Attached files
file | filename |
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EX-32 - EX-32 - CENTRAL BANCORP INC /MA/ | b87836exv32.htm |
EX-31.1 - EX-31.1 - CENTRAL BANCORP INC /MA/ | b87836exv31w1.htm |
EX-31.2 - EX-31.2 - CENTRAL BANCORP INC /MA/ | b87836exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - CENTRAL BANCORP INC /MA/ | Financial_Report.xls |
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 September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number: 0-25251
CENTRAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-3447594 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
399 Highland Avenue, Somerville, Massachusetts | 02144 | |
(Address of principal executive offices) | (Zip Code) |
(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
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 þ No o
Yes þ 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
Yes o No þ
Common Stock, $1.00 par value | 1,681,071 | |
Class | Outstanding at November 11, 2011 |
CENTRAL BANCORP, INC.
FORM 10-Q
Table of Contents
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements |
(In Thousands, Except Share and Per Share Data) | September 30, 2011 | March 31, 2011 | ||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,984 | $ | 3,728 | ||||
Short-term investments |
23,206 | 37,190 | ||||||
Cash and cash equivalents |
27,190 | 40,918 | ||||||
Investment securities available for sale, at fair value (Note 2) |
25,869 | 25,185 | ||||||
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 |
35,963 | 35,279 | ||||||
Loans held for sale |
523 | | ||||||
Loans (Note 3) |
432,297 | 394,217 | ||||||
Less allowance for loan losses |
(4,173 | ) | (3,892 | ) | ||||
Loans, net |
428,124 | 390,325 | ||||||
Accrued interest receivable |
1,514 | 1,496 | ||||||
Banking premises and equipment, net |
2,562 | 2,705 | ||||||
Deferred tax asset, net |
4,045 | 3,600 | ||||||
Other real estate owned |
187 | 132 | ||||||
Goodwill |
2,232 | 2,232 | ||||||
Bank-owned life insurance (Note 11) |
7,112 | 6,972 | ||||||
Other assets |
3,793 | 3,966 | ||||||
Total assets |
$ | 513,245 | $ | 487,625 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits (Note 4) |
$ | 333,359 | $ | 309,077 | ||||
Federal Home Loan Bank advances |
117,291 | 117,351 | ||||||
Subordinated debentures (Note 5) |
11,341 | 11,341 | ||||||
Advanced payments by borrowers for taxes and insurance |
2,230 | 1,387 | ||||||
Accrued expenses and other liabilities |
2,264 | 1,348 | ||||||
Total liabilities |
466,485 | 440,504 | ||||||
Commitments and Contingencies (Note 7) |
||||||||
Stockholders equity: |
||||||||
Preferred stock Series A Cumulative Perpetual, $1.00 par value;
5,000,000 shares authorized; No shares issued and outstanding at
September 30, 2011 and 10,000 shares issued and outstanding, with a
liquidation preference and redemption value of $10,063,889 at March 31,
2011 |
| 9,709 | ||||||
Preferred stock Series B Senior Non-Cumulative Perpetual, $1.00 par
value; 10,000 shares authorized; 10,000 shares issued and outstanding,
with a liquidation preference and redemption value of $10,000,000 at
September 30, 2011 and no shares issued and outstanding at March 31, 2011 |
9,957 | | ||||||
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,681,071
shares issued and outstanding at September 30, 2011 and March 31, 2011 |
1,681 | 1,681 | ||||||
Additional paid-in capital |
4,662 | 4,589 | ||||||
Retained income |
34,969 | 35,288 | ||||||
Accumulated other comprehensive income (Note 6) |
184 | 892 | ||||||
Unearned compensation Employee Stock Ownership Plan |
(4,693 | ) | (5,038 | ) | ||||
Total stockholders equity |
46,760 | 47,121 | ||||||
Total liabilities and stockholders equity |
$ | 513,245 | $ | 487,625 | ||||
See accompanying notes to unaudited consolidated financial statements.
1
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
(In Thousands, Except Share and Per Share Data) | 2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and dividend income: |
|||||||||||||||||
Mortgage loans |
$ | 5,502 | $ | 6,211 | $ | 10,800 | $ | 12,677 | |||||||||
Other loans |
30 | 65 | 68 | 134 | |||||||||||||
Investments |
314 | 316 | 547 | 619 | |||||||||||||
Short-term investments |
10 | 13 | 24 | 20 | |||||||||||||
Total interest and dividend income |
5,856 | 6,605 | 11,439 | 13,450 | |||||||||||||
Interest expense: |
|||||||||||||||||
Deposits |
422 | 674 | 809 | 1,390 | |||||||||||||
Advances from Federal Home Loan Bank of Boston |
1,103 | 1,254 | 2,193 | 2,611 | |||||||||||||
Other borrowings |
139 | 142 | 276 | 279 | |||||||||||||
Total interest expense |
1,664 | 2,070 | 3,278 | 4,280 | |||||||||||||
Net interest and dividend income |
4,192 | 4,535 | 8,161 | 9,170 | |||||||||||||
Provision for loan losses |
300 | 300 | 800 | 600 | |||||||||||||
Net interest and dividend income after
provision for loan losses (Note 3) |
3,892 | 4,235 | 7,361 | 8,570 | |||||||||||||
Noninterest income: |
|||||||||||||||||
Deposit service charges |
236 | 258 | 476 | 512 | |||||||||||||
Net gain (loss) from sales and write-downs
of investment securities |
64 | (226 | ) | 555 | (184 | ) | |||||||||||
Net gains on sales of loans |
27 | 87 | 35 | 129 | |||||||||||||
Bank-owned life insurance |
51 | 75 | 101 | 149 | |||||||||||||
Other |
122 | 97 | 237 | 213 | |||||||||||||
Total noninterest income |
500 | 291 | 1,404 | 819 | |||||||||||||
Noninterest expenses: |
|||||||||||||||||
Salaries and employee benefits |
2,460 | 2,306 | 5,055 | 4,493 | |||||||||||||
Occupancy and equipment |
519 | 518 | 1,049 | 1,024 | |||||||||||||
Data processing fees |
189 | 213 | 390 | 417 | |||||||||||||
Professional fees |
223 | 255 | 401 | 497 | |||||||||||||
FDIC deposit insurance premiums |
99 | 147 | 201 | 287 | |||||||||||||
Advertising and marketing |
51 | 33 | 83 | 97 | |||||||||||||
Other expenses |
571 | 455 | 978 | 865 | |||||||||||||
Total noninterest expenses |
4,112 | 3,927 | 8,157 | 7,680 | |||||||||||||
Income before income taxes |
280 | 599 | 608 | 1,709 | |||||||||||||
Provision for income taxes |
76 | 198 | 168 | 570 | |||||||||||||
Net income |
$ | 204 | $ | 401 | $ | 440 | $ | 1,139 | |||||||||
Net (loss) income available to common shareholders
(Note 9) |
$ | (247 | ) | $ | 246 | $ | (167 | ) | $ | 830 | |||||||
(Loss) earnings per common share basic (Note 9) |
$ | (0.16 | ) | $ | 0.16 | $ | (0.11 | ) | $ | 0.55 | |||||||
(Loss) earnings per common share diluted (Note 9) |
$ | (0.16 | ) | $ | 0.15 | $ | (0.11 | ) | $ | 0.52 | |||||||
Weighted average common shares outstanding basic |
1,535,924 | 1,500,497 | 1,533,235 | 1,497,808 | |||||||||||||
Weighted average common and equivalent shares
outstanding diluted |
1,535,924 | 1,602,963 | 1,533,235 | 1,594,935 |
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 | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Shares of Series A | Series A | Number of Shares of | Series B | Number of Shares of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Series B Preferred | Preferred | Common | Common | Paid-In | Retained | Comprehensive | Compensation- | Stockholders' | ||||||||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Capital | Income | Income | ESOP | Equity | ||||||||||||||||||||||||||||||||||
Six Months Ended
September 30, 2010 |
||||||||||||||||||||||||||||||||||||||||||||
Balance at March
31, 2010 |
10,000 | $ | 9,589 | | $ | | 1,667,151 | $ | 1,667 | $ | 4,291 | $ | 34,482 | $ | 810 | $ | (5726 | ) | $ | 45,113 | ||||||||||||||||||||||||
Net income |
| | | | | | | 1,139 | | | 1,139 | |||||||||||||||||||||||||||||||||
Other comprehensive
income, net of
taxes of $21: |
||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain
on securities,
net
of reclassification
adjustment (Note 6) |
| | | | | | | | 27 | | 27 | |||||||||||||||||||||||||||||||||
Comprehensive income |
1,166 | |||||||||||||||||||||||||||||||||||||||||||
Dividends paid to
common stockholders
($0.10 per share) |
| | | | | | | (148 | ) | | | (148 | ) | |||||||||||||||||||||||||||||||
Preferred stock
accretion of
discount and
issuance costs |
| 59 | | | | | | (59 | ) | | | | ||||||||||||||||||||||||||||||||
Dividends paid on
preferred stock |
| | | | | | | (250 | ) | | | (250 | ) | |||||||||||||||||||||||||||||||
Stock-based
compensation (Note
10) |
| | | | | | 201 | | | | 201 | |||||||||||||||||||||||||||||||||
Amortization of
unearned
compensation
ESOP |
| | | | | | (228 | ) | | | 344 | 116 | ||||||||||||||||||||||||||||||||
Balance at
September 30, 2010 |
10,000 | $ | 9,648 | | $ | 1,667 | 1,667,151 | $ | 1,667 | $ | 4,264 | $ | 35,164 | $ | 837 | $ | (5,382 | ) | $ | 46,198 | ||||||||||||||||||||||||
Number of | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Shares of Series A | Series A | Number of Shares of | Series B | Number of Shares of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Series B Preferred | Preferred | Common | Common | Paid-In | Retained | Comprehensive | Compensation- | Stockholders' | ||||||||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Capital | Income | Income | ESOP | Equity | ||||||||||||||||||||||||||||||||||
Six Months Ended
September 30, 2011 |
||||||||||||||||||||||||||||||||||||||||||||
Balance at March
31, 2011 |
10,000 | $ | 9,709 | | $ | | 1,681,071 | $ | 1,681 | $ | 4,589 | $ | 35,288 | $ | 892 | $ | (5,038 | ) | $ | 47,121 | ||||||||||||||||||||||||
Net income |
| | | | | | | 440 | | | 440 | |||||||||||||||||||||||||||||||||
Other comprehensive
loss, net of tax
benefit of $445: |
||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss
on securities,
net of
reclassification adjustment
(Note 6) |
| | | | | | | | (708 | ) | | (708 | ) | |||||||||||||||||||||||||||||||
Comprehensive loss |
(268 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends paid to
common stockholders
($0.10 per share) |
| | | | | | | (152 | ) | | | (152 | ) | |||||||||||||||||||||||||||||||
Redemption of
Series A Preferred
Stock net |
(10,000 | ) | (9,765 | ) | | | | | | (235 | ) | | | (10,000 | ) | |||||||||||||||||||||||||||||
Issuance of Series
B Preferred Stock,
net of issuance
costs of $45 |
| | 10,000 | 9,955 | | | | | | | 9,955 | |||||||||||||||||||||||||||||||||
Preferred stock
accretion of
discount and
issuance costs |
| 56 | | 2 | | | | (58 | ) | | | | ||||||||||||||||||||||||||||||||
Dividends paid on
preferred stock |
| | | | | | | (314 | ) | | | (314 | ) | |||||||||||||||||||||||||||||||
Stock-based
compensation (Note
10) |
| | | | | | 216 | | | | 216 | |||||||||||||||||||||||||||||||||
Amortization of
unearned
compensation
ESOP |
| | | | | | (143 | ) | | | 345 | 202 | ||||||||||||||||||||||||||||||||
Balance at
September 30, 2011 |
| $ | | 10,000 | $ | 9,957 | 1,681,071 | $ | 1,681 | $ | 4,662 | $ | 34,969 | $ | 184 | $ | (4,693 | ) | $ | 46,760 | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
3
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
September 30, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 440 | $ | 1,139 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
281 | 319 | ||||||
Amortization of premiums |
60 | 132 | ||||||
Deferred tax benefit |
| (94 | ) | |||||
Provision for loan losses |
800 | 600 | ||||||
Stock-based compensation and amortization of unearned compensation ESOP |
418 | 317 | ||||||
Net (losses) gains from sales of investment securities |
(555 | ) | 184 | |||||
Bank-owned life insurance income |
(101 | ) | (149 | ) | ||||
Gain on sale of OREO |
| (2 | ) | |||||
Gains on sales of loans held for sale |
(35 | ) | (129 | ) | ||||
Originations of loans held for sale |
(3,533 | ) | (15,262 | ) | ||||
Proceeds from sale of loans originated for sale |
3,045 | 12,158 | ||||||
(Increase) decrease in accrued interest receivable |
(18 | ) | 292 | |||||
Decrease in other assets |
134 | 350 | ||||||
Increase in accrued expenses and other liabilities |
916 | 332 | ||||||
Net cash provided by operating activities |
1,852 | 188 | ||||||
Cash flows from investing activities: |
||||||||
Loan principal (originations) collections, net |
(38,654 | ) | 33,465 | |||||
Principal payments on mortgage-backed securities |
2,262 | 5,089 | ||||||
Proceeds from sales of investment securities |
6,788 | 2,002 | ||||||
Purchases of investment securities |
(10,392 | ) | | |||||
Proceeds from sales of OREO |
| 62 | ||||||
Purchase of banking premises and equipment |
( 138 | ) | (448 | ) | ||||
Net cash (used in) provided by investing activities |
(40,134 | ) | 40,170 | |||||
Cash flows from financing activities: |
||||||||
Issuance of Series B preferred stock |
10,000 | | ||||||
Preferred stock issuance costs |
(45 | ) | | |||||
Redemption of Series A preferred stock |
(10,000 | ) | | |||||
Net increase (decrease) in deposits |
24,282 | (3,025 | ) | |||||
Increase in advance payments by borrowers for taxes and insurance |
843 | 90 | ||||||
Repayment of advances from FHLB of Boston |
(60 | ) | (15,058 | ) | ||||
Cash dividends paid |
(466 | ) | (398 | ) | ||||
Net cash provided by (used in) financing activities |
24,554 | (18,391 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(13,728 | ) | 21,966 | |||||
Cash and cash equivalents at beginning of period |
40,918 | 16,536 | ||||||
Cash and cash equivalents at end of period |
$ | 27,190 | $ | 38,502 | ||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 4,295 | $ | 4,378 | ||||
Income taxes |
(609 | ) | 125 | |||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Accretion of Series A and B preferred stock discount and issuance costs |
58 | 59 | ||||||
Deemed dividend on Series A preferred stock |
299 | | ||||||
Loans transferred to other real estate owned |
55 | |
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2011
(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, 2011, included in the Companys Annual Report on
Form 10-K as filed with the Securities and Exchange Commission (SEC) on June 17, 2011. 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 six months ended September 30, 2011 are not necessarily
indicative of the results that may be expected for the fiscal year ending March 31, 2012 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, 2011 and are also included in the Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this Form 10-Q. For interim reporting purposes, the
Company follows the same significant accounting policies.
(2) Investments
The amortized cost and fair value of investment securities available for sale at September 30,
2011, are summarized as follows:
September 30, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Government agency
and government
sponsored enterprise
mortgage-backed
securities |
$ | 18,361 | $ | 684 | $ | (8 | ) | $ | 19,037 | |||||||
Single issuer trust
preferred securities
issued by financial
institutions |
1,001 | 28 | | 1,029 | ||||||||||||
Total debt securities |
19,362 | 712 | (8 | ) | 20,066 | |||||||||||
Perpetual preferred
stock issued by
financial institutions |
3,067 | 84 | (409 | ) | 2,742 | |||||||||||
Common stock |
3,408 | 64 | (411 | ) | 3,061 | |||||||||||
Total |
$ | 25,837 | $ | 860 | $ | (828 | ) | $ | 25,869 | |||||||
5
Table of Contents
The amortized cost and fair value of investment securities available for sale at March 31,
2011 are as follows:
March 31, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Government agency
and government
sponsored enterprise
mortgage-backed
securities |
$ | 18,129 | $ | 764 | $ | (70 | ) | $ | 18,823 | |||||||
Single issuer trust
preferred securities
issued by financial
institutions |
1,002 | 47 | | 1,049 | ||||||||||||
Total debt securities |
19,131 | 811 | (70 | ) | 19,872 | |||||||||||
Perpetual preferred
stock issued by
financial institutions |
3,071 | 194 | (80 | ) | 3,185 | |||||||||||
Common stock |
1,799 | 354 | (25 | ) | 2,128 | |||||||||||
Total |
$ | 24,001 | $ | 1,359 | $ | (175 | ) | $ | 25,185 | |||||||
During the six-month period ended September 30, 2011, no available for sale securities were
determined to be other-than-temporarily impaired.
Temporarily impaired securities as of September 30, 2011 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 | Unrealized | ||||||||||||||
Value | Losses | Fair Value | Losses | |||||||||||||
(In Thousands) | ||||||||||||||||
Government agency and government sponsored
enterprise mortgage-backed securities |
$ | 114 | $ | (3 | ) | $ | 284 | $ | (5 | ) | ||||||
Perpetual preferred stock issued by financial
institutions |
850 | (170 | ) | 778 | (239 | ) | ||||||||||
Common stock |
1,647 | (391 | ) | 116 | (20 | ) | ||||||||||
Total temporarily impaired securities |
$ | 2,611 | $ | (564 | ) | $ | 1,178 | $ | (264 | ) | ||||||
The Company had one preferred stock investment currently in an unrealized loss position for
longer than twelve months for which the fair value has decreased during the six months ended
September 30, 2011. The preferred stock had an unrealized loss to book value ratio of 23.5% at
September 30, 2011 compared to a loss to book value ratio of 5.7% at March 31, 2011. Due to the
long-term nature of preferred stocks, management considers these securities to be similar to debt
securities for analysis purposes. Based on available information, which included Fitch bond rating
upgrades during August 2010 and January 2011, management has determined that the unrealized loss on
the Companys investment in this preferred stock is not other-than-temporary as of September 30,
2011.
The Company had one debt security in an unrealized loss position as of September 30, 2011,
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 $284 thousand and an unrealized loss of $5 thousand as
of September 30, 2011. 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 that it
will not have to sell this security before recovery of its cost basis. Based on managements
analysis of these securities, it has been determined that there is no other-than-temporarily
impaired as of September 30, 2011.
6
Table of Contents
The Company had twenty one equity securities with a fair value of $1.8 million and unrealized
losses of $411 thousand which were temporarily impaired at September 30, 2011. The total
unrealized losses relating to these securities represent approximately 23.3% of book value. This
is an increase when compared to the ratio of unrealized losses to book value of 6.3% at March 31,
2011. Of these twenty one securities, one has been in a continuous unrealized loss position for
greater than twelve months aggregating $20 thousand at September 30, 2011. 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. As of September 30,
2011, the Company has determined that the unrealized losses associated with these securities are
not other-than-temporary based on the projected recovery of the unrealized losses, and managements
intent and ability to hold to recovery of cost.
The maturity distribution (based on contractual maturities) and annual yields of debt
securities at September 30, 2011 are as follows:
Amortized | Fair | Annual | ||||||||||
Cost | Value | Yield | ||||||||||
(Dollars in thousands) | ||||||||||||
Government agency and government sponsored
enterprise mortgage-backed securities |
||||||||||||
Due within one year |
$ | 9 | $ | 9 | 3.40 | % | ||||||
Due after one year but within five years |
755 | 776 | 3.91 | |||||||||
Due after five years but within ten years |
1,915 | 1,947 | 2.74 | |||||||||
Due after ten years |
15,682 | 16,314 | 3.88 | |||||||||
Total |
18,361 | 19,037 | ||||||||||
Single issuer trust preferred securities
issued by financial institutions: |
||||||||||||
Due after ten years |
1,001 | 1,029 | 7.78 | % | ||||||||
Total |
$ | 19,362 | $ | 20,066 | ||||||||
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.
Mortgage-backed securities with an amortized cost of $1.0 million and a fair value of $1.1
million at September 30, 2011, were pledged to provide collateral for certain customers.
Investment securities carried at $2.5 million were pledged under a blanket lien to partially secure
the Banks advances from the FHLB of Boston. Additionally, investment securities carried at $2.1
million were pledged to maintain borrowing capacity at the Federal Reserve Bank of Boston.
As a member of the Federal Home Loan Bank of Boston (FHLBB), the Bank is 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.
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.
7
Table of Contents
The FHLBB reported earnings for 2010 of approximately $107 million after two consecutive years
of losses. During July and October 2011, the FHLBB declared dividends based upon average stock
outstanding for the second and third quarters of 2011, respectively. The FHLBBs board of
directors anticipates that it will continue to declare modest cash dividends through 2011, but
cautioned that adverse events such as a negative trend in credit losses on the FHLBBs private
label mortgage-backed securities or mortgage portfolio, a meaningful decline in income, or
regulatory disapproval could lead to reconsideration of this plan.
On August 8, 2011, Standard & Poors Ratings Services cut the credit ratings for many
government-related entities to AA+ from AAA reflecting their dependence on the recently downgraded
U.S. Government. Included in those downgrades were ten of twelve Federal Home Loan Banks,
including the FHLBB. The other two Federal Home Loan Banks previously had been downgraded to AA+.
The Company does not believe that its investment in the FHLBB is impaired as of September 30,
2011. 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.
(3) Loans and the Allowance for Loan Losses
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, 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.
Fair value is estimated based on outstanding investor commitments. Net unrealized losses, if any,
are provided for in a valuation allowance by charges to operations. 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. Loans held for sale are
sold on a servicing released basis. As of September 30, 2011 loans held for sale totaled $523
thousand compared to $0 at March 31, 2011.
Mortgage loan commitments that relate to the origination of a mortgage that will be held for
sale upon funding are considered derivative instruments. Loan commitments that are derivatives are
recognized at fair value on the consolidated balance sheet in other assets and other liabilities
with changes in their fair values recorded in noninterest income.
The Company carefully evaluates all loan sales agreements to determine whether they meet the
definition of a derivative as facts and circumstances may differ significantly. If agreements
qualify, to protect against the price risk inherent in derivative loan commitments, the Company
generally uses best efforts forward loan sale commitments to mitigate the risk of potential
decreases in the values of loans that would result from the exercise of the derivative loan
commitments. Forward loan sale commitments are recognized at fair value on the consolidated balance
sheet in other assets and liabilities with changes in their fair values recorded in other
noninterest income. The fair value of forward loan sale commitments at September 30, 2011 was not
material.
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 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
8
Table of Contents
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. Other factors considered by management 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 impairment classification. For all
loans, charge-offs occur when management believes that the collectability of a portion or all of
the loans principal balance is remote. Management considers nonaccrual loans, except for certain
nonaccrual residential and consumer loans, to be impaired. However, all troubled debt
restructurings (TDRs) are considered to be impaired. In April 2011, the FASB issued Accounting
Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a
Restructuring is a Troubled Debt Restructuring. The Company adopted this guidance on June 30, 2011
and applied it retrospectively to April 1, 2011, the beginning of the annual period of adoption.
In evaluating when a restructuring constitutes a TDR, a creditor must separately conclude that both
of the following exist: 1) the restructuring constitutes a concession, and 2) the debtor is
experiencing financial difficulties. The majority of 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. A TDR is typically on
non-accrual until the borrower successfully performs under the new terms for at least six
consecutive months. However, a TDR may be kept on accrual immediately following the restructuring
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. 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 and amortized over
the remaining life of the loan.
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 such loan and documents what
management believes to be an appropriate reserve level in accordance with Accounting Standards
Codification
9
Table of Contents
(ASC) 310 Receivables (ASC 310). If management does not believe that any separate reserve
for such loan is deemed necessary at the evaluation date in accordance with ASC 310, that loan
would continue to be evaluated separately and will not be returned to be included in the general
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:
| Apartments | ||
| Offices | ||
| Retail | ||
| Mixed Use | ||
| Industrial/Other |
CRE loans are segmented monthly using the above collateral-types and three LTV ratio
categories: <40%, 40%-60%, and >60%. While these ranges are subjective, management feels
that each category represents a significantly different degree of risk from the other. CRE loans
carrying higher LTV ratios are assigned incrementally higher ASC 450 reserve rates. Annually, for
the CRE portfolio, management adjusts the appraised values which are used to calculate LTV ratios
in 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. Based on the Companys
allowance for loan loss methodology with respect to CRE, unfavorable trends in the value of real
estate will increase the required level of the Companys ASC 450 allowance for loan losses.
In developing ASC 450 reserve levels, recent regulatory guidance suggests using the Banks
charge-off history as a starting point. The Banks charge-off history in recent years has been
minimal. The charge-off 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
September 30, 2011, the commercial real estate concentration ratio was 300%, compared to a ratio of
330% at March 31, 2011.
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.
10
Table of Contents
During the three months ended September 30, 2011, management increased the ASC 450 loss
factors related to economic conditions for all loan types, and trends in delinquencies factor for
commercial real estate loans. As a result of those changes, the impact to the allowance for loan
losses were increases in ASC 450 reserves of $128 thousand for those loan types. During the six
months ended September 30, 2011, management increased the ASC 450 loss factors related to economic
conditions for all loan types, changes in collateral values for residential loans, and trends in
delinquencies factor for commercial real estate loans. As a result of those changes, the impact to
the allowance for loan losses were increases in ASC 450 reserves of $155 thousand for those loan
types.
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 nonperforming loans to cover losses that may result from these loans at September 30,
2011.
In the ordinary course of business, the Bank enters into commitments to extend credit,
commercial letters of credit, and standby letters of credit. Such financial instruments are
recorded in the consolidated financial statements when they become payable. The credit risk
associated with these commitments is evaluated in a manner similar to the allowance for loan
losses. The reserve for unfunded lending commitments is included in other liabilities in the
balance sheet. The reserve was $0 at September 30, 2011 and March 31, 2011.
