2 million at December 31, 2010.
At December 31, 2010, the Company had commitments to originate loans, unused outstanding lines
of credit, undisbursed proceeds of loans totaling $22.2 million, and commitments to sell loans of
$231 thousand. Since many of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. At December 31, 2010,
the Company believes it has sufficient funds available to meet its current loan commitments.
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 that 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 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.
The Company is a separate legal entity from the Bank and must provide for its own liquidity.
In addition to its operating expenses, the Company is responsible for paying any dividends declared
to its shareholders. The Companys primary source of cash are dividends received from the Bank,
and principal and interest payment receipts related to loans which the Company has made to the
ESOP. Regarding dividends received from the Bank, 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 Massachusetts Commissioner of Banks 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. At December 31, 2010, the Company had liquid assets
of $357 thousand.
37
Table of Contents
The following table sets forth the capital positions of the Company and the Bank at December
31, 2010:
At December 31, 2010 | ||||||||
Regulatory | ||||||||
Threshold | ||||||||
For Well | ||||||||
Actual | Capitalized | |||||||
Central Bancorp: |
||||||||
Tier 1 Leverage |
10.16 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
16.82 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
18.07 | % | 10.0 | % | ||||
Central Co-operative Bank: |
||||||||
Tier 1 Leverage |
9.07 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
15.00 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
16.24 | % | 10.0 | % |
Off-Balance Sheet Arrangements
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 our 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 and for the nine months ended December 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the potential impact of interest rate changes upon the market value of the
Companys portfolio equity, see Item 7A in the Companys Annual Report on Form 10-K for the year
ended March 31, 2010. Management, as part of its regular practices, performs periodic reviews of
the impact of interest rate changes upon net interest income and the market value of the Companys
portfolio equity. Based on such reviews, among other factors, management believes that there have
been no material changes in the market risk of the Companys asset and liability position since
March 31, 2010.
Item 4. Controls and Procedures
The Companys management has carried out an evaluation, under the supervision and with the
participation of the Companys principal executive officer and principal financial officer, of 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 on this evaluation, the Companys 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 information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act,
(1) is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions 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.
38
Table of Contents
In addition, based on that evaluation, there has been no change in the Companys internal
control over financial reporting that occurred during the Companys last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits against 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 a 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 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors, which could materially affect our business, financial condition or future results.
These risk factors are discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form
10-K for the year ended March 31, 2010, as filed with the SEC on June 18, 2010 and our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the SEC on August 13, 2010.
At December 31, 2010, the Companys risk factors had not changed materially from those set forth in
the Companys Form 10-K and Form 10-Q. The risks described in these documents are not the only
risks that we face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase any of its securities during the quarter ended December 31,
2010.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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 |
39
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CENTRAL BANCORP, INC.
Registrant
|
||||
February 15, 2011 | By: | /s/ John D. Doherty | ||
John D. Doherty | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) |
||||
February 15, 2011 | By: | /s/ Paul S. Feeley | ||
Paul S. Feeley | ||||
Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |