UNITED STATES
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

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

Not applicable

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		Smaller Reporting Company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Common Stock, $1.00 par value		1,681,071
Class		Outstanding at November 11, 2011

 

 

CENTRAL BANCORP, INC.

FORM 10-Q

Table of Contents

		Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)			1
Consolidated Statements of Financial Condition at September 30, 2011 and March 31, 2011			1
Consolidated Statements of Income for the Three and Six Months Ended September 30, 2011 and 2010			2
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2011 and 2010			3
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2011 and 2010			4
Notes to Unaudited Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			46
Part II. Other Information			47
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. Defaults Upon Senior Securities			47
Item 4. [Removed and Reserved]			47
Item 5. Other Information			47
Item 6. Exhibits			47
Signatures
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

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition
(Unaudited)

(In Thousands, Except Share and Per Share Data)		September 30, 2011				March 31, 2011
ASSETS
Cash and due from banks		$	3,984			$	3,728
Short-term investments			23,206				37,190
Cash and cash equivalents			27,190				40,918
Investment securities available for sale, at fair value (Note 2)			25,869				25,185
Stock in Federal Home Loan Bank of Boston, at cost (Note 2)			8,518				8,518
The Co-operative Central Bank Reserve Fund, at cost			1,576				1,576
Total investments			35,963				35,279
Loans held for sale			523				—
Loans (Note 3)			432,297				394,217
Less allowance for loan losses			(4,173	)			(3,892	)
Loans, net			428,124				390,325
Accrued interest receivable			1,514				1,496
Banking premises and equipment, net			2,562				2,705
Deferred tax asset, net			4,045				3,600
Other real estate owned			187				132
Goodwill			2,232				2,232
Bank-owned life insurance (Note 11)			7,112				6,972
Other assets			3,793				3,966
Total assets		$	513,245			$	487,625
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 4)		$	333,359			$	309,077
Federal Home Loan Bank advances			117,291				117,351
Subordinated debentures (Note 5)			11,341				11,341
Advanced payments by borrowers for taxes and insurance			2,230				1,387
Accrued expenses and other liabilities			2,264				1,348
Total liabilities			466,485				440,504
Commitments and Contingencies (Note 7)
Stockholders’ equity:
Preferred stock — Series A Cumulative Perpetual, $1.00 par value; 5,000,000 shares authorized; No shares issued and outstanding at September 30, 2011 and 10,000 shares issued and outstanding, with a liquidation preference and redemption value of $10,063,889 at March 31, 2011			—				9,709
Preferred stock — Series B Senior Non-Cumulative Perpetual, $1.00 par value; 10,000 shares authorized; 10,000 shares issued and outstanding, with a liquidation preference and redemption value of $10,000,000 at September 30, 2011 and no shares issued and outstanding at March 31, 2011			9,957				—
Common stock $1.00 par value; 15,000,000 shares authorized; and 1,681,071 shares issued and outstanding at September 30, 2011 and March 31, 2011			1,681				1,681
Additional paid-in capital			4,662				4,589
Retained income			34,969				35,288
Accumulated other comprehensive income (Note 6)			184				892
Unearned compensation — Employee Stock Ownership Plan			(4,693	)			(5,038	)
Total stockholders’ equity			46,760				47,121
Total liabilities and stockholders’ equity		$	513,245			$	487,625

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

		Three Months Ended								Six Months Ended
		September 30,								September 30,
(In Thousands, Except Share and Per Share Data)			2011				2010				2011				2010
Interest and dividend income:
Mortgage loans		$	5,502			$	6,211			$	10,800			$	12,677
Other loans			30				65				68				134
Investments			314				316				547				619
Short-term investments			10				13				24				20
Total interest and dividend income			5,856				6,605				11,439				13,450
Interest expense:
Deposits			422				674				809				1,390
Advances from Federal Home Loan Bank of Boston			1,103				1,254				2,193				2,611
Other borrowings			139				142				276				279
Total interest expense			1,664				2,070				3,278				4,280
Net interest and dividend income			4,192				4,535				8,161				9,170
Provision for loan losses			300				300				800				600
Net interest and dividend income after provision for loan losses (Note 3)			3,892				4,235				7,361				8,570
Noninterest income:
Deposit service charges			236				258				476				512
Net gain (loss) from sales and write-downs of investment securities			64				(226	)			555				(184	)
Net gains on sales of loans			27				87				35				129
Bank-owned life insurance			51				75				101				149
Other			122				97				237				213
Total noninterest income			500				291				1,404				819
Noninterest expenses:
Salaries and employee benefits			2,460				2,306				5,055				4,493
Occupancy and equipment			519				518				1,049				1,024
Data processing fees			189				213				390				417
Professional fees			223				255				401				497
FDIC deposit insurance premiums			99				147				201				287
Advertising and marketing			51				33				83				97
Other expenses			571				455				978				865
Total noninterest expenses			4,112				3,927				8,157				7,680
Income before income taxes			280				599				608				1,709
Provision for income taxes			76				198				168				570
Net income		$	204			$	401			$	440			$	1,139
Net (loss) income available to common shareholders (Note 9)		$	(247	)		$	246			$	(167	)		$	830
(Loss) earnings per common share — basic (Note 9)		$	(0.16	)		$	0.16			$	(0.11	)		$	0.55
(Loss) earnings per common share — diluted (Note 9)		$	(0.16	)		$	0.15			$	(0.11	)		$	0.52
Weighted average common shares outstanding — basic			1,535,924				1,500,497				1,533,235				1,497,808
Weighted average common and equivalent shares outstanding — diluted			1,535,924				1,602,963				1,533,235				1,594,935

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP, INC. AND SUBSIDIARY

		Number of																																Accumulated
		Shares of Series A				Series A				Number of Shares of				Series B				Number of Shares of								Additional								Other				Unearned				Total
		Preferred				Preferred				Series B Preferred				Preferred				Common				Common				Paid-In				Retained				Comprehensive				Compensation-				Stockholders'
		Stock				Stock				Stock				Stock				Stock				Stock				Capital				Income				Income				ESOP				Equity
Six Months Ended September 30, 2010
Balance at March 31, 2010			10,000			$	9,589				—			$	—				1,667,151			$	1,667			$	4,291			$	34,482			$	810			$	(5726	)		$	45,113
Net income			—				—				—				—				—				—				—				1,139				—				—				1,139
Other comprehensive income, net of taxes of $21:
Unrealized gain on securities, net of reclassification adjustment (Note 6)			—				—				—				—				—				—				—				—				27				—				27
Comprehensive income																																											1,166
Dividends paid to common stockholders ($0.10 per share)			—				—				—				—				—				—				—				(148	)			—				—				(148	)
Preferred stock accretion of discount and issuance costs			—				59				—				—				—				—				—				(59	)			—				—				—
Dividends paid on preferred stock			—				—				—				—				—				—				—				(250	)			—				—				(250	)
Stock-based compensation (Note 10)			—				—				—				—				—				—				201				—				—				—				201
Amortization of unearned compensation — ESOP			—				—				—				—				—				—				(228	)			—				—				344				116
Balance at September 30, 2010			10,000			$	9,648				—			$	1,667				1,667,151			$	1,667			$	4,264			$	35,164			$	837			$	(5,382	)		$	46,198

		Number of																																Accumulated
		Shares of Series A				Series A				Number of Shares of				Series B				Number of Shares of								Additional								Other				Unearned				Total
		Preferred				Preferred				Series B Preferred				Preferred				Common				Common				Paid-In				Retained				Comprehensive				Compensation-				Stockholders'
		Stock				Stock				Stock				Stock				Stock				Stock				Capital				Income				Income				ESOP				Equity
Six Months Ended September 30, 2011
Balance at March 31, 2011			10,000			$	9,709				—			$	—				1,681,071			$	1,681			$	4,589			$	35,288			$	892			$	(5,038	)		$	47,121
Net income			—				—				—				—				—				—				—				440				—				—				440
Other comprehensive loss, net of tax benefit of $445:
Unrealized loss on securities, net of reclassification adjustment (Note 6)			—				—				—				—				—				—				—				—				(708	)			—				(708	)
Comprehensive loss																																											(268	)
Dividends paid to common stockholders ($0.10 per share)			—				—				—				—				—				—				—				(152	)			—				—				(152	)
Redemption of Series A Preferred Stock net			(10,000	)			(9,765	)			—				—				—				—				—				(235	)			—				—				(10,000	)
Issuance of Series B Preferred Stock, net of issuance costs of $45			—				—				10,000				9,955				—				—				—				—				—				—				9,955
Preferred stock accretion of discount and issuance costs			—				56				—				2				—				—				—				(58	)			—				—				—
Dividends paid on preferred stock			—				—				—				—				—				—				—				(314	)			—				—				(314	)
Stock-based compensation (Note 10)			—				—				—				—				—				—				216				—				—				—				216
Amortization of unearned compensation — ESOP			—				—				—				—				—				—				(143	)			—				—				345				202
Balance at September 30, 2011			—			$	—				10,000			$	9,957				1,681,071			$	1,681			$	4,662			$	34,969			$	184			$	(4,693	)		$	46,760

See accompanying notes to consolidated financial statements

CENTRAL BANCORP, INC. AND SUBSIDIARY

		Six Months Ended
		September 30,
(In thousands)		2011				2010
Cash flows from operating activities:
Net income		$	440			$	1,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			281				319
Amortization of premiums			60				132
Deferred tax benefit			—				(94	)
Provision for loan losses			800				600
Stock-based compensation and amortization of unearned compensation — ESOP			418				317
Net (losses) gains from sales of investment securities			(555	)			184
Bank-owned life insurance income			(101	)			(149	)
Gain on sale of OREO			—				(2	)
Gains on sales of loans held for sale			(35	)			(129	)
Originations of loans held for sale			(3,533	)			(15,262	)
Proceeds from sale of loans originated for sale			3,045				12,158
(Increase) decrease in accrued interest receivable			(18	)			292
Decrease in other assets			134				350
Increase in accrued expenses and other liabilities			916				332
Net cash provided by operating activities			1,852				188
Cash flows from investing activities:
Loan principal (originations) collections, net			(38,654	)			33,465
Principal payments on mortgage-backed securities			2,262				5,089
Proceeds from sales of investment securities			6,788				2,002
Purchases of investment securities			(10,392	)			—
Proceeds from sales of OREO			—				62
Purchase of banking premises and equipment			( 138	)			(448	)
Net cash (used in) provided by investing activities			(40,134	)			40,170
Cash flows from financing activities:
Issuance of Series B preferred stock			10,000				—
Preferred stock issuance costs			(45	)			—
Redemption of Series A preferred stock			(10,000	)			—
Net increase (decrease) in deposits			24,282				(3,025	)
Increase in advance payments by borrowers for taxes and insurance			843				90
Repayment of advances from FHLB of Boston			(60	)			(15,058	)
Cash dividends paid			(466	)			(398	)
Net cash provided by (used in) financing activities			24,554				(18,391	)
Net (decrease) increase in cash and cash equivalents			(13,728	)			21,966
Cash and cash equivalents at beginning of period			40,918				16,536
Cash and cash equivalents at end of period		$	27,190			$	38,502
Cash paid (received) during the period for:
Interest		$	4,295			$	4,378
Income taxes			(609	)			125
Supplemental disclosure of non-cash investing and financing activities:
Accretion of Series A and B preferred stock discount and issuance costs			58				59
Deemed dividend on Series A preferred stock			299				—
Loans transferred to other real estate owned			55				—

See accompanying notes to unaudited consolidated financial statements.

CENTRAL BANCORP AND SUBSIDIARY

(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 Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on June 17, 2011. The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity or cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the six months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2012 or any other period.

     The Company owns 100% of the common stock of Central Bancorp Capital Trust I (“Trust I”) and Central Bancorp Statutory Trust II (“Trust II”), which have issued trust preferred securities to the public in private placement offerings. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860 Transfers and Servicing, neither Trust I nor Trust II are included in the Company’s consolidated financial statements (See Note 5).

     The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2011 and are also included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Investments

     The amortized cost and fair value of investment securities available for sale at September 30, 2011, are summarized as follows:

		September 30, 2011
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
						(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities		$	18,361			$	684			$	(8	)		$	19,037
Single issuer trust preferred securities issued by financial institutions			1,001				28				—				1,029
Total debt securities			19,362				712				(8	)			20,066
Perpetual preferred stock issued by financial institutions			3,067				84				(409	)			2,742
Common stock			3,408				64				(411	)			3,061
Total		$	25,837			$	860			$	(828	)		$	25,869

     The amortized cost and fair value of investment securities available for sale at March 31, 2011 are as follows:

		March 31, 2011
		Amortized				Gross Unrealized								Fair
		Cost				Gains				Losses				Value
						(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities		$	18,129			$	764			$	(70	)		$	18,823
Single issuer trust preferred securities issued by financial institutions			1,002				47				—				1,049
Total debt securities			19,131				811				(70	)			19,872
Perpetual preferred stock issued by financial institutions			3,071				194				(80	)			3,185
Common stock			1,799				354				(25	)			2,128
Total		$	24,001			$	1,359			$	(175	)		$	25,185

     During the six-month period ended September 30, 2011, no available for sale securities were determined to be other-than-temporarily impaired.

     Temporarily impaired securities as of September 30, 2011 are presented in the following table and are aggregated by investment category and length of time that individual securities have been in a continuous loss position:

		Less Than or Equal to								Greater Than
		12 Months								12 Months
		Fair				Unrealized								Unrealized
		Value				Losses				Fair Value				Losses
						(In Thousands)
Government agency and government sponsored enterprise mortgage-backed securities		$	114			$	(3	)		$	284			$	(5	)
Perpetual preferred stock issued by financial institutions			850				(170	)			778				(239	)
Common stock			1,647				(391	)			116				(20	)
Total temporarily impaired securities		$	2,611			$	(564	)		$	1,178			$	(264	)

     The Company had one preferred stock investment currently in an unrealized loss position for longer than twelve months for which the fair value has decreased during the six months ended September 30, 2011. The preferred stock had an unrealized loss to book value ratio of 23.5% at September 30, 2011 compared to a loss to book value ratio of 5.7% at March 31, 2011. Due to the long-term nature of preferred stocks, management considers these securities to be similar to debt securities for analysis purposes. Based on available information, which included Fitch bond rating upgrades during August 2010 and January 2011, management has determined that the unrealized loss on the Company’s investment in this preferred stock is not other-than-temporary as of September 30, 2011.

     The Company had one debt security in an unrealized loss position as of September 30, 2011, which has been in a continuous unrealized loss position for a period greater than twelve months. This debt security has a total fair value of $284 thousand and an unrealized loss of $5 thousand as of September 30, 2011. This debt security is a government agency mortgage—backed security. Management currently does not have the intent to sell this security and it is more likely that it will not have to sell this security before recovery of its cost basis. Based on management’s analysis of these securities, it has been determined that there is no other-than-temporarily impaired as of September 30, 2011.

     The Company had twenty one equity securities with a fair value of $1.8 million and unrealized losses of $411 thousand which were temporarily impaired at September 30, 2011. The total unrealized losses relating to these securities represent approximately 23.3% of book value. This is an increase when compared to the ratio of unrealized losses to book value of 6.3% at March 31, 2011. Of these twenty one securities, one has been in a continuous unrealized loss position for greater than twelve months aggregating $20 thousand at September 30, 2011. Data indicates that, due to current economic conditions, the time for many stocks to recover may be substantially lengthened. Management’s investment approach is to be a long-term investor. As of September 30, 2011, the Company has determined that the unrealized losses associated with these securities are not other-than-temporary based on the projected recovery of the unrealized losses, and management’s intent and ability to hold to recovery of cost.

     The maturity distribution (based on contractual maturities) and annual yields of debt securities at September 30, 2011 are as follows:

		Amortized				Fair				Annual
		Cost				Value				Yield
		(Dollars in thousands)
Government agency and government sponsored enterprise mortgage-backed securities
Due within one year		$	9			$	9				3.40	%
Due after one year but within five years			755				776				3.91
Due after five years but within ten years			1,915				1,947				2.74
Due after ten years			15,682				16,314				3.88
Total			18,361				19,037
Single issuer trust preferred securities issued by financial institutions:
Due after ten years			1,001				1,029				7.78	%
Total		$	19,362			$	20,066

     Mortgage-backed securities are shown at their contractual maturity dates but actual maturities may differ as borrowers have the right to prepay obligations without incurring prepayment penalties.

     Mortgage-backed securities with an amortized cost of $1.0 million and a fair value of $1.1 million at September 30, 2011, were pledged to provide collateral for certain customers. Investment securities carried at $2.5 million were pledged under a blanket lien to partially secure the Bank’s advances from the FHLB of Boston. Additionally, investment securities carried at $2.1 million were pledged to maintain borrowing capacity at the Federal Reserve Bank of Boston.

     As a member of the Federal Home Loan Bank of Boston (“FHLBB”), the Bank is required to invest in stock of the FHLBB in an amount which, until April 2004, was equal to 1% of its outstanding home loans or 1/20th of its outstanding advances from the FHLBB, whichever was higher.

     The Company views its investment in the FHLBB stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value rather than recognizing temporary declines in value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLBB as compared to the capital stock amount and length of time a decline has persisted; (2) impact of legislative and regulatory changes on the FHLBB and (3) the liquidity position of the FHLBB.

     The FHLBB reported earnings for 2010 of approximately $107 million after two consecutive years of losses. During July and October 2011, the FHLBB declared dividends based upon average stock outstanding for the second and third quarters of 2011, respectively. The FHLBB’s 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 FHLBB’s 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 & Poor’s Ratings Services cut the credit ratings for many government-related entities to AA+ from AAA reflecting their dependence on the recently downgraded U.S. Government. Included in those downgrades were ten of twelve Federal Home Loan Banks, including the FHLBB. The other two Federal Home Loan Banks previously had been downgraded to AA+.

     The Company does not believe that its investment in the FHLBB is impaired as of September 30, 2011. However, this estimate could change in the near term in the event that: (1) additional significant impairment losses are incurred on the mortgage-backed securities causing a significant decline in the FHLBB’s regulatory capital status; (2) the economic losses resulting from credit deterioration on the mortgage-backed securities increases significantly; or (3) capital preservation strategies being utilized by the FHLBB become ineffective.

(3) Loans and the Allowance for Loan Losses

     Loans. Loans that management has the intent and ability to hold for the foreseeable future are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination costs and fees.

     Loans classified as held for sale are stated at the lower of aggregate cost or fair value. Fair value is estimated based on outstanding investor commitments. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. The Company enters into forward commitments (generally on a best efforts delivery basis) to sell loans held for sale in order to reduce market risk associated with the origination of such loans. Loans held for sale are sold on a servicing released basis. As of September 30, 2011 loans held for sale totaled $523 thousand compared to $0 at March 31, 2011.

     Mortgage loan commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in noninterest income.

     The Company carefully evaluates all loan sales agreements to determine whether they meet the definition of a derivative as facts and circumstances may differ significantly. If agreements qualify, to protect against the price risk inherent in derivative loan commitments, the Company generally uses “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and liabilities with changes in their fair values recorded in other noninterest income. The fair value of forward loan sale commitments at September 30, 2011 was not material.

     Loan origination fees, net of certain direct loan origination costs, are deferred and are amortized into interest income over the contractual loan term using the level-yield method.

     Interest income on loans is recognized on an accrual basis only if deemed collectible. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due 90 days with respect to interest or principal. The accrual on some loans, however, may continue even though they are more than 90 days past due if management deems it appropriate, provided that the loans are well secured and in the process of collection. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully

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 loan’s 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 loan’s principal balance is remote. Management considers nonaccrual loans, except for certain nonaccrual residential and consumer loans, to be impaired. However, all troubled debt restructurings (“TDRs”) are considered to be impaired. In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring. The Company adopted this guidance on June 30, 2011 and applied it retrospectively to April 1, 2011, the beginning of the annual period of adoption. In evaluating when a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. The majority of TDRs involve a modification in loan terms such as a temporary reduction in the interest rate or a temporary period of interest only, and escrow (if required). TDRs are accounted for as set forth in ASC 310. A TDR is typically on non-accrual until the borrower successfully performs under the new terms for at least six consecutive months. However, a TDR may be kept on accrual immediately following the restructuring in those instances where a borrower’s 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 Bank’s 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 deemed necessary at the evaluation date in accordance with ASC 310, that loan would continue to be evaluated separately and will not be returned to be included in the general ASC 450 Contingencies (“ASC 450”) formula based reserve calculation. In evaluating impaired loans, all related management discounts of appraised values, selling and resolution costs are taken into consideration in determining the level of reserves required when appropriate.

     The methodology employed in calculating the allowance for loan losses is portfolio segmentation. For the commercial real estate (“CRE”) portfolio, this is further refined through stratification within each segment based on loan-to-value (LTV) ratios. The CRE portfolio is further segmented by type of properties securing those loans. This approach allows the Bank to take into consideration the fact that the various sectors of the real estate market change value at differing rates and thereby present different risk levels. CRE loans are segmented into the following categories:

	•		Apartments
	•		Offices
	•		Retail
	•		Mixed Use
	•		Industrial/Other

     CRE loans are segmented monthly using the above collateral-types and three LTV ratio categories: <40%, 40%-60%, and >60%. While these ranges are subjective, management feels that each category represents a significantly different degree of risk from the other. CRE loans carrying higher LTV ratios are assigned incrementally higher ASC 450 reserve rates. Annually, for the CRE portfolio, management adjusts the appraised values which are used to calculate LTV ratios in our allowance for loan losses calculation. The data is provided by an independent appraiser and it indicates annual changes in value for each property type in the Bank’s 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 Bank’s own experience with collateral values in its market area in recent years. Based on the Company’s allowance for loan loss methodology with respect to CRE, unfavorable trends in the value of real estate will increase the required level of the Company’s ASC 450 allowance for loan losses.

     In developing ASC 450 reserve levels, recent regulatory guidance suggests using the Bank’s charge-off history as a starting point. The Bank’s 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. Management’s efforts to reduce the levels of commercial real estate and construction loans are reflected in changes in the Bank’s commercial real estate concentration ratio, which is calculated as total non-owner occupied commercial real estate and construction loans divided by the Bank’s risk-based capital. At September 30, 2011, the commercial real estate concentration ratio was 300%, compared to a ratio of 330% at March 31, 2011.

     Residential loans, home equity loans and consumer loans, other than TDRs and loans in the process of foreclosure or repossession, are collectively evaluated for impairment. Factors considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. TDRs and loans that are in the process of foreclosure or repossession are evaluated under ASC 310.

     Commercial and industrial and construction loans that are not impaired are evaluated under ASC 450 and factors considered in determining the appropriate reserve levels include trends in delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in underwriting practices, experience of loan staff, national and local economic trends, industry conditions, and changes in credit concentrations. Those loans that are individually reviewed for impairment are evaluated according to ASC 310.

     During the three months ended September 30, 2011, management increased the ASC 450 loss factors related to economic conditions for all loan types, and trends in delinquencies factor for commercial real estate loans. As a result of those changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of $128 thousand for those loan types. During the six months ended September 30, 2011, management increased the ASC 450 loss factors related to economic conditions for all loan types, changes in collateral values for residential loans, and trends in delinquencies factor for commercial real estate loans. As a result of those changes, the impact to the allowance for loan losses were increases in ASC 450 reserves of $155 thousand for those loan types.

     Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in loan composition or volume, changes in economic market area conditions or other factors. As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Management currently believes that there are adequate reserves and collateral securing nonperforming loans to cover losses that may result from these loans at September 30, 2011.

     In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for unfunded lending commitments is included in other liabilities in the balance sheet. The reserve was $0 at September 30, 2011 and March 31, 2011.

     Loans, excluding loans held for sale, as of September 30, 2011 and March 31, 2011 are summarized below (in thousands):

		September 30,				March 31,
		2011				2011
Real estate loans:
Residential real estate and condominium		$	242,179			$	183,157
Commercial real estate			178,742				199,074
Land			438				456
Home equity lines of credit			8,823				8,426
Total real estate loans			430,182				391,113
Commercial and Industrial loans			1,228				2,212
Consumer loans			887				892
Total loans			432,297				394,217
Less: allowance for loan losses			(4,173	)			(3,892	)
Total loans, net		$	428,124			$	390,325

     The following is a summary of the activity in the allowance for loan losses by loan portfolio segment for the three and six months ended September 30, 2011 and 2010 (in thousands):

For the Three Months Ending September 30, 2011
		Residential				Commercial Real				Commercial
		Real Estate and				Estate				And				Consumer
		Condominium				And Land				Industrial Loans				Loans				Unallocated				Total
Beginning balance		$	1,256			$	3,027			$	15			$	15			$	105			$	4,418
Charge offs			(122	)			(418	)			(3	)			(4	)			—				(547	)
Recoveries			—				—				—				21				—				2
Provision			259				26				—				(7	)			22				300
Ending balance		$	1,393			$	2,635			$	12			$	6			$	127			$	4,173

For the Three Months Ending September 30, 2010
		Residential				Commercial Real				Commercial
		Real Estate and				Estate				And				Consumer
		Condominium				And Land				Industrial Loans				Loans				Unallocated				Total
Beginning balance		$	839			$	2,264			$	35			$	20			$	178			$	3,336
Charge offs			—				—				—				(4	)			—				(4	)
Recoveries			—				—				—				1				—				1
Provision			90				302				1				3				(96	)			300
Ending balance		$	929			$	2,566			$	36			$	20			$	82			$	3,633

For the Six Months Ending September 30, 2011
		Residential				Commercial Real				Commercial
		Real Estate and				Estate				And				Consumer
		Condominium				And Land				Industrial Loans				Loans				Unallocated				Total
Beginning balance		$	816			$	2,771			$	16			$	17			$	272			$	3,892
Charge offs			(122	)			(418	)			(3	)			(9	)			—				(552	)
Recoveries			30				—				—				3				—				33
Provision			669				282				(1	)			(5	)			(145	)			800
Ending balance		$	1,393			$	2,635			$	12			$	6			$	127			$	4,173

For the Six Months Ending September 30, 2010
		Residential				Commercial Real				Commercial
		Real Estate and				Estate				And				Consumer
		Condominium				And Land				Industrial Loans				Loans				Unallocated				Total
Beginning balance		$	853			$	2,037			$	44			$	22			$	82			$	3,038
Charge offs			—				—				—				(7	)			—				(7	)
Recoveries			—				—				—				2				—				2
Provision			76				529				(8	)			3				—				600
Ending balance		$	929			$	2,566			$	36			$	20			$	82			$	3,633

     The increased provision for loan losses during the six months ended September 30, 2011 compared to the six months ended September 30, 2010 was primarily due to net increased allocated reserves for three commercial loans with balances of $3.8 million at September 30, 2011 and three residential loans with balances of $647 thousand at September 30, 2011.

Financing Receivables on Nonaccrual Status as of:

		September 30,				March 31,
		2011				2011
		(In Thousands)
Commercial real estate:
Mixed Use		$	1,555			$	1,616
Industrial (other)			2,081				1,500
Retail			—				769
Apartments			1,566				2,757
Residential:
Residential Real Estate			2,423				2,587
Condominium			712				352
		$	8,337			$	9,581

     Total nonaccrual loans include nonaccrual impaired loans as well as certain nonaccrual residential loans that are not considered impaired.

     The following is an age analysis of past due loans as of September 30, 2011 and March 31, 2011, by loan portfolio classes (in thousands):

						Age Analysis of Past Due Financing Receivables
										as of September 30, 2011
										Greater
		30-59 Days				60-89 Days				than				Total
		Past Due				Past Due				90 Days				Past Due				Current				Total
Commercial real estate:
Mixed use		$	—			$	—			$	1,936			$	1,936			$	33,334			$	35,270
Apartments			588				1,567				—				2,155				64,050				66,205
Industrial (other)			691				631				1,450				2,772				32,968				35,740
Retail			923				—				—				923				25,215				26,138
Offices			718				—				—				718				14,671				15,389
Land and Construction			—				—				—				—				438				438
Residential:
Residential real estate			483				443				183				1,109				210,619				211,728
Condominium			—				—				—				—				30,451				30,451
Home Equity Lines of Credit			28				—				—				28				8,795				8,823
Commercial and Industrial Loans			—				—				—				—				1,228				1,228
Consumer Loans							—				—				—				887				887
		$	3,431			$	2,641			$	3,569			$	9,641			$	422,656			$	432,297