Loans, excluding loans held for sale, as of September 30, 2011 and March 31, 2011 are
summarized below (in thousands):
September 30, | March 31, | |||||||
2011 | 2011 | |||||||
Real estate loans: |
||||||||
Residential real estate and condominium |
$ | 242,179 | $ | 183,157 | ||||
Commercial real estate |
178,742 | 199,074 | ||||||
Land |
438 | 456 | ||||||
Home equity lines of credit |
8,823 | 8,426 | ||||||
Total real estate loans |
430,182 | 391,113 | ||||||
Commercial and Industrial loans |
1,228 | 2,212 | ||||||
Consumer loans |
887 | 892 | ||||||
Total loans |
432,297 | 394,217 | ||||||
Less: allowance for loan losses |
(4,173 | ) | (3,892 | ) | ||||
Total loans, net |
$ | 428,124 | $ | 390,325 | ||||
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The following is a summary of the activity in the allowance for loan losses by loan
portfolio segment for the three and six months ended September 30, 2011 and 2010 (in thousands):
For the Three Months Ending September 30, 2011 | ||||||||||||||||||||||||
Residential | Commercial Real | Commercial | ||||||||||||||||||||||
Real Estate and | Estate | And | Consumer | |||||||||||||||||||||
Condominium | And Land | Industrial Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 1,256 | $ | 3,027 | $ | 15 | $ | 15 | $ | 105 | $ | 4,418 | ||||||||||||
Charge offs |
(122 | ) | (418 | ) | (3 | ) | (4 | ) | | (547 | ) | |||||||||||||
Recoveries |
| | | 21 | | 2 | ||||||||||||||||||
Provision |
259 | 26 | | (7 | ) | 22 | 300 | |||||||||||||||||
Ending balance |
$ | 1,393 | $ | 2,635 | $ | 12 | $ | 6 | $ | 127 | $ | 4,173 | ||||||||||||
For the Three Months Ending September 30, 2010 | ||||||||||||||||||||||||
Residential | Commercial Real | Commercial | ||||||||||||||||||||||
Real Estate and | Estate | And | Consumer | |||||||||||||||||||||
Condominium | And Land | Industrial Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 839 | $ | 2,264 | $ | 35 | $ | 20 | $ | 178 | $ | 3,336 | ||||||||||||
Charge offs |
| | | (4 | ) | | (4 | ) | ||||||||||||||||
Recoveries |
| | | 1 | | 1 | ||||||||||||||||||
Provision |
90 | 302 | 1 | 3 | (96 | ) | 300 | |||||||||||||||||
Ending balance |
$ | 929 | $ | 2,566 | $ | 36 | $ | 20 | $ | 82 | $ | 3,633 | ||||||||||||
For the Six Months Ending September 30, 2011 | ||||||||||||||||||||||||
Residential | Commercial Real | Commercial | ||||||||||||||||||||||
Real Estate and | Estate | And | Consumer | |||||||||||||||||||||
Condominium | And Land | Industrial Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 816 | $ | 2,771 | $ | 16 | $ | 17 | $ | 272 | $ | 3,892 | ||||||||||||
Charge offs |
(122 | ) | (418 | ) | (3 | ) | (9 | ) | | (552 | ) | |||||||||||||
Recoveries |
30 | | | 3 | | 33 | ||||||||||||||||||
Provision |
669 | 282 | (1 | ) | (5 | ) | (145 | ) | 800 | |||||||||||||||
Ending balance |
$ | 1,393 | $ | 2,635 | $ | 12 | $ | 6 | $ | 127 | $ | 4,173 | ||||||||||||
For the Six Months Ending September 30, 2010 | ||||||||||||||||||||||||
Residential | Commercial Real | Commercial | ||||||||||||||||||||||
Real Estate and | Estate | And | Consumer | |||||||||||||||||||||
Condominium | And Land | Industrial Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 853 | $ | 2,037 | $ | 44 | $ | 22 | $ | 82 | $ | 3,038 | ||||||||||||
Charge offs |
| | | (7 | ) | | (7 | ) | ||||||||||||||||
Recoveries |
| | | 2 | | 2 | ||||||||||||||||||
Provision |
76 | 529 | (8 | ) | 3 | | 600 | |||||||||||||||||
Ending balance |
$ | 929 | $ | 2,566 | $ | 36 | $ | 20 | $ | 82 | $ | 3,633 | ||||||||||||
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Table of Contents
The increased provision for loan losses during the six months ended September 30, 2011
compared to the six months ended September 30, 2010 was primarily due to net increased allocated
reserves for three commercial loans with balances of $3.8 million at September 30, 2011 and three
residential loans with balances of $647 thousand at September 30, 2011.
Financing Receivables on Nonaccrual Status as of:
September 30, | March 31, | |||||||
2011 | 2011 | |||||||
(In Thousands) | ||||||||
Commercial real estate: |
||||||||
Mixed Use |
$ | 1,555 | $ | 1,616 | ||||
Industrial (other) |
2,081 | 1,500 | ||||||
Retail |
| 769 | ||||||
Apartments |
1,566 | 2,757 | ||||||
Residential: |
||||||||
Residential Real Estate |
2,423 | 2,587 | ||||||
Condominium |
712 | 352 | ||||||
$ | 8,337 | $ | 9,581 | |||||
Total nonaccrual loans include nonaccrual impaired loans as well as certain nonaccrual
residential loans that are not considered impaired.
The following is an age analysis of past due loans as of September 30, 2011 and March 31,
2011, by loan portfolio classes (in thousands):
Age Analysis of Past Due Financing Receivables | ||||||||||||||||||||||||
as of September 30, 2011 | ||||||||||||||||||||||||
Greater | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | than | Total | |||||||||||||||||||||
Past Due | Past Due | 90 Days | Past Due | Current | Total | |||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Mixed use |
$ | | $ | | $ | 1,936 | $ | 1,936 | $ | 33,334 | $ | 35,270 | ||||||||||||
Apartments |
588 | 1,567 | | 2,155 | 64,050 | 66,205 | ||||||||||||||||||
Industrial (other) |
691 | 631 | 1,450 | 2,772 | 32,968 | 35,740 | ||||||||||||||||||
Retail |
923 | | | 923 | 25,215 | 26,138 | ||||||||||||||||||
Offices |
718 | | | 718 | 14,671 | 15,389 | ||||||||||||||||||
Land and Construction |
| | | | 438 | 438 | ||||||||||||||||||
Residential: |
||||||||||||||||||||||||
Residential real estate |
483 | 443 | 183 | 1,109 | 210,619 | 211,728 | ||||||||||||||||||
Condominium |
| | | | 30,451 | 30,451 | ||||||||||||||||||
Home Equity Lines of
Credit |
28 | | | 28 | 8,795 | 8,823 | ||||||||||||||||||
Commercial and
Industrial Loans |
| | | | 1,228 | 1,228 | ||||||||||||||||||
Consumer Loans |
| | | 887 | 887 | |||||||||||||||||||
$ | 3,431 | $ | 2,641 | $ | 3,569 | $ | 9,641 | $ | 422,656 | $ | 432,297 | |||||||||||||
13
Table of Contents
Age Analysis of Past Due Financing Receivables | ||||||||||||||||||||||||
as of March 31, 2011 | ||||||||||||||||||||||||
Greater | ||||||||||||||||||||||||
30-59 Days | 60-89 Days | than | Total | |||||||||||||||||||||
Past Due | Past Due | 90 Days | Past Due | Current | Total | |||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Mixed use |
$ | 398 | $ | | $ | 1,616 | $ | 2,014 | $ | 36,605 | $ | 38,619 | ||||||||||||
Apartments |
| 258 | 2,757 | 3,015 | 75,655 | 78,670 | ||||||||||||||||||
Industrial (other) |
| | 1,500 | 1,500 | 36,005 | 37,505 | ||||||||||||||||||
Retail |
| | | | 29,045 | 29,045 | ||||||||||||||||||
Offices |
| | | | 15,235 | 15,235 | ||||||||||||||||||
Land |
| | | | 456 | 456 | ||||||||||||||||||
Residential: |
||||||||||||||||||||||||
Residential real estate |
782 | 247 | 1,299 | 2,328 | 154,266 | 156,594 | ||||||||||||||||||
Condominium |
| | 352 | 352 | 26,211 | 26,563 | ||||||||||||||||||
Home equity lines of credit |
| | | | 8,426 | 8,426 | ||||||||||||||||||
Commercial and industrial
loans |
| | | | 2,212 | 2,212 | ||||||||||||||||||
Consumer loans |
4 | | | 4 | 888 | 892 | ||||||||||||||||||
$ | 1,184 | $ | 505 | $ | 7,524 | $ | 9,213 | $ | 385,004 | $ | 394,217 | |||||||||||||
There was one loan with a balance of $381 thousand which was past due 90 days or more and
still accruing interest as of September 30, 2011 and March 31, 2011.
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 September 30, 2011 and March 31, 2011 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 loan repayment terms and which may result in the future inclusion of such
loans in the nonperforming 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 September 30, 2011 and March 31,
2011 there were no loans classified as doubtful or loss.
14
Table of Contents
The following table displays the loan portfolio by credit quality indicators as of September
30, 2011 and March 31, 2011 (in thousands):
Credit Quality Indicators as of September 30, 2011 | ||||||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||
Commercial and | Real Estate and | Home Equity Lines | Commercial | Consumer | ||||||||||||||||||||||||
Industrial | Condominium | of Credit | Real Estate | Land | Loans | Total | ||||||||||||||||||||||
Pass |
$ | 1,228 | $ | 240,980 | $ | 8,823 | $ | 165,185 | $ | 438 | $ | 887 | $ | 417,541 | ||||||||||||||
Special mention |
| | | 8,686 | | | 8,686 | |||||||||||||||||||||
Substandard |
| 1,199 | | 4,871 | | | 6,070 | |||||||||||||||||||||
$ | 1,228 | $ | 242,179 | $ | 8,823 | $ | 178,742 | $ | 438 | $ | 887 | $ | 432,297 | |||||||||||||||
Credit Quality Indicators as of March 31, 2011 | ||||||||||||||||||||||||||||
Residential | Home Equity | |||||||||||||||||||||||||||
Commercial and | Real Estate And | Lines of | Commercial | Consumer | ||||||||||||||||||||||||
Industrial | Condominium | Credit | Real Estate | Land | Loans | Total | ||||||||||||||||||||||
Pass |
$ | 2,212 | $ | 182,931 | $ | 8,426 | $ | 188,917 | $ | 456 | $ | 892 | $ | 383,834 | ||||||||||||||
Special mention |
| | | 7,128 | | | 7,128 | |||||||||||||||||||||
Substandard |
| 226 | | 3,029 | | | 3,255 | |||||||||||||||||||||
$ | 2,212 | $ | 183,157 | $ | 8,426 | $ | 199,074 | $ | 456 | $ | 892 | $ | 394,217 | |||||||||||||||
The $973 thousand net increase in substandard residential loans during the six months
ended September 30, 2011 was due to the addition of three loans totaling $1.2 million, partially
offset by a decrease of $226 thousand as the substandard loan relationship at March 31, 2011 was
transferred to OREO during the six month period. The $1.8 million net increase in substandard
commercial real estate loans during the six months ended September 30, 2011 was due to increases
resulting from the downgrades of five loans totaling $4.9 million, partially offset by decreases
due to the settlement payoff of one loan which totaled $2.8 million and the full charge-off of
another loan which totaled $258 thousand.
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 portfolio as of September 30, 2011 and March 31, 2011
(in thousands):
Non-impaired CRE Loans by Collateral Type and LTV Ratio as of September 30, 2011 | ||||||||||||||||||||||||
Apartments | Offices | Mixed Use | Industrial (Other) | Retail | Total | |||||||||||||||||||
< 40% |
$ | 10,244 | $ | 1,231 | $ | 9,496 | $ | 6,560 | $ | 6,667 | $ | 34,198 | ||||||||||||
40% - 60% |
26,010 | 8,447 | 7,785 | 9,272 | 13,133 | 64,647 | ||||||||||||||||||
> 60% |
24,194 | 5,309 | 15,651 | 8,842 | 3,851 | 57,847 | ||||||||||||||||||
Participations |
600 | | | 9,033 | 458 | 10,091 | ||||||||||||||||||
Total |
$ | 61,048 | $ | 14,987 | $ | 32,932 | $ | 33,707 | $ | 24,109 | $ | 166,783 | ||||||||||||
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Non-impaired CRE Loans by Collateral Type and LTV Ratio as of March 31, 2011 |
||||||||||||||||||||||||
Apartments | Offices | Mixed Use | Industrial (Other) | Retail | Total | |||||||||||||||||||
< 40% |
$ | 12,720 | $ | 1,028 | $ | 10,083 | $ | 6,646 | $ | 6,883 | $ | 37,360 | ||||||||||||
40% - 60% |
22,994 | 8,299 | 7,899 | 9,055 | 16,220 | 64,467 | ||||||||||||||||||
> 60% |
32,165 | 5,494 | 18,658 | 10,396 | 2,660 | 69,373 | ||||||||||||||||||
Participations |
4,576 | | | 9,352 | 1,116 | 15,044 | ||||||||||||||||||
Total |
$ | 72,455 | $ | 14,821 | $ | 36,640 | $ | 35,449 | $ | 26,879 | $ | 186,244 | ||||||||||||
The following is a summary of the allowance for loan losses and loans as of September 30,
2011 and March 31, 2011, by loan portfolio segment disaggregated by impairment method (in
thousands):
Allowance for Loan Losses as of September 30, 2011 |
||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial Real | Commercial | ||||||||||||||||||||||
And | Estate | And Industrial | Consumer | |||||||||||||||||||||
Condominium | And Land | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Allowance for loan
losses ending
balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 435 | $ | 1,155 | $ | | $ | | $ | | $ | 1,590 | ||||||||||||
Collectively
evaluated for
impairment |
958 | 1,481 | 12 | 6 | 126 | 2,583 | ||||||||||||||||||
$ | 1,393 | $ | 2,636 | $ | 12 | $ | 6 | $ | 126 | $ | 4,173 | |||||||||||||
Loans ending balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 3,599 | $ | 11,796 | $ | | $ | | $ | | $ | 15,395 | ||||||||||||
Collectively
evaluated for
impairment |
247,403 | 167,384 | 1,228 | 887 | | 416,902 | ||||||||||||||||||
$ | 251,002 | $ | 179,180 | $ | 1,228 | $ | 887 | $ | | $ | 432,297 | |||||||||||||
Allowance for Loan Losses as of March 31, 2011 |
||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial Real | Commercial | ||||||||||||||||||||||
And | Estate | And Industrial | Consumer | |||||||||||||||||||||
Condominium | And Land | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Allowance for loan
losses ending
balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 110 | $ | 1,307 | $ | | $ | | $ | | $ | 1,417 | ||||||||||||
Collectively
evaluated for
impairment |
763 | 1,513 | 17 | 16 | 166 | 2,475 | ||||||||||||||||||
$ | 873 | $ | 2,820 | $ | 17 | $ | 16 | $ | 166 | $ | 3,892 | |||||||||||||
Loans ending balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 3,588 | $ | 12,486 | $ | | $ | | $ | | $ | 16,074 | ||||||||||||
Collectively
evaluated for
impairment |
187,995 | 187,044 | 892 | 2,212 | | 378,143 | ||||||||||||||||||
$ | 191,583 | $ | 199,530 | $ | 892 | $ | 2,212 | $ | | $ | 394,217 | |||||||||||||
16
Table of Contents
The following is a summary of impaired loans and their related allowances within the
allowance for loan losses as of September 30, 2011 and March 31, 2011, (in thousands):
Impaired Loans and Their Related Allowances as of September 30, 2011 | ||||||||||||||||||||||||
Average | Interest | |||||||||||||||||||||||
Recorded | Unpaid Principal | Related | Partial | Recorded | Income | |||||||||||||||||||
Investment * | Balance | Allowance | Charge-offs | Investment | Recognized | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Residential Real Estate and Condominium |
$ | 1,658 | $ | 1,657 | $ | | $ | 3 | $ | 2,122 | $ | 8 | ||||||||||||
Commercial Real Estate and Land |
6,747 | 6,983 | | 16 | 7,689 | 70 | ||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Residential Real Estate and Condominium |
1,949 | 2,107 | 435 | 162 | 1,971 | 3 | ||||||||||||||||||
Commercial Real Estate and Land |
5,317 | 5,254 | 1,155 | 384 | 5,993 | |||||||||||||||||||
Total |
||||||||||||||||||||||||
Residential Real Estate and Condominium |
3,607 | 3,764 | 435 | 165 | 4,093 | 11 | ||||||||||||||||||
Commercial Real Estate and Land |
$ | 12,064 | $ | 12,237 | $ | 1,155 | $ | 400 | $ | 13,682 | $ | 70 |
* | Includes accrued interest, specific reserves and net unearned deferred fees and costs. |
Impaired Loans and Their Related Allowances as of March 31, 2011 | ||||||||||||
Unpaid Principal | Related | |||||||||||
Recorded Investment* | Balance | Allowance | ||||||||||
With no related allowance recorded: |
||||||||||||
Residential Real Estate and Condominium |
$ | 2,119 | $ | 2,123 | $ | | ||||||
Commercial Real Estate and Land |
8,894 | 8,920 | | |||||||||
| | | ||||||||||
With an allowance recorded: |
||||||||||||
Residential Real Estate and Condominium |
||||||||||||
Commercial Real Estate and Land |
1,468 | 1,630 | 110 | |||||||||
3,629 | 4,580 | 1,307 | ||||||||||
Total |
||||||||||||
Residential Real Estate and Condominium |
3,587 | 3,753 | 110 | |||||||||
Commercial Real Estate and Land |
$ | 12,523 | $ | 13,500 | $ | 1,307 |
* | Includes accrued interest, specific reserves and net unearned deferred fees and costs. |
Impaired loans are evaluated separately and measured utilizing guidance set forth by ASC
310 as described in Note 1 to the Companys audited financial statements for the year ended March
31, 2011. All loans modified in TDRs are included in impaired loans.
At September 30, 2011 total TDRs amounted to $11.6 million and were comprised of nine
residential real estate loan relationships which totaled $3.1 million and seven commercial real
estate loan relationships which totaled $8.5 million. Additionally, at September 30, 2011, total
accruing TDRs amounted to $6.8 million and total nonaccruing TDRs amounted to $4.8 million.
17
Table of Contents
Following are tables and discussions regarding TDR activity during the quarter and six month
periods ended September 30, 2011 and 2010 (in thousands):
Troubled Debt Restructurings | ||||||||||||
Number | Pre-Modification | Post-Modification | ||||||||||
of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
TDRs during the quarter ended September 30, 2011: |
||||||||||||
Commercial Real Estate |
| $ | | $ | | |||||||
Residential |
| | | |||||||||
TDRs during the 12 months ended June 30, 2011
which defaulted during the quarter ended September 30, 2011: |
Defaulted Balance at September 30, 2011 |
|||||||||||
Commercial Real Estate: |
||||||||||||
Industrial (other) |
1 | $ | 712 | |||||||||
Residential: |
||||||||||||
Residential real estate |
1 | 200 | ||||||||||
Condominium |
1 | 265 |
Troubled Debt Restructurings | ||||||||||||
Number | Pre-Modification | Post-Modification | ||||||||||
of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
TDRs during the six months ended September 30, 2011: |
||||||||||||
Commercial Real Estate: |
||||||||||||
Apartments |
1 | $ | 415 | $ | 415 | |||||||
Residential: |
||||||||||||
Residential real estate |
1 | 200 | 200 | |||||||||
TDRs during the 12 months ended March 31, 2011
which defaulted during the six months ended September 30, 2011: |
Defaulted Balance at September 30, 2011 |
|||||||||||
Commercial Real Estate |
||||||||||||
Industrial (other) |
1 | $ | 712 | |||||||||
Residential : |
||||||||||||
Residential real estate |
2 | 1,031 | ||||||||||
Condominium |
1 | 265 |
There were no troubled debt restructurings during the quarter ended September 30, 2011.
During the six months ended September 30, 2011, two loans were modified in troubled debt
restructurings comprised of one commercial real estate loan relationship which totaled $415
thousand as of September 30, 2011 and one residential real estate loan relationship which totaled
$200 thousand as of September 30, 2011. The commercial real estate TDR resulted from what
management determined to be temporary cash flow difficulties. The modification consisted of six
months of interest only and no forgiveness of principal. As there was no change in the interest
rate, no loss resulted and therefore there is no allocated reserve for this customer. The
residential modification resulted from the re-default of a prior modification. Both modifications
for this residential customer consisted of temporary reductions in the interest rate as management
has attempted to allow this customer to work through financial difficulties. The customer was not
able to meet the modified terms and this relationship is now considered to be collateral dependent
with an allocated reserve of $80,000 which represents the estimated loss under the foreclosure and
sale of collateral scenario. Regarding TDR re-defaults, all TDRs are considered impaired and are
subject to individual loss analysis both at the time of the TDR and subsequent to the restructuring
periodically as determined by management, which includes events of re-default. Management may
change allocated reserves within the allowance for loan losses as necessary based upon those
subsequent reviews.
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Table of Contents
Troubled Debt Restructurings | ||||||||||||
Number | Pre-Modification | Post-Modification | ||||||||||
of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
TDRs during the quarter ended September 30, 2010: |
||||||||||||
Commercial Real Estate: |
||||||||||||
Mixed Use |
1 | $ | 1,521 | $ | 1,676 | |||||||
Residential: |
||||||||||||
Condominium |
1 | 270 | 270 | |||||||||
TDRs during the 12 months ended June 30, 2011
which defaulted during the six months ended September 30, 2010: |
Defaulted Balance at September 30, 2011 |
|||||||||||
Residential : |
||||||||||||
Residential real estate |
2 | 1,040 |
Troubled Debt Restructurings | ||||||||||||
Number | Pre-Modification | Post-Modification | ||||||||||
of | Outstanding Recorded | Outstanding Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
TDRs during the six months ended September 30, 2010: |
||||||||||||
Commercial Real Estate: |
||||||||||||
Apartments |
1 | $ | 4,130 | $ | 4,130 | |||||||
Industrial (Other) |
1 | $ | 293 | $ | 293 | |||||||
Mixed Use |
$ | 1,521 | $ | 1,676 | ||||||||
Residential: |
||||||||||||
Residential real estate |
2 | $ | 964 | $ | 964 | |||||||
Condominium |
1 | $ | 270 | $ | 270 | |||||||
TDRs during the 12 months ended March 31, 2010
which defaulted during the six months ended September 30, 2010: |
Defaulted Balance at September 30, 2010 |
|||||||||||
Commercial Real Estate |
||||||||||||
Industrial (other) |
1 | $ | 321 | |||||||||
Residential : |
||||||||||||
Residential real estate |
3 | $ | 1,240 |
During the six months ended September 30, 2010, six loans were modified in troubled debt
restructurings comprised of three commercial real estate loan relationships which totaled $5.9
million as of September 30, 2011 and three residential real estate loan relationships which totaled
$1.2 million as of September 30, 2011. Two of the commercial real estate TDRs which totaled $4.4
million resulted from what management determined to be temporary cash flow difficulties. One
commercial real estate modification which totaled $293 thousand consisted of six months of interest
only and no forgiveness of principal. The other commercial real estate modification totaled $4.1
million and consisted of six months of interest-only and no forgiveness of principal. As there
were no changes in the interest rate, no losses resulted and therefore there are no allocated
reserves for these two customers which were determined to have temporary cash flow difficulties.
The third commercial real estate TDR consisted of relationship which totaled $1.5 million. While
there was no forgiveness of principal, the interest rate was reduced and payments were changed to
interest-only. Additional funds were disbursed to pay past due taxes resulting in a post-TDR
balance of $1.7 million. Management was not sure of the total collectability of the principal and
interest under the modified terms, therefore the interest-only payments have been applied to
principal resulting in an estimated reduction in interest income of $36 thousand during the six
months ended September 30, 2011. Additionally, management is considering this relationship to be
collateral dependent with an allocated reserve of $300 thousand within the allowance for loan
losses at September 30, 2011. Regarding the three residential TDRs, one totaled $839 thousand with
TDR terms of interest only for six months and no forgiveness of principal, resulting
19
Table of Contents
in no estimated loss and no allocated reserve. Another residential TDR had an interest rate
reduction for one year resulting in an estimated interest rate differential loss of $3 thousand
which is allocated as a reserve within the allowance for loan losses. The third residential TDR
consisted of interest only for three months. This customer continued to have financial problems
and this relationship is considered to be collateral dependent with an allocated reserve of $70
thousand. Regarding TDR re-defaults, all TDRs are considered impaired and are subject to
individual loss analysis both at the time of the TDR and subsequent to the restructuring
periodically as determined by management, which includes events of re-default. Management may
change allocated reserves within the allowance for loan losses as necessary based upon those
subsequent reviews.
(4) Deposits
Deposits at September 30, 2011 and March 31, 2011 are summarized as follows (in thousands):
September 30, | March 31, | |||||||
2011 | 2011 | |||||||
Demand deposit accounts |
$ | 45,684 | $ | 40,745 | ||||
NOW accounts |
29,589 | 28,989 | ||||||
Passbook and other savings accounts |
57,245 | 55,326 | ||||||
Money market deposit accounts |
67,322 | 76,201 | ||||||
Total non-certificate accounts |
199,840 | 201,261 | ||||||
Term deposit certificates: |
||||||||
Certificates of $100,000 and above |
68,386 | 40,843 | ||||||
Certificates of less than $100,000 |
65,133 | 66,973 | ||||||
Total term deposit certificates |
133,519 | 107,816 | ||||||
Total deposits |
$ | 333,359 | $ | 309,077 | ||||
(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 September 30, 2011 the interest rate was
2.79%. 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.
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,
20
Table of Contents
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 Loss
The Company has established standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by, and distributions to, 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 (loss) and related tax effect for the three and six
months ended September 30, 2011 and 2010 are as follows (in thousands):
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
Before | After | Before | After | |||||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Amount | Effect | Amount | Amount | Effect | Amount | |||||||||||||||||||
Unrealized losses on securities: |
||||||||||||||||||||||||
Unrealized net holding (losses) gains
during period |
$ | (764 | ) | $ | (305 | ) | $ | (459 | ) | $ | 406 | $ | 168 | $ | 238 | |||||||||
Less: reclassification adjustment for
net gains (losses) included in net
income |
64 | 26 | 38 | (226 | ) | (93 | ) | (133 | ) | |||||||||||||||
Other comprehensive (loss) income |
$ | (828 | ) | $ | (331 | ) | $ | (497 | ) | $ | 632 | $ | 261 | $ | 371 | |||||||||
For the Six Months Ended | For the Six Months Ended | |||||||||||||||||||||||
September 30, 2011 | September 30, 2010 | |||||||||||||||||||||||
Before | After | Before | After | |||||||||||||||||||||
Tax | Tax | Tax | Tax | Tax | Tax | |||||||||||||||||||
Amount | Effect | Amount | Amount | Effect | Amount | |||||||||||||||||||
Unrealized (losses) gains on securities: |
||||||||||||||||||||||||
Unrealized net holding losses during
period |
$ | (597 | ) | $ | (222 | ) | $ | (379 | ) | $ | (136 | ) | $ | (57 | ) | $ | (79 | ) | ||||||
Less: reclassification adjustment for
net gains (losses) included in net
income |
555 | 223 | 332 | (184 | ) | (78 | ) | (106 | ) | |||||||||||||||
Other comprehensive gain (loss) income |
$ | (1,152 | ) | $ | (445 | ) | $ | (707 | ) | $ | 48 | $ | 21 | $ | 27 | |||||||||
(7) Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk. The Bank is a party to financial
instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include unused lines of credit, unadvanced
portions of commercial loans, and commitments to originate loans. The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheets. The amounts of those instruments reflect the extent of the Banks involvement
in particular classes of financial instruments.
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The Banks exposure to credit loss in the event of nonperformance by the other party to its
financial instruments is represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risks as of September 30, 2011 and March 31, 2011
included the following (In thousands):
At September 30, | At March 31, | ||||||||||
2011 | 2011 | ||||||||||
Unused lines of credit |
$ | 15,451 | $ | 15,940 | |||||||
Unadvanced portions of commercial loans |
532 | 459 | |||||||||
Commitments to originate residential mortgage loans |
13,009 | 11,232 | |||||||||
Commitments to sell residential mortgage loans |
3,250 | 595 | |||||||||
Total off-balance sheet commitments |
$ | 32,242 | $ | 28,226 | |||||||
Commitments to originate loans, unused lines of credit and unadvanced portions of commercial
loans are agreements to lend to a customer, provided there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit
evaluation of the borrower.
Legal Proceedings. The Company from time to time is involved in various legal actions
incident to its business. At September 30, 2011, 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 October 19, 2011, the Company repurchased the warrant it previously issued to the U.S.
Department of Treasury (the Treasury) on December 5, 2008 in connection with the Companys
participation in the TARP Capital Purchase Program. The warrant, which had a ten year term, had
entitled the Treasury to purchase up to 234,742 shares of the Companys common stock at an exercise
price of $6.39 per share. The Company paid the Treasury a negotiated total of $2.525 million to
repurchase the warrant. The Company had previously redeemed all $10.0 million of the preferred
stock that it sold to the Treasury under the TARP Capital Purchase Program on August 25, 2011.
On October 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 November 18, 2011 to
common stockholders of record as of November 4, 2011.
(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 September 30, 2011 and 2010, there were
approximately 143,000 and 165,000 unallocated ESOP shares, respectively.
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The following depicts a reconciliation of earnings per share:
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Amounts in thousands | (Amounts in thousands | |||||||||||||||
except share and per | except share and per | |||||||||||||||
share amounts) | share amounts) | |||||||||||||||
Net income as reported |
$ | 204 | $ | 401 | $ | 440 | $ | 1,139 | ||||||||
Less preferred dividends and accretion |
(451 | ) | (155 | ) | (607 | ) | (309 | ) | ||||||||
Net income (loss) available to common stockholders |
$ | (247 | ) | $ | 246 | $ | (167 | ) | $ | 830 | ||||||
Weighted average number of common shares
outstanding |
1,681,071 | 1,667,151 | 1,681,071 | 1,667,151 | ||||||||||||
Weighted average number of unallocated ESOP shares |
(145,147 | ) | (166,654 | ) | (147,836 | ) | (169,343 | ) | ||||||||
Weighted average number of common shares
outstanding
used in calculation of basic earnings per share |
1,535,924 | 1,500,497 | 1,533,235 | 1,497,808 | ||||||||||||
Incremental shares from the assumed exercise of
dilutive
securities |
| 102,467 | | 97,127 | ||||||||||||
Weighted average number of common shares
outstanding used in
calculating diluted earnings per share |
1,535,924 | 1,602,963 | 1,533,235 | 1,594,935 | ||||||||||||
Earnings (loss) per common share |
||||||||||||||||
Basic |
$ | (0.16 | ) | $ | 0.16 | $ | (0.11 | ) | $ | 0.55 | ||||||
Diluted |
$ | (0.16 | ) | $ | 0.15 | $ | (0.11 | ) | $ | 0.52 | ||||||
At September 30, 2011, 33,589 stock options were anti-dilutive and therefore excluded
from the above calculations for the three and six-month periods ended September 30, 2011. At
September 30, 2010, 41,669 stock options were both anti-dilutive and, therefore, excluded from the
above calculation for both the three and six-month periods ended September 30, 2010.
(10) Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to ASC 718 CompensationStock
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
September 30, 2011, 49,880 shares remained unissued and available for award under the Incentive
Plan, of which 9,880 were available to be issued in the form of stock grants.
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Forfeitures of awards granted under the Incentive Plan are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in
order to derive the Companys best estimate of awards ultimately expected to vest. 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 six months ended September 30, 2011 and 2010.
The Company granted no stock options in fiscal 2011. During the fourth quarter of fiscal
2011, 13,920 restricted shares were issued under the Incentive Plan. Of these shares, 5,871 shares
vested immediately and 8,049 shares vest over a five-year life. No stock options or grants were
issued during the quarter and six months ended September 30, 2011. Stock-based compensation
totaled $108,000 and $100,000 for the six months ended September 30, 2011 and 2010, respectively.
Stock option activity was as follows for the six months ended September 30, 2011:
Number of | Weighted | |||||||
Shares | Exercise Price | |||||||
Outstanding at March 31, 2011 |
34,458 | $ | 29.63 | |||||
Exercised |
||||||||
Forfeited |
||||||||
Expired |
(869 | ) | $ | 28.99 | ||||
Outstanding at September 30, 2011 |
33,589 | $ | 29.65 | |||||
Exercisable at September 30, 2011 |
31,589 | $ | 29.55 | |||||
As of September 30, 2011, the Company expects all non-vested stock options to vest over their
remaining vesting periods.
As of September 30, 2011, the expected future compensation costs related to options and
restricted stock vesting is as follows: $86 thousand during the final six months of the fiscal year
ending March 31, 2012; $30 thousand per year during the fiscal years ending March 31, 2013 through
March 31, 2015; and $29 thousand during the fiscal year ending March 31, 2016.
The range of exercise prices, weighted average remaining contractual lives of outstanding
stock options and aggregate intrinsic value at September 30, 2011 were as follows:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Number | Contractual | Aggregate | ||||||||||||||
Exercise | of Shares | Life | Intrinsic | |||||||||||||
Price | Outstanding | (Years) | Value (1) | |||||||||||||
$ | 28.99 | 23,589 | (2) | 3.4 | | |||||||||||
31.20 | 10,000 | (3) | 5.0 | | ||||||||||||
Average/Total |
$ | 29.63 | 33,589 | 3.9 | $ | | ||||||||||
(1) | Represents the total intrinsic value, based on the Companys closing stock price of $17.14 on September 30, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. As of September 30, 2011, 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 September 30, 2011. |
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A summary of restricted stock activity under all Company plans for the six months ended
September 30, 2011 is as follows:
Number | Weighted Average | |||||||
of Restricted | Grant Date | |||||||
Shares | Fair | |||||||
Non-vested at March 31, 2011 |
$ | 38,949 | $ | 15.33 | ||||
Granted |
| | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Non-vested at September 30, 2011 |
$ | 38,949 | $ | 15.33 | ||||
(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 $7.1 million at September 30, 2011.
(12) Recent Accounting Pronouncements
In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02, Receivables
(Topic 310): A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring.
For public entities this update provides guidance and clarification to help creditors in
determining whether a creditor has granted a concession and whether a debtor is experiencing
financial difficulties for purposes of determining whether a restructuring constitutes a troubled
debt restructuring. The amendments in this update are effective for the first interim or annual
period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning
of the annual period of adoption. The adoption of this guidance on June 30, 2011 did not have a
material impact on the Companys consolidated financial statements.
In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-03, Transfers and
Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The main
provisions in this amendment remove from the assessment of effective control (1) the criterion
requiring the transferor to have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by the transferee, and (2) the
collateral maintenance implementation guidance related to that criterion. Eliminating the
transferors ability criterion and related implementation guidance from an entitys assessment of
effective control should improve the accounting for repos and other similar transactions. The
guidance in this update is effective for the first interim or annual period beginning on or after
December 15, 2011 and should be applied prospectively to transactions or modifications of existing
transactions that occur on or after the effective date. Early adoption is not permitted. The
Company does not anticipate that the adoption of this guidance will have a material impact on the
Companys consolidated financial statements.
In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. The amendments in this update are a result of the work by the
FASB and the International Accounting Standards Board to develop common requirements for measuring
fair value and for disclosing information about fair value measurements in accordance with U.S.
generally accepted accounting principles (GAAP) and International Financial Reporting Standards
(IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP
for measuring fair value and for disclosing information about fair value measurements. For many of
the requirements, the FASB does not intend for these amendments to result in a change in the
application of the requirements of Topic 820. The amendments are to be applied prospectively. The
amendments are effective during interim and annual periods beginning after December 15, 2011.
Early application is not permitted. The Company does not anticipate that the adoption of this
guidance will have a material impact on the Companys consolidated financial statements.
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Table of Contents
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive
Income (Topic 220): Presentation of Comprehensive Income. The objective of this update is to
improve the comparability, consistency, and transparency of financial reporting and to increase the
prominence of items reported in other comprehensive income. The amendments in this update require
that all non-owner changes in stockholders equity be presented either in as single continuous
statement of comprehensive income or in two separate but consecutive statements. The amendments
are to be applied prospectively. The amendments are effective during interim and annual periods
beginning after December 15, 2011. Early adoption is permitted. The Company does not anticipate
that the adoption of this guidance will have a material impact on the Companys consolidated
financial statements.
In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles
Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The objective of this update
is to simplify how entities test goodwill for impairment. The amendments in this update permit an
entity to first assess qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment test described in Topic 350. The
more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The
amendments are to be applied prospectively. The amendments are effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early
adoption is permitted. The Company does not anticipate that the adoption of this guidance will
have a material impact on the Companys consolidated financial statements.
(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 upon the sale of an asset or paid to
transfer a liability in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. In addition, ASC 820
specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are
observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Companys market assumptions. These two types of
inputs have the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets | |||
Level 2 Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which all significant inputs and value drivers are observable in active markets | |||
Level 3 Valuation derived from significant unobservable inputs |
The Company uses fair value measurements to record certain assets at fair value on a recurring
basis. Additionally, the Company may be required to record fair values 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.
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The only assets of the Company recorded at fair value on a recurring basis at September 30,
2011 and March 31, 2011 were securities available for sale. The assets of the Company recorded at
fair value on a nonrecurring basis at September 30, 2011 and March 31, 2011 were collateral
dependent loans and other real estate owned (OREO). The following table presents the level of
valuation assumptions used to determine the values of such securities and loans:
Carrying Value (In Thousands) | ||||||||||||||||
At September 30, 2011 | 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 |
$ | | $ | 19,037 | $ | | $ | 19,037 | ||||||||
Single issuer trust preferred securities
issued by financial institutions |
1,029 | | | 1,029 | ||||||||||||
Perpetual preferred stock issued by financial
institutions |
862 | 1,880 | | 2,742 | ||||||||||||
Common stock |
3,061 | | | 3,061 | ||||||||||||
Assets measured at estimated fair value on a
nonrecurring basis: |
||||||||||||||||
Impaired loans: |
||||||||||||||||
CRE |
| | 4,051 | 4,051 | ||||||||||||
Residential |
| | 845 | 845 | ||||||||||||
OREO |
| | 187 | 187 |
Carrying Value (In Thousands) | ||||||||||||||||
At March 31, 2011 | 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 |
$ | | $ | 18,823 | $ | | $ | 18,823 | ||||||||
Single issuer trust preferred securities
issued by financial institutions |
1,049 | | | 1,049 | ||||||||||||
Perpetual preferred stock issued by financial
institutions |
2,063 | 1,122 | | 3,185 | ||||||||||||
Common stock |
2,128 | | | 2,128 | ||||||||||||
Assets measured at estimated fair value on a
nonrecurring basis: |
||||||||||||||||
Impaired loans: |
||||||||||||||||
CRE |
| | 4,566 | 4,566 | ||||||||||||
Residential |
| | 433 | 433 | ||||||||||||
OREO |
| | 132 | 132 |
There were no Level 3 securities at September 30, 2011 or March 31, 2011. The Company did not
have any sales, purchases or transfers of Level 3 available for sale securities during the quarter
ended September 30, 2011.
At September 30, 2011, the fair value of one government sponsored enterprise preferred stock
amounting to $54 thousand was measured using Level 1 inputs in comparison to March 31, 2011, at
which time the security had a fair value of $46 thousand and was measured using Level 2 inputs.
The transfer from Level 2 to Level 1 was primarily the result of increased trading volume of the
security at and around September 30, 2011. The fair value as of September 30, 2011 was determined
using actual trades of the exact security, whereas the fair value as of March 31, 2011 was
determined by matrix pricing models based upon comparable securities. At September 30, 2011, the
fair value of one financial institution preferred stock amounting to $1.0 million was measured
using Level 2 inputs in comparison to March 31, 2011, at which time the security had a fair value
of $1.1 million and was measured
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using Level 1 inputs. The transfer from Level 1 to Level 2 was primarily the result of
decreased trading volume of the security at and around September 30, 2011. The fair value as of
September 30, 2011 was determined by matrix pricing models based upon comparable securities,
whereas the fair value as of September 30, 2011 was determined using actual trades of the exact
security. There were no other transfers of Level 1 or Level 2 securities during the six months
ended September 30, 2011.
Management utilizes a fair value measurement to determine the allocated allowance for
collateral dependent impaired loans on a periodic basis in periods subsequent to its initial
recognition. At September 30, 2011, impaired loans measured at estimated fair value using Level 3
inputs amounted to $4.9 million, which represents ten customer relationships, compared to ten
customer relationships which totaled $5.0 million at March 31, 2011. There were no impaired loans
measured at estimated fair value using Level 2 inputs at September 30, 2011 or March 31, 2011.
Level 3 inputs utilized to determine the estimated fair value of the impaired loan relationships at
September 30, 2011 and March 31, 2011 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, fair appraised values of the collateral, or managements estimation of the value of
the collateral. During the six months ended September 30, 2011, OREO increased by $55 thousand as
the Bank foreclosed upon one parcel of residential property with an estimated value less selling
costs of $55 thousand. As of September 30, 2011, the Company had two residential parcels of OREO
which totaled $187 thousand.
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 Where quoted prices are available in an active
market, securities are classified within Level 1 of the valuation hierarchy. Examples of such
instruments include publicly traded common and preferred stocks. If quoted prices are not
available, then fair values are estimated by using pricing models (i.e., matrix pricing) and market
interest rates and credit assumptions or quoted prices of securities with similar characteristics
and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include
government agency and government sponsored agency mortgage-backed securities, as well as certain
preferred and trust preferred stocks. Level 3 securities are securities for which significant
unobservable inputs are utilized. There were no changes in valuation techniques used to measure
similar assets during the period. Available for sale securities are recorded at fair value on a
recurring basis.
Loans and Loans Held for Sale The fair values of loans are estimated using discounted cash
flow analysis, using interest rates, estimated using local market data, of which loans with similar
terms would be made 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 mortgage loans held for sale are based on commitments on hand from investors or prevailing
market prices. 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 the Bank believes 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.
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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 $5.8 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.
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 Fair values of the Companys off-balance-sheet lending
commitments are based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements. The fair value of off-balance-sheet instruments was
not significant at September 30, 2011 and March 31, 2011.
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The estimated carrying amounts and fair values of the Companys financial instruments are
as follows:
September 30, 2011 | March 31, 2011 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 3,984 | $ | 3,984 | $ | 3,728 | $ | 3,728 | ||||||||
Short-term investments |
23,206 | 23,206 | 37,190 | 37,190 | ||||||||||||
Investment securities available for sale |
25,869 | 25,869 | 25,185 | 25,185 | ||||||||||||
Loans held for sale |
523 | 523 | | | ||||||||||||
Net loans |
428,124 | 438,524 | 390,325 | 394,475 | ||||||||||||
Stock in FHLB 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 |
1,514 | 1,514 | 1,496 | 1,496 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 333,359 | $ | 333,818 | $ | 309,077 | $ | 300,875 | ||||||||
Advances from FHLB of Boston |
117,291 | 128,279 | 117,351 | 125,314 | ||||||||||||
Subordinated debentures |
11,341 | 8,942 | 11,341 | 8,651 | ||||||||||||
Advance payments by borrowers for taxes and insurance |
2,230 | 2,230 | 1,387 | 1,387 | ||||||||||||
Accrued interest payable |
384 | 384 | 397 | 397 |
(14) Troubled Asset Relief Program Capital Purchase Program
On August 25, 2011, the Company entered into and consummated a letter agreement (the
Repurchase Letter) with the United States Department of the Treasury (Treasury), pursuant to
which the Company redeemed, out of the proceeds of its issuance of 10,000 shares of its Series B
Senior Non-Cumulative Perpetual Preferred Stock, all 10,000 outstanding shares of its Series A
Fixed Rate Cumulative Perpetual Preferred Stock, liquidation amount $1,000 per share (the Series A
Preferred Stock), for a redemption price of $10,013,889, including accrued but unpaid dividends to
the date of redemption. On December 5, 2008, the Company sold $10.0 million in the Series A
Preferred Stock to the 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. In connection with the investment, the Company had
entered into a Letter Agreement and the related Securities Purchase Agreement with the Treasury
pursuant to which the Company issued the 10,000 shares of Series A Preferred Stock and 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 Company subsequently repurchased the warrant from the Treasury on October 19, 2011 for an
aggregate purchase price of $2.525 million.
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(15) U.S. Treasury Department Small Business Lending Fund
On August 25, 2011, the Company entered into and consummated a Securities Purchase Agreement
(the Purchase Agreement) with the Secretary of the U.S. Department of the Treasury (the
Secretary), pursuant to which the Company issued 10,000 shares of the Companys Senior
Non-Cumulative Perpetual Preferred Stock, Series B (the Series B Preferred Stock), having a
liquidation amount per share equal to $1,000, for a total purchase price of $10,000,000. The
Purchase Agreement was entered into, and the Series B Preferred Stock was issued, pursuant to the
Small Business Lending Fund (SBLF) program, a $30 billion fund established under the Small
Business Jobs Act of 2010, that encourages lending to small businesses by providing capital to
qualified community banks with assets of less than $10 billion. The Company used the $10 million
in SBLF funds to redeem shares of the Series A Preferred Stock issued under the TARP Capital
Purchase Program.
The Series B Preferred Stock is entitled to receive non-cumulative dividends, payable
quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The
dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during
the first 10 quarters during which the Series B Preferred Stock is outstanding, based upon changes
in the level of Qualified Small Business Lending or QSBL (as defined in the Purchase
Agreement) by the Companys wholly owned subsidiary Central Co-operative Bank (the Bank). Based
upon the increase in the Banks level of QSBL over the baseline level calculated under the terms of
the Purchase Agreement, the dividend rate for the initial dividend period has been set at five
percent (5%). For the second through ninth calendar quarters, the dividend rate may be adjusted to
between one percent (1%) and five percent (5%) per annum, to reflect the amount of change in the
Banks level of QSBL. If the level of the Banks qualified small business loans declines so that
the percentage increase in QSBL as compared to the baseline level is less than 10%, then the
dividend rate payable on the Series B Preferred Stock would increase. For the tenth calendar
quarter through four and one half years after issuance, the dividend rate will be fixed at between
one percent (1%) and seven percent (7%) based upon the increase in QSBL as compared to the
baseline. After four and one half years from issuance, the dividend rate will increase to 9%
(including a quarterly lending incentive fee of 0.5%). In addition, beginning on January 1, 2014,
and on all Series B Preferred Stock dividend payment dates thereafter ending on April 1, 2016, the
Company will be required to pay to the Secretary, on each share of Series B Preferred Stock, but
only out of assets legally available therefore, a fee equal to 0.5% of the liquidation amount per
share of Series B Preferred Stock.
The Series B Preferred Stock is non-voting, except in limited circumstances. In the event
that the Company misses five dividend payments, whether or not consecutive, the holder of the
Series B Preferred Stock will have the right, but not the obligation, to appoint a representative
as an observer on the Companys Board of Directors. In the event that the Company misses six
dividend payments, whether or not consecutive, and if the then outstanding aggregate liquidation
amount of the Series B Preferred Stock is at least $25,000,000, then the holder of the Series B
Preferred Stock will have the right to designate two directors to the Board of Directors of the
Company.
The Series B Preferred Stock may be redeemed at any time at the Companys option, at a
redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of
redemption for the current period, subject to the approval of its federal banking regulator.
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
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limited to: recent and future bail-out actions by the government; the impact of the Companys
participation in the U.S. Department of Treasurys Small Business Lending Fund; a further slowdown
in the national and Massachusetts economies; a further deterioration in asset values locally and
nationwide; the volatility of rate-sensitive deposits; changes in the regulatory environment;
increasing competitive pressure in the banking industry; operational risks including data
processing system failures or fraud; asset/liability matching risks and liquidity risks; continued
access to liquidity sources; changes in our borrowers performance on loans; changes in critical
accounting policies and judgments; changes in accounting policies or procedures as may be required
by the Financial Accounting Standards Board or other regulatory agencies; changes in the equity and
debt securities markets; governmental action as a result of our inability to comply with regulatory
orders and agreements; the effect of additional provision for loan losses; the effect of an
impairment charge on our deferred tax asset; fluctuations of our stock price; the success and
timing of our business strategies; the impact of reputation risk created by these developments on
such matters as business generation and retention, funding and liquidity; the impact of regulatory
restrictions on our ability to receive dividends from our subsidiaries; and political developments,
wars or other hostilities may disrupt or increase volatility in securities or otherwise affect
economic conditions. 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, 2011, as filed with the Securities and Exchange Commission on June 17, 2011, which is
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 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 six months ended September 30, 2011 as compared to the three and six months September 30,
2010 and its financial condition at September 30, 2011 compared to March 31, 2011. Managements
discussion and analysis of financial condition and results of operations should be read in
conjunction with the consolidated financial statements and accompanying notes.
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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,
loans, 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.
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 such loan and documents what
management believes to be an appropriate reserve level in accordance with Accounting Standards
Codification (ASC) 310 Receivables (ASC 310). If management does not believe that any separate
reserve for such loan is deemed necessary at the evaluation date in accordance with ASC 310, that
loan would continue to be evaluated separately and will not be returned to be included in the
general 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:
| Apartments | ||
| Offices | ||
| Retail | ||
| Mixed Use | ||
| Industrial/Other |
CRE loans are segmented monthly using the above collateral-types and three LTV ratio
categories: <40%, 40%-60%, and >60%. While these ranges are subjective, management feels
that each category represents a significantly different degree of risk from the other. CRE loans
carrying higher LTV ratios are assigned incrementally higher ASC 450 reserve rates. Annually, for
the CRE portfolio, management adjusts the appraised values which are used to calculate LTV ratios
in 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. Based on the Companys
allowance for loan loss methodology
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with respect to CRE, unfavorable trends in the value of real estate will increase the required
level of the Companys ASC 450 allowance for loan losses.
In developing ASC 450 reserve levels, recent regulatory guidance suggests using the Banks
charge-off history as a starting point. The Banks charge-off history in recent years has been
minimal. The charge-off 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
September 30, 2011, the commercial real estate concentration ratio was 300%, compared to a ratio of
330% at March 31, 2011 and 466% at March 31, 2010.
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 six months ended September 30, 2011, management increased the ASC 450 loss factors
related to economic conditions for all loan types, changes in collateral values for residential
loans, and trends in delinquencies factor for commercial real estate loans. As a result of those
changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of $155
thousand for those loan types.
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 nonperforming loans to cover losses that may result from these loans at September 30,
2011.
In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in other liabilities in the balance sheet. At September 30, 2011 and March 31, 2011, the reserve for unfunded commitments was not significant. |
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, 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.
Fair value is estimated based on outstanding investor commitments. Net unrealized losses, if any,
are provided for in a valuation
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allowance by charges to operations. 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. Loans held for sale are sold on a servicing
released basis. As of September 30, 2011 loans held for sale totaled $523 thousand compared to $0
at March 31, 2011.
Mortgage loan commitments that relate to the origination of a mortgage that will be held for
sale upon funding are considered derivative instruments. Loan commitments that are derivatives are
recognized at fair value on the consolidated balance sheet in other assets and other liabilities
with changes in their fair values recorded in noninterest income.
The Company carefully evaluates all loan sales agreements to determine whether they meet the
definition of a derivative as facts and circumstances may differ significantly. If agreements
qualify, to protect against the price risk inherent in derivative loan commitments, the Company
generally uses best efforts forward loan sale commitments to mitigate the risk of potential
decreases in the values of loans that would result from the exercise of the derivative loan
commitments. Forward loan sale commitments are recognized at fair value on the consolidated
balance sheet in other assets and liabilities with changes in their fair values recorded in other
noninterest income. At September 30, 2011, the fair value of forward loan sale commitments was not
material.
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 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. Other factors considered by management 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 impairment classification. For all
loans, charge-offs occur when management believes that the collectability of a portion or all of
the loans principal balance is remote. Management considers nonaccrual loans, except for certain
nonaccrual residential and consumer loans, to be impaired. However, all troubled debt
restructurings (TDRs) are 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 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. A TDR is typically on nonaccrual until the borrower successfully performs
under the new terms for at least six consecutive months. However, a TDR may be kept on accrual
immediately following the restructuring 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.
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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. 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 and amortized over
the remaining life of the loan.
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 an asset.
Accounting for Goodwill and Impairment. ASC 350, Intangibles Goodwill and Other
Intangibles (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 ASC 350. 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, management also
considered utilizing market capitalization, but ultimately 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 does not believe that this measure generally
reflects the premium that a buyer would typically pay for a controlling interest. No facts or
circumstances have arisen after the Companys impairment testing date to warrant an interim
analysis.
Fair Value of Other Real Estate Owned. OREO is recorded at the lower of cost, 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.
