Attached files
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EXCEL - IDEA: XBRL DOCUMENT - CENTRAL BANCORP INC /MA/ | Financial_Report.xls |
EX-32 - EX-32 - CENTRAL BANCORP INC /MA/ | b86849exv32.htm |
EX-31.2 - EX-31.2 - CENTRAL BANCORP INC /MA/ | b86849exv31w2.htm |
EX-31.1 - EX-31.1 - CENTRAL BANCORP INC /MA/ | b86849exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 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
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
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 (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).Yes o
No þ
Common Stock, $1.00 par value | 1,681,071 | |
Class | Outstanding at August 11, 2011 |
CENTRAL BANCORP, INC.
FORM 10-Q
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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) | June 30, 2011 | March 31, 2011 | ||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,251 | $ | 3,728 | ||||
Short-term investments |
21,963 | 37,190 | ||||||
Cash and cash equivalents |
25,214 | 40,918 | ||||||
Investment securities available for sale, at fair value (Note 2) |
27,479 | 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 |
37,573 | 35,279 | ||||||
Loans held for sale |
196 | | ||||||
Loans (Note 3) |
417,756 | 394,217 | ||||||
Less allowance for loan losses |
(4,418 | ) | (3,892 | ) | ||||
Loans, net |
413,338 | 390,325 | ||||||
Accrued interest receivable |
1,399 | 1,496 | ||||||
Banking premises and equipment, net |
2,637 | 2,705 | ||||||
Deferred tax asset, net |
3,714 | 3,600 | ||||||
Other real estate owned |
132 | 132 | ||||||
Goodwill |
2,232 | 2,232 | ||||||
Bank-owned life insurance (Note 11) |
7,041 | 6,972 | ||||||
Other assets |
3,762 | 3,966 | ||||||
Total assets |
$ | 497,238 | $ | 487,625 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits (Note 4) |
$ | 317,499 | $ | 309,077 | ||||
Federal Home Loan Bank advances |
117,321 | 117,351 | ||||||
Subordinated debentures (Note 5) |
11,341 | 11,341 | ||||||
Advanced payments by borrowers for taxes and insurance |
1,782 | 1,387 | ||||||
Accrued expenses and other liabilities |
2,139 | 1,348 | ||||||
Total liabilities |
450,082 | 440,504 | ||||||
Commitments and Contingencies (Note 7) |
||||||||
Stockholders equity: |
||||||||
Preferred stock Series A Cumulative Perpetual, $1.00 par value;
5,000,000 shares authorized; 10,000 shares issued and outstanding, with
a liquidation preference and redemption value of $10,064 at June 30,
2011 and March 31, 2011 |
9,740 | 9,709 | ||||||
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,681,071
shares issued and outstanding at June 30, 2011 and March 31, 2011 |
1,681 | 1,681 | ||||||
Additional paid-in capital |
4,627 | 4,589 | ||||||
Retained income |
35,292 | 35,288 | ||||||
Accumulated other comprehensive income (Note 6) |
682 | 892 | ||||||
Unearned compensation Employee Stock Ownership Plan |
(4,866 | ) | (5,038 | ) | ||||
Total stockholders equity |
47,156 | 47,121 | ||||||
Total liabilities and stockholders equity |
$ | 497,238 | $ | 487,625 | ||||
See accompanying notes to unaudited consolidated financial statements.
1
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
June 30, | ||||||||
(In Thousands, Except Share and Per Share Data) | 2011 | 2010 | ||||||
Interest and dividend income: |
||||||||
Mortgage loans |
$ | 5,298 | $ | 6,466 | ||||
Other loans |
38 | 68 | ||||||
Investments |
233 | 303 | ||||||
Short-term investments |
14 | 8 | ||||||
Total interest and dividend income |
5,583 | 6,845 | ||||||
Interest expense: |
||||||||
Deposits |
388 | 715 | ||||||
Advances from Federal Home Loan Bank of Boston |
1,090 | 1,357 | ||||||
Other borrowings |
137 | 138 | ||||||
Total interest expense |
1,615 | 2,210 | ||||||
Net interest and dividend income |
3,968 | 4,635 | ||||||
Provision for loan losses |
500 | 300 | ||||||
Net interest and dividend income after
provision for loan losses |
3,468 | 4,335 | ||||||
Noninterest income: |
||||||||
Deposit service charges |
240 | 253 | ||||||
Net gain from sales and write-downs
of investment securities |
490 | 43 | ||||||
Net gains on sales of loans |
9 | 42 | ||||||
Bank-owned life insurance |
72 | 72 | ||||||
Other |
94 | 118 | ||||||
Total noninterest income |
905 | 528 | ||||||
Noninterest expenses: |
||||||||
Salaries and employee benefits |
2,595 | 2,133 | ||||||
Occupancy and equipment |
529 | 506 | ||||||
Data processing fees |
202 | 204 | ||||||
Professional fees |
178 | 295 | ||||||
FDIC deposit insurance premiums |
102 | 140 | ||||||
Advertising and marketing |
32 | 64 | ||||||
Other expenses |
407 | 410 | ||||||
Total noninterest expenses |
4,045 | 3,752 | ||||||
Income before income taxes |
328 | 1,111 | ||||||
Provision for income taxes |
92 | 372 | ||||||
Net income |
$ | 236 | $ | 739 | ||||
Net income available to common shareholders |
$ | 80 | $ | 585 | ||||
Earnings per common share basic (Note 9) |
$ | 0.05 | $ | 0.39 | ||||
Earnings per common share diluted (Note 9) |
$ | 0.05 | $ | 0.37 | ||||
Weighted average common shares outstanding basic |
1,530,547 | 1,495,120 | ||||||
Weighted average common and equivalent shares
outstanding diluted |
1,686,755 | 1,584,794 |
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)
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Number of | Number of | Accumulated | ||||||||||||||||||||||||||||||||||
Shares of Series | Series A | Shares of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||
A Preferred | Preferred | Common | Common | Paid-In | Retained | Comprehensive | Compensation- | Stockholders | ||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Capital | Income | Income | ESOP | Equity | ||||||||||||||||||||||||||||
Three Months Ended June 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 |
| | | | | 739 | | | 739 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax benefit of $240: |
||||||||||||||||||||||||||||||||||||
Unrealized loss on securities, net of reclassification
adjustment
(Note 6) |
| | | | | | (344 | ) | | (344 | ) | |||||||||||||||||||||||||
Comprehensive income |
395 | |||||||||||||||||||||||||||||||||||
Dividends paid to common stockholders ($0.05 per share) |
| | | | | (75 | ) | | | (75 | ) | |||||||||||||||||||||||||
Preferred stock accretion of discount and
issuance costs |
| 29 | | | | (29 | ) | | | | ||||||||||||||||||||||||||
Dividends paid on preferred stock |
| | | | | (125 | ) | | | (125 | ) | |||||||||||||||||||||||||
Stock-based compensation (Note 10) |
| | | | 100 | | | | 100 | |||||||||||||||||||||||||||
Amortization of unearned compensation ESOP |
| | | | (117 | ) | | | 172 | 55 | ||||||||||||||||||||||||||
Balance at June 30, 2010 |
10,000 | $ | 9,618 | 1,667,151 | $ | 1,667 | $ | 4,274 | $ | 34,992 | $ | 466 | $ | (5,554 | ) | $ | 45,463 | |||||||||||||||||||
Number of | Number of | Accumulated | ||||||||||||||||||||||||||||||||||
Shares of Series | Series A | Shares of | Additional | Other | Unearned | Total | ||||||||||||||||||||||||||||||
A Preferred | Preferred | Common | Common | Paid-In | Retained | Comprehensive | Compensation- | Stockholders | ||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Capital | Income | Income | ESOP | Equity | ||||||||||||||||||||||||||||
Three Months Ended June 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 |
| | | | | 236 | | | 236 | |||||||||||||||||||||||||||
Other comprehensive loss, net of tax benefit of $114: |
||||||||||||||||||||||||||||||||||||
Unrealized loss on securities, net of reclassification
adjustment
(Note 6) |
| | | | | | (210 | ) | | (210 | ) | |||||||||||||||||||||||||
Comprehensive income |
26 | |||||||||||||||||||||||||||||||||||
Dividends paid to common stockholders ($0.05 per share) |
| | | | | (76 | ) | | | (76 | ) | |||||||||||||||||||||||||
Preferred stock accretion of discount and
issuance costs |
| 31 | | | | (31 | ) | | | | ||||||||||||||||||||||||||
Dividends paid on preferred stock |
| | | | | (125 | ) | | | (125 | ) | |||||||||||||||||||||||||
Stock-based compensation (Note 10) |
| | | | 108 | | | | 108 | |||||||||||||||||||||||||||
Amortization of unearned compensation ESOP |
| | | | (70 | ) | | | 172 | 102 | ||||||||||||||||||||||||||
Balance at June 30, 2011 |
10,000 | $ | 9,740 | 1,681,071 | $ | 1,681 | $ | 4,627 | $ | 35,292 | $ | 682 | $ | (4,686 | ) | $ | 47,156 | |||||||||||||||||||
See accompanying notes to consolidated financial statements
3
Table of Contents
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
June 30, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 236 | $ | 739 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
145 | 162 | ||||||
Amortization of premiums |
33 | 57 | ||||||
Provision for loan losses |
500 | 300 | ||||||
Stock-based compensation and amortization of unearned compensation ESOP |
210 | 155 | ||||||
Net gains from sales of investment securities |
(490 | ) | (43 | ) | ||||
Bank-owned life insurance income |
(72 | ) | (72 | ) | ||||
Gain on sale of OREO |
| (2 | ) | |||||
Gains on sales of loans held for sale |
(9 | ) | (42 | ) | ||||
Originations of loans held for sale |
(806 | ) | (5,626 | ) | ||||
Proceeds from sale of loans originated for sale |
619 | 5,053 | ||||||
Decrease in accrued interest receivable |
97 | 248 | ||||||
Decrease in other assets, net |
206 | 109 | ||||||
Increase in accrued expenses and other liabilities, net |
791 | 395 | ||||||
Net cash provided by operating activities |
1,460 | 1,433 | ||||||
Cash flows from investing activities: |
||||||||
Loan principal (originations) collections, net |
(23,513 | ) | 13,294 | |||||
Principal payments on mortgage-backed securities |
1,372 | 2,241 | ||||||
Proceeds from sales of investment securities |
6,310 | 2,002 | ||||||
Purchases of investment securities |
(9,842 | ) | | |||||
Proceeds from sales of OREO |
| 62 | ||||||
Purchase of banking premises and equipment |
( 77 | ) | ( 244 | ) | ||||
Net cash (used in) provided by investing activities |
(25,750 | ) | 17,355 | |||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in deposits |
8,422 | (5,257 | ) | |||||
Increase (decrease) in advance payments by borrowers for taxes and insurance |
395 | (61 | ) | |||||
Repayment of advances from FHLB of Boston |
(30 | ) | (11,029 | ) | ||||
Cash dividends paid |
(201 | ) | (200 | ) | ||||
Net cash provided by (used in) financing activities |
8,586 | (16,547 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(15,704 | ) | 2,241 | |||||
Cash and cash equivalents at beginning of period |
40,918 | 16,536 | ||||||
Cash and cash equivalents at end of period |
$ | 25,214 | $ | 18,777 | ||||
Cash paid (received) during the period for: |
||||||||
Interest |
$ | 1,629 | $ | 2,285 | ||||
Income taxes |
(609 | ) | | |||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Accretion of Series A preferred stock issuance costs |
31 | 29 |
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
CENTRAL BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
June 30, 2011
Notes to Unaudited Consolidated Financial Statements
June 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 three months ended June 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.
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 June 30,
2011, are summarized as follows:
June 30, 2011 | ||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Government agency and
government sponsored
enterprise
mortgage-backed
securities |
$ | 19,276 | $ | 492 | $ | (23 | ) | $ | 19,745 | |||||||
Single issuer trust
preferred securities
issued by financial
institutions |
1,001 | 38 | | 1,039 | ||||||||||||
Total debt securities |
20,277 | 530 | (23 | ) | 20,784 | |||||||||||
Perpetual preferred
stock issued by
financial institutions |
3,069 | 180 | (58 | ) | 3,191 | |||||||||||
Common stock |
3,273 | 292 | (61 | ) | 3,504 | |||||||||||
Total |
$ | 26,619 | $ | 1,002 | $ | (142 | ) | $ | 27,479 | |||||||
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 three-month period ended June 30, 2011, no available for sale securities were
determined to be other-than-temporarily impaired. During the three month period ended June 30,
2010, two common stock holdings were determined to be other-than-temporarily impaired and their
book values were reduced to their fair values of $118 thousand through an impairment charge of $108
thousand included in Net gain from sales and write-downs of investment securities in the
consolidated statement of income.
Temporarily impaired securities as of June 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 |
$ | 3,270 | $ | (14 | ) | $ | 295 | $ | (9 | ) | ||||||
Perpetual
preferred stock issued by financial
institutions |
| | 959 | (58 | ) | |||||||||||
Common stock |
692 | (49 | ) | 124 | (12 | ) | ||||||||||
Total temporarily impaired securities |
$ | 3,962 | $ | (63 | ) | $ | 1,378 | $ | (79 | ) | ||||||
The Company had one preferred stock investment currently in an unrealized loss position for
longer than twelve months for which the fair value has increased during the three months ended June
30, 2011. The preferred stock had a loss to book value ratio of 5.7% at June 30, 2011 compared to
a loss to book value ratio of 7.8% 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 June 30, 2011.
The Company had one debt security in an unrealized loss position as of June 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 $295 thousand and an unrealized loss of $9 thousand as of
June 30, 2011. This debt security is a government agency mortgagebacked security. Management
currently does not have the intent to sell these securities and it is
6
Table of Contents
more likely that it will not have to sell these securities before recovery of their cost
basis. Based on managements analysis of these securities, it has been determined that none of the
securities are other-than-temporarily impaired as of March 31, 2011.
The Company had nine equity securities with a fair value of $3.6 million and unrealized losses
of $23 thousand which were temporarily impaired at June 30, 2011. The total unrealized losses
relating to these securities represent approximately 6.9% 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 nine
securities, two have been in a continuous unrealized loss position for greater than twelve months
aggregating $12 thousand at June 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 June 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 June 30, 2011 are as follows:
Amortized | Fair | Annual | ||||||||||
Cost | Value | Yield | ||||||||||
(Dollars in Thousands) | ||||||||||||
Government agency and government sponsored
enterprise mortgage-backed securities |
||||||||||||
Due after one year but within five years |
$ | 937 | $ | 956 | 3.93 | % | ||||||
Due after five years but within ten years |
2,014 | 2,028 | 2.76 | |||||||||
Due after ten years |
16,325 | 16,761 | 3.95 | |||||||||
Total |
19,276 | 19,745 | ||||||||||
Single issuer trust preferred securities issued by
financial institutions: |
||||||||||||
Due after ten years |
1,001 | 1,039 | 7.78 | % | ||||||||
Total |
$ | 20,277 | $ | 20,784 | ||||||||
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 $1.1 million and a fair value of $1.2
million at June 30, 2011, were pledged to provide collateral for certain customers. Investment
securities carried at $2.6 million were pledged under a blanket lien to partially secure the Banks
advances from the FHLB of Boston. Additionally, investment securities carried at $2.6 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 was required to invest
in stock of the FHLBB in an amount which, until April 2004, was equal to 1% of its outstanding home
loans or 1/20th of its outstanding advances from the FHLBB, whichever was higher. In April 2004,
the FHLBB amended its capital structure at which time the Companys FHLBB stock was converted to
Class B stock.
The Company views its investment in the FHLBB stock as a long-term investment. Accordingly,
when evaluating for impairment, the value is determined based on the ultimate recovery of the par
value rather than recognizing temporary declines in value. The determination of whether a decline
affects the ultimate recovery is influenced by criteria such as: (1) the significance of the
decline in net assets of the FHLBB as compared to the
7
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capital stock amount and length of time a decline has persisted; (2) impact of legislative and
regulatory changes on the FHLBB and (3) the liquidity position of the FHLBB.
The FHLB of Boston reported earnings for 2010 of approximately $107 million after two
consecutive years of losses. During February and May 2011, the FHLB of Boston declared dividends
based upon average stock outstanding for the fourth quarter of 2010 and the first quarter of 2011,
respectively. The FHLB of Bostons 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 FHLB of Bostons 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 FHLB of Boston. The other two FHLBs previously had been downgraded to AA+.
The Company does not believe that its investment in the FHLBB is impaired as of June 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 June 30, 2011 loans held for sale totaled $196 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. Mandatory delivery contracts are accounted for as derivative instruments.
Accordingly, 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.
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
8
Table of Contents
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 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 (ASC) 310 Receivables (ASC 310). If management does not believe that any separate
reserve for such loan is
9
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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 | ||
■ | 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 June
30, 2011, the commercial real estate concentration ratio was 309%, 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.
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Table of Contents
During the three months ended June 30, 2011, management increased the ASC 450 loss factors
related to changes in collateral values for residential and home equity loans. As a result of
those changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of
$25 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 June 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 June 30, 2011 and March 31, 2011, the reserve for unfunded commitments was not
significant.
Loans, excluding loans held for sale, as of June 30, 2011 and March 31, 2011 are summarized
below (in thousands):
June 30, | March 31, | |||||||
2011 | 2011 | |||||||
Real estate loans: |
||||||||
Residential real estate (1- 4 family) |
$ | 220,215 | $ | 183,157 | ||||
Commercial real estate |
185,405 | 199,074 | ||||||
Land and Construction |
449 | 456 | ||||||
Home equity lines of credit |
8,717 | 8,426 | ||||||
Total real estate loans |
414,786 | 391,113 | ||||||
Commercial loans |
2,090 | 2,212 | ||||||
Consumer loans |
880 | 892 | ||||||
Total loans |
417,756 | 394,217 | ||||||
Less: allowance for loan losses |
(4,418 | ) | (3,892 | ) | ||||
Total loans, net |
$ | 413,338 | $ | 390,325 | ||||
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The following is a summary of the activity in the allowance for loan losses and loans by
loan portfolio segment for the three months ended June 30, 2011 and 2010 (in thousands):
For the Three Months Ending June 30, 2011 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Residential | and | |||||||||||||||||||||||
Real | Construction | Commercial | Consumer | |||||||||||||||||||||
Estate | Real Estate | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 816 | $ | 2,771 | $ | 16 | $ | 17 | $ | 272 | $ | 3,892 | ||||||||||||
Charge offs |
| | | (5 | ) | | (5 | ) | ||||||||||||||||
Recoveries |
30 | | | 1 | | 31 | ||||||||||||||||||
Provision |
410 | 256 | (1 | ) | 2 | (167 | ) | 500 | ||||||||||||||||
Ending balance |
$ | 1,256 | $ | 3,027 | $ | 15 | $ | 15 | $ | 105 | $ | 4,418 | ||||||||||||
For the Three Months Ending June 30, 2010 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Residential | and | |||||||||||||||||||||||
Real | Construction | Commercial | Consumer | |||||||||||||||||||||
Estate | Real Estate | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Beginning balance |
$ | 853 | $ | 2,037 | $ | 44 | $ | 22 | $ | 82 | $ | 3,038 | ||||||||||||
Charge offs |
| | | (3 | ) | | (3 | ) | ||||||||||||||||
Recoveries |
| | | 1 | | 1 | ||||||||||||||||||
Provision |
(14 | ) | 227 | (9 | ) | | 96 | 300 | ||||||||||||||||
Ending balance |
$ | 839 | $ | 2,264 | $ | 35 | $ | 20 | $ | 178 | $ | 3,336 | ||||||||||||
The increased provision for loan losses during the quarter ended June 30, 2011 compared
to the quarter ended June 30, 2010 was primarily due to increased allocated reserves for two
commercial loans with balances of $892 thousand at June 2011 and three residential loans with
balances of $740 thousand at June 30, 2011.
Financing Receivables on Nonaccrual Status as of:
June 30, | March 31, | |||||||
2011 | 2011 | |||||||
(In Thousands) | ||||||||
Commercial real estate: |
||||||||
Mixed Use |
$ | 2,221 | $ | 1,616 | ||||
Industrial (other) |
1,464 | 1,500 | ||||||
Retail |
| 769 | ||||||
Apartments |
2,732 | 2,757 | ||||||
Residential: |
||||||||
Residential (1-4 family) |
2,765 | 2,587 | ||||||
Condominium |
740 | 352 | ||||||
Commercial |
| | ||||||
$ | 9,922 | $ | 9,581 | |||||
Total nonaccrual loans include nonaccrual impaired loans as well as certain nonaccrual
residential loans that are not considered impaired.
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Table of Contents
The following is an age analysis of past due loans as of June 30, 2011 and March 31, 2011, by
loan portfolio classes (in thousands):
Age Analysis of Past Due Financing Receivables | ||||||||||||||||||||||||
as of June 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 |
$ | | $ | 381 | $ | 2,221 | $ | 2,602 | 33,298 | $ | 35,900 | |||||||||||||
Apartments |
| 2,404 | 2,732 | 5,136 | 66,213 | 71,349 | ||||||||||||||||||
Industrial (other) |
693 | | 1,464 | 2,157 | 33,947 | 36,104 | ||||||||||||||||||
Retail |
| | | | 26,336 | 26,336 | ||||||||||||||||||
Offices |
| | | | 15,520 | 15,520 | ||||||||||||||||||
Commercial real estate
(construction) |
| | | | 449 | 449 | ||||||||||||||||||
Residential: |
||||||||||||||||||||||||
Residential real estate Loans |
1,058 | | 2,765 | 3,823 | 187,508 | 191,331 | ||||||||||||||||||
Residential (condominium) |
| | 740 | 740 | 28,340 | 29,080 | ||||||||||||||||||
Home Equity Lines of Credit |
| | | | 8,717 | 8,717 | ||||||||||||||||||
Commercial and Industrial Loans |
| | | | 2,090 | 2,090 | ||||||||||||||||||
Consumer Loans |
| | | | 880 | 880 | ||||||||||||||||||
$ | 1,751 | $ | 2,785 | $ | 9,922 | $ | 14,458 | $ | 403,298 | $ | 417,756 | |||||||||||||
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 |
| | 769 | 769 | 28,276 | 29,045 | ||||||||||||||||||
Offices |
| | | | 15,235 | 15,235 | ||||||||||||||||||
Land |
| | | | 456 | 456 | ||||||||||||||||||
Residential: |
||||||||||||||||||||||||
Residential real estate loans |
782 | 247 | 2,587 | 3,616 | 152,978 | 156,594 | ||||||||||||||||||
Residential (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 | $ | 9,581 | $ | 11,270 | $ | 382,947 | $ | 394,217 | |||||||||||||
There were no loans which were past due 90 days or more and still accruing interest as of June
30, 2011 and March 31, 2011.
13
Table of Contents
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 June 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 is individually evaluated for impairment. At June 30, 2011 and March 31, 2011
there were no loans classified as doubtful or loss.
The following table displays the loan portfolio by credit quality indicators as of June 30,
2011 and March 31, 2011(in thousands):
Credit Quality Indicators as of June 30, 2011
Home | ||||||||||||||||||||||||||||
Commercial | Equity | |||||||||||||||||||||||||||
and | Residential | Lines of | Commercial | Consumer | ||||||||||||||||||||||||
Industrial | Real Estate | Credit | Real Estate | Land | Loans | Total | ||||||||||||||||||||||
Pass |
$ | 2,090 | $ | 215,265 | $ | 8,717 | $ | 165,871 | $ | 449 | $ | 880 | $ | 393,272 | ||||||||||||||
Special mention |
| | | 2,598 | | | 2,598 | |||||||||||||||||||||
Substandard |
| 5,146 | | 16,740 | | | 21,886 | |||||||||||||||||||||
$ | 2,090 | $ | 220,411 | $ | 8,717 | $ | 185,209 | $ | 449 | $ | 880 | $ | 417,756 | |||||||||||||||
Credit Quality Indicators as of March 31, 2011
Home | ||||||||||||||||||||||||||||
Commercial | Equity | |||||||||||||||||||||||||||
and | Residential | Lines of | Commercial | Consumer | ||||||||||||||||||||||||
Industrial | Real Estate | Credit | Real Estate | Land | Land | Total | ||||||||||||||||||||||
Pass |
$ | 2,212 | $ | 181,587 | $ | 8,426 | $ | 188,917 | $ | 456 | $ | 892 | $ | 382,490 | ||||||||||||||
Special mention |
| 1,570 | | 7,128 | | | 8,698 | |||||||||||||||||||||
Substandard |
| | | 3,029 | | | 3,029 | |||||||||||||||||||||
$ | 2,212 | $ | 183,157 | $ | 8,426 | $ | 199,074 | $ | 456 | $ | 892 | $ | 394,217 | |||||||||||||||
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Table of Contents
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 June 30, 2011 and March 31,
2011, (in thousands):
Non-impaired CRE Loans by Collateral Type and LTV Ratio as of June 30, 2011
Industrial | ||||||||||||||||||||||||
Apartments | Offices | Mixed Use | (Other) | Retail | Total | |||||||||||||||||||
< 40% |
$ | 12,091 | $ | 1,263 | $ | 10,328 | $ | 6,551 | $ | 6,736 | $ | 36,969 | ||||||||||||
40% - 60% |
21,808 | 8,386 | 7,845 | 9,574 | 12,294 | 59,907 | ||||||||||||||||||
> 60% |
28,973 | 5,459 | 15,758 | 9,111 | 4,799 | 64,100 | ||||||||||||||||||
Participations |
604 | | | 9,280 | 475 | 10,359 | ||||||||||||||||||
Total |
$ | 63,476 | $ | 15,108 | $ | 33,931 | $ | 34,516 | $ | 24,304 | $ | 171,335 | ||||||||||||
Non-impaired CRE Loans by Collateral Type and LTV Ratio as of March 31, 2011
Industrial | ||||||||||||||||||||||||
Apartments | Offices | Mixed Use | (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 | ||||||||||||
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Table of Contents
The following is a summary of the allowance for loan losses and loans as of June 30, 2011
and March 31, 2011, by loan portfolio segment disaggregated by impairment method (in thousands):
Allowance for Loan Losses as of June 30, 2011 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Residential | Real Estate | Commercial | Consumer | |||||||||||||||||||||
Real Estate | And Land | Loans | Loans | Unallocated | Total | |||||||||||||||||||
Allowance for loan
losses ending
balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 345 | $ | 1,646 | $ | | $ | | $ | | $ | 1,991 | ||||||||||||
Collectively
evaluated for
impairment |
913 | 1,381 | 15 | 14 | 104 | 2,427 | ||||||||||||||||||
$ | 1,258 | $ | 3,027 | $ | 15 | $ | 14 | $ | 104 | $ | 4,418 | |||||||||||||
Loans ending balance: |
||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 4,287 | $ | 13,745 | $ | | $ | | $ | | $ | 18,032 | ||||||||||||
Collectively
evaluated for
impairment |
224,489 | 172,628 | 602 | 2,005 | | 399,724 | ||||||||||||||||||
$ | 228,776 | $ | 186,373 | $ | 602 | $ | 2,005 | $ | | $ | 417,756 | |||||||||||||
Allowance for Loan Losses as of March 31, 2011 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Residential | Real Estate | |||||||||||||||||||||||
Real | and | Commercial | Consumer | |||||||||||||||||||||
Estate | 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 |
187,833 | 187,572 | 690 | 2,048 | | 378,143 | ||||||||||||||||||
$ | 191,421 | $ | 200,058 | $ | 690 | $ | 2,048 | $ | | $ | 394,217 | |||||||||||||
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The following is a summary of impaired loans and their related allowances within the
allowance for loan losses as of June 30, 2011 and March 31, 2011, (in thousands):
Impaired Loans and Their Related Allowances as of June 30, 2011 | ||||||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||||||
Recorded | Principal | Related | Partial | Recorded | Income | |||||||||||||||||||
Investment* | Balance | Allowance | Charge-offs | Investment | Recognized | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Residential 1-4 Family |
$ | 2,315 | $ | 2,312 | $ | | $ | 3 | $ | 2,113 | $ | 9 | ||||||||||||
Commercial Real Estate and
Multi-Family |
7,971 | 7,943 | | | 7,635 | 30 | ||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Residential 1-4 Family |
1,976 | 2,140 | 345 | 162 | 1,596 | 1 | ||||||||||||||||||
Commercial Real Estate and
Multi-Family |
5,804 | 6,186 | 1,646 | 384 | 4,824 | | ||||||||||||||||||
Total |
||||||||||||||||||||||||
Residential 1-4 Family |
4,291 | 4,452 | 345 | 165 | 3,709 | 10 | ||||||||||||||||||
Commercial Real Estate and
Multi-Family |
$ | 13,775 | $ | 14,129 | $ | 1,646 | $ | 384 | $ | 12,459 | $ | 30 |
* | Includes accrued interest, specific reserves and net unearned deferred fees and costs. |
Impaired Loans and Their Related Allowances as of March 31, 2011 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment* | Balance | Allowance | ||||||||||
With no related allowance recorded: |
||||||||||||
Residential 1-4 Family |
$ | 2,119 | $ | 2,123 | $ | | ||||||
Commercial Real Estate and Multi-Family |
8,894 | 8,920 | | |||||||||
Commercial Loans |
| | | |||||||||
With an allowance recorded: |
||||||||||||
Residential 1-4 Family |
1,468 | 1,630 | 110 | |||||||||
Commercial Real Estate and Multi-Family |
3,629 | 4,580 | 1,307 | |||||||||
Total |
||||||||||||
Residential 1-4 Family |
3,587 | 3,753 | 110 | |||||||||
Commercial Real Estate and Multi-Family |
$ | 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. All loans modified in troubled debt restructurings are included in
impaired loans.
During the three months ended June 30, 2011, two loans were modified in troubled debt
restructurings comprised of one residential real estate loan relationship which totaled $200
thousand as of June 30, 2011, and one commercial real estate loan relationship which totaled $415
thousand as of June 30, 2011. At June 30, 2011 total TDRs amounted to $11.8 million and were
comprised of eight residential real estate loan relationships which totaled $2.5 million and seven
commercial real estate loan relationships which totaled $9.3 million. Additionally, at June 30,
2011, total accruing TDRs amounted to $7.3 million and total nonaccruing TDRs amounted to $4.5
million.
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(4) Deposits
Deposits at June 30, 2011 and March 31, 2011 are summarized as follows (in thousands):
June 30, | March 31, | |||||||
2011 | 2011 | |||||||
Demand deposit accounts |
$ | 45,815 | $ | 40,745 | ||||
NOW accounts |
32,711 | 28,989 | ||||||
Passbook and other savings accounts |
57,152 | 55,326 | ||||||
Money market deposit accounts |
68,021 | 76,201 | ||||||
Total non-certificate accounts |
203,699 | 201,261 | ||||||
Term deposit certificates: |
||||||||
Certificates of $100,000 and above |
50,195 | 40,843 | ||||||
Certificates of less than $100,000 |
63,605 | 66,973 | ||||||
Total term deposit certificates |
113,800 | 107,816 | ||||||
Total deposits |
$ | 317,499 | $ | 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 June 30, 2011 the interest rate was
2.69%. 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, 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.
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Table of Contents
(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 and related tax effect for the three months ended
June 30, 2011 and 2010 are as follows (in thousands):
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
Before | Tax | After | Before | Tax | After | |||||||||||||||||||
Tax | Expense | Tax | Tax | Expense | Tax | |||||||||||||||||||
Amount | (Benefit) | Amount | Amount | (Benefit) | Amount | |||||||||||||||||||
Unrealized losses on securities: |
||||||||||||||||||||||||
Unrealized net holding gains (losses)
during period |
$ | 166 | $ | 83 | $ | 83 | $ | (541 | ) | $ | (222 | ) | $ | (319 | ) | |||||||||
Less: reclassification adjustment for
net gains included in net income |
490 | 197 | 293 | 43 | 18 | 25 | ||||||||||||||||||
Other comprehensive loss |
$ | (324 | ) | $ | (114 | ) | $ | (210 | ) | $ | (584 | ) | $ | (240 | ) | $ | (344 | ) | ||||||
(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.
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 June 30, 2011 and March 31, 2011
included the following (In Thousands):
At June 30, | At March 31 | |||||||
2011 | 2011 | |||||||
Unused lines of credit |
$ | 14,842 | $ | 15,940 | ||||
Unadvanced portions of commercial loans |
529 | 459 | ||||||
Commitments to originate residential mortgage loans |
19,612 | 11,232 | ||||||
Commitments to sell residential mortgage loans |
1,191 | 595 | ||||||
Total off-balance sheet commitments |
$ | 36,174 | $ | 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-
19
Table of Contents
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 June 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 July 21, 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 August 19, 2011 to common
stockholders of record as of August 5, 2011. Also on July 21, 2011, the Companys Board of
Directors approved the payment of a quarterly cash dividend of $125 thousand to the U.S. Department
of Treasury, as the Companys sole preferred stockholder, in connection with the Companys
participation in the federal governments Troubled Asset Relief Program (TARP) Capital Purchase
Program. See Note 14 below for additional information.
On August 2, 2011, the Company announced that it has received preliminary approval to receive
an investment of up to $10.0 million in the Companys preferred stock from the United States
Department of the Treasury under the Small Business Lending Fund (the SBLF). The SBLF is a
voluntary program intended to encourage small business lending by providing capital to qualified
community banks at favorable rates. The Company intends to use up to $10.0 million in SBLF funds
to redeem the shares of preferred stock issued to the Treasury under the TARP Capital Purchase
Program. Subject to review of the SBLF documentation by the Company and final due diligence by the
Treasury, the Company expects to seek the full amount of the approved investment. Closing is
expected to occur during August 2011.
Management has reviewed events through the issuance of the interim financial statements,
concluding that no other subsequent events have occurred which would require accrual or disclosure.
(9) Earnings Per Share (EPS)
Unallocated shares of Company common stock held by the Central Co-operative Bank Employee
Stock Ownership Plan Trust (the ESOP) are not treated as being outstanding in the computation of
either basic or diluted earnings per share (EPS). At June 30, 2011 and 2010, there were
approximately 149,000 and 170,000 unallocated ESOP shares, respectively.
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Table of Contents
The following depicts a reconciliation of earnings per share:
Three Months Ended | ||||||||
June 30, 2011 | ||||||||
2011 | 2010 | |||||||
(Amounts in thousands except share | ||||||||
and per share amounts) | ||||||||
Net income as reported |
$ | 236 | $ | 739 | ||||
Less preferred dividends and accretion |
(156 | ) | (154 | ) | ||||
Net income available to common stockholders |
$ | 80 | $ | 585 | ||||
Weighted average number of common shares outstanding |
1,681,071 | 1,667,151 | ||||||
Weighted average number of unallocated ESOP shares |
(150,524 | ) | (172,031 | ) | ||||
Weighted average number of common shares outstanding
used in calculation of basic earnings per share |
1,530,547 | 1,495,120 | ||||||
Incremental shares from the assumed exercise of dilutive
securities |
156,208 | 89,674 | ||||||
Weighted average number of common shares outstanding used in
calculating diluted earnings per share |
1,686,755 | 1,584,794 | ||||||
Earnings per common share |
||||||||
Basic |
$ | 0.05 | $ | 0.39 | ||||
Diluted |
$ | 0.05 | $ | 0.37 | ||||
At June 30, 2011, 34,458 stock options were anti-dilutive and therefore excluded from the
above calculations for the three-month period ended June 30, 2011. At June 30, 2010, 41,669 stock
options were anti-dilutive and, therefore, excluded from the above calculation for the three-month
period ended June 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
June 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.
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
21
Table of Contents
Companys historical data, the Company applied a forfeiture rate of 0% to stock options
outstanding in determining stock compensation expense for the three months ended June 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 ended June 30, 2011. Stock-based compensation totaled $108,000 and
$100,000 for the three months ended June 30, 2011 and 2010, respectively.
Stock option activity was as follows for the three months ended June 30, 2011:
Number of | Weighted Average | |||||||
Shares | Exercise Price | |||||||
Outstanding at March 31, 2011 |
34,458 | $ | 29.63 | |||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
Expired |
| | ||||||
Outstanding at June 30, 2011 |
34,458 | $ | 29.63 | |||||
Exercisable at June 30, 2011 |
32,458 | $ | 29.53 | |||||
As of June 30, 2011, the Company expects all non-vested stock options to vest over their
remaining vesting periods.
As of June 30, 2011, the expected future compensation costs related to options and restricted
stock vesting is as follows: $194 thousand during the period of July 1, 2011 through 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 June 30, 2011 were as follows:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Remaining | ||||||||||||||||
Number | Contractual | Aggregate | ||||||||||||||
Exercise | of Shares | Life | Intrinsic | |||||||||||||
Price | Outstanding | (Years) | Value (1) | |||||||||||||
$ | 28.99 | 24,458 | (2) | 3.7 | | |||||||||||
31.20 | 10,000 | (3) | 5.2 | | ||||||||||||
Average/Total |
$ | 29.63 | 34,458 | 4.2 | $ | | ||||||||||
(1) | Represents the total intrinsic value, based on the Companys closing stock price of $20.55 on June 30, 2011, which would have been received by the option holders had all option holders exercised their options as of that date. As of June 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 June 30, 2011. |
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A summary of restricted stock activity under all Company plans for the three months ended June
30, 2011 is as follows:
Number | Weighted Average | |||||||
of Restricted | Grant Date | |||||||
Shares | Fair Value | |||||||
Non-vested at March 31, 2011 |
38,949 | $ | 15.33 | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Non-vested at June 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 $7.0 million at June 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 Company does not anticipate that the adoption of this
guidance will 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
(IFRSs). 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
23
Table of Contents
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 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.
(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 at fair value other assets on a
nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of
lower-of-cost-or market value accounting or write-downs of individual assets.
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The only assets of the Company recorded at fair value on a recurring basis at June 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 June 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 fair values of such securities and loans:
Carrying Value (In Thousands) | ||||||||||||||||
At June 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 |
$ | | $ | 19,745 | $ | | $ | 19,745 | ||||||||
Single issuer trust preferred securities issued
by financial institutions |
1,039 | | | 1,039 | ||||||||||||
Perpetual preferred stock issued by financial
institutions |
1,073 | 2,118 | | 3,191 | ||||||||||||
Common stock |
3,504 | | | 3,504 | ||||||||||||
Assets recorded at fair value on a nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value: |
||||||||||||||||
CRE |
| | 5,042 | 5,042 | ||||||||||||
Residential |
| | 773 | 773 | ||||||||||||
OREO |
| | 132 | 132 |
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 recorded at fair value on a nonrecurring basis: |
||||||||||||||||
Impaired loans carried at fair value: |
||||||||||||||||
CRE |
| | 4,566 | 4,566 | ||||||||||||
Residential |
| | 433 | 433 | ||||||||||||
OREO |
| | 132 | 132 |
There were no Level 3 securities at June 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
June 30, 2011.
At June 30, 2011, the fair value of one government sponsored enterprise preferred stock
amounting to $67 was measured using Level 1 inputs in comparison to March 31, 2011, at which time
the security had a fair value of $46 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 June 30, 2011. The fair value as of June 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 June 30, 2011, the fair value of one financial institution
preferred stock amounting to $1,074 was measured using Level 2 inputs in comparison to March 31,
2011, at which time the security had a fair value of $1,094 and was measured 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 June 30, 2011. The fair value as of June 30, 2011 was determined by matrix
pricing models based upon comparable securities, whereas the
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fair value as of June 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 three months ended June
30, 2011.
The Company measures the fair value of impaired loans on a periodic basis in periods
subsequent to its initial recognition. At June 30, 2011, impaired loans measured at fair value
using Level 3 inputs amounted to $5.8 million, which represents ten customer relationships,
compared to six customer relationships which totaled $5.0 million at March 31, 2011. There were no
impaired loans measured at fair value using Level 2 inputs at June 30, 2011 or March 31, 2011.
Level 3 inputs utilized to determine the fair value of the impaired loan relationships at June 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, appraised values of the collateral, or managements estimation of the value of the
collateral. As of June 30, 2011, the Company had one residential parcel of OREO which totaled $132
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 we believe to be appropriate in accordance with ASC 310, and such
valuations are determined by reviewing current collateral values, financial information, cash
flows, payment histories and trends and other relevant facts surrounding the particular credits.
Accrued Interest Receivable The carrying amount reported in the balance sheet for accrued
interest receivable approximates its fair value due to the short maturity of these accounts.
Stock in FHLBB The carrying amount reported in the balance sheet for FHLBB stock
approximates its fair value based on the redemption features of the stock.
The Co-operative Central Bank Reserve Fund The carrying amount reported in the balance sheet
for the Co-operative Central Bank Reserve Fund approximates its fair value.
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Deposits The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair values for term
deposit certificates are estimated using a discounted cash flow technique that applies interest
rates currently being offered on certificates to a schedule of aggregated monthly maturities on
time deposits with similar remaining maturities.
Advances from FHLBB Fair values of non-callable advances from the FHLBB are estimated based
on the discounted cash flows of scheduled future payments using the respective quarter-end
published rates for advances with similar terms and remaining maturities. Fair values of callable
advances from the FHLBB are estimated using indicative pricing provided by the FHLBB.
Subordinated Debentures The fair value of one subordinated debenture totaling $5.2 million
whose interest rate is adjustable quarterly is estimated to be equal to its book value. The other
subordinated debenture totaling $6.1 million has a fixed rate until March 15, 2017, at which time
it will convert to an adjustable rate which will adjust quarterly. The maturity date is March 15,
2037. The fair value of this subordinated debenture is estimated based on the discounted cash
flows of scheduled future payments utilizing a discount rate derived from instruments with similar
terms and remaining maturities.
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 June 30, 2011 and March 31, 2011.
The estimated carrying amounts and fair values of the Companys financial instruments are as
follows:
June 30, 2011 | March 31, 2011 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 3,251 | $ | 3,251 | $ | 3,728 | $ | 3,728 | ||||||||
Short-term investments |
21,963 | 21,963 | 37,190 | 37,190 | ||||||||||||
Investment securities |
27,479 | 27,479 | 25,185 | 25,185 | ||||||||||||
Loans held for sale |
196 | 196 | | | ||||||||||||
Net loans |
413,338 | 415,741 | 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 |
1,399 | 1,399 | 1,496 | 1,496 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 317,499 | $ | 317,806 | $ | 309,077 | $ | 300,875 | ||||||||
Advances from FHLB of Boston |
117,321 | 126,191 | 117,351 | 125,314 | ||||||||||||
Subordinated debentures |
11,341 | 8,983 | 11,341 | 8,651 | ||||||||||||
Advance payments by borrowers for taxes and insurance |
1,782 | 1,782 | 1,387 | 1,387 | ||||||||||||
Accrued interest payable |
383 | 383 | 397 | 397 |
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(14) Troubled Asset Relief Program Capital Purchase Program
On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department
of Treasury (Treasury) as a participant in the federal governments Troubled Asset Relief Program
(TARP) Capital Purchase Program. This represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary
program for healthy U.S. financial institutions designed to encourage these institutions to build
capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S.
economy. In connection with the investment, the Company entered into a Letter Agreement and the
related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i)
10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference
$1,000 per share (the Series A Preferred Stock); and (ii) a warrant (the Warrant) to purchase
234,742 shares of the Companys common stock for an aggregate purchase price of $10.0 million in
cash.
The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a
rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will
increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem
shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for
cash at a per share amount equal to the sum of the liquidation preference per share plus any
accrued and unpaid dividends to but excluding the redemption date. The Series A Preferred Stock
may be redeemed, in whole or in part, at any time and from time to time, at the option of the
Company, subject to consultation with the Companys primary federal banking regulator, provided
that any partial redemption must be for at least 25% of the issue price of the Series A Preferred
Stock. Any redemption of a share of Series A Preferred Stock would be at one hundred percent
(100%) of its issue price, plus any accrued and unpaid dividends and the Series A Preferred Stock
may be redeemed without regard to whether the Company has replaced such funds from any other source
or to any waiting period.
The Warrant is exercisable at $6.39 per share at any time on or before December 5, 2018. The
number of shares of the Companys common stock issuable upon exercise of the Warrant and the
exercise price per share will be adjusted if specific events occur. Treasury has agreed not to
exercise voting power with respect to any shares of common stock issued upon exercise of the
Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer, except that Treasury may not transfer a portion of the Warrant with
respect to, or exercise the Warrant for, more than one-half of the shares of common stock
underlying the Warrant prior to the date on which the Company has received aggregate gross proceeds
of not less than $10.0 million from one or more qualified equity offerings.
The Warrant was valued at $594,000 and was recognized as equity under ASC 815 Derivatives and
Hedging (ASC 815), and is reported within additional paid-in capital in the accompanying
consolidated balance sheets. The Company also performs accounting for the Series A Preferred Stock
and Warrant as set forth in ASC 470 Debt (ACS 470). The proceeds from the sale of the Series A
Preferred Stock was allocated between the Series A Preferred Stock and Warrant on a relative fair
value basis, resulting in the Series A Preferred Stock having a value of $9.4 million and the
Warrant having a value of $594,000. Therefore, the fair value of the Warrant has been recognized
as a discount to the Series A Preferred Stock and Warrant and such discount is being accreted over
five years using the effective yield method as set forth by ASC 505 Equity. The Warrant was valued
using the Black-Scholes options pricing model. The assumptions used to compute the fair value of
the Warrant at issuance were:
Expected life in years |
10.00 | |||
Expected volatility |
54.76 | % | ||
Dividend yield |
3.00 | % | ||
Risk-free interest rate |
2.67 | % |
Regarding the above assumptions, the expected term represents the expected period of time the
Company believes the Warrant will be outstanding. Estimates of expected future stock price
volatility are based on the historic volatility of the Companys common stock, and the dividend
yield is based on managements estimation of the Companys common stock dividend yield during the
next ten years. The risk-free interest rate is based on the U.S. Treasury 10-year rate.
See Note 8 Subsequent Events for additional information relating to the Companys
participation in the TARP Capital Purchase Program.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements discussion and analysis of the financial condition and results of operations is
intended to assist in understanding the financial condition and results of operations of Central
Bancorp, Inc. (the Company or Central Bancorp). The information contained in this section
should be read in conjunction with the unaudited consolidated financial statements and footnotes
appearing in Part I, Item 1 of this Form 10-Q.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe
future plans, strategies and expectations of the Company. These forward-looking statements are
generally identified by use of the words believe, expect, intend, anticipate, estimate,
project or similar expressions. The Companys ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations of the Company and its subsidiaries include, but are not limited to:
recent and future bail-out actions by the government; the impact of the Companys participation in
the U.S. Department of Treasurys TARP Capital Purchase Program; a further slowdown in the national
and Massachusetts economies; a further deterioration in asset values locally and nationwide; the
volatility of rate-sensitive deposits; changes in the regulatory environment; increasing
competitive pressure in the banking industry; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; continued access to
liquidity sources; changes in our borrowers performance on loans; changes in critical accounting
policies and judgments; changes in accounting policies or procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies; changes in the equity and debt
securities 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 to make loans on commercial real estate in its market
area.
The operations of the Company and its subsidiary are generally influenced by overall economic
conditions, the related monetary and fiscal policies of the federal government and the regulatory
policies of financial institution regulatory authorities, including the Massachusetts Commissioner
of Banks, the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and
the Federal Deposit Insurance Corporation (the FDIC).
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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 months ended June 30, 2011 as compared to June 30, 2010 and its financial condition at June
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.
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:
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■ 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 June
30, 2011, the commercial real estate concentration ratio was 309%, 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.
During the three months ended June 30, 2011, management increased the ASC 450 loss factors
related to changes in collateral values for residential and home equity loans. As a result of
those changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of
$25 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 June 30, 2011.
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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 June 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 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 June 30, 2011 loans held for sale totaled $196 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. Mandatory delivery contracts are accounted for as derivative instruments.
Accordingly, 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.
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
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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 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.
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 book value, or fair
value less estimated selling costs. Property insurance is obtained for each parcel, and each
property is properly maintained and secured during the holding period. Property management vendors
may be utilized in those instances when a direct sale does not seem probable during a reasonable
period of time, or if the property requires additional oversight. It is
the Companys policy and strategy to sell all OREO as soon as possible consistent with
maximizing value and return to the Company.
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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 June 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 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 an 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 June 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 ended June 30, 2011.
Comparison of Financial Condition at June 30, 2011 and March 31, 2011
Total assets were $497.2 million at June 30, 2011 compared to $487.6 million at March 31,
2011, representing an increase of $9.6 million, or 2.0%. The increase in total assets reflected
strategic actions taken by management to reduce risk, which included increasing the residential
loan portfolio by $37.1 million and continuing to de-emphasize commercial real estate lending in
accordance with the Companys business plan. Total loans
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(excluding loans held for sale) were $417.8 million at June 30, 2011, compared to $394.2 million at
March 31, 2011, representing an increase of $23.6 million, or 6.0%. This increase was primarily
due to increases in residential and home equity loans of $37.1 million and $291 thousand,
respectively, offset by decreases in commercial real estate loans of $13.7 million. Residential
and home equity loans increased from $191.6 million at March 31, 2011 to $228.9 million at June 30,
2011. Commercial and industrial loans decreased from $2.2 million at March 31, 2011 to $2.1
million at June 30, 2011 primarily due to the scheduled repayment 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 June 30, 2011 the commercial real estate concentration ratio was
309%, compared to a ratio of 330% at March 31, 2010.
The allowance for loan losses totaled $4.4 million at June 30, 2011 compared to $3.9 million
at March 31, 2011, representing a net increase of $526 thousand, or 13.5%. This net increase was
primarily due to a provision of $500 thousand resulting from managements review of the adequacy of
the allowance for loan losses. Based upon managements regular analysis of the adequacy of the
allowance for loan losses, management considered the allowance for loan losses to be adequate at
both June 30, 2011 and March 31, 2011. See Comparison of Operating Results for the Quarters Ended
June 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 three months ended June 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 $25.2 million at June 30, 2011 compared to $40.9 million at
March 31, 2011, representing a decrease of $15.7 million, or 38.4%. During the three months ended
June 30, 2011, generally, proceeds from cash and cash equivalents, commercial real estate payoffs
and increases in certificates of deposit were utilized to fund the growth in the residential loan
portfolio.
Investment securities totaled $37.6 million at June 30, 2011 compared to $35.3 million at
March 31, 2011, representing an increase of $2.3 million, or 6.5%. The increase in investment
securities is primarily due to the purchase of $9.8 million in mortgage-backed securities, offset
by the sale of $5.8 million in mortgage-backed securities, the repayment of $1.4 million of
principal on mortgage-backed securities and a net decrease of $324 thousand in the fair value of
available for sale securities. Stock in the Federal Home Loan Bank of Boston (FHLBB) totaled
$8.5 million at both June 30, 2011 and March 31, 2011, respectively.
Banking premises and equipment, net, totaled $2.6 million and $2.7 million at June 30, 2011
and March 31, 2011, respectively.
Other real estate owned totaled $132 thousand at both June 30, 2011 and March 31, 2011.
Deferred tax asset totaled $3.7 million at June 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 $7.0 million at both June 30,
2011 and March 31, 2011.
Total deposits amounted to $317.5 million at June 30, 2011 compared to $309.1 million at March
31, 2011, representing an increase of $8.4 million, or 2.7%. The increase was a result of the
combined effect of a $6.0 million increase in certificates of deposit, and a net increase in core
deposits of $2.4 million (consisting of all non-certificate accounts). Certificate of deposit
growth for the quarter ended June 30, 2011 included $9.1 million obtained through
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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 June 30, 2011 compared to $117.4 million at March
31, 2011. The slight decrease between the two periods was due to the scheduled repayment of
principal on outstanding advances.
The net increase in stockholders equity from $47.1 million at March 31, 2011 to $47.2 million
at June 30, 2011 was due to net income of $236 thousand and stock related compensation of $210
thousand, partially offset by a $210 thousand decrease in accumulated other comprehensive income
and $201 thousand of dividends paid to common and preferred shareholders.
Comparison of Operating Results for the Quarters Ended June 30, 2011 and 2010
Net income available to common shareholders for the quarter ended June 30, 2011 was $80
thousand, or $0.05 per diluted common share, as compared to net income available to common
shareholders of $585 thousand, or $0.37 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 $667
thousand, an increase in non-interest expenses of $293 thousand and an increase in the provision
for loan losses of $200 thousand, partially offset by a $377 thousand increase in non-interest
income and a $280 thousand decrease in income tax expense. Additionally, for each of the quarters
ended June 30, 2011 and 2010, net income available to common shareholders was reduced by $154
thousand and $153 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
preferred stock and a warrant to purchase 234,732 shares of the Companys common stock to the U.S.
Treasury Department as a participant in the federal governments TARP Capital Purchase Program.
Interest and Dividend Income. Interest and dividend income decreased by $1.3 million, or
18.4%, to $5.6 million for the quarter ended June 30, 2011 as compared to $6.8 million during the
same period of 2010. During the quarter ended June 30, 2011, the yield on interest-earning assets
decreased by 59 basis points primarily due to a 45 basis point reduction in the yield on mortgage
loans due to a general decline in market interest rates and managements decision to continue to
decrease higher-risk, higher-yield commercial real estate loan balances. The average balance of
commercial real estate loans decreased by $33.4 million, from $225.6 million during the quarter
ended June 30, 2010 to $192.2 million during the quarter ended June 30, 2011.
Interest Expense. Interest expense decreased by $595 thousand, or 26.9%, to $1.6 million for
the quarter ended June 30, 2011 as compared to $2.2 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 39 basis points from 0.97% for the quarter ended June 30, 2010 to 0.58% for the
quarter ended June 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
$108.0 million for the quarter ended June 30, 2011, compared to $130.5 million for the same period
in 2010, a decline of $22.5 million. The average balance of lower-cost non-maturity deposits
decreased by $5.0 million to $158.4 million for the quarter ended June 30, 2011, as compared to an
average balance of $163.4 million during the same period of 2010. The average balance of FHLBB
borrowings decreased by $20.7 million, from $138.1 million for the quarter ended June 30, 2010 to
$117.3 million for the quarter ended June 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 June 30, 2011.
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The following table presents average balances and average rates earned/paid by the Company for
the three months ended June 30, 2011 compared to the three months ended June 30, 2010:
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Mortgage loans |
$ | 401,793 | $ | 5,298 | 5.27 | % | $ | 452,006 | $ | 6,466 | 5.72 | % | ||||||||||||
Other loans |
2,673 | 38 | 5.69 | 4,754 | 68 | 5.72 | ||||||||||||||||||
Investment securities |
30,430 | 227 | 2.98 | 32,745 | 303 | 3.70 | ||||||||||||||||||
Federal Home Loan Bank Stock |
8,518 | 6 | 0.28 | 8,518 | | 0.00 | ||||||||||||||||||
Short-term investments |
23,623 | 14 | 0.24 | 12,081 | 8 | 0.26 | ||||||||||||||||||
Total interest-earning assets |
467,037 | 5,583 | 4.78 | 510,104 | 6,845 | 5.37 | ||||||||||||||||||
Allowance for loan losses |
(3,997 | ) | (3,140 | ) | ||||||||||||||||||||
Noninterest-earning assets |
24,468 | 28,420 | ||||||||||||||||||||||
Total assets |
$ | 487,508 | $ | 535,384 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 266,429 | 388 | 0.58 | $ | 293,961 | 715 | 0.97 | ||||||||||||||||
Advances from FHLB of Boston |
117,331 | 1,090 | 3.72 | 138,066 | 1,357 | 3.93 | ||||||||||||||||||
Other borrowings |
11,341 | 137 | 4.87 | 11,341 | 138 | 4.87 | ||||||||||||||||||
Total interest-bearing liabilities |
395,101 | 1,615 | 1.64 | 443,368 | 2,210 | 1.99 | ||||||||||||||||||
Noninterest-bearing liabilities |
45,175 | 46,680 | ||||||||||||||||||||||
Total liabilities |
440,276 | 490,048 | ||||||||||||||||||||||
Stockholders equity |
47,232 | 45,336 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 487,508 | $ | 535,384 | ||||||||||||||||||||
Net interest and dividend income |
$ | 3,968 | $ | 4,635 | ||||||||||||||||||||
Net interest spread |
3.14 | % | 3.38 | % | ||||||||||||||||||||
Net interest margin |
3.40 | % | 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 level
at the end of each quarter. Periodically, the Company evaluates the allocations used in these
calculations. During the quarters ended June 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 June
30, 2011. As a result of the aforementioned factor changes, the impact to the allowance for loan
losses was an increase in ASC 450 reserves of $25 thousand. Management increased ASC 450 loss
factors related to collateral values for commercial real estate and commercial and industrial loans
during the quarter ended June 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
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$27 thousand. Based on these analyses, a provision for loan losses of $500 thousand was recorded
during the quarter ended June 30, 2011 compared to a provision for loan losses of $300 thousand
recorded during the quarter ended June 30, 2010.
Management gives high priority to monitoring and managing the Companys asset quality. At
June 30, 2011, nonperforming loans totaled $9.9 million as compared to $9.6 million on March 31,
2011. All twenty of the loans included in this category at June 30, 2011 are secured by real
estate collateral that is predominantly located in the Banks market area. Nineteen of these real
estate secured loans have an active plan for resolution in place from either the sale of the real
estate directly by the borrower, through foreclosure or repossession, or through loan workout
efforts. The borrower for the other nonperforming real estate secured loan has entered into a
bankruptcy court approved resolution program with the ongoing net cash flow generated from rents
from the property collateral being paid to the Bank. While bankruptcy filings have extended the
time required to resolve some nonperforming loans, management continues to work with borrowers to
resolve these situations as soon as possible.
Noninterest Income. Noninterest income totaled $905 thousand for the quarter ended June 30,
2011 compared to $528 thousand for the quarter ended June 30, 2010. The increase of $377 thousand
was primarily due to a $447 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 June 30, 2011. Gains on the sale of loans decreased by $33 thousand as
most residential loans originated during the quarter ended June 30, 2011 were retained rather than
sold in the secondary market. Other non-interest income decreased by $37 thousand primarily due to
an $18 thousand decrease in third party brokerage income and a $13 thousand decrease in deposit
service charges.
Noninterest Expenses. Noninterest expenses increased by $293 thousand, or 7.8%, to $4.0
million for the quarter ended June 30, 2011 as compared to $3.8 million during the quarter ended
June 30, 2010. This net increase was primarily due to a $462 thousand increase in salaries and
benefits due to increases in loan origination commissions and staffing, partially offset by a $117
thousand decrease in professional fees resulting from a reduction in collection and loan review
related expenses and a $38 thousand reduction in FDIC insurance premiums. 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 $462 thousand, or 21.7%, to $2.6 million during
the quarter ended June 30, 2011 as compared to $2.1 million during the quarter ended June 30, 2010
primarily due to increases of $247 thousand for loan origination commissions, $94 thousand for
staffing increases, and $46 thousand in stock related compensation expenses.
FDIC deposit insurance premiums decreased by $38 thousand to $102 thousand during the quarter
ended June 30, 2011 compared to $140 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 decreased by $32 thousand to $32 thousand during
the quarter ended June 30, 2011 as compared to $64 thousand during the same period of 2010 as the
Company strategically decided to decrease advertising and marketing efforts on a limited basis.
Office occupancy and equipment expenses increased by $23 thousand, or 4.5%, to $529 thousand
during the quarter ended June 30, 2011 as compared to $506 thousand during the same period of 2010
primarily due to increases in utilities, real estate taxes, security expenses and rents, partially
offset by decreases in amortization of leasehold improvements, depreciation of furniture, fixtures
and equipment, and maintenance costs.
Data processing fees decreased by $2 thousand, or 1.0%, to $202 thousand during the quarter
ended June 30, 2011 as compared to $204 thousand during the same period of 2010 due to decreases in
certain processing costs.
Professional fees decreased by $117 thousand, or 39.7%, to $178 thousand during the quarter
ended June 30, 2011 as compared to $295 thousand during the same
period of 2010 primarily due to decreases in loan workout-related expenses contract labor costs and lower
legal fees.
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Other expenses decreased by $3 thousand, or 0.7%, to $407 thousand during the quarter ended
June 30, 2011 as compared to $410 thousand during the quarter ended June 30, 2010 primarily as a
result of a decrease in OREO expenses of $30 thousand and seminars costs of $5 thousand, partially
offset by an increase of $10 thousand for ATM expense, an $8 thousand increase in directors fees,
and an increase in credit bureau expenses of $7 thousand.
Income Taxes. The effective income tax rate for the quarter ended June 30, 2011 was 28.1%,
compared to an effective income tax rate of 33.5% 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.
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 June 30, 2011, the
Company had approximately $61.0 million in unused borrowing capacity at the FHLBB. The Company
also has established borrowing capacity with the Federal Reserve Bank of Boston (FRB). The
unused borrowing capacity at the FRB totaled $7.1 million at June 30, 2011.
At June 30, 2011, the Company had commitments to originate loans, unused outstanding lines of
credit, undisbursed proceeds of loans totaling $35.0 million, and commitments to sell loans of $1.2
million. Since many of the commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. At June 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 $1.5 million at June 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 June 30, 2011, the Company had liquid assets of
$263 thousand.
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The following table sets forth the capital positions of the Company and the Bank at June 30,
2011:
At June 30, 2011 | ||||||||
Regulatory | ||||||||
Threshold | ||||||||
For Well | ||||||||
Actual | Capitalized | |||||||
Central Bancorp: |
||||||||
Tier 1 Leverage |
10.85 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
16.87 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
18.17 | % | 10.0 | % | ||||
Central Co-operative Bank: |
||||||||
Tier 1 Leverage |
9.70 | % | 5.0 | % | ||||
Tier 1 Risk-Based Ratio |
15.08 | % | 6.0 | % | ||||
Total Risk-Based Ratio |
16.38 | % | 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 three months ended June 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits against the Company, such as claims
to enforce liens, condemnation proceedings on properties in which we hold security interests,
claims involving the making and servicing of real property loans and other issues incident to our
business. We are not a party to any pending legal proceedings that we believe would have a
material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors, which could materially affect our business, financial condition or future results.
These risk factors are discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form
10-K for the year ended March 31, 2011, as filed with the SEC on June 17, 2011. At June 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 June 30, 2011.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. [Removed and Reserved]
Item 5. Other Information
Not applicable.
Item 6. Exhibits
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | ||
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | ||
32 | Section 1350 Certifications | ||
101* | The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended June 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. |
* | 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 |
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August 12, 2011 | By: | /s/ John D. Doherty | ||
John D. Doherty | ||||
Chairman and Chief Executive Officer (Principal Executive Officer) |
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August 12, 2011 | By: | /s/ Paul S. Feeley | ||
Paul S. Feeley | ||||
Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |