e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 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
|
|
(I.R.S. Employer |
Incorporation or Organization)
|
|
Identification No.) |
|
|
|
399 Highland Avenue, Somerville, Massachusetts
|
|
02144 |
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code) |
Registrants telephone number, including area code: (617) 628-4000
Securities registered pursuant to Section 12 (b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered |
|
|
|
Common Stock, par value $1.00
per share, and Related Stock Purchase Rights
|
|
The NASDAQ Stock Market LLC |
|
|
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
Large Accelerated Filer o
|
|
Accelerated Filer o
|
|
Non-accelerated Filer o
(Do not check if a smaller reporting company)
|
|
Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting common equity held by non-affiliates of the
registrant was approximately $9.4 million as of September 30, 2010.
At June 17, 2011, the registrant had 1,681,071 shares of its common stock, $1.00 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K.
CENTRAL BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
|
|
|
|
|
|
|
|
|
|
|
Page |
Item 1.
|
|
Business
|
|
|
1 |
|
Item 1A.
|
|
Risk Factors
|
|
|
24 |
|
Item 1B.
|
|
Unresolved Staff Comments
|
|
|
31 |
|
Item 2.
|
|
Properties
|
|
|
32 |
|
Item 3.
|
|
Legal Proceedings
|
|
|
33 |
|
Item 4.
|
|
[Removed and Reserved]
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
PART II |
|
|
|
|
|
|
|
|
|
|
|
Item 5.
|
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
|
|
33 |
|
Item 6.
|
|
Selected Financial Data
|
|
|
34 |
|
Item 7.
|
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations
|
|
|
36 |
|
Item 7A.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
|
|
50 |
|
Item 8.
|
|
Financial Statements and Supplementary Data
|
|
|
51 |
|
Item 9.
|
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|
|
|
94 |
|
Item 9A.
|
|
Controls and Procedures
|
|
|
95 |
|
Item 9B.
|
|
Other Information
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
PART III |
|
|
|
|
|
|
|
|
|
|
|
Item 10.
|
|
Directors, Executive Officers and Corporate Governance
|
|
|
96 |
|
Item 11.
|
|
Executive Compensation
|
|
|
96 |
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
|
|
|
96 |
|
Item 13.
|
|
Certain Relationships and Related Transactions, and Director Independence
|
|
|
97 |
|
Item 14.
|
|
Principal Accounting Fees and Services
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
PART IV |
|
|
|
|
|
|
|
|
|
|
|
Item 15.
|
|
Exhibits and Financial Statement Schedules
|
|
|
98 |
|
|
|
|
|
|
|
|
SIGNATURES |
|
|
|
|
|
|
PART I
Note Regarding Forward-Looking Statements
This document, as well as other written communications made from time to time by Central
Bancorp, Inc. (the Company) and subsidiaries and oral communications made from time to time by
authorized officers of the Company, may contain statements relating to the future results of the
Company (including certain projections, such as earnings projections, necessary tax provisions, and
business trends) that are considered forward looking statements as defined in the Private
Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be
identified by the use of such words as intend, believe, expect, should, planned,
estimated, and potential. For these statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the PSLRA. The Companys ability to predict
future results is inherently uncertain and the Company cautions you that a number of important
factors could cause actual results to differ materially from those currently anticipated in any
forward-looking statement. These factors include but are not limited to: recent and future
bail-out actions by the government; the impact of the Companys participation in the U.S.
Department of Treasurys Troubled Asset Relief Program; a further slowdown in the national and
Massachusetts economies; a further deterioration in asset values locally and nationwide; the
volatility of rate-sensitive deposits; changes in the regulatory environment; increasing
competitive pressure in the banking industry; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; continued access to
liquidity sources; changes in our borrowers performance on loans; changes in critical accounting
policies and judgments; changes in accounting policies or procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies; changes in the equity and debt
securities markets; governmental action as a result of our inability to comply with regulatory
orders and agreements; the effect of additional provision for loan losses; the effect of an
impairment charge on our deferred tax asset; fluctuations of our stock price; the success and
timing of our business strategies; the impact of reputation risk created by these developments on
such matters as business generation and retention, funding and liquidity; the impact of regulatory
restrictions on our ability to receive dividends from our subsidiaries; and political developments,
wars or other hostilities may disrupt or increase volatility in securities or otherwise affect
economic conditions.
The Company does not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Item 1. Business
General
The Company. Central Bancorp, Inc. (the Company), a Massachusetts corporation, was
organized by Central Co-operative Bank (the Bank) on September 30, 1998, to acquire all of the
capital stock of the Bank as part of its reorganization into the holding company form of ownership,
which was completed on January 8, 1999. Upon completion of the holding company reorganization, the
Companys common stock, par value $1.00 per share (the Common Stock), became registered under the
Securities Exchange Act of 1934, as amended (the Exchange Act). The Company is a registered bank
holding company subject to regulation and examination by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board). The Company has no significant assets or liabilities
other than loans to the Central Co-operative Bank Employee Stock Ownership Plan (ESOP) and
subordinated debentures as well as common stock of the Bank and various other liquid assets in
which it invests in the ordinary course of business. For that reason, substantially all of the
discussion in this Annual Report on Form 10-K relates to the operations of the Bank and its
subsidiaries.
The Bank. Central Co-operative Bank was organized as a Massachusetts chartered co-operative
bank in 1915 and converted from mutual to stock form of ownership in 1986. The primary business of
the Bank is to generate funds in the form of deposits and use the funds to make mortgage loans for
the purchase, refinancing, and construction of residential properties and to make loans on
commercial real estate in its market area. In addition, the Bank makes a limited amount of
consumer loans including secured and unsecured personal loans, and commercial and industrial loans.
The Bank sells some of its residential mortgage loan production in the secondary mortgage
1
market. The Bank also maintains an investment portfolio of various types of debt securities,
including corporate bonds and mortgage-backed securities, and common and preferred equity
securities. The Bank also offers investment services (including annuities) to its customers
through a third party broker-dealer.
The Bank is headquartered in Somerville, Massachusetts and its operations are conducted
through nine full-service office facilities located in Somerville, Arlington, Burlington, Chestnut
Hill, Malden, Medford, Melrose and Woburn, Massachusetts, a limited service high school branch in
Woburn, Massachusetts, a stand-alone 24-hour automated teller machine (ATM) in Somerville,
Massachusetts, as well as over the Internet. Each full-service branch office also has a 24-hour
ATM. The Bank is a member of the Federal Home Loan Bank (FHLB) of Boston and its deposits are
insured to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation (FDIC). Due to issues associated with the recent economic downturn, FDIC deposit
insurance costs have increased considerably. See Regulation and Supervision of the Bank
Insurance of Deposit Accounts for additional information regarding deposit insurance premiums.
All Massachusetts chartered co-operative banks are required to be members of the Share
Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all
deposits in member banks which are not covered by federal insurance. In past years, a premium of
1/24 of 1% of insured deposits had been assessed annually on member banks such as the Bank for this
deposit insurance. However, no premium has been assessed in recent years.
The main offices of the Company and Bank are located at 399 Highland Avenue, Somerville,
Massachusetts 02144 and their telephone number is (617) 628-4000. The Bank also maintains a
website at www.centralbk.com. Information on the Banks website should not be considered a
part of this Annual Report on Form 10-K.
The operations of the Bank are generally influenced by overall economic conditions, the
related monetary and fiscal policies of the federal government and the regulatory policies of
financial institution regulatory authorities, including the Massachusetts Commissioner of Banks
(the Commissioner), the Federal Reserve Board and the FDIC.
Market Area
All of the Banks offices are located in the northwestern suburbs of Boston, which are its
principal market area for deposits. The majority of the properties securing the Banks loans are
located in Middlesex County, Massachusetts. The Banks market area consists of established
suburban areas and includes portions of the Route 128 high-technology corridor.
Competition
The Banks competition for savings deposits has historically come from other co-operative
banks, savings banks, credit unions, savings and loan associations and commercial banks located in
Massachusetts generally, and in the Boston metropolitan area, specifically. With the advent of
interstate banking, the Bank also faces competition from out-of-state banking organizations. In
the past, during times of high interest rates, the Bank has also experienced additional significant
competition for deposits from short-term money market funds and other corporate and government
securities. The Bank has faced continuing competition for deposits from other financial
intermediaries, including those operating over the Internet.
The Bank competes for deposits principally by offering depositors a wide variety of savings
programs, convenient branch locations, 24-hour automated teller machines, Internet banking,
preauthorized payment and withdrawal systems, tax-deferred retirement programs and other
miscellaneous services such as money orders, travelers checks and safe deposit boxes. The Bank
usually does not rely upon any individual, group or entity for a material portion of its deposits.
The Banks competition for real estate loans comes principally from mortgage banking
companies, co-operative banks and savings banks, credit unions, savings and loan associations,
commercial banks, insurance companies and other institutional lenders. The Bank competes for loan
originations primarily through the interest
2
rates and loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. The competition for loans encountered by the Bank, as
well as the types of institutions with which the Bank competes, varies from time to time depending
upon certain factors, including the general availability of lendable funds and credit, general and
local economic conditions, current interest rate levels, volatility in the mortgage markets and
other factors which are not readily predictable.
Changes in bank regulation, such as changes in the products and services banks can offer and
involvement in non-banking activities by bank holding companies, as well as bank mergers and
acquisitions, can affect the Banks ability to compete successfully. Legislation and regulations
have also expanded the activities in which depository institutions may engage. The ability of the
Bank to compete successfully will depend upon how successfully it can respond to the evolving
competitive, regulatory, technological and demographic developments affecting its operations.
Lending Activities
The Banks lending focus is concentrated in real estate secured transactions, including
residential mortgage and home equity loans, commercial mortgage loans and construction loans. For
the year ended March 31, 2011, the Bank originated loans totaling $70.0 million. Of the total
loans originated during fiscal 2011, $64.8 million, or 92.6%, were residential mortgage and home
equity loans; $4.4 million, or 6.3%, were commercial real estate loans; and $800 thousand, or 1.1%,
were commercial and industrial, and other loans. During the years ended March 31, 2011 and 2010,
the Bank sold $21.2 million and $38.9 million, respectively, of residential mortgage loan
originations. The sale of loans in the secondary market allows the Bank to continue to make loans
during periods when savings deposit flows decline or funds are not otherwise available for lending
purposes and to manage interest rate risk.
The Banks loan portfolio decreased by $67.3 million, or 14.6%, to $394.2 million at March 31,
2011 from $461.5 million at March 31, 2010. The decrease was primarily due to decreases in the
commercial real estate, construction and land, and residential loan portfolios. During fiscal 2011
and 2010, management de-emphasized higher-risk commercial real estate and construction and land
lending in accordance with the Companys business plan. Construction and land loans totaled $456
thousand at March 31, 2011 compared to $2.7 million at March 31 2010. Commercial and industrial
loans decreased primarily due to the repayment of such loans. During fiscal 2011 and 2010,
management focused on increasing the residential real estate portfolios as these loans generally
have less risk compared to commercial and construction lending, however, these balances declined
during fiscal 2011 due to higher than anticipated loan payoffs.
3
Loan Portfolio Composition. The following table summarizes the composition of the Banks
loan portfolio by type of loan and the percentage each type represents of the total loan portfolio
at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in Thousands) |
|
Mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
183,157 |
|
|
|
46.56 |
% |
|
$ |
217,053 |
|
|
|
47.03 |
% |
|
$ |
183,327 |
|
|
|
39.80 |
% |
|
$ |
178,727 |
|
|
|
37.6 |
% |
|
$ |
175,259 |
|
|
|
38.1 |
% |
Commercial |
|
|
199,074 |
|
|
|
50.50 |
|
|
|
227,938 |
|
|
|
49.39 |
|
|
|
249,941 |
|
|
|
54.25 |
|
|
|
244,496 |
|
|
|
51.5 |
|
|
|
235,535 |
|
|
|
51.1 |
|
Construction and Land |
|
|
456 |
|
|
|
0.12 |
|
|
|
2,722 |
|
|
|
0.59 |
|
|
|
14,089 |
|
|
|
3.06 |
|
|
|
30,950 |
|
|
|
6.5 |
|
|
|
35,011 |
|
|
|
7.6 |
|
Home equity |
|
|
8,426 |
|
|
|
2.14 |
|
|
|
8,817 |
|
|
|
1.91 |
|
|
|
7,347 |
|
|
|
1.59 |
|
|
|
6,559 |
|
|
|
1.4 |
|
|
|
6,901 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
|
391,113 |
|
|
|
99.21 |
|
|
|
456,530 |
|
|
|
98.92 |
|
|
|
454,704 |
|
|
|
98.70 |
|
|
|
460,732 |
|
|
|
97.0 |
|
|
|
452,706 |
|
|
|
98.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
2,212 |
|
|
|
0.56 |
|
|
|
4,037 |
|
|
|
0.88 |
|
|
|
4,834 |
|
|
|
1.05 |
|
|
|
13,173 |
|
|
|
2.8 |
|
|
|
6,605 |
|
|
|
1.4 |
|
Consumer |
|
|
892 |
|
|
|
0.23 |
|
|
|
943 |
|
|
|
0.20 |
|
|
|
1,132 |
|
|
|
0.25 |
|
|
|
1,037 |
|
|
|
0.2 |
|
|
|
1,231 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans |
|
|
3,104 |
|
|
|
0.79 |
|
|
|
4,980 |
|
|
|
1.08 |
|
|
|
5,966 |
|
|
|
1.30 |
|
|
|
14,210 |
|
|
|
3.0 |
|
|
|
7,836 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
394,217 |
|
|
|
100.0 |
% |
|
|
461,510 |
|
|
|
100.0 |
% |
|
|
460,670 |
|
|
|
100.0 |
% |
|
|
474,942 |
|
|
|
100.0 |
% |
|
|
460,542 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
3,892 |
|
|
|
|
|
|
|
3,038 |
|
|
|
|
|
|
|
3,191 |
|
|
|
|
|
|
|
3,613 |
|
|
|
|
|
|
|
3,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
390,325 |
|
|
|
|
|
|
$ |
458,472 |
|
|
|
|
|
|
$ |
457,479 |
|
|
|
|
|
|
$ |
471,329 |
|
|
|
|
|
|
$ |
456,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio Sensitivity. The following table sets forth certain maturity information
as of March 31, 2011 regarding the dollar amount of commercial and industrial loans as well as
construction and land loans in the Banks portfolio, including scheduled repayments of principal,
based on contractual terms to maturity. Demand loans, loans having no schedule of repayments and
no stated maturity are reported as due in one year or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After |
|
|
|
|
|
|
|
|
|
Due Within |
|
|
One Through |
|
|
Due After |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
|
|
(In Thousands) |
|
Commercial and industrial loans |
|
$ |
1,087 |
|
|
$ |
733 |
|
|
$ |
392 |
|
|
$ |
2,212 |
|
Land loans |
|
|
305 |
|
|
|
22 |
|
|
|
129 |
|
|
|
456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,392 |
|
|
$ |
755 |
|
|
$ |
521 |
|
|
$ |
2,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Lending. Residential mortgage loans at March 31, 2011 totaled $183.2
million, or 46.5%, of the total loan portfolio. Fixed-rate residential mortgages totaled $142.6
million, or 77.8%, of the residential loan portfolio and adjustable-rate loans totaled $40.5
million, or 22.2%, of the residential loan portfolio.
In recent years the Bank has sought to increase its origination of residential mortgage loans
and to generate additional noninterest income via loan sale gains, management regularly assesses
the desirability of holding or selling newly-originated long-term, fixed-rate residential mortgage
loans. A number of factors are evaluated to determine whether or not to hold such loans including,
current and projected liquidity, current and projected interest rate risk profile, projected growth
in other interest-earning assets, e.g., commercial real estate loans, and projected interest rates
and economic conditions. During fiscal 2009, the economy experienced a recession that resulted in
declines in home values and high unemployment rates. During fiscal 2010, demand strengthened
somewhat in the residential real estate market and home prices experienced modest increases.
However, during fiscal 2011, residential property values in the Companys primary market area
decreased slightly, reversing what appeared to be a turnaround in the housing market.
Also, during fiscal 2011 and 2010, management strategically increased its emphasis on
residential lending to reduce credit risk and increase regulatory capital levels. Despite the
emphasis on increasing residential lending, the relatively low interest rate environment
contributed to faster than expected pay-downs and the Banks residential loan portfolio decreased
by $33.9 million or 15.6% during fiscal 2011 as compared to fiscal 2010.
The Banks adjustable-rate residential mortgage loans have a maximum term of 30 years, and
allow for periodic interest rate adjustments. The Bank prices the initial rate competitively, but
generally avoids initial deep
4
discounts from contracted indices and margins. The Bank has adopted
the U.S. Treasury Securities Index, adjusted
to a constant maturity of one to three years, as its primary index. The margin at which
adjustable-rate loans is generally set is 2.875 percentage points over the stated index. Interest
rate adjustments on adjustable mortgage loans are capped at two percentage points per adjustment
and six percentage points over the life of the loan.
Residential loans may be granted as construction loans or permanent loans on residential
properties. Construction loans on owner-occupied residential properties may convert to residential
loans at fixed or adjustable rates upon completion of construction. Loans secured by one- to
four-family residential properties are typically written in amounts up to 80% of the appraised
value of the residential property. The Bank generally requires private mortgage insurance for
loans in excess of 80% of appraised value. The maximum loan-to-value ratio on owner occupied
residential properties is 95%. The maximum loan-to-value ratio on non-owner-occupied residential
properties is 80%.
Commercial Real Estate and Construction Lending. The Bank originates permanent commercial
mortgages and construction loans on commercial and residential real estate projects. Commercial
real estate loans are typically secured by income-producing properties such as apartment buildings,
office buildings, industrial buildings and various retail properties and are written with either
fixed or adjustable interest rates. Commercial real estate loans with fixed interest rates have
terms generally ranging from one to five years while the interest rate on adjustable rate loans is
generally set to the five-year FHLB classic advance rate plus a margin of 175 to 300 basis points.
As of March 31, 2011, the Banks commercial mortgage portfolio totaled $199.1 million and
constituted 50.5% of the total loan portfolio, compared to a balance of $227.9 million, or 49.4%,
of total loans at March 31, 2010. The decline in the commercial mortgage loan portfolio during
fiscal 2011, which totaled $28.9 million, or 12.7%, is attributable to managements decreased
emphasis on this type of lending in the current economic environment.
Commercial real estate loans are generally made for up to 75% of the appraised value of the
property. Commercial real estate loans currently offered by the Bank can have amortization periods
of up to 20 to 25 years. Title insurance, fire, casualty insurance and flood insurance are
required in amounts sufficient to protect the Banks interest, where applicable. In some cases,
commercial real estate loans are granted in participation with other lenders.
The Banks land loans totaled $456 thousand, or 0.12%, of the Banks loan portfolio at March
31, 2011, compared to a construction and land loan balance of $2.7 million or 0.6% of total loans
at March 31, 2010. The decline in these loans is attributable to managements decreased emphasis
on this type of lending in the current economic environment. Construction loans are generally
short-term in nature and have maturities of up to two years. The Bank grants loans to construct
residential dwellings and commercial real estate projects. The Bank also originates loans for the
construction of single-family homes for resale by professional builders. Construction loans are
made for up to 75% of the projected value of the completed property, based on independent
appraisals. Funds are disbursed based on a schedule of completed work presented to the Bank and
confirmed by physical inspection of the property by a construction consultant and after receipt of
title updates.
Home Equity Lines of Credit. The Bank offers home equity lines of credit that are secured by
the borrowers equity in his or her primary residence and may take the form of a first or second
mortgage. Equity loans are made in amounts up to 80% of the appraised value less any first
mortgage. Payment of interest is required monthly and the rate is adjusted monthly based on
changes in the prime rate, as quoted in the Wall Street Journal. Loans are not contingent upon
proceeds being used for home improvement. Generally, the loan term is 20 years with interest only
due during the first 10 years, and then principal and interest due for the remaining 10 years. The
Banks home equity loans outstanding totaled $8.4 million, or 2.1% of total loans at March 31,
2011.
Commercial and Industrial, Consumer and Other Loans. The Banks commercial and industrial,
consumer, and other loans totaled $2.2 million, or 0.56% of the total loan portfolio on March 31,
2011. The commercial and industrial portfolio consists primarily of time, demand and
line-of-credit loans to a variety of local small businesses that are generally made on a secured
basis. The decrease in commercial and industrial loans in fiscal 2011 was primarily attributable
to the repayment of loans. The Bank engages in consumer lending primarily as an accommodation to
existing customers.
5
Risks of Residential and Commercial Real Estate, Construction and Land, and Commercial and
Industrial Lending. Declining home values and default risk are the primary risks associated with
residential lending. However, commercial real estate, construction and land, and commercial and
industrial lending entail significant additional risks compared to residential mortgage lending.
The repayment of loans secured by income-producing properties is typically dependent on the
successful operation of the properties and thus may be subject to a greater extent to adverse
conditions in the local real estate market or in the economy generally. Construction loans involve
a higher degree of risk of loss than long-term financing on improved occupied real estate because
of the uncertainties inherent in estimating construction costs, delays arising from labor problems,
material shortages, and other unpredictable contingencies. Commercial and industrial loans are
generally not secured by real estate and may involve greater risks than other types of lending.
Because payments on such loans are often dependent on the successful operation of the business
involved, repayment of such loans may be subject to a greater extent to adverse conditions in the
economy. For more information see Nonperforming Assets below.
Origination Fees and Other Fees. The Bank currently collects origination fees on some of the
real estate and commercial loan products it offers. Fees to cover the cost of appraisals, credit
reports and other direct costs are also collected. Loan origination fees collected vary in
proportion to the level of lending activity, as well as competitive and economic conditions.
The Bank imposes late charges on all loan products it offers with the exception of equity
lines of credit and loans secured by deposits. The Bank also collects prepayment premiums and
partial release fees on commercial real estate and construction loans where such items are
negotiated as part of the loan agreement.
Loan Solicitation and Processing. Loan originations come from a number of sources and are
attributable to walk-in customers, existing customers, real estate brokers and builders, as well as
the purchase of residential and commercial loans from other financial institutions. The Bank also
utilizes in-house originators in the origination of residential real estate loans. Commercial real
estate loans are originated by the Banks team of commercial loan officers. Consumer loans result
from both walk-in and existing customers.
Each loan originated by the Bank is underwritten by lending personnel of the Bank or, in the
case of certain residential mortgage loans to be sold, qualified independent contract underwriters.
Individual lending officers, a committee of loan officers and the Banks Security Committee have
the authority to approve loans up to various limits. Bank-approved independent certified and
licensed appraisers are used to appraise the property intended to secure real estate loans. The
Banks underwriting criteria are designed to minimize the risks of each loan. There are detailed
guidelines concerning the types of loans that may be made, the nature of the collateral, the
information that must be obtained concerning the loan applicant and follow-up inspections of
collateral after the loan is made.
Nonperforming Assets. The Bank notifies a borrower of a delinquency when any payment becomes
15 days past due. Repeated contacts are made if the loan remains delinquent for 30 days or more.
The Bank will consider working out a payment schedule with a borrower to clear a delinquency, if
necessary. If, however, a borrower is unwilling or unable to resolve such a default after 90 days,
the Bank will generally proceed to foreclose and liquidate the property to satisfy the debt.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are
discontinued either when reasonable doubt exists as to the full and timely collection of interest
or principal, or when a loan becomes contractually past due 90 days with respect to interest or
principal. The accrual on some loans, however, may continue even though they are more than 90 days
past due if management deems it appropriate, provided that the loans are well secured and in the
process of collection. When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Interest accruals are
resumed on such loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to be fully collectable
as to both principal and interest. For some nonaccrual loans that are generally well-secured, cash
interest payments that are received are treated as interest income on a cash basis as long as the
remaining recorded investment is determined by management to be fully collectible.
The Bank has instituted additional procedures to closely monitor loans and bring potential
problems to managements attention early in the collection process. The Bank prepares a monthly
watch list of potential
6
problem loans including currently performing loans, and the Banks Senior Loan Officer reviews
delinquencies with the Security Committee of the Board of Directors at least monthly. Due to the
high priority given to monitoring asset quality, senior management is involved in the early
detection and resolution of problem loans. Additionally, the Bank has a workout committee
comprised of the Banks Senior Loan Officer and other lending and Bank personnel that meets
regularly to discuss the ongoing resolution of any loans identified for special review.
The following table sets forth information with respect to the Banks nonperforming assets at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in Thousands) |
|
Loans accounted for on a nonaccrual
basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans |
|
$ |
8,578 |
|
|
$ |
5,575 |
|
|
$ |
4,617 |
|
|
$ |
9,606 |
|
|
$ |
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
|
1,003 |
|
|
|
671 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
Real estate acquired by foreclosure or
deed in lieu of foreclosure |
|
|
132 |
|
|
|
60 |
|
|
|
2,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
9,713 |
|
|
$ |
6,306 |
|
|
$ |
7,753 |
|
|
$ |
9,606 |
|
|
$ |
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, accruing |
|
$ |
7,171 |
|
|
$ |
10,597 |
|
|
$ |
|
|
|
$ |
136 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
2.49 |
% |
|
|
1.35 |
% |
|
|
1.03 |
% |
|
|
2.02 |
% |
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets |
|
|
1.99 |
% |
|
|
1.16 |
% |
|
|
1.35 |
% |
|
|
1.68 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys nonperforming assets at March 31, 2011 exceeded the balances at March 31, 2010
and March 31, 2009. At March 31, 2008, loans to two customers totaled $8.3 million, or 86.3% of
total nonperforming assets. One relationship was comprised of residential construction loans to
construct two homes, and the other relationship was a commercial real estate loan secured by a
property containing residential and commercial condominiums. During fiscal 2009, the two
residential properties were acquired through a deed in lieu of foreclosure, and these two
properties represented the majority of the balance of other real estate owned (OREO) at March 31,
2009.
Nonperforming assets decreased from $7.8 million at March 31, 2009 to $6.3 million at March
31, 2010 primarily due to the sale in fiscal 2010 of the two OREO properties acquired during fiscal
2009. Partially offsetting the decrease in OREO were increases in nonperforming and restructured
loans which represented eleven customer relationships totaling $6.2 million at March 31, 2010
compared to seven customer relationships totaling $4.8 million at March 31, 2009.
If the interest on nonaccrual loans had been recognized in accordance with original interest
rates, interest income would have increased by $208 thousand for fiscal year 2011 and $94 thousand
for fiscal 2010.
Impaired loans which were accruing interest at March 31, 2010 totaled $10.6 million, comprised
of 16 commercial loans to seven borrowers which totaled $9.7 million, and four residential loans to
four borrowers which totaled $898 thousand. Two customer relationships which totaled $7.0 million
comprised most of the impaired but accruing commercial real estate loans at March 31, 2010. One
relationship which totaled $4.6 million was a troubled debt restructuring (TDR), and for which this
customers loans were accruing interest prior to the restructuring. Managements conclusion that
it was appropriate for this relationship to continue to accrue interest subsequent to the
restructuring was based on the customers satisfactory repayment performance prior to the
restructuring and managements analysis which determined that the remaining contractual principal
and interest are expected to be collected. The other impaired but accruing commercial real estate
loan relationship at March 31, 2010 was comprised of five loans which totaled $2.4 million. As of
March 31, 2011, this customer has paid-in-full
7
four of the five loans. The remaining loan which totaled $764 thousand was placed on
nonaccrual status during fiscal 2011, however, management expects to collect the outstanding
principal balance.
At March 31, 2011, impaired accruing loans totaled $7.2 million and were primarily comprised
of the aforementioned $4.6 million commercial real estate relationship which was restructured in
fiscal 2010 and totaled $4.5 million at March 31, 2011, and a $1.4 million commercial real estate
loan added during fiscal 2011. The $4.5 million commercial real estate relationships TDR was
renewed during fiscal 2011 as the customer exercised a six month interest only option. The $1.4
million relationship added during fiscal 2011 was experiencing temporary cash flow difficulties and
the restructuring included the advancement of funds to pay past due real estate taxes and six
months of interest only payments. Nonperforming assets increased by $3.4 million, from $6.3
million at March 31, 2010 to $9.7 million at March 31, 2011 primarily due to the addition of three
commercial real estate customer relationships which totaled $2.3 million and six residential
customer relationships which totaled $1.5 million, partially offset by the removal of three loans
totaling $400 thousand. At March 31, 2011, TDRs which were accruing interest totaled $7.2 million
compared to $5.7 million at March 31, 2010. While bankruptcy filings have extended the time
required to resolve some situations involving nonperforming assets, management continues to work
with borrowers and bankruptcy trustees to resolve these situations as soon as possible. Management
believes there are adequate reserves and collateral securing these loans to cover losses that may
result from nonperforming loans. At March 31, 2011, there were no loans that are not listed on the
table above where known information about possible credit problems of borrowers caused management
to have serious doubts as to the ability of such borrowers to comply with present loan repayment
terms. For more information regarding non-performing loans, see Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, Provision for Loan Losses.
Allowance for Loan Losses. The Company provides for loan losses in order to maintain the
allowance for loan losses at a level that management estimates is adequate to absorb probable
losses based on an evaluation of known and inherent risks in the portfolio. In determining the
appropriate level of the allowance for loan losses, management considers past and anticipated loss
experience, evaluations of underlying collateral, financial condition of the borrower, prevailing
economic conditions, the nature and volume of the loan portfolio and the levels of non performing
and other classified loans. The amount of the allowance is based on estimates and ultimate losses
may vary from such estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly when appropriate to maintain the adequacy of the
allowance. The Company uses a process of portfolio segmentation to calculate the appropriate
reserve level at the end of each quarter. Management analyzes required reserve allocations for
loans considered impaired under Accounting Standards Codification (ASC) 310 Receivables (ASC
310) and the allocation percentages used when calculating potential losses under ASC 450
Contingencies (ASC 450). Although management uses available information to establish the
appropriate level of the allowance for loan losses, future additions or reductions to the allowance
may be necessary based on estimates that are susceptible to change as a result of changes in loan
composition or volume, changes in economic market area conditions or other factors. As a result,
our allowance for loan losses may not be sufficient to cover actual loan losses, and future
provisions for loan losses could materially adversely affect the Companys operating results. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may require the Company
to recognize adjustments to the allowance based on their judgments about information available to
them at the time of their examination. During fiscal year ended March 31, 2011, a $1.1 million
provision was recorded based upon managements quarterly evaluations of the loan portfolio.
Certain loan loss factor ratios were increased during fiscal 2011 due to the continued recessionary
economic conditions. Management currently believes that there are adequate reserves and collateral
securing non-performing loans to cover losses that may result from these loans at March 31, 2011.
See Note 1 to the Consolidated Financial Statements for a detailed description of managements
estimation process and methodology related to the allowance for loan losses.
8
The following table presents activity in the allowance for loan losses during the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in Thousands) |
|
Balance at beginning of year |
|
$ |
3,038 |
|
|
$ |
3,191 |
|
|
$ |
3,613 |
|
|
$ |
3,881 |
|
|
$ |
3,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reduction of provision) |
|
|
1,100 |
|
|
|
600 |
|
|
|
2,125 |
|
|
|
(70 |
) |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
(2,201 |
) |
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
(69 |
) |
|
|
(250 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
(171 |
) |
|
|
(469 |
) |
|
|
(178 |
) |
|
|
(173 |
) |
|
|
|
|
Other loans |
|
|
(10 |
) |
|
|
(54 |
) |
|
|
(36 |
) |
|
|
(76 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(250 |
) |
|
|
(773 |
) |
|
|
(2,559 |
) |
|
|
(249 |
) |
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
43 |
|
Other loans |
|
|
4 |
|
|
|
20 |
|
|
|
9 |
|
|
|
14 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
4 |
|
|
|
20 |
|
|
|
12 |
|
|
|
51 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(246 |
) |
|
|
(753 |
) |
|
|
(2,547 |
) |
|
|
(198 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
3,892 |
|
|
$ |
3,038 |
|
|
$ |
3,191 |
|
|
$ |
3,613 |
|
|
$ |
3,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding during the
year* |
|
$ |
424,993 |
|
|
$ |
461,592 |
|
|
$ |
464,288 |
|
|
$ |
462,164 |
|
|
$ |
433,935 |
|
Ratio of net charge-offs to average loans |
|
|
0.06 |
% |
|
|
0.16 |
% |
|
|
0.55 |
% |
|
|
0.04 |
% |
|
|
n/a |
|
Total loans outstanding at end of year |
|
$ |
394,217 |
|
|
$ |
461,510 |
|
|
$ |
460,670 |
|
|
$ |
474,942 |
|
|
$ |
460,542 |
|
Ratio of allowance for loan losses to
loans at end of year |
|
|
0.99 |
% |
|
|
0.66 |
% |
|
|
0.69 |
% |
|
|
0.76 |
% |
|
|
0.84 |
% |
n/a means either not applicable or not meaningful
|
|
|
* |
|
Does not include loans held for sale |
9
The allowance for loan losses is available for offsetting credit losses in connection with any
loan, but is internally allocated among loan categories as part of the process for evaluating the
adequacy of the allowance for loan losses. The following table presents the allocation of the
Banks allowance for loan losses, by type of loan, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Loans to |
|
|
|
|
|
|
Loans to |
|
|
|
|
|
|
Loans to |
|
|
|
|
|
|
Loans to |
|
|
|
|
|
|
Loans to |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
|
(Dollars in Thousands) |
|
Mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
771 |
|
|
|
46.56 |
% |
|
$ |
721 |
|
|
|
47.03 |
% |
|
$ |
655 |
|
|
|
39.80 |
% |
|
$ |
520 |
|
|
|
37.60 |
% |
|
$ |
456 |
|
|
|
38.10 |
% |
Commercial |
|
|
2,669 |
|
|
|
50.50 |
|
|
|
2,023 |
|
|
|
49.39 |
|
|
|
1,941 |
|
|
|
54.25 |
|
|
|
1,616 |
|
|
|
51.50 |
|
|
|
2,642 |
|
|
|
51.10 |
|
Construction and land loans |
|
|
14 |
|
|
|
0.12 |
|
|
|
14 |
|
|
|
0.59 |
|
|
|
406 |
|
|
|
3.06 |
|
|
|
1,246 |
|
|
|
6.50 |
|
|
|
587 |
|
|
|
7.60 |
|
Home equity |
|
|
129 |
|
|
|
2.14 |
|
|
|
133 |
|
|
|
1.91 |
|
|
|
114 |
|
|
|
1.59 |
|
|
|
86 |
|
|
|
1.40 |
|
|
|
84 |
|
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
|
3,583 |
|
|
|
99.21 |
|
|
|
2,891 |
|
|
|
98.92 |
|
|
|
3,116 |
|
|
|
98.70 |
|
|
|
3,468 |
|
|
|
97.00 |
|
|
|
3,769 |
|
|
|
98.30 |
|
Other loans |
|
|
309 |
|
|
|
0.79 |
|
|
|
147 |
|
|
|
1.08 |
|
|
|
75 |
|
|
|
1.30 |
|
|
|
145 |
|
|
|
3.00 |
|
|
|
112 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,892 |
|
|
|
100.00 |
% |
|
$ |
3,038 |
|
|
|
100.00 |
% |
|
$ |
3,191 |
|
|
|
100.00 |
% |
|
$ |
3,613 |
|
|
|
100.00 |
% |
|
$ |
3,881 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Investment Activities
The primary objectives of the investment portfolio are to achieve a competitive rate of return
over a reasonable period of time and to provide liquidity. As a Massachusetts chartered bank, the
Bank is authorized to invest in various obligations of federal and state governmental agencies,
corporate bonds and other obligations and, within certain limits, common and preferred stocks. The
Banks investment policy requires that corporate debt securities be rated as investment grade at
the time of purchase. A security that is downgraded below investment grade will require additional
analysis relative to perceived credit quality, market price, and overall impact on capital/earnings
before a decision is made as to hold or sell. For all sub-investment grade corporate holdings,
additional analysis of creditworthiness is required. The Banks investment in common and preferred
stock is generally limited to large, well-known corporations whose shares are actively traded. The
size of the Banks holdings in an individual companys stock is also limited by policy. A portion
of the Banks investment portfolio consists of mortgage-backed securities which represent interests
in pools of residential mortgages. Such securities include securities issued and guaranteed by the
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC)
and the Government National Mortgage Association (GNMA) as well as collateralized mortgage
obligations (CMOs) issued primarily by FNMA and FHLMC.
Investments are classified as held to maturity, available for sale, or trading.
Investments classified as trading securities are reported at fair value with unrealized gains and
losses included in earnings. Investments classified as available for sale are reported at fair
value, with unrealized gains and losses, net of taxes, reported as a separate component of
stockholders equity. Securities held to maturity are carried at amortized cost. At March 31,
2011, all of the Banks marketable investments were classified as available for sale.
As previously reported, the Companys investments in the perpetual preferred stock of the FNMA
and FHLMC were significantly impacted by the September 2008 conservatorship of FNMA and FHLMC,
giving control of their management to the Federal Housing Finance Agency and prohibiting FNMA and
FHLMC from paying dividends on their existing common and preferred stock. This event resulted in a
$9.4 million impairment of the value of the Companys investment in these entities during the
quarter ended September 30, 2008. These impairment changes were partially offset by a tax benefit
of approximately $3.5 million due to the October 2008 enactment of the Emergency Economic
Stabilization Act of 2008, which permitted the Company to treat losses incurred on the FNMA and
FHLMC preferred stock as ordinary losses for federal income tax purposes.
11
The following table sets forth a summary of the Banks investment securities, as well as
the percentage such investments comprise of the Banks total assets, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in Thousands) |
|
U.S. Government and agency obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,503 |
|
Corporate bonds |
|
|
|
|
|
|
1,752 |
|
|
|
701 |
|
Government agency and government sponsored enterprise
mortgage-backed securities |
|
|
18,823 |
|
|
|
24,993 |
|
|
|
28,353 |
|
Single issuer trust preferred securities issued by
financial institutions |
|
|
1,049 |
|
|
|
1,045 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
19,872 |
|
|
|
27,790 |
|
|
|
31,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock issued by financial institutions |
|
|
3,185 |
|
|
|
3,255 |
|
|
|
1,650 |
|
Common stock |
|
|
2,128 |
|
|
|
3,323 |
|
|
|
2,258 |
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
25,185 |
|
|
$ |
34,368 |
|
|
$ |
35,215 |
|
|
|
|
|
|
|
|
|
|
|
Percentage of total assets |
|
|
5.16 |
% |
|
|
6.35 |
% |
|
|
6.12 |
% |
|
|
|
|
|
|
|
|
|
|
There were no investment holdings, other than those of the U.S. government and its agencies,
for which the Companys aggregate holding of one issuer exceeded 10% of stockholders equity as of
March 31, 2011.
The following table sets forth the scheduled maturities, amortized cost, fair values and
average yields for the Banks debt securities at March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less |
|
|
One to Five Years |
|
|
Five to Ten Years |
|
|
More than Ten Years |
|
|
Total Investment Portfolio |
|
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Average |
|
|
Amortized |
|
|
Fair |
|
|
Average |
|
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Cost |
|
|
Cost |
|
|
Yield |
|
|
Cost |
|
|
Value |
|
|
Yield |
|
|
|
(Dollars in Thousands) |
|
Government agency
and government
sponsored
enterprise
mortgage-backed
securities |
|
$ |
|
|
|
|
|
% |
|
$ |
2,970 |
|
|
|
4.18 |
% |
|
$ |
11 |
|
|
|
4.75 |
% |
|
$ |
15,148 |
|
|
|
4.71 |
% |
|
$ |
18,129 |
|
|
$ |
18,823 |
|
|
|
4.62 |
% |
Single issuer trust
preferred
securities issued
by financial
institutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002 |
|
|
|
7.78 |
|
|
|
1,002 |
|
|
|
1,049 |
|
|
|
7.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
$ |
2,970 |
|
|
|
|
|
|
$ |
11 |
|
|
|
|
|
|
$ |
16,150 |
|
|
|
|
|
|
$ |
19,131 |
|
|
$ |
19,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits, Borrowed Funds, and Other Sources of Funds
General. Savings accounts and other types of deposits have traditionally been an important
source of the Banks funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, loan sales, borrowings and from other
operations. The availability of funds is influenced by the general level of interest rates and
other market conditions. Scheduled loan repayments are a relatively stable source of funds while
deposit inflows and outflows vary widely and are influenced by prevailing interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for reductions in deposits
or deposit inflows at less than projected levels and may be used on a longer term basis to support
expanded lending activities. During fiscal 2003, the Bank entered into a retail CD brokerage
agreement with a major brokerage firm. Since entering into the agreement, the Bank has not
obtained brokered deposits but rather maintains the relationship as a potential secondary source of
liquidity.
Deposits. Consumer, business and municipal deposits are attracted principally from within the
Banks market area through the offering of a broad selection of deposit instruments including
demand deposit accounts, NOW accounts, money market deposit accounts, regular savings accounts,
term deposit accounts and retirement savings plans. The Bank has historically not actively
solicited or advertised for deposits outside of its market area or
12
solicited brokered deposits.
The Bank attracts deposits through its branch office network, automated teller
machines, the Internet and by paying rates competitive with other financial institutions in
its market area. From time to time, the Bank bids on short-term certificates of deposit from the
Commonwealth of Massachusetts, which periodically awards deposits to financial institution bidders
throughout Massachusetts.
Deposit Accounts. The following table shows the distribution of the average balance of the
Banks deposit accounts at the dates indicated and the weighted average rate paid for each category
of account for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
% of |
|
|
Rate |
|
|
Average |
|
|
% of |
|
|
Rate |
|
|
Average |
|
|
% of |
|
|
Rate |
|
|
|
Balance |
|
|
Deposits |
|
|
Paid |
|
|
Balance |
|
|
Deposits |
|
|
Paid |
|
|
Balance |
|
|
Deposits |
|
|
Paid |
|
|
|
(Dollars in Thousands) |
|
Demand deposit accounts |
|
$ |
42,534 |
|
|
|
12.84 |
% |
|
|
|
% |
|
$ |
42,247 |
|
|
|
12.04 |
% |
|
|
|
% |
|
$ |
38,807 |
|
|
|
10.92 |
% |
|
|
|
% |
NOW accounts |
|
|
28,697 |
|
|
|
8.66 |
|
|
|
0.27 |
|
|
|
27,856 |
|
|
|
7.93 |
|
|
|
0.29 |
|
|
|
26,029 |
|
|
|
7.32 |
|
|
|
0.37 |
|
Passbook and other
savings accounts |
|
|
54,584 |
|
|
|
16.48 |
|
|
|
0.23 |
|
|
|
51,577 |
|
|
|
14.69 |
|
|
|
0.45 |
|
|
|
50,240 |
|
|
|
14.13 |
|
|
|
0.51 |
|
Money market deposit
accounts |
|
|
79,089 |
|
|
|
23.88 |
|
|
|
0.69 |
|
|
|
79,583 |
|
|
|
22.67 |
|
|
|
1.32 |
|
|
|
67,111 |
|
|
|
18.88 |
|
|
|
2.30 |
|
Term deposit certificates |
|
|
126,326 |
|
|
|
38.14 |
|
|
|
1.31 |
|
|
|
149,814 |
|
|
|
42.67 |
|
|
|
2.08 |
|
|
|
173,303 |
|
|
|
48.75 |
|
|
|
2.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
331,230 |
|
|
|
100.00 |
% |
|
|
0.83 |
% |
|
$ |
351,077 |
|
|
|
100.00 |
% |
|
|
1.45 |
% |
|
$ |
355,490 |
|
|
|
100.00 |
% |
|
|
1.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits in Excess of $100,000. The following table indicates the amount of the
Banks time deposits of $100,000 or more by time remaining until maturity as of March 31, 2011 (In
Thousands):
|
|
|
|
|
Maturity Period: |
|
|
|
|
Three months or less |
|
$ |
13,522 |
|
Three through six months |
|
|
8,107 |
|
Six through twelve months |
|
|
11,366 |
|
Over twelve months |
|
|
7,848 |
|
|
|
|
|
Total |
|
$ |
40,843 |
|
|
|
|
|
Borrowings. From time to time, the Bank borrows funds from the FHLB of Boston. All advances
from the FHLB of Boston are secured by a blanket lien on residential first mortgage loans, certain
investment securities and commercial real estate loans, and all of the Banks stock in the FHLB of
Boston. At March 31, 2011, the Bank had advances outstanding from the FHLB of Boston of $117.4
million and unused borrowing capacity, based on available collateral, of approximately $53.6
million. Proceeds from these advances were primarily used to fund the Banks loan growth.
Additional sources of borrowed funds include The Co-operative Central Bank Reserve Fund, the
Federal Reserve Bank, and a line of credit with a correspondent bank.
The following table sets forth certain information regarding borrowings from the FHLB of
Boston, including short-term FHLB of Boston borrowings under a line of credit, at the dates and for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the |
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
(Dollars in Thousands) |
|
Amounts outstanding at end of period |
|
$ |
117,351 |
|
|
$ |
143,469 |
|
|
$ |
144,583 |
|
Weighted average rate at end of period |
|
|
3.68 |
% |
|
|
3.98 |
% |
|
|
4.52 |
% |
Maximum amount of borrowings outstanding at any month end |
|
$ |
139,460 |
|
|
$ |
161,509 |
|
|
$ |
156,682 |
|
Approximate average amounts outstanding at any month end |
|
$ |
129,505 |
|
|
$ |
146,210 |
|
|
$ |
147,117 |
|
Approximate weighted average rate during the year |
|
|
3.83 |
% |
|
|
4.43 |
% |
|
|
4.59 |
% |
13
Troubled Asset Relief Program Capital Purchase Program. On December 5, 2008, the Company sold
$10.0 million in Series A preferred stock (the Series A Preferred Stock) to the U.S. Department
of Treasury (U.S. Treasury) as a participant in the federal governments Troubled Asset Relief
Program (TARP) Capital Purchase Program. This represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary
program for healthy U.S. financial institutions designed to encourage these institutions to build
capital to increase the flow of financing to U.S. businesses and consumers and to support the
weakened U.S. economy. Participation in this program provided an additional source of funds during
the fiscal year ended March 31, 2009.
Subsidiaries
In September 2004, the Company established Central Bancorp Capital Trust I (the Trust), a
Delaware statutory trust. The Trust issued and sold $5.1 million of trust preferred securities in
a private placement and issued $158,000 of trust common securities to the Company. The Trust used
the proceeds of these issuances to purchase $5.3 million of the Companys floating rate junior
subordinated debentures due September 16, 2034 (the Trust I Debentures). The interest rates on
the Trust I Debentures and trust preferred securities are variable and adjustable quarterly at
2.44% over the three month LIBOR. At March 31, 2011, the interest rate was 2.75%.
On January 31, 2007, the Company completed a trust preferred securities financing in the
amount of $5.9 million. In the transaction, the Company formed a Connecticut statutory trust,
known as Central Bancorp Statutory Trust II (Trust II). Trust II issued and sold $5.9 million of
trust preferred securities in a private placement and issued $183,000 of trust common securities to
the Company. Trust II used the proceeds of these issuances to purchase $6.1 million of the
Companys floating rate junior subordinated debentures due March 15, 2037 (the Trust II
Debentures). From January 31, 2007 until March 15, 2017 (the Fixed Rate Period), the interest
rate on the Trust II Debentures and the trust preferred securities is fixed at 7.015% per annum.
Upon the expiration of the Fixed Rate Period, the interest rate on the Trust II Debentures and the
trust preferred securities will be at a variable per annum rate, reset quarterly, equal to three
month LIBOR plus 1.65%. The Trust II Debentures are the sole assets of Trust II. The Trust II
Debentures and the trust preferred securities each have 30-year lives. The trust preferred
securities and the Trust II Debentures will each be callable by the Company or Trust II, at their
respective option, after ten years, and sooner in certain specific events, including in the event
that the securities are not eligible for treatment as Tier 1 capital, subject to prior approval by
the Federal Reserve Board, if then required. Interest on the trust preferred securities and the
Trust II Debentures may be deferred at any time or from time to time for a period not exceeding 20
consecutive quarterly payments (five years), provided there is no event of default.
The Trust I Debentures and the Trust II Debentures are the sole assets of Trust I and Trust
II, respectively, and are subordinate to all of the Companys existing and future obligations for
borrowed money.
The trust preferred securities generally rank equal to the trust common securities in priority
of payment, but will rank prior to the trust common securities if and so long as the Company fails
to make principal or interest payments on the Trust I Debentures and the Trust II Debentures.
Concurrently with the issuance of the Trust I and Trust II Debentures and the trust preferred
securities, the Company issued guarantees related to each trusts securities for the benefit of the
holders of Trust I and Trust II.
In April 1998 and July 2003, the Bank established Central Securities Corporation and Central
Securities Corporation II, respectively, Massachusetts corporations, as wholly-owned subsidiaries
of the Bank for the purpose of engaging exclusively in buying, selling and holding, on their own
behalf, securities that may be held directly by the Bank. From time to time these subsidiaries
hold securities such as government agency obligations, corporate bonds, mortgage-backed securities,
preferred stocks, and trust preferred securities, and qualify under Section 38B of Chapter 63 of
the Massachusetts General Laws as Massachusetts securities corporations.
During January 2009, the Bank established a wholly-owned subsidiary, Metro Real Estate
Holdings, LLC. The subsidiary was formed to, among other things, hold, maintain, and dispose of
certain foreclosed properties acquired from the Bank.
14
REGULATION AND SUPERVISION
Regulation and Supervision of the Company
The Bank is a Massachusetts-chartered co-operative bank and is the wholly-owned subsidiary of
the Company, a Massachusetts corporation and registered bank holding company. The Banks deposits
are insured up to applicable limits by the Federal Deposit Insurance Corporation and by the Share
Insurance Fund of Massachusetts for amounts in excess of the FDIC insurance limits. The Bank is
subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering
agency, and by the FDIC, as its primary federal regulator and deposit insurer. The Bank is required
to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner
of Banks concerning its activities and financial condition and must obtain regulatory approvals
prior to entering into certain transactions, including, but not limited to, mergers with or
acquisitions of other financial institutions. As a registered bank holding company, the Company is
regulated by the Federal Reserve Board. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is intended primarily
for the protection of depositors and the deposit insurance funds, rather than for the protection of
stockholders and creditors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the establishment of deposit insurance
assessment fees, the classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and policies, whether by the
Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve
Board or Congress, could have a material adverse impact on the financial condition and results of
operations of the Company and the Bank.
Set forth below is a brief description of certain regulatory requirements applicable to the
Company and the Bank. The description below is limited to certain material aspects of the statutes
and regulations addressed, and is not intended to be a complete description of such statutes and
regulations and their effects on the Company and the Bank.
Recent Regulatory Reform
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which
was enacted on July 21, 2010, will significantly change the current bank regulatory structure and
affect the lending, investment, trading and operating activities of financial institutions and
their holding companies. The Dodd-Frank Act will eliminate the Office of Thrift Supervision and
require that federal savings associations be regulated by the Office of the Comptroller of the
Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the
Federal Reserve Board to supervise and regulate all savings and loan holding companies.
The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank
holding companies that are as stringent as those required for insured depository institutions, and
the components of Tier 1 capital would be restricted to capital instruments that are currently
considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of
trust preferred securities are excluded from Tier 1 capital unless such securities were issued
prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of
assets. The legislation also establishes a floor for capital of insured depository institutions
that cannot be lower than the standards in effect today, and directs the federal banking regulators
to implement new leverage and capital requirements within 18 months. These new leverage and capital
requirements must take into account off-balance sheet activities and other risks, including risks
relating to securitized products and derivatives.
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers
to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has
broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and
practices. The Consumer Financial Protection Bureau has examination and enforcement authority over
all banks and savings institutions with more than $10.0 billion in assets. Banks and savings
institutions with $10.0 billion or less in assets will be examined by their applicable bank
regulators. The new legislation also weakens the federal preemption available for national banks
and federal savings associations, and gives the state attorneys general the ability to enforce
applicable federal consumer protection laws.
15
General. The Company is a bank holding company subject to regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended (the BHCA). As a result, the
activities of the Company are subject to certain limitations, which are described below. In
addition, as a bank holding company, the Company is required to file annual and quarterly reports
with the Federal Reserve Board and to furnish such additional information as the Federal Reserve
Board may require pursuant to the BHCA. The Company is also subject to regular examination by and
the enforcement authority of the Federal Reserve Board.
Activities. With certain exceptions, the BHCA prohibits a bank holding company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of a company that is
not a bank or a bank holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for its subsidiaries.
The principal exceptions to these prohibitions involve certain non-bank activities which, by
statute or by Federal Reserve Board regulation or order, have been identified as activities closely
related to the business of banking. The activities of the Company are subject to these legal and
regulatory limitations under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Boards prior approval of specific nonbanking activities, the
Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause
to believe that the continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding
company.
Effective with the enactment of the Gramm-Leach-Bliley Act (the G-L-B Act) on November 12,
1999, bank holding companies whose financial institution subsidiaries are well capitalized and well
managed and have satisfactory Community Reinvestment Act (CRA) records can elect to become
financial holding companies which are permitted to engage in a broader range of financial
activities than are permitted to bank holding companies, including investment banking and insurance
companies. Financial holding companies are authorized to engage in, directly or indirectly,
financial activities. A financial activity is an activity that is: (i) financial in nature; (ii)
incidental to an activity that is financial in nature; or (iii) complementary to a financial
activity and that does not pose a safety and soundness risk. The G-L-B Act includes a list of
activities that are deemed to be financial in nature. Other activities also may be decided by the
Federal Reserve Board to be financial in nature or incidental thereto if they meet specified
criteria. A financial holding company that intends to engage in a new activity or to acquire a
company to engage in such an activity is required to give prior notice to the Federal Reserve
Board. If the activity is not either specified in the G-L-B Act as being a financial activity or
one that the Federal Reserve Board has determined by rule or regulation to be financial in nature,
the prior approval of the Federal Reserve Board is required.
Acquisitions. Under the BHCA, a bank holding company must obtain the prior approval of the
Federal Reserve Board before (1) acquiring direct or indirect ownership or control of any voting
shares of any bank or bank holding company if, after such acquisition, the bank holding company
would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial condition, particularly
with regard to capital adequacy, and satisfactory CRA ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to
acquiring control of the Company or the Bank. For purposes of the BHCA, control is defined as
ownership of more than 25% of any class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company. In addition, the Change in Bank Control Act
and the related regulations of the Federal Reserve Board require any person or persons acting in
concert (except for companies required to make application under the BHCA) to file a written notice
with the Federal Reserve Board before such person or persons may acquire control of the Company.
The Change in Bank Control Act defines control as the power, directly or indirectly, to vote 25%
or more of any voting securities or to direct the management or policies of a bank holding company
or an insured bank. There is a presumption of control where the acquiring person will own,
control or hold with power to vote 10% or more of
16
any class of voting security of a bank holding company or insured bank if, like the Company,
the company involved has registered securities under Section 12 of the Securities Exchange Act of
1934.
Under Massachusetts banking law, prior approval of the Massachusetts Division of Banks is also
required before any person may acquire control of a Massachusetts bank or bank holding company.
Massachusetts law generally prohibits a bank holding company from acquiring control of an
additional bank if the bank to be acquired has been in existence for less than three years or, if
after such acquisition, the bank holding company would control more than 30% of the FDIC-insured
deposits in the Commonwealth of Massachusetts.
Capital Requirements. The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets. See Regulation and
Supervision of the BankCapital Requirements.
Dividends. The Federal Reserve Board has the power to prohibit dividends by bank holding
companies if their actions are believed to constitute unsafe or unsound practices. The Federal
Reserve Board has issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve Boards view that a bank holding company should pay
cash dividends only to the extent that the companys net income for the past year is sufficient to
cover both the cash dividends and a rate of earnings retention that is consistent with the
companys capital needs, asset quality and overall financial condition. The Federal Reserve Board
also indicated that it would be inappropriate for a bank holding company experiencing serious
financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations
adopted by the Federal Reserve Board pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), the Federal Reserve Board may prohibit a bank holding company
from paying any dividends if the holding companys bank subsidiary is classified as
undercapitalized or worse. See Regulation and Supervision of the BankPrompt Corrective
Regulatory Action.
In addition, under the terms of the TARP Capital Purchase program, prior to the earlier of (1)
December 5, 2011, or (ii) the date on which all of the Companys preferred shares held by the U.S.
Department of Treasury have been redeemed in full, the Company cannot increase its quarterly cash
dividend above $0.18 per common share.
Stock Repurchases. Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all
such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the
Companys consolidated net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would violate any law, regulation, Federal Reserve
Board order, directive or any condition imposed by, or written agreement with, the Federal Reserve
Board. This requirement does not apply to bank holding companies that are well-capitalized,
received one of the two highest examination ratings at their last examination and are not the
subject of any unresolved supervisory issues.
The Sarbanes-Oxley Act of 2002 implemented legislative reforms intended to address corporate
and accounting fraud. The Sarbanes-Oxley Act restricts the scope of services that may be provided
by accounting firms to their public company audit clients and any non-audit services being provided
to a public company audit client will require pre-approval by the companys audit committee. In
addition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or
their equivalents, to certify to the accuracy of periodic reports filed with the Securities and
Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement.
Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a
companys financial statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during retirement plan
blackout periods and loans to company executives (other than loans by financial institutions
permitted by federal rules and regulations) are restricted. The legislation accelerates the time
frame for disclosures by public companies of changes in ownership in a companys securities by
directors and executive officers.
17
The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the companys
registered public accounting firm. Among other requirements, companies must disclose whether at
least one member of the audit committee is a financial expert (as such term is defined by the
Securities and Exchange Commission) and if not, why not. Although the Company has incurred
additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not believe that such compliance has had a material impact on the
Companys results of operations or financial condition.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to report on our assessment
of the effectiveness of our internal controls over financial reporting during the fiscal year
ending March 31, 2011 in this annual report on Form 10-K. We have performed reviews regarding our
internal controls over financial reporting during the fiscal year ended March 31, 2011, and we
believe that such internal controls are adequate. The Company is currently considered a smaller
reporting company with the SEC and is not required to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 requirements regarding external auditor attestation of internal controls over financial
reporting.
Regulation and Supervision of the Bank
General. The Bank is subject to extensive regulation by the Massachusetts Commissioner of
Banks (Commissioner) and the FDIC. The lending activities and other investments of the Bank must
comply with various regulatory requirements. The Commissioner and FDIC periodically examine the
Bank for compliance with these requirements. The Bank must file reports with the Commissioner and
the FDIC describing its activities and financial condition. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors.
Massachusetts State Law. As a Massachusetts-chartered co-operative bank, the Bank is subject
to the applicable provisions of Massachusetts law and the regulations of the Commissioner. The
Bank derives its lending and investment powers from these laws, and is subject to periodic
examination and reporting requirements by and of the Commissioner. Certain powers granted under
Massachusetts law may be constrained by federal regulation. In addition, the Bank is required to
make periodic reports to the Co-operative Central Bank. The approval of the Commissioner is
required prior to any merger or consolidation, or the establishment or relocation of any branch
office. Massachusetts co-operative banks are subject to the enforcement authority of the
Commissioner who may suspend or remove directors or officers, issue cease and desist orders and
appoint conservators or receivers in appropriate circumstances. Co-operative banks are required to
pay fees and assessments to the Commissioner to fund that offices operations. The cost of state
examination fees and assessments for the fiscal year ended March 31, 2011 totaled $50 thousand.
Capital Requirements. Under FDIC regulations, state-chartered banks that are not members of
the Federal Reserve System are required to maintain a minimum leverage capital requirement
consisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System (the CAMELS rating system) established by the Federal
Financial Institutions Examination Council. For all but the most highly-rated institutions meeting
the conditions set forth above, the minimum leverage capital ratio is not less than 4%. Tier 1
capital is the sum of common stockholders equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated subsidiaries, minus all
intangible assets (other than certain mortgage and non-mortgage servicing assets and purchased
credit card relationships) minus identified losses, disallowed deferred tax assets, investments in
financial subsidiaries and certain non-financial equity investments.
In addition to the leverage ratio (the ratio of Tier 1 capital to total assets),
state-chartered nonmember banks must maintain a minimum ratio of qualifying total capital to
risk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifying
total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets, cumulative preferred stock and preferred stock with a maturity of over 20 years, term
subordinated debt, certain other capital instruments, and up to 45% of pre-tax net unrealized
holding gains on equity securities. The includable
18
amount of Tier 2 capital cannot exceed the institutions Tier 1 capital. Qualifying total
capital is further reduced by the amount of the banks investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks, most intangible assets and certain other deductions.
Under the FDIC risk-weighting system, all of a banks balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of five broad risk weight
categories from 0% to 200%, based on the risks inherent in the type of assets or item. The
aggregate dollar amount of each category is multiplied by the risk weight assigned to that
category. The sum of these weighted values equals the banks risk-weighted assets.
At March 31, 2011, the Banks ratio of Tier 1 capital to average assets was 9.58%, its ratio
of Tier 1 capital to risk-weighted assets was 15.40% and its ratio of total risk-based capital to
risk-weighted assets was 16.72%.
Dividend Limitations. The Bank may not pay dividends on its capital stock if its regulatory
capital would thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of its conversion to
stock form. The approval of the Commissioner is necessary for the payment of any dividend which
exceeds the total net profits for the year combined with retained net profits for the prior two
years.
Earnings of the Bank appropriated to bad debt reserves and deducted for Federal income tax
purposes are not available for payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. The Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would limit the Banks bad
debt deduction or create federal tax liabilities.
Under FDIC regulations, the Bank is prohibited from making any capital distributions if, after
making the distribution, the Bank would be undercapitalized within the meaning of the Prompt
Corrective Action regulations. See Regulation and Supervision of the BankPrompt Corrective
Regulatory Action.
In addition, as previously mentioned, under the terms of the TARP Capital Purchase program,
prior to the earlier of (1) December 5, 2011 or (ii) the date on which all of the Companys
preferred shares held by the U.S. Department of Treasury have been redeemed in full, the Company
cannot increase its quarterly cash dividend above $0.18 per common share.
Investment Activities. Under federal law, all state-chartered FDIC-insured banks have
generally been limited to activities as principal and equity investments of the type and in the
amount authorized for national banks, notwithstanding state law. The Federal Deposit Insurance
Corporation Improvement Act and the FDIC permit exceptions to these limitations. For example,
state chartered banks, such as the Bank, may, with FDIC approval, continue to exercise
grandfathered state authority to invest in common or preferred stocks listed on a national
securities exchange or the NASDAQ Global Market and in the shares of an investment company
registered under federal law. In addition, the FDIC is authorized to permit institutions that meet
all applicable capital requirements to engage in state authorized activities or investments that do
not meet this standard (other than non-subsidiary equity investments) if it is determined that such
activities or investments do not pose a significant risk to the Deposit Insurance Fund. All
non-subsidiary equity investments, unless otherwise authorized or approved by the FDIC, must have
been divested by December 19, 1996, under a FDIC-approved divestiture plan, unless such investments
were grandfathered by the FDIC. The Bank has received grandfathering authority from the FDIC to
invest in listed stocks and/or registered shares. The maximum permissible investment is 100% of
Tier 1 capital, as specified by the FDICs regulations, or the maximum amount permitted by
Massachusetts Banking Law, whichever is less. Such grandfathering authority may be terminated upon
the FDICs determination that such investments pose a safety and soundness risk to the Bank or if
the Bank converts its charter or undergoes a change in control.
Insurance of Deposit Accounts. The Banks deposits are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to
the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006.
Under the FDICs previous risk-based assessment system, insured institutions were assigned to
one of four risk categories based on supervisory evaluations, regulatory capital levels and certain
other factors, with less risky
19
institutions paying lower assessments. An institutions assessment rate depends upon the
category to which it is assigned and assessment rates ranged from seven to 77.5 basis points. On
February 7, 2011, however, the FDIC approved a final rule that implemented changes to the deposit
insurance assessment system mandated by the Dodd-Frank Act. The final rule, which took effect for
the quarter beginning April 1, 2011, requires that the base on which deposit insurance assessments
are charged be revised from one that is based on domestic deposits to one that is based on average
consolidated total assets minus average tangible equity. Under the final rule, insured depository
institutions are required to report their average consolidated total assets on a daily basis, using
the regulatory accounting methodology established for reporting total assets. For purposes of the
final rule, tangible equity is defined as Tier 1 capital.
The FDIC may adjust rates uniformly from one quarter to the next, except that no adjustment can
deviate more than three basis points from the base scale without notice and comment rulemaking. No
institution may pay a dividend if in default of the FDIC assessment.
The FDIC imposed on all insured institutions a special emergency assessment of five basis
points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an
institutions deposit assessment base), in order to cover losses to the Deposit Insurance Fund.
That special assessment was collected on September 30, 2009. The FDIC provided for similar
assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of
further special assessments, the FDIC required insured institutions to prepay estimated quarterly
risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The
estimated assessments, which include an assumed annual assessment base increase of 5%, were
recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each
quarter thereafter, a charge to earnings will be recorded for each regular assessment
with an offsetting credit to the prepaid asset.
Due to the recent difficult economic conditions, deposit insurance per account owner has been
raised to $250,000 for all types of accounts until January 1, 2014. In addition, the FDIC adopted
an optional Temporary Liquidity Guarantee Program (TLGP) under which, for a fee,
noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30,
2010, subsequently extended to December 31, 2012. The TLGP also included a debt component under
which certain senior unsecured debt issued by institutions and their holding companies between
October 13, 2008 and October 31, 2009 would be guaranteed by the FDIC through June 30, 2012, or in
some cases, December 31, 2012. The Bank opted to participate in the unlimited noninterest-bearing
transaction account coverage and the Bank and Company also opted to participate in the unsecured
debt guarantee program.
In addition to the assessment for deposit insurance, institutions are required to make
payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a
predecessor deposit insurance fund. This payment is established quarterly and during the calendar
year ended March 31, 2011 averaged 1.0 basis point of assessable deposits.
The FDIC has authority to increase insurance assessments. A significant increase in insurance
premiums would likely have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a
finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
All Massachusetts chartered co-operative banks are required to be members of the Share
Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all
deposits in member banks which are not covered by federal insurance. In past years, a premium of
1/24 of 1% of insured deposits has been assessed annually on member banks such as the Bank for this
deposit insurance. However, no premium has been assessed in recent years.
20
Prompt Corrective Regulatory Action. Federal banking regulators are required to take
prompt corrective action if an insured depository institution fails to satisfy certain minimum
capital requirements, including a leverage limit, a risk-based capital requirement and any other
measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of
an insured depository institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees if the institution
would thereafter fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital measure (an
undercapitalized institution) may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45
days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of businesses. The capital restoration plan must include
a guarantee by the institutions holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institutions total assets or the
amount necessary to bring the institution into capital compliance as of the date it failed to
comply with its capital restoration plan. A significantly undercapitalized institution, as well
as any undercapitalized institution that does not submit an acceptable capital restoration plan,
may be subject to regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and restrictions on capital
distributions by any bank holding company controlling the institution. Any company controlling the
institution may also be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly undercapitalized institution
may not receive bonuses or increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing sanctions on an
undercapitalized institution if the regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective provisions.
Under the implementing regulations, the federal banking regulators generally measure an
institutions capital adequacy on the basis of its total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets). The following table shows the capital ratios required for the various prompt
corrective action categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately |
|
|
|
Significantly |
|
|
Well Capitalized |
|
Capitalized |
|
Undercapitalized |
|
Undercapitalized |
Total risk-based capital ratio
|
|
10.0% or more
|
|
8.0% or more
|
|
Less than 8.0%
|
|
Less than 6.0% |
Tier 1 risk-based capital ratio
|
|
6.0% or more
|
|
4.0% or more
|
|
Less than 4.0%
|
|
Less than 3.0% |
Leverage ratio
|
|
5.0% or more
|
|
4.0% or more *
|
|
Less than 4.0% *
|
|
Less than 3.0% |
|
|
|
* |
|
3.0% if the institution has a composite 1 CAMELS rating. |
If an institutions capital falls below the critically undercapitalized level, it is
subject to conservatorship or receivership within specified time frames. A critically
undercapitalized institution is defined as an institution that has a ratio of tangible equity to
total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangible assets other than certain
purchased mortgage servicing rights. The FDIC may reclassify a well capitalized depository
institution as adequately capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized institution as critically
undercapitalized) if the FDIC determines, after notice and an opportunity for a hearing, that the
savings institution is in an unsafe or unsound condition or that the institution has received and
not corrected a less-than-satisfactory rating for any CAMELS rating category.
Loans to Executive Officers, Directors and Principal Stockholders. Loans to directors,
executive officers and principal stockholders of a state non-member bank like the Bank must be made
on substantially the same terms as those prevailing for comparable transactions with persons who
are not executive officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available to employees and
does not favor insiders. Loans to any executive officer, director and principal
21
stockholder, together with all other outstanding loans to such person and related interests,
generally may not exceed 15% of the banks unimpaired capital and surplus, and aggregate loans to
all such persons may not exceed the institutions unimpaired capital and unimpaired surplus. Loans
to directors, executive officers and principal stockholders, and their respective related
interests, in excess of the greater of $25,000 or 5% of capital and surplus (and any loans or loans
aggregating $500,000 or more) must be approved in advance by a majority of the board of directors
of the bank with any interested director not participating in the voting. State non-member banks
are generally prohibited from paying the overdrafts of any of their executive officers or directors
unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit
plan that specifies a method of repayment or transfer of funds from another account at the bank.
Loans to executive officers are restricted as to type, amount and terms of credit. Massachusetts
law also contains restrictions on lending to directors and officers which are, in some cases,
stricter than federal law. In addition, federal law prohibits extensions of credit to executive
officers, directors and greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the normal risk of
repayment or present other unfavorable features.
Transactions with Affiliates. A state non-member bank or its subsidiaries may not engage in
covered transactions with any one affiliate in an amount greater than 10% of such banks capital
stock and surplus, and for all such transactions with all affiliates a state non-member bank is
limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be
on terms substantially the same, or at least as favorable, to the bank or subsidiary as those
provided to a non-affiliate. The term covered transaction includes the making of loans, purchase
of assets, issuance of a guarantee and similar other types of transactions. Specified collateral
requirements apply to certain covered transactions such as loans and guarantees issued on behalf of
an affiliate. An affiliate of a state non-member bank is any company or entity which controls or is
under common control with the state non-member bank and, for purposes of the aggregate limit on
transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a
national bank. In a holding company context, the parent holding company of a state non-member bank
(such as the Company) and any companies which are controlled by such parent holding company are
affiliates of the state non-member bank. Federal law further prohibits a depository institution
from extending credit to or offering any other services, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services of a competitor of
the institution, subject to certain limited exceptions.
Enforcement. The FDIC has extensive enforcement authority over insured non-member banks,
including the Bank. This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors and officers. In
general, these enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or receiver for an insured
bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a
receiver or conservator for an insured state non-member bank if that bank was critically
undercapitalized on average during the calendar quarter beginning 270 days after the date on which
the institution became critically undercapitalized. See Prompt Corrective Regulatory Action.
The FDIC may also appoint itself as conservator or receiver for an insured state non-member
institution under specific circumstances on the basis of the institutions financial condition or
upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of
assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an
unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of
losses that will deplete substantially all of the institutions capital with no reasonable prospect
of replenishment without federal assistance.
Federal Reserve System. The Federal Reserve Board regulations require depository institutions
to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). The Federal Reserve Board regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for that portion of transaction
accounts aggregating $55.8 million less an exemption of $10.7 million (which may be adjusted
annually by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than
$58.8 million, the reserve requirement is 10% (which may be adjusted annually by the
22
Federal Reserve Board between 8% and 14%) of the portion in excess of $58.8 million. The Bank
is in compliance with these requirements.
Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC
regulations, a state non-member bank has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire community, including low
and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific
lending requirements or programs for financial institutions nor limits an institutions discretion
to develop the types of products and services that it believes are best suited to its particular
community. The Community Reinvestment Act requires the FDIC, in connection with its examination of
an institution, to assess the institutions record of meeting the credit needs of its community and
to consider such record when it evaluates applications made by such institution. The Community
Reinvestment Act requires public disclosure of an institutions Community Reinvestment Act rating.
The Banks latest Community Reinvestment Act rating received from the FDIC was Satisfactory.
The Bank is also subject to similar obligations under Massachusetts Law. The Massachusetts
Community Reinvestment Act requires the Massachusetts Banking Commissioner to consider a banks
Massachusetts Community Reinvestment Act rating when reviewing a banks application to engage in
certain transactions, including mergers, asset purchases and the establishment of branch offices or
automated teller machines, and provides that such assessment may serve as a basis for the denial of
such application. The Banks latest Massachusetts Community Reinvestment Act rating received from
the Massachusetts Division of Banks was High Satisfactory.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank system,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Banks provide a
central credit facility primarily for member institutions, and provide funds for certain other
purposes including affordable housing programs. The Bank, as a member of the Federal Home Loan
Bank of Boston (FHLB of Boston), is required to acquire and hold shares of capital stock in the
FHLB of Boston. The Bank was in compliance with this requirement with an investment in FHLB of
Boston stock at March 31, 2011 of $8.5 million.
During February 2011, the FHLB of Boston declared a dividend based upon average stock
outstanding for the fourth quarter of 2010. 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 negative trend in credit losses on the
Federal Home Loan Bank 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.
For the years ended March 31, 2011, 2010 and 2009, cash dividends from the Federal Home Loan
Bank of Boston to the Bank amounted to $6, $0, and approximately $202 thousand, respectively.
Further, there can be no assurance that the impact of economic events or recent or future
legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the
Federal Home Loan Bank stock held by the Bank.
Employees
At March 31, 2011, the Company and the Bank employed 92 full-time and 37 part-time employees.
The Companys and Banks employees are not represented by any collective bargaining agreement.
Management of the Company and Bank considers its relations with its employees to be good.
23
Item 1A. Risk Factors
An investment in shares of our common stock involves various risks. Before deciding to invest
in our common stock, you should carefully consider the risks described below in conjunction with
the other information in this Annual Report on Form 10-K and information incorporated by reference
into this Annual Report on Form 10-K, including our consolidated financial statements and related
notes. Our business, financial condition and results of operations could be harmed by any of the
following risks or by other risks that have not been identified or that we may believe are
immaterial or unlikely. The value or market price of our common stock could decline due to any of
these risks, and you may lose all or part of your investment. The risks discussed below also
include forward-looking statements and our actual results may differ substantially from those
discussed in these forward-looking statements.
Our nonresidential real estate, land and construction lending may expose us to a greater risk of
loss and hurt our earnings and profitability.
Our business strategy centers, in part, on offering nonresidential real estate and
construction loans in order to expand our net interest margin. These types of loans generally have
higher risk-adjusted returns and shorter maturities than traditional one-to four-family residential
mortgage loans. At March 31, 2011, nonresidential real estate and land loans totaled $199.5
million, which represented 50.6% of total loans. If we increase the level of our nonresidential
real estate and construction and land loans, we will increase our credit risk profile relative to
other financial institutions that have higher concentrations of one to four-family residential
mortgage loans.
Loans secured by commercial, land or nonresidential real estate properties are generally for
larger amounts and involve a greater degree of risk than one-to four-family residential mortgage
loans. Payments on loans secured by nonresidential real estate buildings generally are dependent
on the income produced by the underlying properties which, in turn, depends on the successful
operation and management of the properties. Accordingly, repayment of these loans is subject to
adverse conditions in the real estate market or the local economy. While we seek to minimize these
risks in a variety of ways, including limiting the size of our nonresidential real estate loans,
generally restricting such loans to our primary market area and attempting to employ conservative
underwriting criteria, there can be no assurance that these measures will protect against
credit-related losses.
Construction financing typically involves a higher degree of credit risk than long-term
financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely
dependent upon the accuracy of the initial estimate of the propertys value at completion of
construction and the bid price and estimated cost (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds
beyond the amount originally committed to permit completion of the project. If the estimate of the
value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project whose value is insufficient to assure full repayment. When lending to builders, the
cost of construction breakdown is provided by the builder, as well as supported by the appraisal.
Although management believes that the Banks underwriting criteria are designed to evaluate and
minimize the risks of each construction loan, there can be no guarantee that these practices will
safeguard against material delinquencies and losses to our operations.
Severe, adverse and precipitous economic and market conditions have adversely affected us and our
industry.
The recent negative events in the housing market, including significant and continuing home
price reductions coupled with the upward trends in delinquencies and foreclosures, have resulted
and will likely continue to result in poor performance of mortgage and construction loans and in
significant asset write-downs by many financial institutions. Reduced availability of commercial
credit and increasing unemployment further contribute to deteriorating credit performance of
commercial and consumer credit, resulting in additional write-downs. Financial market and economic
instability have caused financial institutions to severely restrict their lending to customers and
each other. This market turmoil and credit tightening has exacerbated commercial and consumer
deficiencies, the lack of consumer confidence, market volatility and widespread reduction in
general business activity. Financial institutions also have experienced decreased access to
deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack
of confidence in the financial markets has and may continue to adversely affect our business,
financial condition, results of operations and stock price. We do not expect that the difficult
24
conditions in the financial markets are likely to improve in the near future. In particular,
we may face the following risks in connection with these events:
|
|
|
We potentially face increased regulation of our industry including heightened legal
standards and regulatory requirements or expectations imposed in connection with recent
and anticipated legislation. Compliance with such regulation may increase our costs and
limit our ability to pursue business opportunities. |
|
|
|
|
The process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of economic conditions
and how these economic conditions might impair the ability of our borrowers to repay
their loans. The level of uncertainty concerning economic conditions may adversely
affect the accuracy of our estimates which may, in turn, impact the reliability of the
process. |
|
|
|
|
We may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC and reduced the
ratio of reserves to insured deposits, also our current risk profile may cause us to
pay higher premiums. |
|
|
|
|
The number of our borrowers that may be unable to make timely repayments of their
loans, or the decrease in value of real estate collateral securing the payment of such
loans could continue to escalate and result in significant credit losses, increased
delinquencies, foreclosures and customer bankruptcies, any of which could have a
material adverse effect on our operating results. |
|
|
|
|
Further disruptions in the capital markets or other events, including actions by
rating agencies and deteriorating investor expectations, may result in an inability to
borrow on favorable terms or on any terms from other financial institutions. |
|
|
|
|
Increased competition among financial services companies due to the recent
consolidation of certain competing financial institutions, the conversion of certain
investment banks to bank holding companies and the favorable governmental treatment
afforded to the largest of the financial institutions may adversely affect our ability
to market our products and services and continue to obtain market share. |
Legislative and regulatory initiatives to address difficult market and economic conditions may not
stabilize the U.S. banking system. If current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial condition, results of
operations, and cash flows.
The legislation that established the U.S. Treasurys Troubled Assets Relief Program (TARP)
was signed into law on October 3, 2008. As part of TARP, the U.S. Treasury established the TARP
Capital Purchase Program (CPP) to provide up to $700 billion of funding to eligible financial
institutions through the purchase of capital stock and other financial instruments for the purpose
of stabilizing and providing liquidity to the U.S. financial markets. Subsequently, on February
17, 2009, the American Recovery and Reinvestment Act of 2009 (the ARRA) was signed into law as a
sweeping economic recovery package intended to stimulate the economy and provide for broad
infrastructure, energy, health, and education needs. There can be no assurance as to the actual
impact any of this legislation will have on the national economy or financial markets. The failure
of these significant legislative measures to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could materially and adversely
affect our business, financial condition, results of operations, access to credit or the trading
price of our common stock.
There have been numerous actions undertaken in connection with or following the recent
legislation by the Federal Reserve, Congress, U.S. Treasury, the Securities and Exchange Commission
and the federal bank regulatory agencies in efforts to address the current liquidity and credit
crisis in the financial industry that followed the sub-prime mortgage market meltdown which began
in late 2007. These measures include homeowner relief that encourages loan restructuring and
modification; the temporary increase in FDIC deposit insurance from $100,000 to
25
$250,000; the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate; emergency action against
short selling practices; a temporary guaranty program for money market funds; the establishment of
a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses in the banking
sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S.
banking system. The recent legislation and the other regulatory initiatives described above may
not have their desired effects. If the volatility in the markets continues and economic conditions
fail to improve or worsen, our business, financial condition and results of operations could be
materially and adversely affected.
U.S. and international financial markets and economic conditions, particularly in our market area,
could adversely affect our liquidity, results of operations and financial condition.
Recent turmoil and downward economic trends have been particularly acute in the financial
sector. We are considered well-capitalized under the FDICs prompt corrective action regulations.
While our management has taken aggressive measures to maintain and increase our liquidity, the
cost and availability of funds may be adversely affected by illiquid credit markets and the demand
for our products and services may decline as our borrowers and customers experience the impact of
an economic slowdown and recession. In view of the concentration of our operations and the
collateral securing our loan portfolio in the metropolitan Boston area, we may be particularly
susceptible to adverse economic conditions in the metropolitan Boston area, where our business is
concentrated. In addition, the severity and duration of these adverse conditions is unknown and may
exacerbate our exposure to credit risk and adversely affect the ability of borrowers to perform
under the terms of their lending arrangements with us. In addition, the severity and duration of
these adverse conditions is unknown and may exacerbate our exposure to credit risk and adversely
affect the ability of borrowers to perform under the terms of their lending arrangements with us.
Accordingly, continued turbulence in the U.S. and international markets and economy may adversely
affect our liquidity, financial condition, results of operations and profitability.
Recently enacted regulatory reform may have a material impact on our operations.
On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). The Dodd-Frank Act contains various provisions designed to
enhance the regulation of depository institutions and prevent the recurrence of a financial crisis
such as occurred in 2008-2009. These include provisions strengthening holding company capital
requirements, requiring retention of a portion of the risk of securitized loans and regulating
debit card interchange fees. The Dodd-Frank Act also creates a new federal agency to administer
consumer protection and fair lending laws, a function that is now performed by the depository
institution regulators. The full impact of the Dodd-Frank Act on our business and operations will
not be known for years until regulations implementing the statute are written and adopted.
However, it is likely that the provisions of the Dodd-Frank Act will have an adverse impact on our
operations, particularly through increased regulatory burden and compliance costs.
Liquidity is essential to our businesses and we rely on external sources to finance a
significant portion of our operations.
Liquidity is essential to our businesses. Our liquidity could be substantially affected in a
negative fashion by an inability to raise funding in the long-term or short-term debt capital
markets or the equity capital markets or an inability to access the secured lending markets.
Current conditions in the capital markets are such that traditional sources of capital may not be
available to us on reasonable terms if it needed to raise capital. As previously reported, the
Companys investments in the perpetual preferred stock of the FNMA and FHLMC were significantly
impacted by the September 2008 conservatorship of FNMA and FHLMC, giving control of their
management to the Federal Housing Finance Agency and prohibiting FNMA and FHLMC from paying
dividends on their existing common and preferred stock. This impairment to the Companys
securities portfolio caused the Company to be adequately capitalized under the federal prompt
corrective action regulations as of September 30, 2008. On December 5, 2008, the Company sold
$10.0 million in preferred shares to the U.S. Treasury as a participant in the
26
TARP Capital Purchase Program, which represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2008. With the U.S. Treasurys $10.0 million investment
in the Company, the Company and the Bank met all regulatory requirements to be considered well
capitalized under the federal prompt corrective action regulations at both March 31, 2010 and
March 31, 2011. In the event that the Company needs to raise additional capital in the future,
there is no guarantee that we will be able to borrow funds or successfully raise additional capital
at all or on terms that are favorable or otherwise not dilutive to existing shareholders. If we
are unable to raise funding using the methods described above, we would likely need to finance or
liquidate unencumbered assets to meet maturing liabilities. We may be unable to sell some of our
assets, or we may have to sell assets at a discount from market value, either of which could
adversely affect our results of operations and financial condition.
The limitations on executive compensation imposed through our participation in the TARP Capital
Purchase Program may restrict our ability to attract, retain and motivate key employees, which
could adversely affect our operations.
As part of our participation in the TARP Capital Purchase Program, we agreed to be bound by
certain executive compensation restrictions, including limitations on severance payments and the
clawback of any bonus and incentive compensation that were based on materially inaccurate financial
statements or any other materially inaccurate performance metric criteria. Subsequent to the
issuance of the preferred stock, the ARRA was enacted, which provides more stringent limitations on
severance pay and the payment of bonuses. To the extent that any of these compensation
restrictions do not permit us to provide a comprehensive compensation package to our key employees
that is competitive in our market area, we have difficulty in attracting, retaining and motivating
our key employees, which could have an adverse effect on our results of operations.
Future dividend payments and common stock repurchases are restricted by the terms of the U.S.
Treasurys equity investment in us.
Under the terms of the TARP Capital Purchase Program, until the earlier of the third
anniversary of the date of issuance of the Companys Series A Preferred Stock and the date on which
the Series A Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of
the Series A Preferred Stock to third parties, we are prohibited from increasing dividends on our
common stock from the last quarterly cash dividend per share ($0.18) declared on the common stock
prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions,
and from making certain repurchases of equity securities, including our common stock, without the
consent of the U.S. Treasury. Furthermore, as long as the Series A Preferred Stock is outstanding,
dividend payments and repurchases or redemptions relating to certain equity securities, including
our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred
stock, subject to certain limited exceptions.
The terms governing the issuance of the preferred stock to the U.S. Treasury may be changed, the
effect of which may have an adverse effect on our operations.
The terms of the Securities Purchase Agreement in which we entered into with U.S. Treasury
pursuant to the TARP Capital Purchase Program provides that the U.S. Treasury may unilaterally
amend any provision of the Purchase Agreement to the extent required to comply with any changes in
applicable federal law that may occur in the future. We have no assurances that changes in the
terms of the transaction will not occur in the future. Such changes may place restrictions on our
business or results of operation, which may adversely affect the market price of our common stock.
Our business is subject to the success of the local economy in which we operate.
Because the majority of our borrowers and depositors are individuals and businesses located
and doing business in the northwestern suburbs of Boston, our success depends to a significant
extent upon economic conditions in that market area. Adverse economic conditions in our market
area could reduce our growth rate, affect the ability of our customers to repay their loans and
generally affect our financial condition and results of operations. Conditions such as inflation,
recession, unemployment, high interest rates, short money supply, scarce natural
27
resources, international disorders, terrorism and other factors beyond our control may
adversely affect our profitability. We are less able than a larger institution to spread the risks
of unfavorable local economic conditions across a large number of diversified economies. Any
sustained period of increased payment delinquencies, foreclosures or losses caused by adverse
market or economic conditions in the Commonwealth of Massachusetts could adversely affect the value
of our assets, revenues, results of operations and financial condition. Moreover, we cannot give
any assurance we will benefit from any market growth or favorable economic conditions in our
primary market areas.
If the value of real estate in northwestern suburbs of Boston were to decline materially, a
significant portion of our loan portfolio could become under-collateralized, which could have a
material adverse effect on us.
With most of our loans concentrated in the northwestern suburbs of Boston, a decline in local
economic conditions could adversely affect the value of the real estate collateral securing our
loans. Generally, it appears that the local commercial real estate and residential real estate
markets remain weak. Commercial real estate prices have generally declined by 5% during calendar
year 2010 compared to a 10% decline during calendar 2009 and a 2% decline during calendar 2008.
Boston area residential property values decreased slightly during calendar year 2010, reversing
what appeared to be a turnaround in the housing market. Housing prices increased slightly during
2009 compared to a decline of approximately 8% to 9% during calendar 2008. Further declines in
property values would diminish our ability to recover on defaulted loans by selling the real estate
collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a
decrease in asset quality could require additions to our allowance for loan losses through
increased provisions for loan losses, which would hurt our profits. Also, a decline in local
economic conditions may have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are more geographically
diverse. Real estate values are affected by various factors in addition to local economic
conditions, including, among other things, changes in general or regional economic conditions,
governmental rules or policies and natural disasters.
Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are required by regulatory authorities to maintain adequate levels of capital to support
our operations. We anticipate our capital resources will satisfy our capital requirements for the
foreseeable future. We may at some point, however, need to raise additional capital to support our
continued growth. If we raise capital through the issuance of additional shares of our common
stock or other securities, it could dilute the ownership interests of current investors and may
dilute the per share book value of our common stock. New investors may also have rights,
preferences and privileges senior to our current stockholders, which may adversely impact our
current shareholders.
Our ability to raise additional capital, if needed, will depend on conditions in the capital
markets at that time, which are outside our control, and on our financial performance.
Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when needed, our ability to further expand
our operations through internal growth and acquisitions could be materially impaired.
Competition from financial institutions and other financial service providers may adversely affect
our growth and profitability.
The banking business is highly competitive and we experience competition in each of our
markets from many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies, securities
brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other
super-regional, national and international financial institutions that operate offices in our
primary market areas and elsewhere. We compete with these institutions both in attracting deposits
and in making loans. This competition has made it more difficult for us to make new loans and has
occasionally forced us to offer higher deposit rates. Price competition for loans and deposits
might result in us earning less on our loans and paying more on our deposits, which reduces net
interest income. While we believe we can and do successfully compete with these other financial
institutions in our primary markets, we may face a competitive disadvantage as a result of our
smaller size, smaller resources and smaller lending limits, lack of
28
geographic diversification and inability to spread our marketing costs across a broader
market. Although we compete by concentrating our marketing efforts in our primary markets with
local advertisements, personal contacts, and greater flexibility and responsiveness in working with
local customers, we can give no assurance this strategy will be successful.
Future FDIC assessments may reduce our earnings.
On September 29, 2009, the FDIC adopted an Amended Restoration Plan to enable the Deposit
Insurance Fund to return to its minimum reserve ratio of 1.15% over eight years. Under this plan,
the FDIC did not impose a previously-planned second special assessment (on September 30, 2009, the
Bank paid the first special assessment which totaled $270 thousand). Also, the plan calls for
deposit insurance premiums to increase by 3 basis points effective January 1, 2011. Additionally,
to meet bank failure cash flow needs, the FDIC assessed a three year insurance premium prepayment,
which was paid by banks in December 2009 covers the period of January 1, 2010 through December 31,
2012. The FDIC estimates that bank failures will total approximately $100 billion during the
period, but only projects revenues of approximately $60 billion. The shortfall will be met through
the collection of the prepaid premiums, which is estimated to be $45 billion. The Banks prepaid
premium totaled $2.3 million and was paid during the quarter ended December 31, 2009, and it is
being amortized monthly over the three year period. This prepaid deposit premium is carried on the
balance sheet in the other assets category and amounted to $1.6 million at March 31, 2011. Any
additional emergency special assessment imposed by the FDIC will further reduce the Companys
earnings.
Fluctuations in interest rates could reduce our profitability and affect the value of our assets.
Like other financial institutions, we are subject to interest rate risk. Our primary source
of income is net interest income, which is the difference between interest earned on loans and
investments and the interest paid on deposits and borrowings. We expect that we will periodically
experience imbalances in the interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest rates than our
interest-bearing liabilities, or vice versa. In addition, the individual market interest rates
underlying our loan and deposit products (e.g., prime) may not change to the same degree over a
given time period. In any event, if market interest rates should move contrary to our position,
our earnings may be negatively affected. In addition, loan volume and quality and deposit volume
and mix can be affected by market interest rates. Changes in levels of market interest rates could
materially adversely affect our net interest spread, asset quality, origination volume and overall
profitability.
During fiscal 2006, short-term market interest rates (which we use as a guide to price our
deposits) had risen from historically low levels, while longer-term market interest rates (which we
use as a guide to price our longer-term loans) did not. This flattening of the market yield
curve existed during fiscal 2007 and for part of 2008 and had a negative impact on our interest
rate spread and net interest margin as rates on our deposits repriced upwards faster than the rates
on our longer-term loans and investments. For fiscal years 2007, 2008, 2009, 2010 and 2011, our
interest rate spread was 2.21%, 2.06%, 2.63%, 2.92%, and 3.26% respectively. In addition, the U.S.
Federal Reserve has decreased the federal funds target rate from 5.25% in September 2007 to a rate
of 0.25% at March 31, 2011. However, decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their
borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to
redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively
impact our income.
We principally manage interest rate risk by managing our volume and mix of our earning assets
and funding liabilities. In a changing interest rate environment, we may not be able to manage
this risk effectively. If we are unable to manage interest rate risk effectively, our business,
financial condition and results of operations could be materially harmed.
Changes in the level of interest rates also may negatively affect our ability to originate
real estate loans, the value of our assets and our ability to realize gains from the sale of our
assets, all of which ultimately affect our earnings.
29
For more information on how changes in interest rates could impact us, see Item 7A.,
Quantitative and Qualitative Disclosures About Market Risk.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
Like all financial institutions, we maintain an allowance for loan losses to provide for loans
in our portfolio that may not be repaid in their entirety. We believe that our allowance for loan
losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio
as of the corresponding balance sheet date. However, our allowance for loan losses may not be
sufficient to cover actual loan losses, and future provisions for loan losses could materially
adversely affect our operating results.
In evaluating the adequacy of our allowance for loan losses, we consider numerous quantitative
factors, including our historical charge-off experience, growth of our loan portfolio, changes in
the composition of our loan portfolio and the volume of delinquent and criticized loans. In
addition, we use information about specific borrower situations, including their financial position
and estimated collateral values, to estimate the risk and amount of loss for those borrowers.
Finally, we also consider many qualitative factors, including general and economic business
conditions, duration of the current business cycle, quality of underwriting standards, current
general market collateral valuations, trends apparent in loan concentrations, loan to value ratios,
lenders experience, past due and nonaccrual loans, and other matters, which are by nature more
subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are
complicated by the significant uncertainties surrounding our borrowers abilities to successfully
execute their business models through changing economic environments, competitive challenges and
other factors. Because of the degree of uncertainty and susceptibility of these factors to change,
our actual losses may vary from our current estimates.
At March 31, 2011, our allowance for loan losses as a percentage of total loans was 0.99%.
The FDIC and the Massachusetts Commissioner of Banks periodically review our allowance for loan
losses and may require us to increase our allowance for loan losses by recognizing additional
provisions for loan losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or
charge-offs, as required by these regulatory agencies, could have a material adverse effect on our
financial condition and results of operations.
We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management and
banking abilities of our senior executives. We believe that our future results will also depend in
part upon our attracting and retaining highly skilled and qualified management. We are especially
dependent on a limited number of key management personnel and the loss of our chief executive
officer or other senior executive officers could have a material adverse impact on our operations
because other officers may not have the experience and expertise to readily replace these
individuals. Competition for such personnel is intense, and we cannot assure you that we will be
successful in attracting or retaining such personnel. Changes in key personnel and their
responsibilities may be disruptive to our business and could have a material adverse effect on our
business, financial condition and results of operations.
Our failure to continue to recruit and retain qualified loan originators could adversely affect our
ability to compete successfully and affect our profitability.
Our continued success and future growth depend heavily on our ability to attract and retain
highly skilled and motivated loan originators and other banking professionals. We compete against
many institutions with greater financial resources, both within our industry and in other
industries, to attract these qualified individuals. Our failure to recruit and retain adequate
talent could reduce our ability to compete successfully and adversely affect our business and
profitability.
We operate in a highly regulated environment and we may be adversely affected by changes in laws
and regulations.
The Bank is subject to regulation, supervision and examination by the Massachusetts
Commissioner of Banks and the FDIC, as insurer of its deposits. Such regulation and supervision
govern the activities in which a co-
30
operative bank and its holding company may engage and are intended primarily for the protection of
the deposit insurance funds and for the depositors of Central Co-operative Bank and are not
intended to protect the interests of investors in our common stock. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including the imposition of
restrictions on our operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in such regulation and oversight, whether in the form of
regulatory policy, regulations, legislation or supervisory action, may have a material impact on
our operations. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations
promulgated by the Securities and Exchange Commission and NASDAQ that are applicable to us, have
increased the scope, complexity and cost of corporate governance, reporting and disclosure
practices, including the costs of completing our audit and maintaining our internal controls.
We are subject to security and operational risks relating to our use of technology that could
damage our reputation and our business.
Security breaches in our Internet banking activities could expose us to possible liability and
damage our reputation. Any compromise of our security also could deter customers from using our
internet banking services that involve the transmission of confidential information. We rely on
standard internet security systems to provide the security and authentication necessary to effect
secure transmission of data. These precautions may not protect our systems from compromises or
breaches of our security measures that could result in damage to our reputation and our business.
Additionally, we outsource our data processing to third parties. If our third party providers
encounter difficulties or if we have difficulty in communicating with such third parties, it will
significantly affect our ability to adequately process and account for customer transactions, which
would significantly affect our business operations.
We may have fewer resources than many of our competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce
costs. Our future success will depend, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy customer demands
for convenience, as well as to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services or be successful
in marketing these products and services to our customers.
Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due
is substantially dependent on capital distributions from Central Co-operative Bank, and these
distributions are subject to regulatory limits and other restrictions.
A substantial source of our income from which we service our debt, pay our obligations and
from which we can pay dividends is the receipt of dividends from Central Co-operative Bank. The
availability of dividends from Central Co-operative Bank is limited by various statutes and
regulations. It is also possible, depending upon the financial condition of Central Co-operative
Bank, and other factors, that the applicable regulatory authorities could assert that payment of
dividends or other payments is an unsafe or unsound practice. In the event that Central
Co-operative Bank is unable to pay dividends to us, we may not be able to service our debt, pay our
obligations or pay dividends on our common stock. The inability to receive dividends from Central
Co-operative Bank would adversely affect our business, financial condition, results of operations
and prospects.
Item 1B. Unresolved Staff Comments
Not applicable.
31
Item 2. Properties
The Bank owns all its offices, except the Burlington, Malden and Woburn High School branch
offices, the stand-alone ATM, the loan centers located in Somerville and the branch and operations
center located in Medford. Net book value includes the cost of land, buildings and improvements as
well as leasehold improvements, net of depreciation and amortization. At March 31, 2011, all of
the Banks offices were in reasonable condition and met the business needs of the Bank. The
following table sets forth the location of the Banks offices, as well as certain information
relating to these offices as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book |
|
|
|
Year |
|
|
Value at |
|
Office Location |
|
Opened |
|
|
March 31, 2011 |
|
|
|
|
|
|
|
(In Thousands) |
|
Main Office
399 Highland Avenue
Somerville, MA (owned) |
|
|
1974 |
|
|
$ |
366 |
|
|
|
|
|
|
|
|
|
|
Branch Offices: |
|
|
|
|
|
|
|
|
175 Broadway |
|
|
|
|
|
|
|
|
Arlington, MA (owned) |
|
|
1982 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
85 Wilmington Road |
|
|
|
|
|
|
|
|
Burlington, MA (leased) |
|
|
1978 |
(a) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
1192 Boylston Street |
|
|
|
|
|
|
|
|
Chestnut Hill (Brookline), MA (owned) |
|
|
1954 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
137 Pleasant Street |
|
|
|
|
|
|
|
|
Malden, MA (leased) |
|
|
1975 |
(b) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
846 Main Street |
|
|
|
|
|
|
|
|
Melrose, MA (owned) |
|
|
1994 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
275 Main Street |
|
|
|
|
|
|
|
|
Woburn, MA (owned) |
|
|
1980 |
|
|
|
433 |
|
|
|
|
|
|
|
|
|
|
198 Lexington Street |
|
|
|
|
|
|
|
|
Woburn, MA (owned) |
|
|
1974 |
|
|
|
164 |
|
|
|
|
|
|
|
|
|
|
Woburn High School |
|
|
|
|
|
|
|
|
Woburn, MA (leased) |
|
|
2002 |
(c) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
Stand-Alone ATM |
|
|
|
|
|
|
|
|
94 Highland Avenue |
|
|
|
|
|
|
|
|
Somerville, MA (leased) |
|
|
2004 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Center |
|
|
|
|
|
|
|
|
401 Highland Avenue |
|
|
|
|
|
|
|
|
Somerville, MA (leased) |
|
|
2002 |
(e) |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
Operations Center/Branch Office |
|
|
|
|
|
|
|
|
270 Mystic Avenue |
|
|
|
|
|
|
|
|
Medford, MA (leased) |
|
|
2006 |
(f) |
|
|
384 |
|
|
|
|
(a) |
|
The lease for the Burlington branch expires October 31, 2012 with a five-year renewal option. |
|
(b) |
|
The lease for the Malden branch expires August 31, 2015. |
|
(c) |
|
The lease for the Woburn High School branch is for one year, renewable annually on an automatic
basis. |
|
(d) |
|
The lease for the stand-alone ATM expires November 30, 2013 with an option to extend for two
additional three-year terms. |
|
(e) |
|
The lease for the Commercial Loan Center expires May 1, 2015 with two five-year renewal
options. |
|
(f) |
|
In March 2005, the Bank signed a lease for a combined retail branch and operations center to
be located at 270 Mystic Avenue, Medford. The lease was subsequently renegotiated and the
Bank took occupancy in May 2006. The initial rent under the lease is for $150,000 per year
and the initial term is 10 years. There are options to extend the lease by two five-year
terms. |
At March 31, 2011 the aggregate net book value of the Banks premises and equipment was
$2.7 million.
32
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Company, such as
claims to enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and other issues
incident to our business. We are not party to any pending legal proceedings that we believe would
have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. [Removed and Reserved]
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Companys common stock is quoted on the NASDAQ Global MarketSM under the symbol
CEBK. At March 31, 2011, there were 1,681,071 shares of the Companys common stock outstanding
and approximately 196 holders of record. The foregoing number of holders does not reflect the
number of persons or entities who held the stock in nominee or street name through various
brokerage firms. In October 1996, the Company established a quarterly cash dividend policy and
made its first dividend distribution on November 15, 1996. The Company has paid cash dividends on
a quarterly basis since initiating the dividend program.
The following tables list the high and low prices for the Companys common stock during each
quarter of fiscal 2011 and fiscal 2010 as reported by NASDAQ, and the amounts and payable dates of
the cash dividends paid during each quarter of fiscal 2011 and fiscal 2010. The stock quotations
constitute interdealer prices without retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Prices |
|
|
|
|
|
|
|
|
|
Cash Dividends (payable dates) |
|
|
|
|
Fiscal 2011 |
|
High |
|
|
Low |
|
|
Fiscal 2011 |
|
|
Amount |
|
June 30, 2010 |
|
$ |
11.51 |
|
|
$ |
8.56 |
|
|
May 21, 2010 |
|
$ |
0.05 |
|
September 30, 2010 |
|
|
14.17 |
|
|
|
9.80 |
|
|
August 20, 2010 |
|
|
0.05 |
|
December 31, 2010 |
|
|
15.30 |
|
|
|
12.43 |
|
|
November 19, 2010 |
|
|
0.05 |
|
March 31, 2011 |
|
|
20.00 |
|
|
|
13.50 |
|
|
February 18, 2011 |
|
|
0.05 |
|
|
Fiscal 2010 |
|
High |
|
|
Low |
|
|
Fiscal 2010 |
|
|
Amount |
|
June 30, 2009 |
|
$ |
8.00 |
|
|
$ |
4.05 |
|
|
May 15, 2009 |
|
$ |
0.05 |
|
September 30, 2009 |
|
|
9.40 |
|
|
|
5.60 |
|
|
August 21, 2009 |
|
|
0.05 |
|
December 31, 2009 |
|
|
10.80 |
|
|
|
7.96 |
|
|
November 20, 2009 |
|
|
0.05 |
|
March 31, 2010 |
|
|
10.09 |
|
|
|
8.11 |
|
|
February 19, 2010 |
|
|
0.05 |
|
The Company did not repurchase any shares of its common stock during the fourth quarter of
fiscal year 2011.
33
Item 6. Selected Financial Data
The Company has derived the following selected consolidated financial and other data in part
from its Consolidated Financial Statements and Notes appearing elsewhere in this Annual Report on
Form 10-K:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in Thousands, Except Share and Per Share Data) |
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
487,625 |
|
|
$ |
542,444 |
|
|
$ |
575,827 |
|
|
$ |
571,245 |
|
|
$ |
566,140 |
|
Total loans |
|
|
394,217 |
|
|
|
461,510 |
|
|
|
460,670 |
|
|
|
474,942 |
|
|
|
460,542 |
|
Investments available for sale |
|
|
25,185 |
|
|
|
34,368 |
|
|
|
35,215 |
|
|
|
52,960 |
|
|
|
65,763 |
|
Deposits |
|
|
309,077 |
|
|
|
339,169 |
|
|
|
375,074 |
|
|
|
361,089 |
|
|
|
388,573 |
|
Total borrowings |
|
|
128,692 |
|
|
|
154,810 |
|
|
|
156,938 |
|
|
|
168,173 |
|
|
|
137,053 |
|
Total stockholders equity |
|
|
47,121 |
|
|
|
45,113 |
|
|
|
40,239 |
|
|
|
38,816 |
|
|
|
37,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding |
|
|
1,681,071 |
|
|
|
1,667,151 |
|
|
|
1,639,951 |
|
|
|
1,639,951 |
|
|
|
1,639,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
$ |
17,382 |
|
|
$ |
17,013 |
|
|
$ |
15,862 |
|
|
$ |
13,596 |
|
|
$ |
14,449 |
|
Provision for loan losses (reduction of provision) |
|
|
1,100 |
|
|
|
600 |
|
|
|
2,125 |
|
|
|
(70 |
) |
|
|
80 |
|
Net gain (loss) from sales and write-downs of
investment securities |
|
|
136 |
|
|
|
(465 |
) |
|
|
(9,796 |
) |
|
|
645 |
|
|
|
581 |
|
Gain on sales of loans |
|
|
251 |
|
|
|
329 |
|
|
|
111 |
|
|
|
158 |
|
|
|
99 |
|
Other noninterest income |
|
|
1,671 |
|
|
|
1,547 |
|
|
|
1,640 |
|
|
|
1,429 |
|
|
|
1,314 |
|
Total noninterest expenses |
|
|
15,669 |
|
|
|
15,146 |
|
|
|
15,159 |
|
|
|
13,859 |
|
|
|
14,856 |
|
Net income (loss) |
|
|
1,725 |
|
|
|
1,993 |
|
|
|
(6,205 |
) |
|
|
1,447 |
|
|
|
1,020 |
|
Earnings (loss) per common share diluted |
|
|
0.68 |
|
|
|
0.92 |
|
|
|
(4.58 |
) |
|
|
1.07 |
|
|
|
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
3.25 |
% |
|
|
2.92 |
% |
|
|
2.63 |
% |
|
|
2.06 |
% |
|
|
2.21 |
% |
Net yield on interest-earning assets |
|
|
3.50 |
|
|
|
3.21 |
|
|
|
2.96 |
|
|
|
2.51 |
|
|
|
2.68 |
|
Noninterest expenses to average assets |
|
|
3.01 |
|
|
|
2.73 |
|
|
|
2.73 |
|
|
|
2.49 |
|
|
|
2.69 |
|
Book equity-to-assets |
|
|
9.66 |
|
|
|
8.32 |
|
|
|
6.99 |
|
|
|
6.79 |
|
|
|
6.66 |
|
Return on average assets |
|
|
0.33 |
|
|
|
0.36 |
|
|
|
(1.12 |
) |
|
|
0.26 |
|
|
|
0.18 |
|
Return on average stockholders equity |
|
|
3.74 |
|
|
|
4.66 |
|
|
|
(16.68 |
) |
|
|
3.76 |
|
|
|
2.59 |
|
Dividend payout ratio for common shares |
|
|
29.41 |
|
|
|
21.74 |
|
|
|
n/a |
|
|
|
67.29 |
|
|
|
100.00 |
|
Book value per common share |
|
$ |
22.26 |
|
|
$ |
21.31 |
|
|
$ |
18.76 |
|
|
$ |
23.67 |
|
|
$ |
22.99 |
|
Tangible book value per common share |
|
$ |
20.93 |
|
|
$ |
19.97 |
|
|
$ |
17.40 |
|
|
$ |
22.31 |
|
|
$ |
21.63 |
|
34
Quarterly Results of Operations (In Thousands, Except Per Share Data)
The following tables summarize the Companys operating results on a quarterly basis for the
years ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Interest and dividend income |
|
$ |
6,845 |
|
|
$ |
6,605 |
|
|
$ |
6,187 |
|
|
$ |
5,668 |
|
Interest expense |
|
|
2,210 |
|
|
|
2,070 |
|
|
|
1,939 |
|
|
|
1,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
|
4,635 |
|
|
|
4,535 |
|
|
|
4,248 |
|
|
|
3,964 |
|
Provision for loan losses |
|
|
300 |
|
|
|
300 |
|
|
|
300 |
|
|
|
200 |
|
Noninterest income |
|
|
578 |
|
|
|
291 |
|
|
|
552 |
|
|
|
686 |
|
Noninterest expenses |
|
|
3,752 |
|
|
|
3,927 |
|
|
|
3,825 |
|
|
|
4,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,111 |
|
|
|
599 |
|
|
|
675 |
|
|
|
287 |
|
Income tax provision |
|
|
372 |
|
|
|
198 |
|
|
|
330 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
739 |
|
|
$ |
401 |
|
|
$ |
345 |
|
|
$ |
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
0.39 |
|
|
$ |
0.16 |
|
|
$ |
0.13 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
$ |
0.37 |
|
|
$ |
0.15 |
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Interest and dividend income |
|
$ |
7,188 |
|
|
$ |
7,225 |
|
|
$ |
7,088 |
|
|
$ |
7,037 |
|
Interest expense |
|
|
3,340 |
|
|
|
3,039 |
|
|
|
2,711 |
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
|
3,848 |
|
|
|
4,186 |
|
|
|
4,377 |
|
|
|
4,602 |
|
Provision for loan losses |
|
|
50 |
|
|
|
200 |
|
|
|
100 |
|
|
|
250 |
|
Noninterest income |
|
|
534 |
|
|
|
410 |
|
|
|
379 |
|
|
|
87 |
|
Noninterest expenses |
|
|
3,922 |
|
|
|
3,485 |
|
|
|
3,983 |
|
|
|
3,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
410 |
|
|
|
911 |
|
|
|
673 |
|
|
|
683 |
|
Income tax provision (benefit) |
|
|
112 |
|
|
|
307 |
|
|
|
307 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
298 |
|
|
$ |
604 |
|
|
$ |
366 |
|
|
$ |
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
$ |
0.10 |
|
|
$ |
0.31 |
|
|
$ |
0.15 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
$ |
0.10 |
|
|
$ |
0.31 |
|
|
$ |
0.14 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
General
The operations of the Company and its subsidiary, the Bank, are generally influenced by
overall economic conditions, the related monetary and fiscal policies of the federal government and
the regulatory policies of financial institution regulatory authorities, including the
Massachusetts Commissioner of Banks, the Federal Reserve Board and the FDIC.
The Bank monitors its exposure to earnings fluctuations resulting from market interest rate
changes. Historically, the Banks earnings have been vulnerable to changing interest rates due to
differences in the terms to maturity or repricing of its assets and liabilities. For example, in a
rising interest rate environment, the Banks net interest income and net income could be negatively
affected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to
rising interest rates than the Banks interest-sensitive assets (loans and investments).
The following is a discussion and analysis of the Companys results of operations for the last
two fiscal years and its financial condition at the end of fiscal years 2011 and 2010.
Managements discussion and analysis of financial condition and results of operations should be
read in conjunction with the consolidated financial statements and accompanying notes included in
this Annual Report on Form 10-K.
Application of Critical Accounting Policies
Managements discussion and analysis of the Companys financial condition and results of
operations are based on the consolidated financial statements which are prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of such
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates, including those related
to the allowance for loan losses, fair value of investments and other-than-temporary impairment,
income taxes, impairment of goodwill, valuation of other real estate owned and valuation of stock
options under ASC 718 Compensation Stock Compensation and other equity based instruments.
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 and other-than-temporary impairment,
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. Actual results
could differ from the amount derived from managements estimates and assumptions under different
assumptions or conditions.
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.
36
Regarding impaired loans, the Bank individually evaluates each loan and documents what
management believes to be an appropriate reserve level in accordance with ASC 310. If management
does not believe that any separate reserve for such 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 |
Monthly, CRE loans are segmented 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 level of the Companys ASC 450 allowance for loan losses.
In developing ASC 450 reserve levels, recent regulatory guidance focuses on the Banks
charge-off history as a starting point. The Banks charge-off history in recent years has been
minimal; therefore, management continues to utilize more conservative historical loss ratios which
are believed to be appropriate. Those ratios are then adjusted based on trends in delinquent and
impaired loans, trends in charge-offs and recoveries, trends in underwriting practices, experience
of loan staff, national and local economic trends, industry conditions, and changes in credit
concentrations. There is a concentration in CRE loans, but the concentration is decreasing.
Managements efforts to reduce the levels of commercial real estate and construction loans are
reflected in changes in the Banks commercial real estate concentration ratio, which is calculated
as total non-owner occupied commercial real estate and construction loans divided by the Banks
risk-based capital. At March 31, 2011, the commercial real estate concentration ratio was 330%,
compared to a ratio of 466% at March 31, 2010, and 600% at March 31, 2009.
Residential loans, home equity loans and consumer loans, other than TDRs and loans in the
process of foreclosure or repossession, are collectively evaluated for impairment. Factors
considered in determining the appropriate ASC 450 reserve levels are trends in delinquent and
impaired loans, changes in the value of collateral, trends in charge-offs and recoveries, trends in
underwriting practices, experience of loan staff, national and local economic trends, industry
conditions, and changes in credit concentrations. TDRs and loans that are in the process of
foreclosure or repossession are evaluated under ASC 310.
Commercial and Industrial and construction loans that are not impaired are evaluated under ASC
450 and factors considered in determining the appropriate reserve levels include trends in
delinquent and impaired loans, changes in the value of collateral, trends in charge-offs and
recoveries, trends in underwriting practices, experience of loan staff, national and local economic
trends, industry conditions, and changes in credit concentrations. Those loans that are
individually reviewed for impairment are evaluated according to ASC 310.
37
Although management uses available information to establish the appropriate level of the
allowance for loan losses, future additions or reductions to the allowance may be necessary based
on estimates that are susceptible to change as a result of changes in loan composition or volume,
changes in economic market area conditions or other factors. As a result, our allowance for loan
losses may not be sufficient to cover actual loan losses, and future provisions for loan losses
could materially adversely affect the Companys operating results. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the Companys
allowance for loan losses. Such agencies may require the Company to recognize adjustments to the
allowance based on their judgments about information available to them at the time of their
examination. Management currently believes that there are adequate reserves and collateral
securing non-performing loans to cover losses that may result from these loans at March 31, 2011.
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 March 31, 2011 loans held for sale totaled $0 compared to
$392 thousand at March 31, 2010, and, at that date, the aggregate cost of loans held for sale
approximated fair value.
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. At
March 31, 2011 and 2010, net deferred loan fees of $23 thousand and net deferred loan costs of $88
thousand, respectively, were included with the related loan balances for financial presentation
purposes.
Interest income on loans is recognized on an accrual basis using the simple interest method
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. The Bank records interest income on
nonaccrual and impaired loans on the cash basis of accounting.
Loans are classified as impaired when it is probable that the Bank will not be able to collect
all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans,
except those loans that are accounted for at fair value or at lower of cost or fair value such as
loans held for sale, are accounted for at the
38
present value of the expected future cash flows discounted at the loans effective interest
rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair
value of the collateral less selling and other costs, or the recorded amount of the loan. In
evaluating collateral values for impaired loans, management obtains new appraisals or opinions of
value when deemed necessary and may discount those appraisals depending on the likelihood of
foreclosure, generally by 20 percent to 30 percent. Other factors considered by 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 collectibility 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 Receivables (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, (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
39
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
events have occurred during the three months ended March 31, 2011 which indicate that the
impairment test would need to be re-performed.
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.
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 March 31,
2011 and 2010, 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 March 31, 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
40
data, the Company applied a forfeiture rate of 0% to stock options outstanding in determining
stock compensation expense for each of the years ended March 31, 2011 and 2010.
Troubled Asset Relief Program Capital Purchase Program
On December 5, 2008, the Company sold $10.0 million in preferred shares to the U.S. Department
of Treasury as a participant in the federal governments Troubled Asset Relief Program (TARP)
Capital Purchase Program. This represented approximately 2.6% of the Companys risk-weighted
assets as of September 30, 2008. The TARP Capital Purchase Program is a voluntary program for
healthy U.S. financial institutions designed to encourage these institutions to build capital to
increase the flow of financing to U.S. businesses and consumers and to support the weakened U.S.
economy. In connection with the investment, the Company entered into a Letter Agreement and
related Securities Purchase Agreement with the U.S. Treasury pursuant to which the Company issued
(i) 10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation
preference $1,000 per share (the Series A Preferred Stock) and (ii) a warrant (the Warrant) to
purchase 234,742 shares of the Companys common stock for an aggregate purchase price of $10.0
million in cash. The warrant term is 10 years and it is immediately exercisable, in whole or in
part, at an exercise price of $6.39 per share. With the U.S. Treasurys $10.0 million investment
in the Company, the Company and the Bank met all regulatory requirements to be considered
well-capitalized under the federal prompt corrective action regulations as of March 31, 2011. For
more information on the Series A Preferred Stock and Warrant issued to the U.S. Treasury in
connection with the TARP Capital Purchase Program, see Note 14 to the Companys Consolidated
Financial Statements included in this Annual Report.
Results of Operations
Overview. Net income available to common shareholders for the year ended March 31, 2011 was
$1.1 million, or $0.68 per diluted share, as compared to net income available to common
shareholders of $1.4 million, or $0.92 per diluted share, during the year ended March 31, 2010.
Items primarily affecting the Companys earnings for the year ended March 31, 2011 when compared to
the year ended March 31, 2010 were increases in the provision of loan losses of $500 thousand and
noninterest expenses of $523 thousand, offset by a $3.6 million decrease in the cost of
interest-bearing liabilities. Noninterest expense increased primarily due to increases in salaries
and benefits of $1.2 million and professional fees of $149 thousand, partially offset by decreases
in FDIC deposit insurance expense of $590 thousand, foreclosure and collection expenses of $244
thousand and occupancy and equipment of $47 thousand. Additionally, for the years ended March 31,
2011 and 2010, net income available to common shareholders was reduced by $620 thousand and $613
thousand, respectively, as a result of dividends and accretion allocated to preferred shareholders
related to the Companys December 2008 sale of $10.0 million of preferred stock and warrant to
purchase common stock to the U.S. Treasury Department as a participant in the federal governments
TARP Capital Purchase Program.
Net interest and dividend income increased by $369 thousand during fiscal 2011 as compared to
fiscal 2010 primarily due to a 62 basis point decrease in the average rates paid on deposits,
partially offset by a 29 basis decrease on the yield on interest-earning assets.
The provision for loan losses increased by $500 thousand during fiscal 2011 as compared to
fiscal 2010. The increase was primarily associated with additional provisions required for certain
customer relationships in fiscal 2011.
Noninterest income increased by $647 thousand to $2.1 million for the year ended March 31,
2011 when compared to fiscal 2010 primarily due to net gains on the sales of investment securities,
which totaled $136 thousand for fiscal 2011 compared to net losses on the sales of investment
securities of $465 thousand for fiscal 2010.
Noninterest expenses increased by $523 thousand during fiscal 2011 when compared to fiscal
2010 primarily due to increases in salaries and benefits expenses of $1.2 million offset by a $590
thousand decrease in deposit insurance premium expense and decreases in foreclosure and collection,
advertising and marketing, professional fees, and occupancy and equipment expenses.
41
The Company recognized income tax expense of $946 thousand during fiscal 2011, compared to
$685 thousand in fiscal 2010.
Net Interest Rate Spread and Net Interest Margin. The Companys and the Banks operating
results are significantly affected by the net interest rate spread, which is the difference between
the yield on loans and investments and the interest cost of deposits and borrowings. The net
interest rate spread is affected by economic conditions and market factors that influence interest
rates, loan demand and deposit flows. The net interest margin reflects the relationship of net
interest income to interest earning assets and it is calculated by dividing net interest income
before the provision for loan losses by average interest earning assets. The net interest spread
and net interest margin improved from 2.92% and 3.21%, respectively, for the fiscal year ended
March 31, 2010 to 3.25% and 3.50%, respectively, for the fiscal year ended March 31, 2011 due to
several factors. The cost of funds decreased by 63 basis points during fiscal 2011 mainly due to
decreases in the average rates paid on deposits resulting from
comprehensive liability management as
some maturing certificates of deposit were either not renewed or were replaced with lower cost
deposits or FHLB borrowings. During the fiscal year ended March 31, 2011, the yield on
interest-earning assets declined by 29 basis points primarily due to a 26 basis point reduction in
interest income on mortgage loans. Contributing to the reduced yield on mortgage loans were
decreases in commercial real estate and construction loans as management refocused its lending
emphasis in the current market environment in an effort to reduce risk and increase regulatory
capital ratios in accordance with the Companys business plan, and a general decline in the market
interest rates on loans.
42
The following table presents average balances, interest income and expense and yields earned
or rates paid on interest-earning assets and interest-bearing liabilities for the years indicated.
For purposes of the following table, average loans include nonperforming loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Cost |
|
|
Balance |
|
|
Interest |
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
$ |
425,720 |
|
|
$ |
23,707 |
|
|
|
5.57 |
% |
|
$ |
458,214 |
|
|
$ |
26,694 |
|
|
|
5.83 |
% |
Other loans |
|
|
4,112 |
|
|
|
226 |
|
|
|
5.50 |
|
|
|
5,560 |
|
|
|
320 |
|
|
|
5.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
429,832 |
|
|
|
23,933 |
|
|
|
5.57 |
|
|
|
463,774 |
|
|
|
27,014 |
|
|
|
5.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
27,506 |
|
|
|
71 |
|
|
|
0.26 |
|
|
|
20,504 |
|
|
|
50 |
|
|
|
0.24 |
|
Investment securities |
|
|
30,235 |
|
|
|
1,295 |
|
|
|
4.28 |
|
|
|
36,667 |
|
|
|
1,473 |
|
|
|
4.02 |
|
Federal Home Loan Bank Stock |
|
|
8,518 |
|
|
|
6 |
|
|
|
0.07 |
|
|
|
8,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
66,259 |
|
|
|
1,372 |
|
|
|
2.07 |
|
|
|
65,689 |
|
|
|
1,523 |
|
|
|
2.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets |
|
|
496,091 |
|
|
|
25,305 |
|
|
|
5.10 |
|
|
|
529,463 |
|
|
|
28,537 |
|
|
|
5.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
( 3,527 |
) |
|
|
|
|
|
|
|
|
|
|
( 2,962 |
) |
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
27,945 |
|
|
|
|
|
|
|
|
|
|
|
28,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
520,509 |
|
|
|
|
|
|
|
|
|
|
$ |
555,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
288,696 |
|
|
|
2,399 |
|
|
|
0.83 |
|
|
$ |
308,830 |
|
|
|
4,468 |
|
|
|
1.45 |
|
Other borrowings |
|
|
11,341 |
|
|
|
558 |
|
|
|
4.92 |
|
|
|
11,892 |
|
|
|
578 |
|
|
|
4.86 |
|
Advances from FHLB of Boston |
|
|
129,616 |
|
|
|
4,966 |
|
|
|
3.83 |
|
|
|
146,210 |
|
|
|
6,478 |
|
|
|
4.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
429,653 |
|
|
|
7,923 |
|
|
|
1.84 |
|
|
|
466,932 |
|
|
|
11,524 |
|
|
|
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
42,534 |
|
|
|
|
|
|
|
|
|
|
|
42,247 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
1,911 |
|
|
|
|
|
|
|
|
|
|
|
3,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
474,098 |
|
|
|
|
|
|
|
|
|
|
|
512,235 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
46,411 |
|
|
|
|
|
|
|
|
|
|
|
42,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
520,509 |
|
|
|
|
|
|
|
|
|
|
$ |
555,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
|
|
|
|
$ |
17,382 |
|
|
|
|
|
|
|
|
|
|
$ |
17,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest-earning assets |
|
|
|
|
|
|
|
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Rate/Volume Analysis. The effect on net interest income of changes in interest rates and
changes in the amounts of interest-earning assets and interest-bearing liabilities is shown in the
following table. Information is provided on changes for the fiscal years indicated attributable to
changes in interest rates and changes in volume. Changes due to combined changes in interest rates
and volume are allocated between changes in rate and changes in volume proportionally to the change
due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 vs. 2010 |
|
|
2010 vs. 2009 |
|
|
|
|
|
|
|
Changes due to |
|
|
|
|
|
|
Changes due to |
|
|
|
Increase (decrease) in: |
|
|
Increase (decrease) in: |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
$ |
(1,834 |
) |
|
$ |
(1,153 |
) |
|
$ |
(2,987 |
) |
|
$ |
136 |
|
|
$ |
(583 |
) |
|
$ |
(447 |
) |
Other loans |
|
|
(80 |
) |
|
|
(14 |
) |
|
|
(94 |
) |
|
|
(173 |
) |
|
|
(40 |
) |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from loans |
|
|
(1,913 |
) |
|
|
(1,167 |
) |
|
|
(3,081 |
) |
|
|
(37 |
) |
|
|
(623 |
) |
|
|
(660 |
) |
Short-term investments |
|
|
17 |
|
|
|
4 |
|
|
|
21 |
|
|
|
(26 |
) |
|
|
(74 |
) |
|
|
(100 |
) |
Investment securities |
|
|
(269 |
) |
|
|
91 |
|
|
|
(178 |
) |
|
|
(10 |
) |
|
|
(984 |
) |
|
|
(994 |
) |
Federal Home Loan Bank Stock |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from investments |
|
|
(252 |
) |
|
|
101 |
|
|
|
(151 |
) |
|
|
(36 |
) |
|
|
(1,058 |
) |
|
|
(1,094 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
(2,165 |
) |
|
|
(1,066 |
) |
|
|
(3,232 |
) |
|
|
(73 |
) |
|
|
(1,681 |
) |
|
|
(1,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(285 |
) |
|
|
(1,783 |
) |
|
|
(2,069 |
) |
|
|
(170 |
) |
|
|
(2,346 |
) |
|
|
(2,516 |
) |
Other borrowings including
short-term
advances from FHLB |
|
|
(689 |
) |
|
|
(823 |
) |
|
|
(1,512 |
) |
|
|
(13 |
) |
|
|
(98 |
) |
|
|
(111 |
) |
Long-term advance FHLB of Boston |
|
|
(27 |
) |
|
|
7 |
|
|
|
(20 |
) |
|
|
(41 |
) |
|
|
(237 |
) |
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(1,001 |
) |
|
|
(2,599 |
) |
|
|
(3,601 |
) |
|
|
(224 |
) |
|
|
(2,681 |
) |
|
|
(2,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
$ |
(1,164 |
) |
|
$ |
1,533 |
|
|
$ |
369 |
|
|
$ |
151 |
|
|
$ |
1,000 |
|
|
$ |
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income. Interest and dividend income decreased by $3.2 million, or
11.3%, to $25.3 million for the year ended March 31, 2011 compared to $28.5 million for the year
ended March 31, 2010 primarily due to decreases in the average balances of loans and investments,
as well as a decrease in the average yield on loans. The average balance of commercial real estate
and construction loans decreased as management continued to shift its focus from those loan types
in order to decrease risk and to increase capital ratios in accordance with the Companys business
plan. The average balance of residential loans decreased due to higher than expected residential
loan payoffs. The average balance of investment securities decreased as maturities and principal
repayments were used to fund deposit withdrawals and repayment of borrowings. The yield on
short-term investments was 0.26% during the year ended March 31, 2011 as compared to 0.24% for the
year ended March 31, 2010 as the average yields on these investments are closely tied to the
federal funds target rate, which averaged approximately 0.25% during the years ended March 31, 2011
and 2010.
Interest Expense. Interest expense decreased by $3.6 million, or 31.2%, to $7.9 million for
the year ended March 31, 2011 compared to $11.5 million for the year ended March 31, 2010. The
cost of deposits decreased by 62 basis points from 1.45% during the year ended March 31, 2010 to
0.83% during the year ended March 31, 2011, as some high-cost certificates of deposit were replaced
by lower-costing deposits. The average balance of certificates of deposit totaled $149.8 million
during the year ended March 31, 2010, compared to $126.3 million for the year ended March 31, 2011,
a decline of $23.5 million. The average balance of lower-costing non-maturing deposits increased
by $3.6 million to $204.9 million for the year ended March 31, 2011, as compared to an average
balance of $201.3 million for the year ended March 31, 2010. The average balance of FHLB of Boston
borrowings decreased by $16.6 million, from $146.2 million during the year ended March 31, 2010 to
$129.6 million during the year ended March 31, 2011. The average cost of FHLB of Boston borrowings
declined as management did not replace maturing, relatively high-rate advances during the year
ended March 31, 2011. The average cost of other borrowings increased as a portion of these
borrowings are adjustable and the average rate paid during the year ended March 31, 2011 was 4.92%,
compared to an average rate of 4.86% during the year ended March 31, 2010.
44
Provision for Loan Losses.
Provision for Loan Losses. The Company provides for loan losses in order to maintain the
allowance for loan losses at a level that management estimates is adequate to absorb probable
losses based on an evaluation of known and inherent risks in the portfolio. In determining the
appropriate level of the allowance for loan losses, management considers past and anticipated loss
experience, evaluations of underlying collateral, financial condition of the borrower, prevailing
economic conditions, the nature and volume of the loan portfolio and the levels of non-performing
and other classified loans. The amount of the allowance is based on estimates and ultimate losses
may vary from such estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly when appropriate to maintain the adequacy of the
allowance. The Company uses a process of portfolio segmentation to calculate the appropriate
allowance level at the end of each quarter. Periodically, the Company evaluates the allocations
used in these calculations. During the years ended March 31, 2011 and 2010, management performed a
thorough analysis of the loan portfolio as well as the required allowance allocations for loans
considered impaired under ASC 310 and the allocation percentages used when calculating potential
losses under ASC 450. During the year ended March 31, 2011, management increased the ASC 450 loss
factors related to trends in delinquent and impaired loans for residential condominium and
commercial real estate loans, increased loss factors related to national and local economic
conditions for commercial real estate loans, and increased the loss factors related to changes in
collateral values for residential loans. As a result of the aforementioned ASC 450 factor changes,
the impact to the allowance for loan losses were increases in ASC 450 reserves of $57 thousand for
residential and residential condominium loans and $48 thousand for CRE loans.
Nonperforming loans totaled $9.6 million as compared to $6.2 million on March 31, 2010. Of
the eighteen loans constituting this category at March 31, 2011, all are secured by real estate
collateral that is predominantly located in the Banks market area. Seventeen of these real estate
secured loans have an active plan for resolution in place from either the sale of the real estate
directly by the borrower, through foreclosure or repossession, or through loan workout efforts.
The borrower for the other nonperforming real estate secured loan has entered into a bankruptcy
court approved resolution program with the ongoing net cash flow generated from apartment rents
from the property collateral being paid to the Bank. While bankruptcy filings have extended the
time required to resolve some nonperforming loans, management continues to work with borrowers to
resolve these situations as soon as possible.
Noninterest Income. Noninterest income increased by $647 thousand from $1.4 million for the
year ended March 31, 2010 to $2.1 million for the year ended March 31, 2011. The increase of $647
thousand was primarily due to net gains on the sales and write-downs of investment securities which
totaled $136 thousand for the year ended March 31, 2011 compared to net losses of $465 during the
prior year, a $67 thousand increase in other income and a $44 thousand increase in brokerage income
to $181 thousand as compared to $137 thousand at March 31, 2011. The aforementioned $67 thousand
increase in other income was primarily the result of the change in net gain on sale of foreclosed
property, which totaled $2 thousand for fiscal 2011, compared to a net loss of $62 thousand for
fiscal 2010. These increases were partially offset by a $78 thousand decrease in gains on sale of
loans. Income on bank-owned life insurance policies totaled $300 thousand during the year ended
March 31, 2010 compared to $295 thousand during the year ended March 31, 2011. |
Noninterest Expenses. Noninterest expenses increased by $523 thousand, or 3.5%, to $15.6
million during the year ended March 31, 2011 as compared to $15.1 million during the year ended
March 31, 2010. This increase is primarily due to $1.2 million increase in salaries and benefits
expenses and a $149 thousand increase in professional fees, partially offset by $590 thousand
decrease in deposit insurance premiums expense and $244 thousand decrease in foreclosure and
collection costs. Management continues to closely monitor operating expenses throughout the
Company.
Salaries and employee benefits increased by $1.2 million, or 14.4%, to $9.1 million during the
year ended March 31, 2011 as compared to $8.0 million during the year ended March 31, 2010
primarily due to increases of: $131 thousand for staffing increases and merit pay increases; $141
thousand for commissions primarily related to increased residential loan originations; $89 thousand
for retirement benefits related to the aforementioned increases in salaries and commissions; $301
thousand for stock-related compensation; $80 thousand for increased contract labor, and a $150
thousand recovery from a vendor for a benefits related settlement that was recorded during fiscal
2010.
45
FDIC insurance premiums decreased by $590 thousand to $561 thousand during the year ended
March 31, 2010 compared to $1.2 million during the year ended March 31, 2010 primarily due to a
change in the calculation methodology mandated by the FDIC for deposit insurance premiums and lower
deposit insurance costs due to declining average balances of deposits.
Advertising and marketing expenses increased by $30 thousand to $193 thousand during the year
ended March 31, 2011 as compared to $163 thousand during the year ended March 31, 2010 as
management strategically decided to increase advertising and marketing efforts on a limited basis
in fiscal 2011.
Office occupancy and equipment expenses decreased by $47 thousand, or 2.2%, to $2.1 million
during the year ended March 31, 2011 as compared $2.2 million during the year ended March 31, 2010
primarily due to decreases in the amortization of leasehold improvements and depreciation of
furniture, fixtures and equipment, and maintenance costs, partially offset by increases in
utilities, real estate taxes, security expenses and rents.
Data processing costs decreased by $10 thousand, or 1.2%, to $844 thousand during the year
ended March 31, 2011 as compared to $854 thousand during the year ended March 31, 2010 due to
decreases in certain processing costs.
Professional fees increased by $149 thousand, or 16.6%, to $1.0 million during the year ended
March 31, 2011 as compared to $895 thousand for the year ended March 31, 2010 primarily due to
increases in loan workout-related expenses and compliance-related costs, partially offset by lower
legal fees.
Other expenses decreased by $163 thousand, or 8.59%, to $1.7 million during the year ended
March 31, 2011 as compared to $1.9 million during the year ended March 31, 2010 primarily as a
result of a decrease in OREO expenses of $244 thousand and other recruiting expenses of $27,
partially offset by an increase of $33 thousand for telephone expenses and an increase in bank
policy losses of $30 thousand.
Income Taxes. The effective income tax rates for the years ended March 31, 2011 and 2010 were
35.4% and 25.6%, respectively. The effective income tax rate for fiscal 2010 was affected by a
one-time $271 thousand reduction in state income taxes associated with the Banks sale of an
investment security previously held by a subsidiary. The investment security was transferred to
the Bank prior to the sale of the investment, which occurred during the fourth quarter of fiscal
2010.
Comparison of Financial Condition at March 31, 2011 and March 31, 2010
Total assets were $487.6 million at March 31, 2011 compared to $542.4 million at March 31,
2010, representing a decrease of $54.8 million, or 10.1%. The decrease in total assets reflected
strategic actions taken by management to reduce risk and increase capital ratios in accordance with
the Companys business plan, including the use of loan repayment and investment maturity and
repayment proceeds to fund certain maturing deposits and borrowings. Total loans (excluding loans
held for sale) were $394.2 million at March 31, 2011, compared to $461.5 million at March 31, 2010,
representing a decrease of $67.3 million, or 14.6%. This decrease was primarily due to decreases
in residential and home equity loans of $33.9 million and $391 thousand, respectively, as well as
decreases in construction and land and commercial real estate loans of $31.1 million. Construction
and land and commercial real estate loans declined as management de-emphasized this type of lending
in the current economic environment in an effort to reduce risk and increase regulatory capital
ratios in accordance with the Companys business plan. Residential and home equity loans decreased
from $225.9 million at March 31, 2010 to $191.6 million at March 31, 2011 due to higher than
expected residential loan payoffs. Commercial and industrial loans decreased from $4.0 million at
March 31, 2010 to $2.2 million at March 31, 2011 primarily due to the scheduled repayment of
principal. Managements efforts to reduce the levels of commercial real estate and construction
loans are reflected in changes in the Banks commercial real estate concentration ratio, which is
calculated as total non-owner occupied commercial real estate and construction loans divided by the
Banks risk-based capital. At March 31, 2011, the commercial real estate concentration ratio was
330%, compared to a ratio of 466% at March 31, 2010.
The allowance for loan losses totaled $3.9 million at March 31, 2011 compared to $3.0 million
at March 31, 2010, representing a net increase of $854 thousand, or 28.1%. This net increase was
primarily due to a provision
46
of $1.1 million 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 March 31, 2011 and March
31, 2010.
Management regularly assesses the desirability of holding newly originated residential
mortgage loans in the Banks portfolio or selling such loans in the secondary market. A number of
factors are evaluated to determine whether or not to hold such loans in the Banks portfolio
including current and projected liquidity, current and projected interest rates, projected growth
in other interest-earning assets and the current and projected interest rate risk profile. Based
on its consideration of these factors, management determined that most long-term residential
mortgage loans originated during the year ended March 31, 2011 should be sold in the secondary
market, rather than being retained in the Banks portfolio. The decision to sell or hold loans is
made at the time the loan commitment is issued. Upon making a determination not to retain a loan,
the Bank simultaneously enters into a best efforts forward commitment to sell the loan to manage
the interest rate risk associated with the decision to sell the loan. Loans are sold servicing
released.
Cash and cash equivalents totaled $40.9 million at March 31, 2011 compared to $16.5 million at
March 31, 2010, representing an increase of $24.4 million. During the twelve months ended March
31, 2011, in general, proceeds from loan and investment pay-downs and maturities were utilized to
fund deposit withdrawals and maturing borrowings, with the remaining funds contributing to the
increase in cash and cash equivalents.
Investment securities totaled $35.3 million at March 31, 2011 compared to $44.5 million at
March 31, 2010, representing a decrease of $9.2 million, or 20.7%. The decrease in investment
securities is primarily due to the repayment of $9.1 million in principal on mortgage-backed
securities, the sale of $3.3 million in corporate bonds, common stocks and preferred stocks,
partially offset by the purchase of two government sponsored mortgage backed securities totaling
$3.2 million and a net increase of $1.2 million in the fair value of available for sale securities.
Stock in the FHLB of Boston totaled $8.5 million at both March 31, 2011 and March 31, 2010.
Banking premises and equipment, net, totaled $2.7 million and $2.8 million at March 31, 2011
and March 31, 2010, respectively.
Other real estate owned totaled $132 thousand at March 31, 2011, compared to $60 thousand at
March 31, 2010 as one residential condominium foreclosed property was sold during the quarter ended
June 30, 2010 and another residential condominium was acquired during the quarter ended December
31, 2010.
Deferred tax asset totaled $3.6 million at March 31, 2011 compared to $4.7 million at March
31, 2010. The decrease in deferred tax asset is primarily due to the sale of previously
written-down preferred stock investments during the year ended March 31, 2011 resulting in a
current tax deduction for the prior book write-down.
The cash surrender value of bank-owned life insurance policies is carried as an asset titled
Bank-Owned Life Insurance and totaled $7.0 million at March 31, 2011 as compared to $6.7 million
as of March 31, 2010.
Total deposits amounted to $309.1 million at March 31, 2011 compared to $339.2 million at
March 31, 2010, representing a decrease of $30.1 million, or 8.9%. The decrease was a result of
the combined effect of a $26.8 million decrease in certificates of deposit and a net decrease in
core deposits of $3.3 million (consisting of all non-certificate accounts). Management utilized
cash and short-term investments to fund certain maturing higher-cost certificates of deposit in an
effort to improve the Companys net interest rate spread and net interest margin.
FHLB of Boston advances amounted to $117.4 million at March 31, 2011 compared to $143.5
million at March 31, 2010, representing a decrease of $26.1 million, or 18.2%, as maturing advances
were not renewed but were instead funded with available cash.
The net increase in stockholders equity from $45.1 million at March 31, 2010 to $47.1 million
at March 31, 2011 is primarily the result of net income of $1.7 million, partially offset by $799
thousand of dividends paid to common and preferred shareholders.
47
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term
nature. The Banks principal sources of liquidity are customer deposits, short-term investments,
repayments of loans, FHLB of Boston advances, maturities and repayments of various other
investments, and funds from operations. These various sources of liquidity, as well as the Banks
ability to sell residential mortgage loans in the secondary market, are used to fund deposit
withdrawals, loan originations and investment purchases and funds from operations. In addition,
the Company has access to the capital markets to raise additional equity. On December 5, 2008, the
Company sold $10.0 million of its preferred stock and issued a warrant to purchase common stock to
the U.S. Department of Treasury under the TARP Capital Purchase Program See Troubled Asset
Relief Program Capital Purchase Program above.
During the year ended March 31, 2011, the Bank decreased deposits by $30.1 million, or 8.9%.
The decrease in deposits reflected strategic actions taken by management to reduce risk and
increase capital ratios in accordance with the Companys business plan, which included the use of
proceeds from loan repayments and investment maturities and repayments to fund certain maturing
deposits and borrowings. Differences in deposit levels are primarily the result of managements
decision to focus at various times on the use of deposits to fund growth while at other times to
instead utilize FHLB of Boston advances. These decisions are based on the relative interest rates
of the various sources of funds at any particular time.
On September 29, 2009, the FDIC adopted an Amended Restoration Plan to enable the
Deposit Insurance Fund to return to its minimum reserve ratio of 1.15% over eight years. Under
this plan, the FDIC did not impose a previously-planned second special assessment. On June 30,
2009, the Bank accrued the first special assessment which totaled $270 thousand and was paid on
September 30, 2009. Also, the plan calls for deposit insurance premiums to increase by 3 basis
points effective January 1, 2011. Additionally, to meet bank failure cash flow needs, the FDIC
assessed a three year insurance premium prepayment, which was paid by banks in December 2009 and
will cover the period of January 1, 2010 through December 31, 2012. The FDIC estimates that bank
failures will cost the fund approximately $100 billion during the next three years, but only
projects revenues of approximately $60 billion. The shortfall will be met through the collection
of prepaid premiums, which is estimated to be $45 billion. The Banks prepaid premium totaled $2.3
million and was paid during the quarter ended December 31, 2009, and is being amortized monthly
over the three year period. This prepaid deposit premium is carried on the consolidated balance
sheet in the other assets category and totaled $1.6 million at March 31, 2011.
At March 31, 2011, the Company had commitments to originate loans, unused outstanding lines of
credit and undisbursed proceeds of loans totaling $27.6 million. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. At March 31, 2011, the Company believes it has sufficient funds available to
meet its current loan commitments.
The Bank is a voluntary member of the FHLB of Boston and has the ability to borrow up to the
value of its qualified collateral that has not been pledged to others. Qualified collateral
generally consists of FHLB of Boston stock, residential first mortgage loans, commercial real
estate loans, U.S. Government and agencies securities, mortgage-backed securities and funds on
deposit at the FHLB of Boston. At March 31, 2011 and 2010, the Bank had outstanding FHLB of Boston
advances of $117.4 and $143.5 million, respectively. At March 31, 2011, the Bank had approximately
$53.6 million in unused borrowing capacity at the FHLB of Boston.
The Bank also may obtain funds from the Federal Reserve Bank of Boston, the Co-operative
Central Bank Reserve Fund and through a retail CD brokerage agreement with a major brokerage firm.
The Bank views these borrowing facilities as secondary sources of liquidity and has had no
immediate need to use them.
Commitments, Contingencies and Off-Balance Sheet Risk
In the normal course of operations, the Company engages in a variety of financial transactions
that, in accordance with generally accepted accounting principles are not recorded in its
consolidated financial statements. These transactions involve, to varying degrees, elements of
credit, interest rate and liquidity risk. Such transactions are used primarily to manage
customers requests for funding and take the form of loan commitments and lines of credit.
48
For the year ended March 31, 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.
Commitments to originate new loans or to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Loan commitments
generally expire within 30 to 45 days. Most home equity line commitments are for a term of 15
years, and commercial lines of credit are generally renewable on an annual basis. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. At March 31, 2011, the Company had commitments to originate loans, unused outstanding lines
of credit and undisbursed proceeds of loans totaling $27.6 million. Since many of the commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the borrower.
Commitments to sell loans held for sale are agreements to sell loans on a best efforts
delivery basis to a third party at an agreed upon price. Additionally, these loans are sold
servicing released and without recourse.
On September 16, 2004 the Company completed a $5.1 million trust preferred securities
financing through Central Bancorp Capital Trust I. On January 31, 2007, the Company completed a
trust preferred securities financing in the amount of $5.9 million through Central Bancorp
Statutory Trust II. Central Bancorp Capital Trust I and Central Bancorp Statutory Trust II are the
Companys only special purpose subsidiaries. The Company, within the financing transactions and
concurrent with the issuance of the junior subordinated debentures and the trust preferred
securities, issued guarantees related to the trust securities of both trusts for the benefit of
their respective holders. Refer to Note 1, Subordinated Debentures, in Notes to the Consolidated
Financial Statements for more detail.
Management believes that, at March 31, 2011, the Company and Bank have adequate sources of
liquidity to fund these commitments.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this Annual Report on Form
10-K have been prepared in conformity with accounting principles generally accepted in the United
States of America, which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike many industrial companies, substantially all of the assts and
liabilities of the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Banks performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
Capital Resources
The Company and the Bank are required to maintain minimum capital ratios pursuant to the
federal prompt corrective action regulations. These regulations establish a risk-adjusted ratio
relating capital to different categories of balance sheet assets and off-balance sheet obligations.
Two categories of capital are defined: Tier 1 or core capital (stockholders equity) and Tier 2 or
supplementary capital. Total capital is the sum of both Tier 1 and Tier 2 capital. According to the
federal prompt corrective action regulations, Tier 1 capital must represent at least 50% of
qualifying total capital. At March 31, 2011, the minimum total risk-based capital ratio required to
be well-capitalized was 10.00%. The Companys and the Banks total risk-based capital ratios at
March 31, 2011 were 18.53% and 16.72%, respectively.
To complement the risk-based standards, the FDIC has also adopted a leverage ratio (adjusted
stockholders equity divided by total average assets) of 3.00% for the most highly rated banks and
4.00% for all others. The leverage ratio is to be used in tandem with the risk-based capital
ratios as the minimum standards for banks. The Companys and the Banks leverage ratios were
10.66% and 9.58%, respectively, at March 31, 2011.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Companys earnings are largely dependent on its net interest income, which is the
difference between the yield on interest-earning assets and the cost of interest-bearing
liabilities. The Company seeks to reduce its exposure to changes in interest rates, or market
risk, through active monitoring and management of its interest-rate risk exposure. The policies and
procedures for managing both on- and off-balance sheet activities are established by the Banks
asset/liability management committee (ALCO). The Board of Directors reviews and approves the ALCO
policy annually and monitors related activities on an ongoing basis.
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys
market risk arises primarily from interest rate risk inherent in its lending, borrowing and deposit
taking activities.
The main objective in managing interest rate risk is to minimize the adverse impact of changes
in interest rates on the Banks net interest income and preserve capital, while adjusting the
Banks asset/liability structure to control interest-rate risk. However, a sudden and substantial
increase or decrease in interest rates may adversely impact earnings to the extent that the
interest rates borne by assets and liabilities do not change at the same speed, to the same extent,
or on the same basis.
The Company quantifies its interest-rate risk exposure using a sophisticated simulation model.
Simulation analysis is used to measure the exposure of net interest income to changes in interest
rates over a specific time horizon. Simulation analysis involves projecting future interest income
and expense under various rate scenarios. The simulation is based on forecasted cash flows and
assumptions of management about the future changes in interest rates and levels of activity (loan
originations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and,
therefore, actual results will differ from simulated results due to timing, magnitude and frequency
of interest rate changes as well as changes in market conditions and strategies. The net interest
income projection resulting from the use of forecasted cash flows and managements assumptions is
compared to net interest income projections based on immediate shifts of 300 basis points upward
and 50 basis points downward for fiscal 2011, and 300 basis points upward and 50 basis points
downward for fiscal year 2010. Internal guidelines on interest rate risk state that for every 100
basis points immediate shift in interest rates, estimated net interest income over the next twelve
months should decline by no more than 5%. Managements decision to utilize different rate shift
scenarios at March 31, 2011 as compared to those used at March 31, 2010, is based on the overall
lower interest rate environment that existed at March 31, 2011 when compared to March 31, 2010.
The following table indicates the projected change in net interest income, and sets forth such
change as a percentage of estimated net interest income, for the twelve-month period following the
date indicated assuming an immediate and parallel shift for all market rates with other rates
adjusting to varying degrees in each scenario based on both historical and expected spread
relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months following at March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Amount |
|
|
% Change |
|
|
Amount |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
|
|
|
|
300 basis point increase in rates |
|
$ |
(1,095 |
) |
|
|
(6.58 |
)% |
|
$ |
(1,631 |
) |
|
|
(9.00 |
)% |
50 basis point decrease in rates |
|
|
(282 |
) |
|
|
(1.69 |
) |
|
|
(131 |
) |
|
|
(0.72 |
) |
As noted, this policy provides broad, visionary guidance for managing the Banks balance
sheet, not absolute limits. When the simulation results indicate a variance from stated
parameters, ALCO will intensify its scrutiny of the reasons for the variance and take whatever
actions are deemed appropriate under the circumstances.
50
Item 8. Financial Statements and Supplementary Data
|
|
|
|
|
|
|
Page |
Consolidated Balance Sheets at March 31, 2011 and 2010
|
|
|
52 |
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended March 31, 2011 and 2010
|
|
|
53 |
|
|
|
|
|
|
Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income for the Years
Ended March 31, 2011 and 2010
|
|
|
54 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2011 and 2010
|
|
|
56 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
57 |
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
92 |
|
51
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
3,728 |
|
|
$ |
4,328 |
|
Short-term investments |
|
|
37,190 |
|
|
|
12,208 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
40,918 |
|
|
|
16,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale, at fair value (Note 2) |
|
|
25,185 |
|
|
|
34,368 |
|
Stock in Federal Home Loan Bank of Boston, at cost (Notes 2 and 7) |
|
|
8,518 |
|
|
|
8,518 |
|
The Co-operative Central Bank Reserve Fund, at cost (Note 2) |
|
|
1,576 |
|
|
|
1,576 |
|
|
|
|
|
|
|
|
Total investments |
|
|
35,279 |
|
|
|
44,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at fair value |
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (Note 3) |
|
|
394,217 |
|
|
|
461,510 |
|
Less allowance for loan losses (Note 3) |
|
|
(3,892 |
) |
|
|
(3,038 |
) |
|
|
|
|
|
|
|
Loans, net |
|
|
390,325 |
|
|
|
458,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,496 |
|
|
|
1,896 |
|
Banking premises and equipment, net (Note 4) |
|
|
2,705 |
|
|
|
2,759 |
|
Deferred tax asset, net (Note 8) |
|
|
3,600 |
|
|
|
4,681 |
|
Other real estate owned (Note 5) |
|
|
132 |
|
|
|
60 |
|
Goodwill, net |
|
|
2,232 |
|
|
|
2,232 |
|
Bank-owned life insurance |
|
|
6,972 |
|
|
|
6,686 |
|
Other assets |
|
|
3,966 |
|
|
|
4,268 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
487,625 |
|
|
$ |
542,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits (Note 6) |
|
$ |
309,077 |
|
|
$ |
339,169 |
|
Federal Home Loan Bank advances (Notes 2 and 7) |
|
|
117,351 |
|
|
|
143,469 |
|
Subordinated debentures |
|
|
11,341 |
|
|
|
11,341 |
|
Advance payments by borrowers for taxes and insurance |
|
|
1,387 |
|
|
|
1,649 |
|
Accrued expenses and other liabilities |
|
|
1,348 |
|
|
|
1,703 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
440,504 |
|
|
|
497,331 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 8, 9 and 12) |
|
|
|
|
|
|
|
|
Stockholders equity (Note 10): |
|
|
|
|
|
|
|
|
Preferred stock Series A Fixed Rate Cumulative Perpetual, $1.00 par value;
5,000,000 shares authorized; 10,000 shares issued and outstanding at March
31,
2011 and 2010, with a liquidation preference and redemption value of
$10,063,889 at March 31, 2011 and 2010 (Note 13) |
|
|
9,709 |
|
|
|
9,589 |
|
Common stock $1.00 par value; 15,000,000 shares authorized; 1,681,071 and
1,667,151 shares issued and outstanding at March 31, 2011 and 2010,
respectively |
|
|
1,681 |
|
|
|
1,667 |
|
Additional paid-in capital |
|
|
4,589 |
|
|
|
4,291 |
|
Retained income |
|
|
35,288 |
|
|
|
34,482 |
|
Accumulated other comprehensive income (Notes 1,2 and 11) |
|
|
892 |
|
|
|
810 |
|
Unearned compensation Employee Stock Ownership Plan (Note 11) |
|
|
(5,038 |
) |
|
|
(5,726 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
47,121 |
|
|
|
45,113 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
487,625 |
|
|
$ |
542,444 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In Thousands, Except Share And Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Interest and dividend income: |
|
|
|
|
|
|
|
|
Mortgage loans |
|
$ |
23,707 |
|
|
$ |
26,694 |
|
Other loans |
|
|
226 |
|
|
|
320 |
|
Investments |
|
|
1,301 |
|
|
|
1,473 |
|
Short-term investments |
|
|
71 |
|
|
|
50 |
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
25,305 |
|
|
|
28,537 |
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
|
|
2,399 |
|
|
|
4,468 |
|
Advances from Federal Home Loan Bank of Boston |
|
|
4,966 |
|
|
|
6,478 |
|
Other borrowings |
|
|
558 |
|
|
|
578 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,923 |
|
|
|
11,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income |
|
|
17,382 |
|
|
|
17,013 |
|
Provision for loan losses (Note 3) |
|
|
1,100 |
|
|
|
600 |
|
|
|
|
|
|
|
|
Net interest and dividend income after
provision for loan losses |
|
|
16,282 |
|
|
|
16,413 |
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
Deposit service charges |
|
|
1,003 |
|
|
|
985 |
|
Net gain (loss) from sales and write-downs of investment securities (Note 2) |
|
|
136 |
|
|
|
(465 |
) |
Net gains on sales of loans |
|
|
251 |
|
|
|
329 |
|
Bank-owned life insurance income |
|
|
295 |
|
|
|
300 |
|
Brokerage income |
|
|
181 |
|
|
|
137 |
|
Other income |
|
|
192 |
|
|
|
125 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,058 |
|
|
|
1,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses: |
|
|
|
|
|
|
|
|
Salaries and employee benefits (Note 11) |
|
|
9,145 |
|
|
|
7,991 |
|
Occupancy and equipment (Note 4) |
|
|
2,137 |
|
|
|
2,184 |
|
Data processing fees |
|
|
844 |
|
|
|
854 |
|
Professional fees |
|
|
1,044 |
|
|
|
895 |
|
FDIC deposit premiums |
|
|
561 |
|
|
|
1,151 |
|
Advertising and marketing |
|
|
193 |
|
|
|
163 |
|
Other expenses |
|
|
1,745 |
|
|
|
1,908 |
|
|
|
|
|
|
|
|
Total noninterest expenses |
|
|
15,669 |
|
|
|
15,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,671 |
|
|
|
2,678 |
|
Provision for income taxes (Note 8) |
|
|
946 |
|
|
|
685 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,725 |
|
|
$ |
1,993 |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
1,105 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share (Note 1) |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.74 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.68 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
1,503,719 |
|
|
|
1,457,232 |
|
Weighted average common and equivalent shares outstanding diluted |
|
|
1,621,182 |
|
|
|
1,499,912 |
|
See accompanying notes to consolidated financial statements.
53
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
(In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Series A |
|
|
Series A |
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Unearned |
|
|
Total |
|
|
|
Preferred |
|
|
Preferred |
|
|
Shares of |
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Compensation- |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Common Stock |
|
|
Stock |
|
|
Capital |
|
|
Income |
|
|
Income (Loss) |
|
|
ESOP |
|
|
Equity |
|
|
|
|
Balance at March 31, 2009 |
|
|
10,000 |
|
|
$ |
9,476 |
|
|
|
1,639,951 |
|
|
$ |
1,640 |
|
|
$ |
4,371 |
|
|
$ |
33,393 |
|
|
$ |
(2,226 |
) |
|
$ |
(6,415 |
) |
|
$ |
40,239 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,993 |
|
|
|
|
|
|
|
|
|
|
|
1,993 |
|
Other comprehensive income, net of taxes of
$2.0 million: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on post retirement benefits, net of
taxes of $17 thousand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
Unrealized gain on securities, net of reclassification
adjustment (Note 2) and taxes of $2.0 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,012 |
|
|
|
|
|
|
|
3,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to common stockholder ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
(291 |
) |
Preferred stock accretion of discount and issuance costs |
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
(500 |
) |
Grant of restricted common stock |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
30 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted common stock |
|
|
|
|
|
|
|
|
|
|
(2,800 |
) |
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321 |
|
Amortization of unearned compensation ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374 |
) |
|
|
|
|
|
|
|
|
|
|
689 |
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
10,000 |
|
|
$ |
9,589 |
|
|
|
1,667,151 |
|
|
$ |
1,667 |
|
|
$ |
4,291 |
|
|
$ |
34,482 |
|
|
$ |
810 |
|
|
$ |
(5,726 |
) |
|
$ |
45,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,725 |
|
|
|
|
|
|
|
|
|
|
|
1,725 |
|
Other comprehensive gain, net of tax expense of $50
thousand: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on post retirement benefits, net of
tax benefit of $22 thousand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
(30 |
) |
Unrealized gain on securities, net of
reclassification
adjustment (Note 2) and taxes of $72 thousand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to common stockholders ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(299 |
) |
|
|
|
|
|
|
|
|
|
|
(299 |
) |
Preferred stock accretion of discount and issuance costs |
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
(500 |
) |
Grants of restricted and unrestricted common stock |
|
|
|
|
|
|
|
|
|
|
13,920 |
|
|
|
14 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation (Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512 |
|
Amortization of unearned compensation ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
688 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
|
10,000 |
|
|
$ |
9,709 |
|
|
|
1,681,071 |
|
|
$ |
1,681 |
|
|
$ |
4,589 |
|
|
$ |
35,288 |
|
|
$ |
892 |
|
|
$ |
(5,038 |
) |
|
$ |
47,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
54
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income (continued)
(In Thousands)
The Companys other comprehensive income and related tax effect for the years ended March 31,
2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax |
|
|
Tax Expense |
|
|
After-Tax |
|
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
Year ended March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on post-retirement benefits |
|
$ |
(52 |
) |
|
$ |
(22 |
) |
|
$ |
(30 |
) |
Unrealized gains on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding gains during period |
|
|
320 |
|
|
|
127 |
|
|
|
193 |
|
Less: reclassification adjustment for net
gains included in net
income |
|
|
136 |
|
|
|
55 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
132 |
|
|
$ |
50 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax |
|
|
Tax Expense |
|
|
After-Tax |
|
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
Year ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on post-retirement benefits |
|
$ |
41 |
|
|
$ |
17 |
|
|
$ |
24 |
|
Unrealized gains on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding gains during period |
|
|
4,553 |
|
|
|
1,816 |
|
|
|
2,737 |
|
Less: reclassification adjustment for net losses included in net
income |
|
|
(465 |
) |
|
|
(190 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
5,059 |
|
|
$ |
2,023 |
|
|
$ |
3,036 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,725 |
|
|
$ |
1,993 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
623 |
|
|
|
773 |
|
Amortization of premiums |
|
|
218 |
|
|
|
369 |
|
Provision for loan losses |
|
|
1,100 |
|
|
|
600 |
|
Stock-based compensation and amortization of unearned
compensation ESOP |
|
|
1,000 |
|
|
|
636 |
|
Deferred tax provision |
|
|
941 |
|
|
|
896 |
|
Net (gains) losses from sales and write-downs of investment securities |
|
|
(136 |
) |
|
|
465 |
|
Bank-owned life insurance income |
|
|
(286 |
) |
|
|
(300 |
) |
Gains on sales of loans held for sale |
|
|
(251 |
) |
|
|
(329 |
) |
Originations of loans held for sale |
|
|
(20,795 |
) |
|
|
(36,052 |
) |
Proceeds from the sale of loans originated for sale |
|
|
21,438 |
|
|
|
39,197 |
|
(Gain) loss on sale of other real estate |
|
|
(2 |
) |
|
|
60 |
|
Gain on sale of equipment |
|
|
|
|
|
|
(5 |
) |
Decrease (increase) in accrued interest receivable |
|
|
400 |
|
|
|
(37 |
) |
Decrease (increase) in other assets, net |
|
|
302 |
|
|
|
(1,230 |
) |
Decrease in accrued expenses and other liabilities, net |
|
|
(317 |
) |
|
|
(317 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
5,960 |
|
|
|
6,719 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Loan principal collections (originations), net |
|
|
66,915 |
|
|
|
(1,670 |
) |
Principal payments on mortgage-backed securities |
|
|
9,137 |
|
|
|
14,225 |
|
Purchases of investment securities |
|
|
(3,223 |
) |
|
|
(11,026 |
) |
Proceeds from sales of investment securities |
|
|
3,371 |
|
|
|
335 |
|
Maturities and calls of investment securities |
|
|
|
|
|
|
1,500 |
|
Purchases of banking premises and equipment |
|
|
(569 |
) |
|
|
(214 |
) |
Net expenditures on other real estate |
|
|
|
|
|
|
16 |
|
Proceeds from sale of equipment |
|
|
|
|
|
|
10 |
|
Proceeds from sales of other real estate |
|
|
62 |
|
|
|
2,926 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
75,693 |
|
|
|
6,102 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
(30,092 |
) |
|
|
(35,905 |
) |
(Increase) decrease in payments by borrowers for taxes and insurance |
|
|
(262 |
) |
|
|
117 |
|
Advances from FHLB of Boston |
|
|
|
|
|
|
26,000 |
|
Repayment of advances from FHLB of Boston |
|
|
(26,118 |
) |
|
|
(27,114 |
) |
Repayments of short-term borrowings |
|
|
|
|
|
|
(1,014 |
) |
Cash dividends paid |
|
|
(799 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,271 |
) |
|
|
(38,707 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
24,382 |
|
|
|
(25,886 |
) |
Cash and cash equivalents at beginning of year |
|
|
16,536 |
|
|
|
42,422 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
40,918 |
|
|
$ |
16,536 |
|
|
|
|
|
|
|
|
Cash paid (received) during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
8,043 |
|
|
$ |
11,610 |
|
Income taxes |
|
|
|
|
|
|
(813 |
) |
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
132 |
|
|
$ |
77 |
|
Accretion of Series A preferred stock discount and issuance costs |
|
|
120 |
|
|
|
113 |
|
See accompanying notes to consolidated financial statements
56
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2011
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Central Bancorp,
Inc. (the Company), a Massachusetts corporation, and its wholly owned subsidiary, Central
Co-operative Bank (the Bank), as well as the wholly owned subsidiaries of the Bank, Central
Securities Corporation, Central Securities Corporation II, and Metro Real Estate Holdings, LLC.
The Company was organized at the direction of the Bank in September 1998 to acquire all of the
capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding
company form of ownership. This reorganization was completed in January 1999. The Bank was
organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock
form of ownership in 1986. The primary business of the Bank is to generate funds in the form of
deposits and use the funds to make mortgage loans for the construction, purchase and refinancing of
residential properties, and to make loans on commercial real estate in its market area. The Bank is
subject to competition from other financial institutions. The Company is subject to the regulations
of, and periodic examinations by the Federal Reserve Bank (FRB), the Federal Deposit Insurance
Corporation (FDIC) and the Massachusetts Division of Banks. The Banks deposits are insured by
the Deposit Insurance Fund of the FDIC for deposits up to $250,000 for most accounts and up to
$250,000 for retirement accounts and the Share Insurance Fund (SIF) for deposits in excess of the
FDIC limits. Additionally, during 2010, amendments to the Federal Deposit Insurance Act were
enacted, providing unlimited insurance coverage for noninterest bearing transaction accounts
beginning December 31, 2010, through December 31, 2012.
The Company conducts its business through one operating segment, the Bank. Most of the Banks
activities are with customers located in eastern Massachusetts. As set forth in Note 3 herein, the
Bank concentrates in real estate lending. Management believes that the Bank does not have any
significant concentrations in any one customer or industry.
The accompanying consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All significant
intercompany balances and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the balance sheet and
income and expenses for the year. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to the allowance for loan losses, fair
value of other real estate owned, fair value of investments and other-than-temporary impairment,
income taxes, accounting for goodwill and impairment, and stock-based compensation.
The Company owns 100% of the common stock of Central Bancorp Capital Trust I (Trust I) and
Central Bancorp Statutory Trust II (Trust II), which have issued trust preferred securities to
the public in private placement offerings. In accordance with Accounting Standards Codification
(ASC) 860 Transfers and Servicing, neither Trust I nor Trust II are included in the Companys
consolidated financial statements (See Subordinated Debentures below).
The following is a summary of the significant accounting policies adopted by the Company and the
Bank:
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and due from
banks, money market mutual fund investments, federal funds sold and other short-term investments
having an original maturity at date of purchase of 90 days or less.
57
The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Such
required reserves are calculated based upon deposit levels and amounted to approximately $2.2
million at March 31, 2011.
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 March 31, 2011 and 2010,
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.
The Companys investments in the Federal Home Loan Bank of Boston and the Co-operative Central
Bank Reserve Fund are accounted for at cost. Such investments are reviewed for impairment when
impairment indications are present. Factors considered in determining impairment include a current
financial analysis of the issuer and an assessment of future financial performance.
Loans
Loans 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 March 31, 2011 loans held for sale totaled $0 compared to
$392 thousand at March 31, 2010, and, at that date, the aggregate cost of loans held for sale
approximated fair value.
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
58
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. At
March 31, 2011 and 2010, net deferred loan fees of $23 thousand and net deferred loan costs of $88
thousand, respectively, were included with the related loan balances for financial presentation
purposes.
Interest income on loans is recognized on an accrual basis using the simple interest method
only if deemed collectible. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans and amortization of net deferred loan
fees or costs are discontinued either when reasonable doubt exists as to the full and timely
collection of interest or principal, or when a loan becomes contractually past due 90 days with
respect to interest or principal. The accrual on some loans, however, may continue even though
they are more than 90 days past due if management deems it appropriate, provided that the loans are
well secured and in the process of collection. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period interest income.
Interest accruals are resumed on such loans only when they are brought fully current with respect
to interest and principal and when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest.
Loans are classified as impaired when it is probable that the Bank will not be able to collect
all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans,
except those loans that are accounted for at fair value or at lower of cost or fair value such as
loans held for sale, are accounted for at the present value of the expected future cash flows
discounted at the loans effective interest rate, or as a practical expedient in the case of
collateral dependent loans, the lower of the fair value of the collateral less selling and other
costs, or the recorded amount of the loan. In evaluating collateral values for impaired loans,
management obtains new appraisals or opinions of value when deemed necessary and may discount those
appraisals depending on the likelihood of foreclosure, generally by 20 percent to 30 percent.
Other factors considered by 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
collectibility 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 Receivables (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.
59
Allowance for Loan Losses
The allowance for loan losses is maintained at a level determined to be adequate by management
to absorb probable losses based on an evaluation of known and inherent risks in the portfolio.
This allowance is increased by provisions charged to operating expense and by recoveries on loans
previously charged-off, and reduced by charge-offs on loans or reductions in the provision credited
to operating expense.
The Bank provides for loan losses in order to maintain the allowance for loan losses at a
level that management estimates is adequate to absorb probable losses based on an evaluation of
known and inherent risks in the portfolio. In determining the appropriate level of the allowance
for loan losses, management considers past and anticipated loss experience, evaluations of
underlying collateral, financial condition of the borrower, prevailing economic conditions, the
nature and volume of the loan portfolio and the levels of non-performing and other classified
loans. The amount of the allowance is based on estimates and ultimate losses may vary from such
estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for
loan losses monthly when appropriate to maintain the adequacy of the allowance.
Regarding impaired loans, the Bank individually evaluates each loan and documents what
management believes to be an appropriate reserve level in accordance with ASC 310. If management
does not believe that any separate reserves for such loans are deemed necessary at the evaluation
date in accordance with ASC 310, such loans 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 |
Monthly, CRE loans are segmented 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 level of the Companys ASC 450 allowance for loan losses.
In developing ASC 450 reserve levels, 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
60
commercial real estate and construction loans divided by the Banks risk-based
capital. At March 31, 2011, the commercial real estate concentration ratio was 330%, compared to a
ratio of 466% at March 31, 2010, and 600% at March 31, 2009.
Residential loans, home equity loans and consumer loans, other than TDRs and loans in the
process of foreclosure or repossession, are collectively evaluated for impairment. In addition to
our charge-off experience, 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 year ended March 31, 2011, management increased the ASC 450 loss factors related to
trends in delinquent and impaired loans for residential condominium and commercial real estate
loans, increased loss factors related to national and local economic conditions for commercial real
estate loans, and increased the loss factors related to changes in collateral values for
residential loans. As a result of the aforementioned ASC 450 factor changes, the impact to the
allowance for loan losses were increases in ASC 450 reserves of $57 thousand for residential and
residential condominium loans and $48 thousand for CRE loans.
Although management uses available information to establish the appropriate level of the
allowance for loan losses, future additions or reductions to the allowance may be necessary based
on estimates that are susceptible to change as a result of changes in loan composition or volume,
changes in economic market area conditions or other factors. As a result, our allowance for loan
losses may not be sufficient to cover actual loan losses, and future provisions for loan losses
could materially adversely affect the Companys operating results. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the Companys
allowance for loan losses. Such agencies may require the Company to recognize adjustments to the
allowance based on their judgments about information available to them at the time of their
examination. Management currently believes that there are adequate reserves and collateral
securing non-performing loans to cover losses that may result from these loans at March 31, 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 March 31, 2011 and 2010, the reserve for unfunded commitments was not
significant.
Subordinated Debentures
On September 16, 2004, the Company completed a trust preferred securities financing in the
amount of $5.1 million. In the transaction, the Company formed a Delaware statutory trust, known as
Central Bancorp Capital Trust I (Trust I). Trust I issued and sold $5.1 million of trust
preferred securities in a private placement and issued $158,000 of trust common securities to the
Company. Trust I used the proceeds of these issuances to purchase $5.3 million of the Companys
floating rate junior subordinated debentures due September 16, 2034 (the Trust I Debentures). The
interest rate on the Trust I Debentures and the trust preferred securities is variable and
adjustable quarterly at 2.44% over three-month LIBOR. At March 31, 2011 the interest rate was
2.75%. The Trust I Debentures are the sole assets of Trust I and are subordinate to all of the
Companys existing and future obligations for borrowed money. With respect to Capital Trust I, the
trust preferred securities and debentures each have 30-year lives and may be callable by the
Company or the Trust, at their respective option, after five years, and sooner in the case of
certain specific events, including in the event that the securities are not eligible for treatment
as Tier 1 capital, subject to prior approval by the Federal Reserve Board, if then required. Interest
on the trust preferred
61
securities and the debentures may be deferred at any time or from time to
time for a period not exceeding 20 consecutive quarterly periods (five years), provided there is no
event of default.
On January 31, 2007, the Company completed a trust preferred securities financing in the
amount of $5.9 million. In the transaction, the Company formed a Connecticut statutory trust,
known as Central Bancorp Statutory Trust II (Trust II). Trust II issued and sold $5.9 million of
trust preferred securities in a private placement and issued $183,000 of trust common securities to
the Company. Trust II used the proceeds of these issuances to purchase $6.1 million of the
Companys floating rate junior subordinated debentures due March 15, 2037 (the Trust II
Debentures). From January 31, 2007 until March 15, 2017 (the Fixed Rate Period), the interest
rate on the Trust II Debentures and the trust preferred securities is fixed at 7.015% per annum.
Upon the expiration of the Fixed Rate Period, the interest rate on the Trust II Debentures and the
trust preferred securities will be at a variable per annum rate, reset quarterly, equal to three
month LIBOR plus 1.65%. The Trust II Debentures are the sole assets of Trust II. The Trust II
Debentures and the trust preferred securities each have 30-year lives. The trust preferred
securities and the Trust II Debentures will each be callable by the Company or Trust II, at their
respective option, after ten years, and sooner in certain specific events, including in the event
that the securities are not eligible for treatment as Tier 1 capital, subject to prior approval by
the Federal Reserve Board, if then required. Interest on the trust preferred securities and the
Trust II Debentures may be deferred at any time or from time to time for a period not exceeding 20
consecutive quarterly payments (five years), provided there is no event of default.
The trust preferred securities generally rank equal to the trust common securities in priority
of payment, but will rank prior to the trust common securities if and so long as the Company fails
to make principal or interest payments on the Trust I and/or the Trust II Debentures. Concurrently
with the issuance of the Trust I and the Trust II Debentures and the trust preferred securities,
the Company issued guarantees related to each trusts securities for the benefit of the respective
holders of Trust I and Trust II.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the accounting basis and the tax basis of the Banks assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be realized or settled. The Banks
deferred tax asset is reviewed periodically and adjustments to such asset are recognized as
deferred income tax expense or benefit based on managements judgments relating to the
realizability of such asset.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the consolidated financial statements in the period
during which, based on all available evidence, management believes it is more-likely-than-not that
the position will be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50% likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits along with any associated interest and penalties that would be payable to the taxing
authorities upon examination. Interest and penalties associated with unrecognized tax benefits, if
any, would be classified as additional provision for income taxes in the statement of income.
Banking Premises and Equipment
Land is stated at cost. Buildings, leasehold improvements and equipment are stated at cost,
less allowances for depreciation and amortization. Depreciation and amortization are computed on
the straight-line method over the estimated useful lives of the assets or terms of the leases, if
shorter. Rental payments under long-term leases are charge to expense on a straight-line basis
over the life of the lease.
62
Other Real Estate Owned
Other real estate owned (OREO) is recorded at the lower of book value, or fair market value
less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed by
management and asset values are adjusted downward if necessary.
Accounting for Goodwill and Impairment
ASC 350, Intangibles Goodwill and Other, (ASC 350) addresses the method of identifying
and measuring goodwill and other intangible assets having indefinite lives acquired in a business
combination, 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. 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 believes 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 fair 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 events have occurred during the three months ended March 31,
2011 which would indicate that the impairment test would need to be re-performed.
Pension Benefits and Other Post-Retirement Benefits
The Bank provides pension benefits for its employees in a multi-employer pension plan through
membership in the Co-operative Banks Employees Retirement Association. Pension costs are funded as
they are accrued and are accounted for on a defined contribution plan basis.
The Bank maintains supplemental retirement plans (SERP) for two highly compensated employees
designed to offset the impact of regulatory limits on benefits under qualified pension plans. The
Bank recognizes retirement expense based upon an annual analysis performed by a benefits
administrator. Annual SERP expense can vary based upon changes in factors such as changes in
salaries or estimated retirement ages.
The Bank also maintains a post-retirement medical insurance plan and life insurance plan for
certain individuals. The Bank recognizes the over funded or under funded status of the plan as an
asset or liability in its statement of financial condition and recognizes changes in that funded
status in the year in which the changes occur through other comprehensive income as set forth by
ASC 715 Compensation Retirement Benefits (ASC 715).
Related Party Transactions
Directors and officers of the Company and their affiliates have been customers of and have had
transactions with the Bank, and it is expected that such persons will continue to have such
transactions in the future. Management believes that all deposit accounts, loans, services and
commitments comprising such transactions were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other customers who are not directors or officers. In the
opinion of management, the transactions with related parties did not involve more than normal risks
of collectibility, nor favored treatment or terms, nor present other unfavorable features.
63
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 fair value of stock option grants. The Company has previously adopted two
qualified stock option plans for the benefit of officers and other employees under which an
aggregate of 281,500 shares have been reserved for issuance. One of these plans expired in 1997
and the other plan expired in 2009. All awards under the plan that expired in 2009 were granted by
the end of 2005. Awards outstanding at the time the plans expire will continue to remain
outstanding according to their terms.
On July 31, 2006, the Companys stockholders approved the Central Bancorp, Inc. 2006 Long-Term
Incentive Plan (the Incentive Plan). Under the Incentive Plan, 150,000 shares have been reserved
for issuance as options to purchase stock, restricted stock, or other stock awards. 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 March 31, 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 Companys historical data,
the Company applied a forfeiture rate of 0% to stock options outstanding in determining stock
compensation expense for each of the years ended March 31, 2011 and 2010.
The Company granted no stock options in the year ended March 31, 2010. During the fiscal year
ended March 31, 2010, 30,000 restricted shares were issued and 2,800 unvested restricted shares
were forfeited. No options were granted in fiscal 2011. During the fourth quarter of fiscal 2011,
13,920 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. The restricted shares granted in fiscal
2010 vest over a two-year life. The options to purchase 10,000 and 30,000 restricted shares
granted in fiscal 2007 vest over a five-year life. Stock-based compensation totaled $512 thousand
for the year ended March 31, 2011 and $321 thousand for the year ended March 31, 2010.
The number of shares and weighted average exercise prices of outstanding stock options at
March 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Balance at March 31, 2009 |
|
|
68,218 |
|
|
$ |
25.36 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(865 |
) |
|
|
28.99 |
|
Expired |
|
|
(13,745 |
) |
|
|
20.25 |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
|
53,608 |
|
|
|
26.62 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(12,466 |
) |
|
|
23.64 |
|
Expired |
|
|
(6,684 |
) |
|
|
16.63 |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
|
34,458 |
|
|
|
29.63 |
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2011 |
|
|
32,458 |
|
|
|
29.53 |
|
|
|
|
|
|
|
|
|
As of March 31, 2011, the Company expects all non-vested stock options to vest over their
remaining vesting periods.
As of March 31, 2011, the expected future compensation costs related to options and restricted
stock
64
vesting is as follows: $302 thousand for fiscal 2012, $30 thousand each year for fiscal 2013
through fiscal 2015, and $29 thousand for fiscal 2016.
The range of exercise prices, weighted average remaining contractual lives of outstanding
stock options and aggregate intrinsic value at March 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
Number |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
Number of |
|
|
Contractual |
|
|
Average |
|
Exercise |
|
of Shares |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
Shares |
|
|
Life |
|
|
Exercise |
|
Price |
|
Outstanding |
|
|
(Years) |
|
|
Price |
|
|
Value (1) |
|
|
Outstanding |
|
|
(Years) |
|
|
Price |
|
$28.99 |
|
|
24,458 |
(2) |
|
|
3.9 |
|
|
$ |
28.99 |
|
|
$ |
|
|
|
|
24,458 |
(2) |
|
|
3.9 |
|
|
$ |
28.99 |
|
31.20 |
|
|
10,000 |
(3) |
|
|
5.5 |
|
|
|
31.20 |
|
|
|
|
|
|
|
8,000 |
(3) |
|
|
5.5 |
|
|
|
31.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,458 |
|
|
|
4.4 |
|
|
|
29.63 |
|
|
|
|
|
|
|
32,458 |
|
|
|
4.4 |
|
|
|
29.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the total intrinsic value, based on the Companys closing stock price of $19.00 as
of March 31, 2011, which would have been received by the option holders had all option holders
exercised their options as of that date. As of March 31, 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 March 31, 2011. |
A summary of non-vested restricted stock activity under all Company plans for the year ended
March 31, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date |
|
Non-Vested Shares |
|
Shares |
|
|
Fair Value |
|
Balance at March 31, 2009 |
|
|
29,400 |
|
|
$ |
31.20 |
|
Granted |
|
|
30,000 |
|
|
|
8.28 |
|
Vested |
|
|
(9,800 |
) |
|
|
31.20 |
|
Forfeited |
|
|
(2,800 |
) |
|
|
31.20 |
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2010 |
|
|
46,800 |
|
|
|
16.51 |
|
Granted |
|
|
8,049 |
|
|
|
18.48 |
|
Vested |
|
|
(15,900 |
) |
|
|
20.39 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2011 |
|
|
38,949 |
|
|
|
15.33 |
|
|
|
|
|
|
|
|
|
Regarding unrestricted stock activity, 5,871 shares of unrestricted stock grants were issued
during the fourth quarter of the fiscal year ended March 31, 2011 and the stock-based compensation
expense associated with those shares totaled $109 thousand.
Earnings Per Share
Regarding earnings per share, the Company adheres to guidance as set forth by ASC 360,
Earnings Per Share (ASC 360). Basic earnings per share (EPS) is computed by dividing income
available to common stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock, such as stock options, were exercised or converted into common
stock. Unallocated shares of common stock held by the Central Co-operative Bank Employee Stock
Ownership Plan Trust (the ESOP) are not treated as being outstanding in the computation of either
basic or diluted EPS. At March 31, 2011 and 2010, there were approximately 154,000 and 176,000
unallocated ESOP shares, respectively.
65
The following depicts a reconciliation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
(Amounts in thousands, except share |
|
|
|
and per share amounts) |
|
Net income as reported |
|
$ |
1,725 |
|
|
$ |
1,933 |
|
Less preferred dividends and accretion |
|
|
(620 |
) |
|
|
(613 |
) |
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
1,105 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
1,667,685 |
|
|
|
1,642,705 |
|
Weighted average number of unallocated ESOP shares |
|
|
(163,966 |
) |
|
|
(185,473 |
) |
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding used in calculation of basic earnings per
share |
|
|
1,503,719 |
|
|
|
1,457,232 |
|
Incremental shares from the assumed exercise of
dilutive common stock equivalents |
|
|
117,463 |
|
|
|
42,680 |
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding used in calculating diluted earnings per
share |
|
|
1,621,182 |
|
|
|
1,499,912 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.74 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.68 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
At March 31, 2011 and 2010, respectively, 34,458 and 53,608 stock options were anti-dilutive
and were excluded from the above calculation.
Bank-Owned Life Insurance
During the quarter ended December 31, 2007, the Bank purchased life insurance policies on one
executive which totaled $6.0 million. The Bank follows ASC 325 Investments Other (ASC 325) in
accounting for this asset. Increases in the cash value are recognized in other noninterest income
and are not subject to income taxes. The Bank reviewed the financial strength of the insurance
carrier prior to the purchase of the policies, and continues to conduct such reviews on an annual
basis. Bank-owned life insurance totaled $7.0 million at March 31, 2011 and $6.7 million at March
31, 2010.
Other Comprehensive Income
The Company has established standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by, and distributions to, shareholders. Net
income is a component of comprehensive income, with all other components referred to, in the
aggregate, as other comprehensive income. Other comprehensive income consists of unrealized gains
or losses on available for sale securities, net of taxes, and unrealized gain or loss on
post-retirement benefits, net of taxes.
66
The components of accumulated other comprehensive income (loss), included in stockholders
equity, are as follows at March 31:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
(In Thousands) |
|
Net unrealized gain on securities available for sale |
|
$ |
1,184 |
|
|
$ |
1,000 |
|
Tax effect |
|
|
(452 |
) |
|
|
(380 |
) |
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
732 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on pension benefits |
|
|
270 |
|
|
|
321 |
|
Tax effect |
|
|
(110 |
) |
|
|
(131 |
) |
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
160 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
892 |
|
|
$ |
810 |
|
|
|
|
|
|
|
|
The Company has established standards for reporting and displaying comprehensive income, which
is defined as all changes to equity except investments by, and distributions to, shareholders. Net
income is a component of comprehensive income, with all other components referred to, in the
aggregate, as other comprehensive income. Other comprehensive income consists of unrealized gains
or losses on available for sale securities, net of taxes, and unrealized gain or loss on
post-retirement benefits, net of taxes.
Recent Accounting Pronouncements
In June 2009, the FASB issued guidance on Accounting for Transfers of Financial Assets, now
incorporated into ASC 860 Transfers and Servicing, which amends prior accounting guidance to
enhance reporting about transfers of financial assets, including securitizations, and where
companies have continuing exposure to the risks related to transferred financial assets. The new
guidance eliminates the concept of a qualifying special-purpose entity and changes the
requirements for derecognizing financial assets. The new guidance significantly impacts loans
participations sold as these transactions must meet the additional criteria of a participating
interest to be treated as a sale. Additionally, participation agreements that contain last in,
first out, and similar loan repayment arrangements will disallow the use of sale treatment. The
guidance also requires additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from transfers during the
period. The guidance was adopted as of April 1, 2010 and has not had a material impact on the
Companys consolidated financial statements. The guidance may impact the accounting for any loan
participations entered into by the Bank after April 1, 2010.
In June 2009, the FASB issued SFAS No. 167 (now incorporated into ASC 810-10), Amendments to
FASB Interpretation No. 46(R), to amend certain requirements of FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by
enterprises involved with variable interest entities and to provide more relevant and reliable
information to users of financial statements. The Statement is effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and annual reporting
periods thereafter. The adoption of this standard on April 1, 2010 did not have a material impact
on our consolidated financial statements.
67
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-6, Improving
Disclosures About Fair Value Measurements, which requires reporting entities to make new
disclosures about recurring or nonrecurring fair-value measurements including significant transfers
into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value
measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for annual periods
beginning after December 15, 2010. The adoption of this standard on April 1, 2010 did not have a
material impact on our consolidated financial statements, but has required disaggregation of
certain fair-value measurements as well as additional disclosures.
In July 2010, the FASB issued ASU 2010-20, Disclosures About the Credit Quality of Financing
Receivables, which amends Accounting Standards Codification Topic 310, Receivables. The purpose of
the Update is to improve transparency by companies that hold financing receivables, including
loans, leases and other long-term receivables. The Update requires such companies to disclose more
information about the credit quality of their financing receivables and the credit reserves against
them. The disclosures as of the end of a reporting period are effective for interim and annual
reporting periods ending on or after December 15, 2010. The disclosure requirements as of March
31, 2011 of ASU 2010-20 have been incorporated in the notes to the Companys consolidated financial
statements. Disclosures about activity that occurs during a reporting period will be required
beginning April 1, 2011.
In 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. In addition the previously deferred disclosure requirements originally
included in Update No. 2010-20 are effective upon adoption of this standard. 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 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.
68
Note 2. Investments (In Thousands)
The amortized cost and fair value of investments securities available for sale are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In Thousands) |
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In Thousands) |
|
Corporate bonds |
|
$ |
1,752 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,752 |
|
Government agency and government
sponsored enterprise mortgage-backed
securities |
|
|
24,253 |
|
|
|
752 |
|
|
|
(12 |
) |
|
|
24,993 |
|
Single issuer trust preferred
securities issued by financial
institutions |
|
|
1,002 |
|
|
|
43 |
|
|
|
|
|
|
|
1,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
27,007 |
|
|
|
795 |
|
|
|
(12 |
) |
|
|
27,790 |
|
Perpetual preferred stock issued by
financial institutions |
|
|
3,394 |
|
|
|
56 |
|
|
|
(195 |
) |
|
|
3,255 |
|
Common stock |
|
|
2,967 |
|
|
|
508 |
|
|
|
(152 |
) |
|
|
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,368 |
|
|
$ |
1,359 |
|
|
$ |
(359 |
) |
|
$ |
34,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the twelve month period ended March 31, 2011, three common stock holdings were
determined to be other-than temporarily impaired and their book values were reduced through an
impairment charge of $118 thousand. Also during the twelve month period ended March 31, 2011, two
preferred stock holdings were determined to be other-than-temporarily impaired and their book
values were reduced through an impairment charge of $226 thousand. This impairment charge is
reflected in Net gain (loss) from sales and write-downs of investment securities in the Companys
consolidated statements of income.
69
Temporarily impaired securities as of March 31, 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 |
|
$ |
3,209 |
|
|
$ |
(63 |
) |
|
$ |
306 |
|
|
$ |
(7 |
) |
Perpetual preferred stock issued by financial
institutions |
|
|
|
|
|
|
|
|
|
|
938 |
|
|
|
(80 |
) |
Common stock |
|
|
199 |
|
|
|
(14 |
) |
|
|
182 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
3,408 |
|
|
$ |
(77 |
) |
|
$ |
1,426 |
|
|
$ |
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, the Company has one government agency mortgage-backed security which has
been in a continuous loss position for a period greater than twelve months and seven which have
been in a continuous loss position for less than twelve months. These debt securities have a total
fair value of $3.5 million and unrealized losses of $70 thousand as of March 31, 2011. Management
currently does not have the intent to sell these securities and it is 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 has one preferred stock security which has been in a continuous loss position for
greater than twelve months as of March 31, 2011. This security has a fair value of $938 thousand
and an unrealized loss of $80 thousand at March 31, 2011. The preferred stock had a loss to book
value ratio of 7.8% at March 31, 2011 compared to a loss to book value ratio of 6.6% at March 31,
2010. 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 losses on the Companys investment in this preferred stock are not other-than-temporary
as of March 31, 2011.
The Company has three equity securities with a fair value of $381 thousand and unrealized
losses of $25 thousand which were temporarily impaired at March 31, 2011. The total unrealized
losses relating to these equity securities represent 6.3% of book value. This is an improvement
when compared to the ratio of unrealized losses to book value of 11.9% at March 31, 2010. Of these
three securities, one has been in a continuous loss position for greater than twelve months. Data
indicates that, due to current economic conditions, the time for many stocks to recover may be
substantially lengthened. Managements investment approach is to be a long-term investor. As of
March 31, 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.
70
The maturity distribution (based on contractual maturities) and annual yields of debt
securities at March 31, 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 |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
Due after one year but within five years |
|
|
2,970 |
|
|
|
3,079 |
|
|
|
4.18 |
|
Due after five years but within ten years |
|
|
11 |
|
|
|
12 |
|
|
|
4.75 |
|
Due after ten years |
|
|
15,148 |
|
|
|
15,732 |
|
|
|
4.71 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,129 |
|
|
$ |
18,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issuer trust preferred securities
issued by financial institutions: |
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years |
|
|
1,002 |
|
|
|
1,049 |
|
|
|
7.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,131 |
|
|
$ |
19,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities are shown at their contractual maturity dates but actual maturities
may differ as borrowers have the right to prepay obligations without incurring prepayment
penalties.
Proceeds from sales of investment securities and related gains and losses for the years ended
March 31, 2011 and 2010 (all classified as available for sale) were as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in Thousands) |
|
Proceeds from sales, maturities,
redemptions |
|
$ |
3,371 |
|
|
$ |
1,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains |
|
|
552 |
|
|
|
46 |
|
Gross losses |
|
|
(72 |
) |
|
|
(170 |
) |
Other than temporary impairments |
|
|
(344 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
Net realized gain (loss) |
|
$ |
136 |
|
|
$ |
(465 |
) |
|
|
|
|
|
|
|
Mortgage-backed securities with an amortized cost of $1.1 million and a fair value of $1.2
million at March 31, 2011, were pledged to provide collateral for certain customers. Investment
securities carried at $8.2 million were pledged under a blanket lien to partially secure the Banks
advances from the FHLB of Boston. Additionally, investment securities carried at $3.8 million were
pledged to maintain borrowing capacity at the Federal Reserve Bank of Boston.
As a member of the FHLB of Boston, the Bank was required to invest in stock of the FHLB of
Boston in an amount which, until April 2004, was equal to 1% of its outstanding home loans or
1/20th of its outstanding advances from the FHLB of Boston, whichever was higher. In April 2004,
the FHLB of Boston amended its capital structure at which time the Companys FHLB of Boston stock
was converted to Class B stock.
The Company views its investment in the FHLB of Boston 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 FHLB of Boston as compared to
71
the capital stock amount and length
of time a decline has persisted; (2) impact of legislative and regulatory changes on the FHLB of
Boston and (3) the liquidity position of the FHLB of Boston.
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 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.
The Company does not believe that its investment in the FHLB of Boston is impaired as of March
31, 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 FHLB of Bostons 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 FHLB of Boston become ineffective.
The Co-operative Central Bank Reserve Fund (the Fund) was established for liquidity purposes
and consists of deposits required of all insured co-operative banks in Massachusetts. The Fund is
used by The Co-operative Central Bank to advance funds to member banks or to make other
investments.
Note 3. Loans and the Allowance for Loan Losses (In Thousands)
Loans, excluding loans for sale, as of March 31, 2011 and 2010 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Residential real estate (1-4 family) |
|
$ |
183,157 |
|
|
$ |
217,053 |
|
Commercial real estate |
|
|
199,074 |
|
|
|
227,938 |
|
Land and Construction |
|
|
456 |
|
|
|
2,722 |
|
Home equity lines of credit |
|
|
8,426 |
|
|
|
8,817 |
|
|
|
|
|
|
|
|
Total real estate loans |
|
|
391,113 |
|
|
|
456,530 |
|
Commercial loans |
|
|
2,212 |
|
|
|
4,037 |
|
Consumer loans |
|
|
892 |
|
|
|
943 |
|
|
|
|
|
|
|
|
Total loans |
|
|
394,217 |
|
|
|
461,510 |
|
Less: allowance for losses |
|
|
(3,892 |
) |
|
|
(3,038 |
) |
|
|
|
|
|
|
|
Total loans, net |
|
$ |
390,325 |
|
|
$ |
458,472 |
|
|
|
|
|
|
|
|
A summary of changes in the allowance for loan losses for the fiscal years ended March 31,
2011 and 2010 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
3,038 |
|
|
$ |
3,191 |
|
Provision charged to expense |
|
|
1,100 |
|
|
|
600 |
|
Less: charge-offs |
|
|
(250 |
) |
|
|
(773 |
) |
Add: recoveries |
|
|
4 |
|
|
|
20 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,892 |
|
|
$ |
3,038 |
|
|
|
|
|
|
|
|
At March 31, 2011 there were twenty six impaired loans to eighteen borrowers which totaled
$16.1 million compared to thirty impaired loans to twenty-one borrowers at March 31, 2010 which
totaled $16.5 million. Impaired loans are evaluated separately and measured utilizing guidance set
forth by ASC 310 described in Note 1.
72
At March 31, 2011 there were twelve impaired loans to seven borrowers totaling $7.2 million
which were accruing interest. At March 31, 2010, there were twenty impaired, accruing loans
totaling $10.6 million which represented eleven customer relationships. All loans modified in troubled debt restructurings
are included in impaired loans.
Nonaccrual loans totaled $9.6 million as of March 31, 2011 and were comprised of five
commercial real estate customer relationships which totaled $6.9 million and eleven residential
customers which totaled $2.9 million of which there were three residential customer relationships
totaling $363 thousand which were not impaired. Nonaccrual loans totaled $6.2 million as of March
31, 2010 and were comprised of three commercial real estate customer relationships which totaled
$4.7 million and eight residential customer relationships which totaled $1.5 million. Total
nonaccrual loans include nonaccrual impaired loans as well as certain nonaccrual residential loans
that are not considered impaired.
|
|
|
|
|
|
|
|
|
Financing Receivables on Nonaccrual Status as of: |
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
Mixed use |
|
$ |
1,616 |
|
|
$ |
4,729 |
|
Industrial (other) |
|
|
1,500 |
|
|
|
|
|
Retail |
|
|
769 |
|
|
|
|
|
Apartments |
|
|
2,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
Residential (1-4 family) |
|
|
2,587 |
|
|
|
1,199 |
|
Condominium |
|
|
352 |
|
|
|
318 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,581 |
|
|
$ |
6,246 |
|
|
|
|
|
|
|
|
If the interest on nonaccrual loans had been recognized in accordance with original interest
rates, interest income would have increased by $208 thousand for fiscal year 2011 and $94 thousand
for fiscal 2010.
During the year ended March 31, 2011, loans modified in troubled debt restructurings (TDRs)
were comprised of five residential real estate loan relationships which totaled $1.8 million as of
March 31, 2011, and five commercial real estate loan relationships which totaled $8.6 million as of
March 31, 2011.
At March 31, 2011 total TDRs amounted to $11.6 million and were comprised of nine residential
real estate loan relationships which totaled $2.7 million and six commercial real estate loan
relationships which totaled $8.9 million. Additionally, at March 31, 2011, total accruing TDRs
amounted to $7.2 million and total nonaccruing TDRs amounted to $4.4 million.
73
The following is a summary of information pertaining to impaired loans for the dates and
periods specified (In Thousands):
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
Impaired loans with a valuation allowance |
|
$ |
6,439 |
|
|
$ |
3,009 |
|
Impaired loans without a valuation allowance |
|
|
9,635 |
|
|
|
13,506 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
16,074 |
|
|
$ |
16,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific valuation allowance related to impaired loans |
|
$ |
1,417 |
|
|
$ |
354 |
|
|
|
|
|
|
|
|
Interest
income on impaired accruing loans totaled $533 thousand during fiscal
2011 and $318 thousand during fiscal 2010.
Following is an age analysis of past due loans as of March 31, 2011 by loan portfolio class
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
9,851 |
|
|
$ |
11,270 |
|
|
$ |
382,947 |
|
|
$ |
394,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no loans which were past due 90 days or more and still accruing interest as of
March 31, 2011.
Credit Quality Indicators. Management regularly reviews the problem loans in the Banks
portfolio to determine whether any assets require classification in accordance with Bank policy and
applicable regulations. The following table sets forth the balance of loans classified as pass,
special mention, or substandard at 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
non-performing loan categories. A loan is considered substandard if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard loans include those characterized by the distinct possibility the Bank will sustain
some loss if the deficiencies are not corrected. Loans classified as doubtful have all the
weaknesses inherent as those classified as substandard, with the added characteristic that the
weaknesses present make collection or liquidation in full on the basis of currently existing facts
and conditions and values, highly questionable and improbable. Loans classified as loss are
considered uncollectible and of such little value that their
74
continuance as loans without the
establishment of specific loss allowance is not warranted. Loans classified as substandard,
doubtful or loss are individually evaluated for impairment. At 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 March 31,
2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and |
|
|
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
Real |
|
|
Home Equity |
|
|
Commercial |
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
Loans |
|
|
Estate |
|
|
Lines of Credit |
|
|
Real Estate |
|
|
Land |
|
|
Loans |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays the balances of non-impaired commercial real estate 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 commercial real estate loan portfolio
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartments |
|
|
Offices |
|
|
Mixed Use |
|
|
Industrial (Other) |
|
|
Retail |
|
|
Total |
|
< 40% |
|
$ |
12,720 |
|
|
$ |
1,028 |
|
|
$ |
10,083 |
|
|
$ |
6,646 |
|
|
$ |
6,883 |
|
|
$ |
37,360 |
|
40% - 60% |
|
|
22,994 |
|
|
|
8,299 |
|
|
|
7,899 |
|
|
|
9,055 |
|
|
|
16,220 |
|
|
|
64,467 |
|
> 60% |
|
|
32,165 |
|
|
|
5,494 |
|
|
|
18,658 |
|
|
|
10,396 |
|
|
|
2,660 |
|
|
|
69,373 |
|
Participations |
|
|
4,576 |
|
|
|
|
|
|
|
|
|
|
|
9,352 |
|
|
|
1,116 |
|
|
|
15,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
72,455 |
|
|
$ |
14,821 |
|
|
$ |
36,640 |
|
|
$ |
35,449 |
|
|
$ |
26,879 |
|
|
$ |
186,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of the allowance for loan losses and loans at March 31, 2011 by
loan portfolio segment disaggregated by impairment method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Following is a summary of impaired loans and their related allowances within the
allowance for loan losses at March 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
Unpaid 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 |
|
|
|
|
|
|
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. |
The following summarizes activity with respect to loans made by the Bank to directors and
officers and their related interests for the years ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2010 |
|
Balance at beginning of year |
|
$ |
305 |
|
|
$ |
390 |
|
New loans |
|
|
4 |
|
|
|
|
|
Repayment of principal |
|
|
(204 |
) |
|
|
(22 |
) |
Reduction of directors and officers |
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
105 |
|
|
$ |
305 |
|
|
|
|
|
|
|
|
Loans included above were made in the Banks ordinary course of business, on substantially the
same terms, including interest rates and collateral requirements, as those prevailing at the time
for comparable transactions with unrelated persons. All loans included above are performing in
accordance with the terms of the respective loan agreement.
Note 4. Banking Premises and Equipment (In Thousands)
A summary of cost, accumulated depreciation and amortization of banking premises and equipment
at March 31, 2011 and 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
2011 |
|
|
2010 |
|
|
Useful Lives |
|
Land |
|
$ |
589 |
|
|
$ |
589 |
|
|
|
|
|
Buildings and improvements |
|
|
2,657 |
|
|
|
2,362 |
|
|
50 years |
|
Furniture and fixtures |
|
|
3,592 |
|
|
|
3,484 |
|
|
3-5 years |
|
Leasehold improvements |
|
|
1,568 |
|
|
|
1,561 |
|
|
5-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,406 |
|
|
|
7,996 |
|
|
|
|
|
Less accumulated depreciation and
amortization |
|
|
(5,701 |
) |
|
|
(5,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,705 |
|
|
$ |
2,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Depreciation and amortization for the years ended March 31, 2011 and 2010 amounted to
$623 thousand and $773 thousand, respectively, and is included in occupancy and equipment expense
in the accompanying consolidated statements of operations.
Note 5. Other Real Estate Owned (In Thousands)
The following summarizes activity with respect to other real estate owned during the year
ended March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of year |
|
$ |
60 |
|
|
$ |
2,986 |
|
Additions |
|
|
132 |
|
|
|
77 |
|
Valuation adjustments |
|
|
0 |
|
|
|
(17 |
) |
Sales |
|
|
(60 |
) |
|
|
(2,986 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
132 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
During fiscal 2011, one residential property totaling $132 thousand was acquired through
foreclosure. Also during fiscal 2011, the sale of one property with a book value of $60 thousand
was sold for $62 thousand resulting in a gain on the sale of other real estate owned of $2
thousand. During fiscal 2010, one residential property totaling $77 thousand was acquired through
foreclosure. Managements subsequent review of this property resulted in the recording of a
valuation allowance of $17 thousand, which comprised the $60 thousand balance in other real estate
owned at March 31, 2010. Also during fiscal 2010, the sales of three properties with book values
of approximately $3.0 million were sold for approximately $2.9 million, resulting in loss on the
sale of other real estate owned of $60 thousand.
Note 6. Deposits (Dollars in Thousands)
Deposits at March 31, 2011 and 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Demand deposit accounts |
|
$ |
40,745 |
|
|
$ |
41,959 |
|
NOW accounts |
|
|
28,989 |
|
|
|
29,358 |
|
Passbook and other savings accounts |
|
|
55,326 |
|
|
|
53,544 |
|
Money market deposit accounts |
|
|
76,201 |
|
|
|
79,745 |
|
|
|
|
|
|
|
|
Total non-certificate accounts |
|
|
201,261 |
|
|
|
204,606 |
|
|
|
|
|
|
|
|
Term deposit certificates |
|
|
|
|
|
|
|
|
Certificates of $100,000 and above |
|
|
40,843 |
|
|
|
51,695 |
|
Certificates less than $100,000 |
|
|
66,973 |
|
|
|
82,868 |
|
|
|
|
|
|
|
|
Total term deposit certificates |
|
|
107,816 |
|
|
|
134,563 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
309,077 |
|
|
$ |
339,169 |
|
|
|
|
|
|
|
|
Contractual maturities of term deposit certificates with weighted average interest rates at
March 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Amount |
|
|
Interest Rate |
|
Within 1 year |
|
$ |
87,297 |
|
|
|
0.93 |
% |
Over 1 to 3 years |
|
|
19,778 |
|
|
|
1.64 |
|
Over 3 years |
|
|
741 |
|
|
|
1.60 |
|
|
|
|
|
|
|
|
|
|
|
$ |
107,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Note 7. Federal Home Loan Bank Advances (Dollars in Thousands)
A summary of the maturity distribution of FHLB of Boston advances (based on final maturity
dates) with weighted average interest rates at March 31, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Within 1 year |
|
$ |
|
|
|
|
|
% |
|
$ |
26,000 |
|
|
|
5.37 |
% |
1-2 years |
|
|
29,351 |
|
|
|
3.92 |
|
|
|
|
|
|
|
|
|
2-3 years |
|
|
11,000 |
|
|
|
2.98 |
|
|
|
29,469 |
|
|
|
3.92 |
|
3-4 years |
|
|
22,000 |
|
|
|
2.93 |
|
|
|
11,000 |
|
|
|
2.98 |
|
4-5 years |
|
|
5,000 |
|
|
|
2.89 |
|
|
|
22,000 |
|
|
|
2.93 |
|
Over 5 to 10 years |
|
|
50,000 |
|
|
|
4.10 |
|
|
|
55,000 |
|
|
|
3.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,351 |
|
|
|
3.68 |
% |
|
|
143,469 |
|
|
|
3.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, advances totaling $87 million are callable during fiscal 2012 prior to
their scheduled maturity. The Bank is subject to a substantial penalty in the event it elects to
prepay any of its FHLB of Boston advances.
The FHLB of Boston is authorized to make advances to its members subject to such regulations
and limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLB
of Boston stock and a blanket lien on certain qualified collateral, defined principally as 90% of
the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of
first mortgage loans on owner-occupied residential property. In addition, certain multi-family
property loans are pledged to secure FHLB of Boston advances. The Banks unused borrowing capacity
with the FHLB of Boston was approximately $53.6 million at March 31, 2011.
Note 8. Income Taxes (Dollars in Thousands)
The components of the provision for income taxes for the years indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Current |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
(176 |
) |
State |
|
|
5 |
|
|
|
55 |
|
|
|
|
|
|
|
|
Total current provision (benefit) |
|
|
5 |
|
|
|
(121 |
) |
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
|
578 |
|
|
|
962 |
|
State |
|
|
363 |
|
|
|
(157 |
) |
|
|
|
|
|
|
|
Total deferred provision |
|
|
941 |
|
|
|
806 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
946 |
|
|
$ |
685 |
|
|
|
|
|
|
|
|
78
The provision for income taxes for the periods presented is different from the amounts
computed by applying the statutory Federal income tax rate to income before income taxes. The
differences between expected tax rates and effective tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Statutory federal tax rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
Items affecting Federal Income tax rate: |
|
|
|
|
|
|
|
|
Dividends received deduction |
|
|
(2.6 |
) |
|
|
(2.7 |
) |
Net state impact of deferred rate change |
|
|
3.0 |
|
|
|
(10.3 |
) |
State income taxes net of federal
tax benefit |
|
|
7.2 |
|
|
|
6.3 |
|
Bank-owned life insurance deduction |
|
|
(3.6 |
) |
|
|
(5.4 |
) |
Valuation allowance |
|
|
(4.8 |
) |
|
|
1.0 |
|
Stock-based compensation |
|
|
1.2 |
|
|
|
3.10 |
|
Other |
|
|
1.0 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
Effective tax rate |
|
|
35.4 |
% |
|
|
25.6 |
% |
|
|
|
|
|
|
|
The components of gross deferred tax assets and gross deferred tax liabilities that have been
recognized at March 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
1,580 |
|
|
$ |
1,243 |
|
Depreciation |
|
|
814 |
|
|
|
966 |
|
Post- retirement employee benefits |
|
|
425 |
|
|
|
299 |
|
Write-down of investments securities |
|
|
845 |
|
|
|
2,778 |
|
Net operating loss carryforward |
|
|
434 |
|
|
|
74 |
|
Other |
|
|
444 |
|
|
|
259 |
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
4,542 |
|
|
|
5,619 |
|
Less: Valuation allowance |
|
|
(292 |
) |
|
|
(421 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
4,250 |
|
|
|
5,198 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized gain on securities, net |
|
|
452 |
|
|
|
380 |
|
Other |
|
|
198 |
|
|
|
137 |
|
|
|
|
|
|
|
|
Gross deferred tax liability |
|
|
650 |
|
|
|
517 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
3,600 |
|
|
$ |
4,681 |
|
|
|
|
|
|
|
|
The Company has recorded a valuation allowance against certain deferred tax assets due to
uncertainty surrounding the realization of these assets. The valuation allowance is related to
certain capital loss carryforwards that are only allowed to be utilized against capital gains. Due
to the uncertainty surrounding future capital gains, management believes it is more likely than not
that these assets will not be realized.
The unrecaptured base year tax bad debt reserves will not be subject to recapture as long as
the Company continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continues to be subject to provisions of present law that require
recapture in the case of certain excess distributions to shareholders. The tax effect of pre-1988
bad debt reserves subject to recapture in the case of certain excess distributions is approximately
$1.3 million.
79
As of March 31, 2011, the Company provided a liability of $155 thousand of unrecognized tax
benefits related to various federal and state income tax matters. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Amount |
|
Unrecognized tax benefits at April 1, 2010 |
|
$ |
198 |
|
Additions for tax positions related to the current year |
|
|
16 |
|
Additions for tax positions of prior years |
|
|
61 |
|
Reductions for tax positions of prior years |
|
|
(120 |
) |
|
|
|
|
Unrecognized tax benefits at March 31, 2011 |
|
$ |
155 |
|
|
|
|
|
The amount of unrecognized tax benefit that would impact the Companys effective tax rate, if
recognized, is $155 thousand. The Company does not expect that the amounts of unrecognized tax
benefits will change significantly within the next twelve months. In general, the tax years ended
March 31, 2007 through March 31, 2011 remain open to examination by federal and state taxing
jurisdictions to which the Company is subject. As of April 1, 2010, the Company had accrued
interest and penalties of $41 thousand related to uncertain tax positions. As of March 31, 2011,
the total amount of accrued interest and penalties is $13 thousand. The Company accounts for
interest and penalties related to uncertain tax positions as part of its provision for federal and
state income taxes.
Note 9. Financial Instruments with Off-Balance Sheet Risk (In Thousands)
The Bank is a party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include
unused lines of credit, unadvanced portions of commercial and construction loans, and commitments
to originate loans. The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the balance sheets. The amounts of those
instruments reflect the extent of the Banks involvement in particular classes of financial
instruments.
The Banks exposure to credit loss in the event of nonperformance by the other party to its
financial instruments is represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet risks as of March 31, 2011 and 2010 included the
following:
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
|
2011 |
|
|
2010 |
|
Unused lines of credit |
|
$ |
15,940 |
|
|
$ |
16,495 |
|
Unadvanced portions of construction loans |
|
|
|
|
|
|
126 |
|
Unadvanced portions of commercial loans |
|
|
459 |
|
|
|
1,135 |
|
Commitments to originate residential mortgage loans |
|
|
11,232 |
|
|
|
6,077 |
|
Commitments to sell residential mortgage loans |
|
|
595 |
|
|
|
4,024 |
|
|
|
|
|
|
|
|
Total off-balance sheet commitments |
|
$ |
28,226 |
|
|
$ |
27,857 |
|
|
|
|
|
|
|
|
Commitments to originate loans, unused lines of credit and unadvanced portions of commercial
and construction loans are agreements to lend to a customer, provided there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customers credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based
on managements credit evaluation of the borrower.
80
The Bank is also a party to lease commitments related to premises used to conduct its
business. A summary of minimum rentals of banking premises for future periods under non-cancelable
operating leases follows:
|
|
|
|
|
Years Ending |
|
|
|
|
March 31, |
|
|
|
|
2012 |
|
$ |
371 |
|
2013 |
|
|
357 |
|
2014 |
|
|
333 |
|
2015 |
|
|
329 |
|
2016 |
|
|
311 |
|
Thereafter |
|
|
17 |
|
|
|
|
|
Total |
|
$ |
1,717 |
|
|
|
|
|
Certain leases contain renewal options the potential impact of which is not included above.
Rental expense for each of the years ended March 31, 2011 and 2010 totaled $365 thousand and $352
thousand, respectively, and is included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
Note 10. Stockholders Equity (Dollars in Thousands, except per share amount)
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Companys and the Banks
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The minimum core (leverage) capital ratio required for banks with the highest overall rating from
bank regulatory agencies is 3.00% and is 4.00% for all others. The Bank must also have a minimum
total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital, consisting of
common stockholders equity). As of March 31, 2011, the Bank met all capital adequacy requirements
to which it is subject.
In December 2008, the U.S. Department of Treasury invested $10.0 million in the Company
through the Troubled Asset Relief Program (TARP) Capital Purchase Program (see Note 14 for
additional information regarding the Companys participation in the TARP Capital Purchase Program).
As a result of this investment, the most recent notification from the FDIC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. The table below
reflects $10.0 million in TARP funds received as a capital contribution from the Company to the
Bank. To be categorized as well capitalized, the Bank must maintain minimum risk-weighted
capital, Tier 1 capital and tangible capital ratios as set forth in the table. There are no
conditions or events, since that notification that management believes would cause a change in the
Banks categorization. No deduction was taken from capital for interest-rate risk. The Companys
and the Banks Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios together with
related regulatory minimum requirements are summarized as follows:
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
56,531 |
|
|
|
18.53 |
% |
|
$ |
24,406 |
|
|
|
³8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital |
|
|
52,514 |
|
|
|
17.22 |
|
|
|
11,854 |
|
|
|
³4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 leverage capital |
|
|
52,514 |
|
|
|
10.66 |
|
|
|
19,705 |
|
|
|
³4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
50,954 |
|
|
|
16.72 |
% |
|
$ |
24,380 |
|
|
|
³8.00 |
% |
|
$ |
30,475 |
|
|
|
³10.00 |
% |
Tier 1 capital |
|
|
46,938 |
|
|
|
15.40 |
|
|
|
12,192 |
|
|
|
³4.00 |
|
|
|
18,288 |
|
|
|
³6.00 |
|
Tier 1 leverage capital |
|
|
46,938 |
|
|
|
9.58 |
|
|
|
19,598 |
|
|
|
³4.00 |
|
|
|
24,498 |
|
|
|
³5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company (consolidated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
53,569 |
|
|
|
15.12 |
% |
|
$ |
29,769 |
|
|
|
³8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital |
|
|
50,432 |
|
|
|
14.24 |
|
|
|
14,166 |
|
|
|
³4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 leverage capital |
|
|
50,432 |
|
|
|
9.22 |
|
|
|
21,879 |
|
|
|
³4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
47,374 |
|
|
|
13.37 |
% |
|
$ |
28,346 |
|
|
|
³8.00 |
% |
|
$ |
35,433 |
|
|
|
³10.00 |
% |
Tier 1 capital |
|
|
44,237 |
|
|
|
12.49 |
|
|
|
14,167 |
|
|
|
³4.00 |
|
|
|
21,250 |
|
|
|
³6.00 |
|
Tier 1 leverage capital |
|
|
44,237 |
|
|
|
8.09 |
|
|
|
21,872 |
|
|
|
³4.00 |
|
|
|
27,340 |
|
|
|
³5.00 |
|
The Company and the Bank may not declare or pay cash dividends on their stock if the effect
thereof would cause capital to be reduced below regulatory requirements, or if such declaration and
payment would otherwise violate regulatory requirements.
In October 1991, the Company adopted a Shareholder Rights Agreement (Rights Plan) entitling
each shareholder, other than an Acquiring Person or an Adverse Person as defined below, to
purchase the Companys stock at a discounted price in the event any person or group of persons
exceeded predetermined ownership limitations of the Companys outstanding common stock (an
Acquiring Person) and, in certain circumstances, engaged in specific activities deemed adverse to
the interests of the Companys stockholders (an Adverse Person).
Note 11. Employee Benefits (Dollars in Thousands, Except Per Share Data)
Pension and Savings Plans
As a participating employer in the Cooperative Banks Employees Retirement Association
(CBERA), a multi-employer plan, the Bank has in effect a non-contributory defined benefit plan
(Pension Plan) and a defined contribution plan (Savings Plan) covering substantially all
eligible employees.
Benefits under the Pension Plan are determined at the rate of 1% and 1.5% of certain elements
of final average pay times years of credited service and are generally provided at age 65 based on
years of service and the average of the participants three highest consecutive years of
compensation from the Bank. Employee contributions are made to a Savings Plan which qualifies under
section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank matches 50% of an
eligible deferral contribution on the first 5% of the deferral amount subject to the maximum
allowable under federal regulations. Pension benefits and employer contributions to the Savings
Plan become vested over six years.
82
Expenses for the Pension Plan and the Savings Plan were $545 thousand and $494 thousand, for
the years ended March 31, 2011 and 2010, respectively. Forfeitures are used to reduce expenses of
the plans.
Employee Stock Ownership Plan
The Bank maintains an Employee Stock Ownership Plan (ESOP) that is authorized to purchase
shares of outstanding common stock of the Company from time to time in the open market or in
negotiated transactions. The ESOP is a tax-qualified defined contribution plan established for the
exclusive benefit of the Banks employees. All full-time employees who have completed one year of
service with the Bank are eligible to participate in the ESOP.
On January 31, 2007, the ESOP completed the purchase of 109,600 shares of the Companys common
stock, of which 6,100 shares were purchased with cash accumulated through allocations to
participants accounts. The ESOP purchased the shares pursuant to the terms of the Stock Purchase
Agreement, dated January 25, 2007, by and among the Company and the ESOP and Mendon Capital
Advisors Corp., Moors & Mendon Master Fund, L.P., Mendon ACAM Master Fund, Ltd. and Burnham
Financial Services Fund (collectively, Mendon). In conjunction with this transaction, the ESOP
refinanced the above-noted third party loan with a loan from the Company with the same term as the
third party loan. Additionally, the ESOP borrowed $3.42 million from the Company related to this
purchase. This loan will be repaid in quarterly installments of principal and interest of $90,800
over 20 years.
As set forth by ASC 718, compensation expense is recognized as the shares are allocated to
participants based upon the fair value of the shares at the time they are allocated. As a result,
changes in the market value of the Companys stock have an effect on the Companys results of
operations but have no effect on stockholders equity. ESOP compensation expense for fiscal 2011
and 2010 amounted to $260 thousand and $153 thousand, respectively.
Company common stock dividends received by the ESOP on allocated shares that are not
associated with financing are allocated to plan participants. Company common stock dividends
received by the ESOP for allocated shares that are associated with financing provided by the
Company are returned to the Bank for the purpose of reducing expenses.
83
Other Post-Retirement Benefits
The Bank maintains a post-retirement medical insurance plan and life insurance plan for
certain individuals. The following tables summarize the funded status and the actuarial benefit
obligations of these plans for fiscal 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Life |
|
|
Medical |
|
|
Life |
|
|
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial present value of benefits obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirees |
|
$ |
(165 |
) |
|
$ |
(146 |
) |
|
$ |
(126 |
) |
|
$ |
(145 |
) |
Fully eligible participants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(165 |
) |
|
$ |
(146 |
) |
|
$ |
(126 |
) |
|
$ |
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligations at prior year-end |
|
$ |
(126 |
) |
|
$ |
(144 |
) |
|
$ |
(165 |
) |
|
$ |
(168 |
) |
Service cost less expense component |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
Actuarial (loss) gain |
|
|
(28 |
) |
|
|
|
|
|
|
60 |
|
|
|
27 |
|
Amendment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions |
|
|
(4 |
) |
|
|
(11 |
) |
|
|
(15 |
) |
|
|
(12 |
) |
Benefits paid |
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligations at year-end |
|
$ |
(165 |
) |
|
$ |
(146 |
) |
|
$ |
(126 |
) |
|
$ |
(145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at prior year-end |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contribution |
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
|
|
17 |
|
Benefits paid and expenses |
|
|
(1 |
) |
|
|
(16 |
) |
|
|
(1 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at current year-end |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accumulated comprehensive income at prior
fiscal year-end |
|
$ |
(173 |
) |
|
$ |
(148 |
) |
|
$ |
(141 |
) |
|
$ |
(140 |
) |
Gain (loss) on actuarial experience |
|
|
28 |
|
|
|
|
|
|
|
(60 |
) |
|
|
(27 |
) |
Gain (loss) actuarial assumptions |
|
|
4 |
|
|
|
11 |
|
|
|
15 |
|
|
|
12 |
|
Amortization included in pension expense |
|
|
7 |
|
|
|
2 |
|
|
|
13 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accumulated other comprehensive income
at current year-end |
|
$ |
(134 |
) |
|
$ |
(135 |
) |
|
$ |
(173 |
) |
|
$ |
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts with deferred recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension cost at beginning of year |
|
$ |
(299 |
) |
|
$ |
(294 |
) |
|
$ |
(305 |
) |
|
$ |
(309 |
) |
Minus net periodic cost |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
6 |
|
|
|
(2 |
) |
Plus employer contributions, net |
|
|
1 |
|
|
|
16 |
|
|
|
1 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued cost at end of year |
|
$ |
(299 |
) |
|
$ |
(283 |
) |
|
$ |
(298 |
) |
|
$ |
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation weighted average assumption as change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
Expected return on plan assets |
|
|
4.50 |
|
|
|
4.50 |
|
|
|
5.00 |
|
|
|
5.00 |
|
Rate of compensation increase |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Life |
|
|
Medical |
|
|
Life |
|
|
Medical |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
8 |
|
|
|
7 |
|
|
|
7 |
|
|
|
9 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
8 |
|
|
|
14 |
|
|
|
9 |
|
|
|
13 |
|
Recognized actuarial gain |
|
|
(15 |
) |
|
|
(16 |
) |
|
|
(22 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit gain (cost) |
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
(6 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic benefit cost weighted average
assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
6.75 |
% |
|
|
6.75 |
% |
Rate of compensation increase |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance
sheets consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
$ |
(165 |
) |
|
$ |
(146 |
) |
|
$ |
(125 |
) |
|
$ |
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive income consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain |
|
$ |
(150 |
) |
|
$ |
(133 |
) |
|
$ |
(198 |
) |
|
$ |
(160 |
) |
Prior credit |
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
(63 |
) |
Transition liability |
|
|
16 |
|
|
|
50 |
|
|
|
25 |
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(134 |
) |
|
$ |
(135 |
) |
|
$ |
(173 |
) |
|
$ |
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The plan is unfunded and the Company accrues actuarial determined benefit costs over the
estimated service period of the employees in the plan as set forth in ASC 715. It addresses
employers disclosures about pension and other post-retirement benefit plans. It requires
additional information about changes in the benefit obligation and the fair values of plan assets
to be disclosed. It also standardized the requirements for pensions and other postretirement
benefit plans to the extent possible, and illustrates combined formats for the presentation of
pension plan and other post-retirement benefit plan disclosures. ASC 715 also requires an employer
to recognize the over funded or under funded status of a defined benefit post-retirement plan
(other than a multiemployer plan) as an asset or liability in its statement of financial position
and to recognize changes in that funded status in the year in which the changes occur through
comprehensive income.
Projected life and medical benefits payments are as follows (in thousands):
|
|
|
|
|
Years Ending |
|
|
|
|
March 31, |
|
|
|
|
2012
|
|
$ |
31 |
|
2013
|
|
|
32 |
|
2014
|
|
|
32 |
|
2015
|
|
|
32 |
|
2016
|
|
|
32 |
|
2017 through 2021
|
|
|
135 |
|
Supplemental Executive Retirement Plans
The Bank maintains supplemental retirement plans (SERP) for two highly compensated employees
designed to offset the impact of regulatory limits on benefits under qualified pension plans. The
Banks obligation is unfunded. The Bank recognizes retirement expense based upon an annual
analysis performed by a benefits administrator. Annual SERP expense can vary based upon changes in
factors such as changes in salaries or estimated retirement ages. SERP expense totaled $227
thousand for fiscal 2011 and $209 thousand for fiscal 2010. The SERP liability balance totaled
$655 thousand at March 31, 2011 and $428 thousand at March 3, 2010.
85
Employment Agreements
The Company has entered into employment agreements with certain executive officers. The
employment agreements are generally for initial terms of five years, with automatic extensions made
annually thereafter. The agreements include stipulations for termination, including termination
made with and without just cause, and provide for base salaries, discretionary bonuses, and
severance benefits. The agreements also provide for insurance and various other benefits. The
employment agreements also include Change of Control provisions, providing that in the event of a
Change in Control, as defined, compensation be paid to the officer in amounts up to approximately
three times the officers base salary in the form of one lump sum payment following a Change of
Control event.
Note 12. Legal Proceedings
The Company from time to time is involved as plaintiff or defendant in various legal actions
incident to its business. None of these actions are believed to be material, either individually
or collectively, to the results of operations and financial condition of the Company or any
subsidiary.
Note 13. Troubled Asset Relief Program Capital Purchase Program
On December 5, 2009, the Company sold $10.0 million in preferred shares to the U.S. Department
of Treasury (Treasury) as a participant in the federal governments Troubled Asset Relief Program
(TARP) Capital Purchase Program. This represented approximately 2.6% of the Companys
risk-weighted assets as of September 30, 2009. The TARP Capital Purchase Program is a voluntary
program for healthy U.S. financial institutions designed to encourage these institutions to build
capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S.
economy. In connection with the investment, the Company entered into a Letter Agreement and the
related Securities Purchase Agreement with the Treasury pursuant to which the Company issued (i)
10,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference
$1,000 per share (the Series A Preferred Stock), and (ii) a warrant (the Warrant) to purchase
234,742 shares of the Companys common stock for an aggregate purchase price of $10.0 million in
cash. As a result of the Treasurys investment, the Company and the Bank met all regulatory
requirements to be considered well capitalized at March 31, 2011.
The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a
rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will
increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem
shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for
cash at a per share amount equal to the sum of the liquidation preference per share plus any
accrued and unpaid dividends to but excluding the redemption date. The Series A Preferred Stock
may be redeemed, in whole or in part, at any time and from time to time, at the option of the
Company, subject to consultation with the Companys primary federal banking regulator, provided
that any partial redemption must be for at least 25% of the issue price of the Series A Preferred
Stock. Any redemption of a share of Series A Preferred Stock would be at one hundred percent
(100%) of its issue price, plus any accrued and unpaid dividends and the Series A Preferred Stock
may be redeemed without regard to whether the Company has replaced such funds from any other source
or to any waiting period.
The Warrant is exercisable at $6.39 per share at any time on or before December 5, 2018. The
number of shares of the Companys common stock issuable upon exercise of the Warrant and the
exercise price per share will be adjusted if specific events occur. Treasury has agreed not to
exercise voting power with respect to any shares of common stock issued upon exercise of the
Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer, except that Treasury may not transfer a portion of the Warrant with
respect to, or exercise the Warrant for, more than one-half of the shares of common stock
underlying the Warrant prior to the date on which the Company has received aggregate gross proceeds
of not less than $10.0 million from one or more qualified equity offerings.
The Warrant was valued at $594 thousand and was recognized as equity under ASC 815
Derivatives and Hedging, (ASC 815) and is reported within additional paid-in capital in the
accompanying Consolidated Balance Sheets. The Company also performs accounting for the Series A
Preferred Stock and Warrant as set forth in ASC
86
470 Debt (ASC 470). The proceeds from the sale of the Series A Preferred Stock was allocated
between the Series A Preferred Stock and Warrant on a relative fair value basis, resulting in the
Series A Preferred Stock having a value of $9.4 million and the Warrant having a value of $594
thousand. Therefore, the fair value of the Warrant has been recognized as a discount to the Series
A Preferred Stock and Warrant and such discount is being accreted over five years using the
effective yield method as set forth by ASC 505 Equity. The Warrant was valued using the
Black-Scholes options pricing model. The assumptions used to compute the fair value of the Warrant
at issuance were:
|
|
|
|
|
Expected life in years
|
|
|
10.00 |
|
Expected volatility
|
|
|
54.76 |
% |
Dividend yield
|
|
|
3.00 |
% |
Risk-free interest rate
|
|
|
2.67 |
% |
Regarding the assumptions above, the expected term represents the expected period of time the
Company believes the warrant will be outstanding. Estimates of expected future stock price
volatility are based on the historic volatility of the Companys common stock, and the dividend
yield is based on managements estimation of the Companys common stock dividend yield during the
next ten years. The risk-free interest rate is based on the U.S. Treasury 10-year rate.
Note 14. Fair Values of Financial Instruments (In Thousands)
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 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.
87
The only assets of the Company recorded at fair value on a recurring basis at March 31, 2011
were securities available for sale. The assets of the Company recorded at fair value on a
nonrecurring basis at 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011 |
|
Carrying Value (In Thousands) |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
443 |
|
|
|
443 |
|
OREO |
|
|
|
|
|
|
|
|
|
|
132 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010 |
|
|
|
|
|
Carrying Value (In Thousands) |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets recorded at fair value on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
|
|
|
$ |
1,752 |
|
|
$ |
|
|
|
$ |
1,752 |
|
Government agency and government sponsored
agency mortgage-backed securities |
|
|
|
|
|
|
24,993 |
|
|
|
|
|
|
|
24,993 |
|
Single issuer trust preferred securities issued
by financial institutions |
|
|
|
|
|
|
1,045 |
|
|
|
|
|
|
|
1,045 |
|
Perpetual preferred stock issued by financial
institutions |
|
|
|
|
|
|
3,255 |
|
|
|
|
|
|
|
3,255 |
|
Common stock |
|
|
3,323 |
|
|
|
|
|
|
|
|
|
|
|
3,323 |
|
Assets recorded at fair value on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRE |
|
|
|
|
|
|
|
|
|
|
6,604 |
|
|
|
6,604 |
|
Residential |
|
|
|
|
|
|
|
|
|
|
599 |
|
|
|
599 |
|
OREO |
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
60 |
|
At March 31, 2011, the fair value of one trust preferred security amounting to $1,049 was
measured using Level 1 inputs in comparison to March 31, 2010, at which time the security 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 year end. The fair value as of March 31,
2011 was determined using actual trades of the exact security, whereas the fair value as of March
31, 2010 was determined by a matrix pricing model based upon comparable securities.
At March 31, 2011, the fair value of three preferred stocks amounting to $2,063 were measured
using Level 1 inputs in comparison to March 31, 2010, at which time the securities were measured
using Level 2 inputs. The transfers from Level 2 to Level 1 were primarily the result of increased
trading volume of the securities at and around year end. The fair values as of March 31, 2011 were
determined using actual trades of the exact securities, whereas the fair values as of March 31,
2010 were determined by matrix pricing models based upon comparable securities.
88
There were no Level 3 securities at March 31, 2011 or at March 31, 2010. The Company did
not have any sales or purchases of Level 3 available for sale securities during the periods.
The Company measures the fair value of impaired loans on a periodic basis in periods
subsequent to its initial recognition. At March 31, 2011, impaired loans measured at fair value
using Level 3 inputs amounted to $5.0 million, which represents five customer relationships,
compared to twelve customer relationships which totaled $7.2 million March 31, 2010. There were no
impaired loans measured at fair value using Level 2 inputs at March 31, 2011 or 2010. Level 3
inputs utilized to determine the fair value of the impaired loan relationships at March 31, 2011
and March 31, 2010 consist of appraisals which may be discounted by management using non-observable
inputs, as well as estimated costs to sell.
OREO is measured at fair value less estimated selling costs. Fair value is based upon
independent market prices, appraised values of the collateral, or managements estimation of value
of the collateral. At March 31, 2011, OREO was comprised of one residential condominium totaling
$132 thousand. OREO at March 31, 2010 consisted of one residential condominium which totaled $60
thousand. The one OREO property at March 31, 2010 was sold during the fiscal year ended March 31,
2011.
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 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 loans held for sale is determined based on the unrealized gain or loss on such loans.
Regular reviews of the loan portfolio are performed to identify impaired loans for which specific
allowance allocations are considered prudent. Valuations of impaired loans are made based on
evaluations that we believe to be appropriate in accordance with ASC 310, and such valuations are
determined by reviewing current collateral values, financial information, cash flows, payment
histories and trends and other relevant facts surrounding the particular credits.
Accrued Interest Receivable The carrying amount reported in the balance sheet for accrued
interest receivable approximates its fair value due to the short maturity of these accounts.
Stock in FHLBB The carrying amount reported in the balance sheet for FHLBB stock
approximates its fair value based on the redemption features of the stock.
89
The Co-operative Central Bank Reserve Fund The carrying amount reported in the balance sheet
for the Co-operative Central Bank Reserve Fund approximates its fair value.
Deposits The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair values for term
deposit certificates are estimated using a discounted cash flow technique that applies interest
rates estimated using local market data 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 The Banks commitments to lend for unused lines of credit and
unadvanced portions of loans have short remaining disbursement periods or variable interest rates,
and, therefore, no fair value adjustment has been made.
The estimated carrying amounts and fair values of the Companys financial instruments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
3,728 |
|
|
$ |
3,728 |
|
|
$ |
4,328 |
|
|
$ |
4,328 |
|
Short-term investments |
|
|
37,190 |
|
|
|
37,190 |
|
|
|
12,208 |
|
|
|
12,208 |
|
Investment securities available for sale |
|
|
25,185 |
|
|
|
25,185 |
|
|
|
34,368 |
|
|
|
34,368 |
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
392 |
|
Net loans |
|
|
390,325 |
|
|
|
394,475 |
|
|
|
458,472 |
|
|
|
454,557 |
|
Stock in Federal Home Loan Bank of Boston |
|
|
8,518 |
|
|
|
8,518 |
|
|
|
8,518 |
|
|
|
8,518 |
|
The Co-operative Central Bank Reserve Fund |
|
|
1,576 |
|
|
|
1,576 |
|
|
|
1,576 |
|
|
|
1,576 |
|
Accrued interest receivable |
|
|
1,496 |
|
|
|
1,496 |
|
|
|
1,896 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
309,077 |
|
|
$ |
300,875 |
|
|
$ |
339,169 |
|
|
$ |
329,749 |
|
Advances from FHLB of Boston |
|
|
117,351 |
|
|
|
125,314 |
|
|
|
143,469 |
|
|
|
150,949 |
|
Subordinated debentures |
|
|
11,341 |
|
|
|
8,651 |
|
|
|
11,341 |
|
|
|
8,226 |
|
Advance payments by borrowers for taxes and insurance |
|
|
1,387 |
|
|
|
1,387 |
|
|
|
1,649 |
|
|
|
1,649 |
|
Accrued interest payable |
|
|
397 |
|
|
|
397 |
|
|
|
517 |
|
|
|
517 |
|
|
Off-Balance Sheet Instruments |
|
|
28,226 |
|
|
|
28,226 |
|
|
|
27,257 |
|
|
|
27,257 |
|
90
Note 15. Parent Company Only Condensed Financial Statements (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
Balance Sheets |
|
2011 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
Cash deposit in subsidiary bank |
|
$ |
301 |
|
|
$ |
342 |
|
Investment in subsidiary |
|
|
52,156 |
|
|
|
49,467 |
|
ESOP loan (Note 11) |
|
|
5,676 |
|
|
|
6,254 |
|
|
|
|
|
|
|
|
Investment in unconsolidated subsidiary |
|
|
341 |
|
|
|
341 |
|
Other assets |
|
|
325 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
58,799 |
|
|
$ |
56,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Subordinated debentures (Note 1) |
|
$ |
11,341 |
|
|
$ |
11,341 |
|
|
|
|
|
|
|
|
Accrued taxes and other liabilities |
|
|
337 |
|
|
|
47 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
47,121 |
|
|
|
45,113 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
58,799 |
|
|
$ |
56,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, |
|
Statements of Operations |
|
2011 |
|
|
2010 |
|
Dividends from subsidiary |
|
$ |
500 |
|
|
$ |
500 |
|
Interest income |
|
|
468 |
|
|
|
515 |
|
Interest expense on subordinated debentures |
|
|
(575 |
) |
|
|
(586 |
) |
Noninterest expenses |
|
|
(460 |
) |
|
|
(432 |
) |
|
|
|
|
|
|
|
Loss before income tax benefit |
|
|
(67 |
) |
|
|
(3 |
) |
Income tax benefit |
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of subsidiary |
|
|
(67 |
) |
|
|
203 |
|
Equity in undistributed net income of subsidiary |
|
|
1,792 |
|
|
|
1,790 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,725 |
|
|
$ |
1,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31 |
|
Statements of Cash Flows |
|
2011 |
|
|
2010 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,725 |
|
|
$ |
1,993 |
|
Adjustments to reconcile net income to net cash provided by
operating activities |
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiary |
|
|
(1,792 |
) |
|
|
(1,790 |
) |
Changes in other assets and other liabilities |
|
|
246 |
|
|
|
27 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
179 |
|
|
|
230 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
ESOP loans, net of repayment |
|
|
578 |
|
|
|
566 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
578 |
|
|
|
566 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(798 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(798 |
) |
|
|
(791 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash in subsidiary bank |
|
|
(41 |
) |
|
|
5 |
|
Cash in subsidiary bank at beginning of year |
|
|
342 |
|
|
|
337 |
|
|
|
|
|
|
|
|
Cash in subsidiary bank at end of year |
|
$ |
301 |
|
|
$ |
342 |
|
|
|
|
|
|
|
|
91
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Central Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Central Bancorp, Inc. and Subsidiary
as of March 31, 2011 and the related consolidated statements of operations, changes in
stockholders equity and comprehensive income, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Central Bancorp, Inc. and Subsidiary, as of March 31,
2011, and the results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
|
|
|
|
|
|
|
|
|
/s/ McGladrey & Pullen, LLP
|
|
|
Boston, Massachusetts |
|
June 17, 2011
92
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Central Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Central Bancorp, Inc. and Subsidiary
(the Company) as of March 31, 2010, and the related consolidated statements of operations,
changes in stockholders equity and comprehensive income, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Central Bancorp, Inc. and Subsidiary as
of March 31, 2010, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America.
|
|
|
|
|
|
|
|
|
/s/ Caturano and Company, P.C.
|
|
|
Boston, Massachusetts |
|
June 18, 2010
93
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
On August 10, 2010, the Company was notified that, due to the fact that certain officers of
Caturano and Company, P.C. became partners of McGladrey & Pullen, LLP effective July 20, 2010,
Caturano and Company, P.C. will resign as the independent registered public accounting firm for the
Company effective August 13, 2010. The audit reports of Caturano and Company, P.C. on the
consolidated financial statements of the Company for the years ended March 31, 2010 and 2009 did
not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the two most recent fiscal years ended March 31, 2010 and 2009 and through August 13,
2010 there were: (1) no disagreements between the Company and Caturano and Company, P.C. on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Caturano and Company, P.C.
would have caused them to make reference thereto in their reports on the Companys financial
statements for such years, and (2) no reportable events within the meaning set for in Item
304(a)(1)(v) of Regulation S-K.
Effective August 13, 2010, the Audit Committee of the Companys Board of Directors engaged
McGladrey & Pullen, LLP as the Companys independent registered public accounting firm. During the
Companys fiscal years ended March 31, 2010 and 2009 and the subsequent interim period preceding
the engagement of McGladrey & Pullen, LLP, the Company did not consult with McGladrey & Pullen, LLP
regarding: (1) the application of accounting principles to a specified transaction, either
completed or proposed; (2) the type of audit opinion that might be rendered on the Companys
financial statements, and McGladrey & Pullen, LLP did not provide any written report or oral advice
that McGladrey & Pullen, LLP concluded was an important factor considered by the Company in
reaching a decision as to any such accounting, auditing or financial reporting issue; or (3) any
matter that was either the subject of a disagreement with Caturano and Company, P.C. on any matter
of accounting principles or practices, financial statement disclosure or auditing scope or
procedure or the subject of a reportable event.
94
Item 9A. Controls and Procedures
|
(a) |
|
Disclosure Controls and Procedures |
|
|
|
|
The Companys management, including the Companys principal executive officer and
principal financial officer, have evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange
Act). Based upon their evaluation, the principal executive officer and principal
financial officer concluded that, as of the end of the period covered by this
report, the Companys disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the reports
that the Company files or submits under the Exchange Act with the Securities and
Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and (2) is
accumulated and communicated to the Companys management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. |
|
|
(b) |
|
Internal Controls Over Financial Reporting |
|
|
|
|
The Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, and management has assessed the
effectiveness of the Companys internal control over financial reporting as of March
31, 2011 based upon the criteria set forth in a report entitled Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on its assessment, the Companys management has
concluded that the Company maintained effective internal control over financial
reporting as of March 31, 2011. |
|
|
|
|
This Annual Report does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
managements report in this Annual Report. |
|
|
(c) |
|
Changes to Internal Control Over Financial Reporting |
|
|
|
|
Except as indicated herein, there were no changes in the Companys internal control
over financial reporting during the twelve months ended March 31, 2011 that have
materially affected, or are reasonable likely to materially affect, the Companys
internal control over financial reporting. |
Item 9B. Other Information
Not applicable.
95
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The information contained under the section captioned Proposal I Election of Directors in
the Companys definitive proxy statement for the Companys 2011 Annual Meeting of Stockholders (the
Proxy Statement) is incorporated herein by reference.
Executive Officers
The information contained under the sections captioned Proposal I Election of Directors
Executive Officers Who Are Not Directors in the Proxy Statement is incorporated herein by
reference.
Compliance with Section 16(a) of the Exchange Act
The information contained under the section captioned Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics that applies to the Companys officers, directors and
employees.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee
financial expert, the sections captioned Meetings and Committees of the Board of Directors
Audit Committee in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
Executive Compensation
The information required by this item is incorporated herein by reference to the sections
titled Executive Compensation and Director Compensation in the Proxy Statement.
Corporate Governance
The information required by this item is incorporated herein by reference to the sections
titled Meetings and Committees of the Board of Directors Compensation Committee in the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
(a) |
|
Security Ownership of Certain Beneficial Owners |
|
|
|
|
The information required by this item is incorporated herein by reference to the
section captioned Principal Holders of Voting Securities in the Proxy Statement. |
|
|
(b) |
|
Security Ownership of Management |
|
|
|
|
The information required by this item is incorporated herein by reference to the
section captioned Security Ownership of Management in the Proxy Statement. |
96
|
(c) |
|
Changes in Control |
|
|
|
|
Management of the Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company. |
|
|
(d) |
|
Equity Compensation Plans |
|
|
|
|
The Company has adopted the 1999 Stock Option and Incentive Plan and the 2006
Long-Term Incentive Plan, pursuant to which equity may be awarded to participants.
Both plans have been approved by stockholders. |
The following table sets forth certain information with respect to the Companys equity
compensation plan as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
(a) |
|
|
|
|
|
|
Number of securities remaining |
|
|
|
Number of securities to be |
|
|
(b) |
|
available for future issuance |
|
|
|
issued |
|
|
Weighted-average exercise |
|
under equity compensation |
|
|
|
upon exercise of outstanding |
|
|
price of outstanding |
|
plan (excluding securities |
|
Plan Category |
|
options, warrants and rights |
|
|
options, warrants and rights |
|
reflected in column (a)) |
|
Equity compensation plans
approved by security holders |
|
|
34,458 |
|
|
|
$ 29.63 |
|
|
|
49,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
|
34,458 |
|
|
|
$ 29.63 |
|
|
|
49,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 1999 Stock Option Plan and the 2006 Long-Term Incentive Plan provides for a proportionate
adjustment to the number of shares reserved thereunder in the event of a stock split, stock
dividend, reclassification or similar event. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the section
titled Transactions with Related Persons in the Proxy Statement.
Director Independence
The information related to director independence required by this item is incorporated herein
by reference to the section titled Proposal 1 Election of Directors in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section
captioned Independent Auditors in the Proxy Statement.
97
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
|
(1) |
|
Financial Statements |
|
|
|
|
For the Financial Statements filed as part of this Annual Report on Form 10-K,
reference is made to Item 8 Financial Statements and Supplementary Data. |
|
|
(2) |
|
Financial Statement Schedules |
|
|
|
|
All financial statement schedules have been omitted as not applicable or not
required or because they are included in the financial statements appearing at Item
8. |
|
|
(3) |
|
Exhibits |
|
|
|
|
The exhibits required by Item 601 of Regulation S-K are either filed as part of this
Annual Report on Form 10-K or incorporated by reference herein. |
The following exhibits are filed as exhibits to this Annual Report:
|
|
|
Exhibit No. |
|
Description |
3.11
|
|
Articles of Organization of Central Bancorp, Inc. |
|
|
|
3.210
|
|
Amended Bylaws of Central Bancorp, Inc. |
|
|
|
4.12
|
|
Articles of Amendment to the Articles of Incorporation of Central Bancorp, Inc.
Establishing Fixed Rate Cumulative Perpetual Preferred Stock, Series A |
|
|
|
4.22
|
|
Form of Stock Certificate for Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, of Central Bancorp, Inc. |
|
|
|
4.32
|
|
Warrant to Purchase 234,742 Shares of Common Stock of Central Bancorp, Inc. |
|
|
|
4.43
|
|
Shareholder Rights Agreement, dated as of October 11, 2001, by and between Central Bancorp, Inc. and Registrar
and Transfer
Company, as Rights
Agent, as amended
and restated as of
January 29, 2003,
and as amended on
February 11, 2003,
May 22, 2003, July
24, 2003 and August 4, 2003 |
|
|
|
10.14
|
|
Employment Agreement by and between Central Co-operative Bank and John D. Doherty |
|
|
|
10.24
|
|
Employment Agreement by and between Central Co-operative Bank and William P. Morrissey |
|
|
|
10.34
|
|
Executive Salary Continuation Agreement by and between Central Co-operative Bank
and John D. Doherty, as amended |
|
|
|
10.44
|
|
Executive Salary Continuation Agreement by and between Central Co-operative Bank
and William P. Morrissey, as amended |
|
|
|
10.54
|
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank
and John D. Doherty |
|
|
|
10.64
|
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank
and John D. Doherty |
|
|
|
10.74
|
|
Executive Health Insurance Plan Agreement by and between Central Co-operative Bank
and William P. Morrissey |
|
|
|
10.81
|
|
Severance Agreement between the Bank and William P. Morrissey, dated December 14,
1994 |
|
|
|
10.91
|
|
Severance Agreement between the Bank and Paul S. Feeley, dated May 14, 1998 |
|
|
|
10.101
|
|
Amendments to Severance Agreements between the Bank and Messrs. Feeley and
Morrissey, dated January 8, 1999 |
|
|
|
10.115
|
|
1999 Stock Option and Incentive Plan |
|
|
|
10.126
|
|
Amended and Restated Deferred Compensation Plan for Non-Employee Directors |
|
|
|
10.1311
|
|
Senior Management Compensation Incentive Plan, as amended |
|
|
|
10.147
|
|
Severance Agreement between the Bank and Bryan E. Greenbaum dated March 17, 2005 |
|
|
|
10.158
|
|
Central Bancorp, Inc. 2006 Long-Term Incentive Plan |
|
|
|
149
|
|
Code of Ethics |
|
|
|
21
|
|
Subsidiaries of Registrant |
98
|
|
|
Exhibit No. |
|
Description |
23.1
|
|
Consent of McGladrey & Pullen, LLP |
|
|
|
23.2
|
|
Consent of Caturano and Company, Inc. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer |
|
|
|
32
|
|
Section 1350 Certifications |
|
|
|
99.1
|
|
31 C.F.R. §30.15 Certification of Chief Executive Officer |
|
|
|
99.2
|
|
31 C.F.R. §30.15 Certification of Chief Financial Officer |
|
|
|
|
|
Management contract or compensatory plan. |
|
(1) |
|
Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31,
1999 (File No. 0- 25251) filed with the SEC on June 28, 1999. |
|
(2) |
|
Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K
(File No. 0-25251) filed with the SEC on December 9, 2010. |
|
(3) |
|
Incorporated by reference to the Form 10-K for the fiscal year ended March 31, 2004 (File No.
0-25251) filed with the SEC on June 28, 2004. |
|
(4) |
|
Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K
(File No. 0-25251) filed with the SEC on December 21, 2007. |
|
(5) |
|
Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-87005)
filed on September 13, 1999. |
|
(6) |
|
Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended December
31, 2009 (File No. 0- 25251) filed with the SEC on February 17, 2010. |
|
(7) |
|
Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended March 31,
2004 filed with the SEC on June 29, 2005 and to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2009 filed with the SEC on November 14, 2009 (File No. 0-25251). |
|
(8) |
|
Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-136234) filed
with the SEC on August 2, 2006. |
|
(9) |
|
Incorporated by reference to the Current Report on Form 8-K (File No. 0-25251) filed with the
SEC on April 13, 2004. |
|
(10) |
|
Incorporated by reference to the exhibits filed with the Companys Current Report on Form 8-K
(File No. 0-25251) |
|
|
|
filed with the SEC on October 22, 2007. |
|
(11) |
|
Incorporated by reference to the exhibits filed with the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2010 (File No. 0-25251) filed with the SEC on August 13,
2010. |
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized
|
|
|
|
|
|
CENTRAL BANCORP, INC.
|
|
Date: June 17, 2011 |
By: |
/s/ John D. Doherty
|
|
|
|
John D. Doherty |
|
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Representative) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
/s/ John D. Doherty
John D. Doherty
|
|
June 17, 2011 |
Chairman and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
/s/ Paul S. Feeley
Paul S. Feeley
|
|
June 17, 2011 |
Senior Vice President, |
|
|
Chief Financial Officer and Treasurer |
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
/s/ William P. Morrissey
William P. Morrissey
President and Director
|
|
June 17, 2011 |
|
|
|
/s/ Robert J. Hardiman
Robert J. Hardiman
Director
|
|
June 17, 2011 |
|
|
|
/s/ Raymond Mannos
Raymond Mannos
Director
|
|
June 17, 2011 |
|
|
|
/s/ James P. McDonough
James P. McDonough
Director
|
|
June 17, 2011 |
|
|
|
/s/ Albert J. Mercuri, Jr.
Albert J. Mercuri, Jr.
Director
|
|
June 17, 2011 |
|
|
|
/s/ John J. Morrissey
John J. Morrissey
|
|
June 17, 2011 |
Director |
|
|
|
|
|
/s/ Kenneth K. Quigley, Jr.
Kenneth K. Quigley, Jr.
|
|
June 17, 2011 |
Director |
|
|
|
|
|
/s/ Edward F. Sweeney, Jr.
Edward F. Sweeney, Jr.
|
|
June 17, 2011 |
Director |
|
|
|
|
|
/s/ Gerald T. Mulligan
Gerald T. Mulligan
|
|
June 17, 2011 |
Director |
|
|