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 determined by management to be temporary excluded from
earnings and reported as a separate component of stockholders equity and comprehensive income. At
September 30, 2011, all of the Banks investment securities were classified as available for sale.
Gains and losses on sales of securities are recognized when realized with the cost basis of
investments sold determined on a specific-identification basis. Premiums and discounts on
investment and mortgage-backed securities
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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. For debt
securities, when the Bank does not intend to sell the security, and it is more-likely-than-not that
the Bank will not have to sell the security before recovery of its cost basis, it will recognize
the credit component of a other-than-temporary impairment loss in earnings, and the remaining
portion in other comprehensive income. The credit loss component recognized in earnings is
identified as the amount of principal cash flows not expected to be received over the remaining
term of the security as estimated based on the cash flows projections discounted at the applicable
original yield of the security.
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, 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. However, awards
may become available again if participants forfeit awards under the plan prior to its expiration.
As of September 30, 2011, 49,880 shares remained available for issue under the Incentive Plan, of
which 9,880 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 quarter and six months ended September 30, 2011.
Comparison of Financial Condition at September 30, 2011 and March 31, 2011
Total assets were $513.2 million at September 30, 2011 compared to $487.6 million at March 31,
2011, representing an increase of $25.6 million, or 5.3%. The increase in total assets reflected
strategic actions taken by management to reduce risk, which included increasing the residential
loan portfolio by $59.0 million and continuing to de-emphasize commercial real estate lending in
accordance with the Companys business plan. Total loans (excluding loans held for sale) were
$432.3 million at September 30, 2011, compared to $394.2 million at March 31, 2011, representing an
increase of $38.1 million, or 9.7%. This increase was primarily due to increases in residential and
home equity loans of $59.0 million and $397 thousand, respectively, offset by decreases in
commercial real estate loans of $20.3 million. Residential and home equity loans increased from
$191.6 million at March 31, 2011 to $251.0 million at September 30, 2011. Commercial and
industrial loans decreased from $2.2 million at March 31, 2011 to $1.2 million at September 30,
2011 primarily due to the scheduled repayments of principal. Managements efforts to reduce the
levels of commercial real estate and land 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 land and construction loans divided by the Banks risk-based capital.
At September 30, 2011 the commercial real estate concentration ratio was 300%, compared to a ratio
of 330% at March 31, 2011.
The allowance for loan losses totaled $4.2 million at September 30, 2011 compared to $3.9
million at March 31, 2011, representing a net increase of $281 thousand, or 7.2%. This net
increase was primarily due to a provision of $800 thousand resulting from managements review of
the adequacy of the allowance for loan losses.
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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 September 30, 2011 and
March 31, 2011. See Comparison of Operating Results for the Quarters Ended September 30, 2011 and
2010Provision 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 six months ended September 30, 2011 should be retained in the
Banks portfolio rather than being sold in the secondary market. The decision to sell or hold
loans is made at the time the loan commitment is issued. Upon making a determination not to retain
a loan, the Bank simultaneously enters into a best efforts forward commitment to sell the loan to
manage the interest rate risk associated with the decision to sell the loan. Loans are sold
servicing released.
Cash and cash equivalents totaled $27.2 million at September 30, 2011 compared to $40.9
million at March 31, 2011, representing a decrease of $13.7 million, or 37.6%. During the six
months ended September 30, 2011, proceeds from cash and cash equivalents, commercial real estate
payoffs and increases in certificates of deposit were generally utilized to fund the growth in the
residential loan portfolio.
Investment securities totaled $36.0 million at September 30, 2011 compared to $35.3 million at
March 31, 2011, representing an increase of $684 thousand, or 1.9%. The increase in investment
securities is primarily due to the purchase of $8.1 million in mortgage-backed securities and $2.2
million in common stock, offset by the sale of $6.2 million in mortgage-backed securities, the
repayment of $2.3 million of principal on mortgage-backed securities and a net decrease of $1.2
million 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 September 30, 2011 and March 31, 2011, respectively.
Banking premises and equipment, net, totaled $2.3 million and $2.7 million at September 30,
2011 and March 31, 2011, respectively.
Other real estate owned totaled $187 thousand at September 30, 2011 compared to $132 thousand
at March 31, 2011.
Deferred tax asset totaled $4.0 million at September 30, 2011 compared to $3.6 million at
March 31, 2011.
The cash surrender value of a bank-owned life insurance policy on one executive is carried as
an asset titled Bank-Owned Life Insurance and totaled approximately $7.1 million at both
September 30, 2011 and March 31, 2011.
Total deposits amounted to $333.4 million at September 30, 2011 compared to $309.1 million at
March 31, 2011, representing an increase of $24.3 million, or 7.9%. The increase was a result of
the combined effect of a $25.7 million increase in certificates of deposit and a net decrease in
core deposits of $1.4 million (consisting of all non-certificate accounts). Certificate of deposit
growth for the six months ended September 30, 2011 included $23.4 million obtained through a
non-broker listing service. Management utilized increases in deposits to fund residential loan
portfolio growth in an effort to reduce risk in accordance with the Companys business plan.
FHLBB advances amounted to $117.3 million at both September 30, 2011 and March 31, 2011. The
slight decrease between the two periods was due to the scheduled repayment of principal on
outstanding advances.
The net decrease in stockholders equity from $47.1 million at March 31, 2011 to $46.8 million
at September 30, 2011 was primarily due to a $707 thousand decrease in accumulated other
comprehensive income due to an overall decrease in the fair value of available for sale securities
and $465 thousand of dividends paid to common and preferred shareholders, partially offset by net
income of $440 thousand and stock-based compensation of $418 thousand.
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On August 25, 2011, the U. S. Department of Treasury invested $10.0 million in the Companys
Series B Preferred Stock under the Small Business Lending Fund. The Company used the proceeds to
redeem all $10.0 million of the Series A Preferred Stock issued under the Treasurys TARP Capital
Purchase Program.
Comparison of Operating Results for the Quarters Ended September 30, 2011 and 2010
Net loss available to common shareholders for the quarter ended September 30, 2011 was $247
thousand, or $0.16 per diluted common share, as compared to net income available to common
shareholders of $246 thousand, or $0.15 per diluted common share, for the comparable prior year
quarter. The decrease was primarily due to a decrease in net interest and dividend income of $343
thousand and an increase in noninterest expenses of $116 thousand, partially offset by a $209
thousand increase in non-interest income. Additionally, for the quarters ended September 30 2011
and 2010 net income available to common shareholders was reduced by $451 thousand and $155
thousand, respectively, for allocated dividends paid to preferred shareholders and accretion of the
discount related to the Companys December 2008 sale of $10.0 million of Series A 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. On August
25, 2011, the Company redeemed all 10,000 outstanding shares of its Series A Preferred Stock for a
redemption price of $10,014 thousand, which amount includes accrued but unpaid dividends. The
Company subsequently repurchased the warrant from the Treasury on October 19, 2011 for an aggregate
purchase price of $2.525 million.
Interest and Dividend Income. Interest and dividend income decreased by $749 thousand, or
11.3%, to $5.9 million for the quarter ended September 30, 2011 as compared to $6.6 million for the
same period of 2010. During the quarter ended September 30, 2011, the yield on interest-earning
assets decreased by 42 basis points primarily due to a 53 basis point reduction in the yield on
mortgage loans. The average balance of commercial real estate loans decreased by $40.4 million,
from $226.2 million for the quarter ended September 30, 2010 to $185.8 million for the quarter
ended September 30, 2011.
Interest Expense. Interest expense decreased by $406 thousand, or 19.6%, to $1.7 million for
the quarter ended September 30, 2011 as compared to $2.1 million for the same period of 2010
primarily due to decreases in the average rates paid on deposits and FHLBB borrowings. The cost of
deposits decreased by 32 basis points from 0.92% for the quarter ended September 30, 2010 to 0.60%
for the quarter ended September 30, 2011, 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 $126.0 million for the quarter ended September 30, 2011, compared to $128.4 million
for the same period in 2010, a decline of $2.4 million. The average balance of lower-cost
non-maturity deposits decreased by $9.8 million to $154.6 million for the quarter ended September
30, 2011, as compared to an average balance of $164.4 million for the same period of 2010. The
average balance of FHLBB borrowings decreased by $12.8 million, from $130.1 million for the quarter
ended September 30, 2010 to $117.3 million for the quarter ended September 30, 2011. The average
cost of these borrowings declined as management utilized short-term investments to fund maturing,
relatively higher-rate advances during the quarter ended September 30, 2011.
39
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The following table presents average balances and average rates earned/paid by the Company for
the three months ended September 30, 2011 compared to the three months ended September 30, 2010:
Three Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
|||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 427,468 | $ | 5,502 | 5.15 | % | $ | 437,772 | $ | 6,211 | 5.68 | % | ||||||||||||
Other loans |
2,193 | 30 | 5.47 | 4,457 | 65 | 5.83 | ||||||||||||||||||
Investment securities |
28,543 | 308 | 4.32 | 30,118 | 316 | 4.20 | ||||||||||||||||||
Federal Home Loan Bank Stock |
8,518 | 6 | .28 | 8,518 | | | ||||||||||||||||||
Short-term investments |
16,366 | 10 | .24 | 19,981 | 13 | 0.26 | ||||||||||||||||||
Total interest-earning assets |
483,088 | 5,856 | 4.85 | 500,868 | 6,605 | 5.27 | ||||||||||||||||||
Allowance for loan losses |
(4,511 | ) | (3,403 | ) | ||||||||||||||||||||
Noninterest-earning assets |
25,379 | 27,707 | ||||||||||||||||||||||
Total Assets |
$ | 503,956 | $ | 525,150 | ||||||||||||||||||||
Interest-bearing liabilities |
||||||||||||||||||||||||
Deposits |
$ | 280,529 | 422 | .60 | $ | 293,220 | 674 | 0.92 | ||||||||||||||||
Advances from FHLB of Boston |
117,301 | 1,103 | 3.76 | 130,120 | 1,254 | 3.85 | ||||||||||||||||||
Other borrowings |
11,341 | 139 | 4.90 | 11,341 | 142 | 5.01 | ||||||||||||||||||
Total interest-bearing
liabilities |
409,171 | 1,664 | 1.63 | 434,681 | 2,070 | 1.90 | ||||||||||||||||||
Noninterest-bearing liabilities |
47,753 | 44,618 | ||||||||||||||||||||||
Total liabilities |
456,924 | 479,299 | ||||||||||||||||||||||
Stockholders equity |
47,032 | 45,851 | ||||||||||||||||||||||
Total liabilities and
stockholders equity |
$ | 503,956 | $ | 525,150 | ||||||||||||||||||||
Net interest and dividend income |
$ | 4,192 | $ | 4,535 | ||||||||||||||||||||
Net interest spread |
3.22 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin |
3.47 | % | 3.62 | % | ||||||||||||||||||||
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 September 30, 2011 and 2010, 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 increased ASC 450 loss factors
related to collateral values for residential and home equity loans during the quarter ended
September 30, 2011, and factors related to trends in delinquent and impaired loans during the
quarter ended September 30, 2010. As a result of the aforementioned factor changes, the impact to
the allowance for loan losses was an increase in ASC 450 reserves of $128 thousand during the
quarter ended September 30, 2011 and $63 thousand during the 2010 quarter. Based on these
analyses, a provision for loan losses of $300 thousand was recorded during the quarter
40
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ended September 30, 2011 compared to a provision for loan losses of $300 thousand recorded
during the quarter ended September 30, 2010.
Management gives high priority to monitoring and managing the Companys asset quality. At
September 30, 2011, nonperforming loans totaled $8.3 million as compared to $9.6 million on March
31, 2011. All twenty three of the loans included in this category at September 30, 2011 are
secured by real estate collateral that is predominantly located in the Banks market area.
Noninterest Income. Noninterest income totaled $500 thousand for the quarter ended September
30, 2011 compared to $291 thousand for the quarter ended September 30, 2010. The increase of $209
thousand was primarily due to a $290 thousand increase in gains on the sale of investment
securities as management strategically sold certain available-for-sale equity and mortgage-backed
securities during the quarter ended September 30, 2011. Gains on the sale of loans decreased by
$60 thousand as most residential loans originated during the quarter ended September 30, 2011 were
retained rather than sold in the secondary market. Other noninterest income decreased by $21
thousand primarily due to a $22 thousand decrease in deposit service charges and a $4 thousand
decrease in third party brokerage income.
Noninterest Expenses. Noninterest expenses increased by $185 thousand, or 4.7%, to $4.1
million for the quarter ended September 30, 2011 as compared to $3.9 million for the quarter ended
September 30, 2010. This net increase was primarily due to a $154 thousand increase in salaries
and benefits due to increases in loan origination commissions and staffing, partially offset by a
$48 thousand reduction in FDIC insurance premiums and a $32 thousand decrease in professional fees
resulting from a reduction in collection and loan review related expenses. FDIC insurance premiums
decreased due to a change in the calculation methodology implemented by the FDIC in April 2011 and
lower deposit insurance costs due to declining average balances of deposits.
Salaries and employee benefits increased by $154 thousand, or 6.7%, to $2.5 million during the
quarter ended September 30, 2011 as compared to $2.3 million during the quarter ended September 30,
2010 primarily due to increases of $131 thousand for loan origination commissions, $61 thousand for
staffing increases, and $38 thousand in stock-related compensation expenses.
FDIC deposit insurance premiums decreased by $88 thousand to $99 thousand during the quarter
ended September 30, 2011 compared to $147 thousand during the same quarter of 2010 due to a change
in the calculation methodology implemented by the FDIC in April 2011 and lower deposit insurance
costs due to declining average balances of deposits.
Advertising and marketing expenses increased by $18 thousand to $51 thousand during the
quarter ended September 30, 2011 as compared to $33 thousand during the same period of 2010 as the
Company strategically decided to increase advertising and marketing efforts on a limited basis.
Office occupancy and equipment expenses remained relatively unchanged at $519 thousand for the
quarter ended September 30, 2011 as compared to $518 thousand during the same period of 2010
Data processing fees decreased by $24 thousand, or 11.3%, to $189 thousand during the quarter
ended September 30, 2011 as compared to $213 thousand during the same period of 2010 due to
decreases in certain processing costs.
Professional fees decreased by $32 thousand, or 12.5%, to $223 thousand during the quarter
ended September 30, 2011 as compared to $255 thousand during the same period of 2010 primarily due
to decreases in loan workout-related expenses and contract labor costs, partially offset by higher
legal fees.
Other expenses increased by $116 thousand, or 25.5%, to $571 thousand during the quarter ended
September 30, 2011 as compared to $455 thousand during the quarter ended September 30, 2010
primarily as a result of an increase in bank policy losses of $49 thousand and telephone expenses
of $33 thousand and a $25 thousand increase in directors fees, partially offset by a decrease of
$13.2 thousand in recruiting expenses and a decrease of $10 thousand for customer check printing
costs.
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Table of Contents
Income Taxes. The effective income tax rate for the quarter ended September 30, 2011 was
27.11%, compared to an effective income tax rate of 33.11% for the same quarter in 2010. 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.
Comparison of Operating Results for the Six Months Ended September 30, 2011 and 2010
Net loss available to common shareholders for the six months ended September 30, 2011 was $167
thousand, or $0.11 per diluted share, as compared to net income of $830 thousand, or $0.52 per
diluted share, during the six months ended September 30, 2010. Items primarily affecting the
Companys earnings for the six months ended September 30, 2011 when compared to the six months
ended September 30, 2010 was a 46 basis point reduction in the yield on mortgage loans, partially
offset by a 32 basis point decrease in the average cost of interest bearing liabilities; and an
increase in noninterest expenses of $477 thousand. Noninterest expenses increased primarily due to
increases in salaries and benefits of $562 thousand, partially offset by decreases in professional
fees of $96 thousand and FDIC deposit insurance of $86 thousand. Additionally, for the six months
ended September 30, 2011 and 2010 net income was reduced by $607 thousand and $309 thousand,
respectively, for allocated dividends 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. On
August 25, 2011, the Company redeemed all 10,000 outstanding shares of its Series A Preferred Stock
for a redemption price of $10,013,889, which amount includes accrued but unpaid dividends. The
Company subsequently repurchased the warrant from the Treasury on October 19, 2011 for an aggregate
purchase price of $2.525 million.
Interest and Dividend Income. Interest and dividend income decreased by $2.1 million, or
15.0%, to $11.4 million for the six months ended September 30, 2011 compared to $13.5 million for
the same period of 2010 primarily due to decreases in the average balances of investment securities
and a decrease in the average yield on short-term investments, partially offset by increased
average loan balances. The average balance of loans 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. The average balance
of investment securities declined as maturities and principal repayments were used to fund loan
growth, deposit withdrawals and the repayment of borrowings.
Interest Expense. Interest expense decreased by $1.0 million, or 23.4%, to $3.3 million for
the six months ended September 30, 2011 compared to $4.3 million for the same period of 2010. The
cost of deposits decreased by 36 basis points from 0.95% during the quarter ended September 30,
2010 to 0.59% during the quarter ended September 30, 2011, as some higher-cost certificates of
deposit were replaced by lower-costing deposits. The average balance of certificates of deposit
totaled $129.4 million during the six months ended September 30, 2010, compared to $117.0 million
for the same period in 2011, a decline of $12.4 million. The average balance of lower-costing
non-maturity deposits decreased by $7.6 million to $198.9 million for the six months ended
September 30, 2011, as compared to an average balance of $206.5 million for the same period of
2010. The average balance of FHLBB borrowings decreased by $16.8 million, from $134.1 million
during the six months ended September 30, 2010 to $117.3 million for the same period of 2011. The
decrease in the average cost of these funds was the result of a decrease in market interest rates.
The average cost of other borrowings decreased as a portion of these borrowings are adjustable and
the average rate paid for the six months ended September 30, 2011 was 4.87%, compared to an average
rate of 4.92% during the same period of 2010.
42
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The following table presents average balances and average rates earned/paid by the
Company for the six months ended September 30, 2011 compared to the six months ended September 30,
2010:
Six Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 410,390 | $ | 10,800 | 5.26 | % | $ | 444,378 | $ | 12,677 | 5.71 | % | ||||||||||||
Other loans |
2,431 | 68 | 5.59 | 4,605 | 134 | 5.82 | ||||||||||||||||||
Investment securities |
29,482 | 535 | 3.63 | 31,821 | 619 | 3.89 | ||||||||||||||||||
Federal Home Loan Bank Stock |
8,518 | 12 | .28 | 8,518 | | | ||||||||||||||||||
Short-term investments |
19,865 | 24 | .24 | 16,536 | 20 | 0.24 | ||||||||||||||||||
Total interest-earning assets |
470,686 | 11,439 | 4.86 | 505,869 | 13,450 | 5.32 | ||||||||||||||||||
Allowance for loan losses |
(4,255 | ) | (3,272 | ) | ||||||||||||||||||||
Noninterest-earning assets |
29,346 | 27,825 | ||||||||||||||||||||||
Total assets |
$ | 495,777 | $ | 530,422 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 273,518 | 809 | .59 | $ | 293,588 | 1,390 | .95 | ||||||||||||||||
Advances from FHLB of Boston |
117,316 | 2,193 | 3.74 | 134,071 | 2,611 | 3.89 | ||||||||||||||||||
Other borrowings |
11,341 | 276 | 4.87 | 11,341 | 279 | 4.92 | ||||||||||||||||||
Total interest-bearing liabilities |
402,175 | 3,278 | 1.63 | 439,000 | 4,280 | 1.95 | ||||||||||||||||||
Noninterest-bearing liabilities |
46,369 | 45,809 | ||||||||||||||||||||||
Total liabilities |
448,544 | 484,809 | ||||||||||||||||||||||
Stockholders equity |
47,233 | 45,613 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 495,777 | $ | 530,422 | ||||||||||||||||||||
Net interest and dividend income |
$ | 8,161 | $ | 9,170 | ||||||||||||||||||||
Net interest spread |
3.23 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin |
3.47 | % | 3.63 | % | ||||||||||||||||||||
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 six-month period ended September 30, 2010, 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 six months ended September 30, 2011, management
increased the ASC 450 loss factors related to economic conditions for all loan types, changes in
collateral values for residential loans, and trends in delinquencies factor for commercial real
estate loans. During six months ended September 30, 2010, management increased factors related to
economic conditions for commercial real estate and commercial and industrial loans, and trends in
delinquent and impaired loans for residential condominiums and commercial real estate loans. As a
result
43
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of those changes, the impact to the allowance for loan losses were increases in ASC 450
reserves of $155 thousand during the six months ended September 30, 2011 and $88 thousand during
the same period of 2010. Based on these analyses, the Company recorded a provision of $800
thousand for the six months ended September 30, 2011 compared to a provision for loan losses of
$600 thousand during the corresponding 2010 period.
Management continues to give high priority to monitoring and managing the Companys asset
quality. At September 30, 2011, nonperforming loans totaled $8.3 million as compared to $9.6
million at March 31, 2011. Of the twenty three loans constituting this category at September 30,
2011, all are secured by real estate collateral that is predominantly located in the Banks market
area.
Noninterest Income. Noninterest income increased by $585 thousand from $819 thousand during
the six months ended September 30, 2010 to $1.4 million during the six months ended September 30,
2011. The increase was primarily due to net gains on the sales and write-downs on investments,
which totaled $555 thousand during the six months ended September 30, 2011 compared to losses of
$184 thousand during the prior year period. Partially offsetting the aforementioned increase were
decreases in gains on sales of loans by $94 thousand due to decreased loan sale activity, deposit
fees of $36 thousand, brokerage income of $22 thousand, and other income of $2 thousand.
Noninterest Expenses. Noninterest expense increased by $477 thousand, or 6.2% to $8.2 million
during the six months ended September 30, 2011 as compared to $7.7 million during the same period
of 2010. This increase is due to increases in salaries and other benefits of $562 thousand, a $113
thousand increase in other expenses, and a $25 thousand increase in occupancy and equipment costs,
partially offset by a $96 thousand decrease in other professional fees, a $86 thousand decrease in
FDIC insurance premiums, a $27 thousand decrease in data processing costs, and a $14 thousand
decrease in marketing expenses.
Salaries and employee benefits increased by $562 thousand, or 12.5%, to $5.1 million during
the six months ended September 30, 2011 as compared to $4.5 million during the same period of 2010
primarily due to increases of $364 thousand for non-deposit investment product and loan origination
commissions and $155 thousand for salaries due to staffing increases.
FDIC deposit insurance premiums decreased by $86 thousand to $201 thousand during the six
months ended September 30, 2011 compared to $287 thousand during the same period of 2010. This
decrease was primarily due to a change in the calculation methodology implemented by the FDIC in
April 2011 and lower deposit insurance costs due to declining average balances of deposits.
Advertising and marketing expenses decreased by $14 thousand to $83 thousand during the six
months ended September 30, 2011 as compared to $97 thousand during the same period of 2010 as
management strategically decided to deemphasize advertising and marketing efforts.
Office occupancy and equipment expenses decreased by $25 thousand, or 2.4%, to $1.0 million
during the six months ended September 30, 2011 as compared $1.0 million during the same period of
2010 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.
Data processing costs decreased by $27 thousand, or 6.5%, to $390 thousand during the six
months ended September 30, 2011 as compared to $417 thousand during the same period of 2010 due to
increases in certain processing costs.
Income Taxes. The effective income tax rate for the six months ended September 30, 2011 was
27.6%, compared to an effective income tax rate of 33.7% for the same period of 2010. 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.
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Table of Contents
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 September 30, 2011,
the Company had approximately $72.7 million in unused borrowing capacity at the FHLBB. The Company
also has established borrowing capacity with the Federal Reserve Bank of Boston (FRB) at
September 30, 2011. The unused borrowing capacity at the FRB totaled $6.6 million at September 30,
2011.
At September 30, 2011, the Company had commitments to originate loans, unused outstanding
lines of credit, undisbursed proceeds of loans totaling $28.9 million, and commitments to sell
loans of $3.3 million. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. At September 30,
2011, 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). 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 covers the
period of January 1, 2010 through December 31, 2012. The FDIC estimates that bank failures will
total approximately $100 billion during this three-year period. The Banks prepaid premium totaled
$2.3 million and was paid during the quarter ended December 31, 2009, and it is being amortized
monthly over the three-year period. This prepaid deposit premium is carried on the balance sheet
in the other assets category and totaled $1.4 at September 30, 2011.
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 September 30, 2011, the Company had liquid assets
of $36 thousand.
45
Table of Contents
The following table sets forth the capital positions of the Company and the Bank at September
30, 2011:
At September 30, 2011 | ||||||||
Regulatory | ||||||||
Threshold | ||||||||
For Well | ||||||||
Actual | Capitalized | |||||||
Central Bancorp: |
||||||||
Tier 1 Leverage |
10.32 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
16.28 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
17.51 | % | 10.0 | % | ||||
Central Co-operative Bank: |
||||||||
Tier 1 Leverage |
9.26 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
14.62 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
15.85 | % | 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, 2011 and for the six months ended September 30, 2011, 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, 2011. 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, 2011.
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.
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.
46
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits against the Company considered
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, 2011, as filed with the SEC on June 17, 2011. At September 30,
2011, 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 September 30,
2011.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Item 5. Other Information
Not applicable.
Item 6. Exhibits
3.1
|
Articles of Amendment to the Articles of Organization of Central Bancorp, Inc. for the Series B Senior Non-Cumulative Perpetual Preferred Stock (1) | |
10.1
|
Securities Purchase Agreement, dated August 25, 2011 between Central Bancorp, Inc. and the Secretary of the Treasury with respect to the Series B Senior Non-Cumulative Perpetual Preferred Stock (1) | |
10.2
|
Repurchase Letter, dated August 25, 2011 between Central Bancorp, Inc. and the United States Department of the Treasury with respect to the Series A Fixed Rate Cumulative Perpetual Preferred Stock (1) | |
31.1
|
Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer | |
32.0
|
Section 1350 Certifications | |
101*
|
The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Changes in Stockholders Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text. |
(1) | Incorporated herein by reference to the Companys Current Report on Form 8-K filed on August 29, 2011 (File No. 0-25251). | |
* | Furnished, not filed. |
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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 |
||||
November 14, 2011 | By: | /s/ John D. Doherty | ||
John D. Doherty | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) |
||||
November 14, 2011 | By: | /s/ Paul S. Feeley | ||
Paul S. Feeley | ||||
Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |