U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER ENDED JUNE 30, 2002
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COMMISSION FILE NUMBER: 0-25251
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CENTRAL BANCORP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MASSACHUSETTS
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
I.R.S. EMPLOYER IDENTIFICATION NO. 04-3447594
399 HIGHLAND AVENUE, SOMERVILLE, MA. 02144
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 628-4000
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REGISTRANT'S TELEPHONE NUMBER
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common Stock, $1.00 par value 1,659,933
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Class Outstanding at August 9, 2002
CENTRAL BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
March 31, 2002 and June 30, 2002 1
Consolidated Statements of Income for the three
months ended June 30, 2002 and 2001 2
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended June 30, 2002 and 2001 3
Consolidated Statements of Cash Flows for the three
months ended June 30, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Liquidity and Capital Resources 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
Item 1. Financial Statements
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, March 31,
(Dollars in Thousands) 2002 2002
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ASSETS (Unaudited)
Cash and due from banks $ 6,826 $ 5,109
Short-term investments 14,677 2,455
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Cash and cash equivalents 21,503 7,564
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Due from brokers 3,970 --
Investment securities available for sale (amortized cost of $69,542
at June 30, 2002 and $74,935 at March 31, 2002) 68,977 73,884
Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300
The Co-operative Central Bank Reserve Fund 1,576 1,576
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Total investments 78,853 83,760
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Loans (Note 2) 363,135 371,707
Less allowance for loan losses 3,293 3,292
----------- -----------
Net loans 359,842 368,415
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Accrued interest receivable 2,710 2,530
Banking premises and equipment, net 1,879 1,836
Deferred tax asset, net 1,519 1,289
Goodwill, net (Note 1) 2,232 2,232
Other assets 764 593
----------- -----------
Total assets $ 473,272 $ 468,219
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 3) $ 271,073 $ 261,907
Advances from Federal Home Loan Bank of Boston 159,255 164,000
Advance payments by borrowers for taxes and insurance 815 1,111
Accrued expenses and other liabilities 3,058 2,247
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Total liabilities 434,201 429,265
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Commitments and Contingencies (Note 5)
Stockholders' equity (Note 6):
Preferred stock $1.00 par value; authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock $1.00 par value; authorized 15,000,000 shares;
1,999,588 issued at June 30, 2002 and March 31, 2002 2,000 2,000
Additional paid-in capital 12,002 11,934
Retained income 34,004 33,141
Treasury stock (367,036 shares at June 30, 2002 and 366,799
shares at March 31, 2002), at cost (7,196) (7,189)
Accumulated other comprehensive income (loss) (Note 4) (293) (626)
Unearned compensation - ESOP (1,446) (306)
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Total stockholders' equity 39,071 38,954
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Total liabilities and stockholders' equity $ 473,272 $ 468,219
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See accompanying notes to unaudited consolidated financial statements.
1
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
June 30,
------------------
2002 2001
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Interest and dividend income:
Mortgage loans $6,204 $6,149
Other loans 146 181
Short-term investments 27 472
Investments 1,186 797
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Total interest and dividend income 7,563 7,599
------ ------
Interest expense:
Deposits 1,494 2,638
Advances from Federal Home Loan Bank of Boston 1,789 1,726
------ ------
Total interest expense 3,283 4,364
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Net interest and dividend income 4,280 3,235
Provision for loan losses -- --
------ ------
Net interest and dividend income after
provision for loan losses 4,280 3,235
------ ------
Non-interest income:
Deposit service charges 129 123
Net gains from sales and write-downs of investment securities 11 203
Other income 83 83
------ ------
Total non-interest income 223 409
------ ------
Non-interest expenses:
Salaries and employee benefits 1,638 1,533
Occupancy and equipment 281 318
Data processing service fees 291 270
Professional fees 249 192
Goodwill amortization (Note 1) -- 72
Other expenses 432 426
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Total non-interest expenses 2,891 2,811
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Income before income taxes 1,612 833
Provision for income taxes 585 303
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Net income $1,027 $ 530
====== ======
Earnings per common share - basic $ 0.64 $ 0.32
====== ======
Earnings per common share - diluted $ 0.63 $ 0.32
====== ======
Weighted average common shares outstanding - basic 1,606 1,661
Weighted average common and equivalent shares
outstanding - diluted 1,625 1,670
See accompanying notes to unaudited consolidated financial statements.
2
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Additional
Common Paid-In Retained Treasury
(In Thousands) Stock Capital Income Stock
- -----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002
- --------------------------------
Balance at March 31, 2002 $ 2,000 $ 11,934 $ 33,141 $ (7,189)
Net Income -- -- 1,027 --
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- -- -- --
Comprehensive income
Purchase of shares by ESOP -- -- -- --
Director deferred compensation
transactions -- 7 -- (7)
Dividends paid ($0.10 per share) -- -- (164) --
Amortization of unearned compensation -
ESOP -- 61 -- --
--------- ----------- ----------- ----------
Balance at June 30, 2002 $ 2,000 $ 12,002 $ 34,004 $ (7,196)
========= =========== =========== ==========
Three Months Ended June 30, 2001
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Balance at March 31, 2001 $ 1,970 $ 11,190 $ 30,950 $ (5,230)
Net Income -- -- 530 --
Other comprehensive income net of tax:
Unrealized (loss) on securities, net
of reclassification adjustment -- -- -- --
Comprehensive income
Proceeds from exercise of stock options 18 274 -- --
Director deferred compensation
transactions -- 22 -- (20)
Purchase of treasury stock -- -- -- (386)
Dividends paid ($0.10 per share) -- -- (168) --
Amortization of unearned compensation -
ESOP -- 50 -- --
--------- ----------- ----------- ----------
Balance at June 30, 2001 $ 1,988 $ 11,536 $ 31,312 $ (5,636)
========= =========== =========== ==========
Accumulated
Other Unearned Total
Comprehensive Compensation Stockholders'
(In Thousands) Income (Loss) ESOP Equity
- --------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002
- --------------------------------
Balance at March 31, 2002 $ (626) $ (306) $ 38,954
Net Income -- -- 1,027
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment 333 -- 333
-----------
Comprehensive income 1,360
-----------
Purchase of shares by ESOP -- (1,183) (1,183)
Director deferred compensation
transactions -- -- --
Dividends paid ($0.10 per share) -- -- (164)
Amortization of unearned compensation -
ESOP -- 43 104
----------- ---------- -----------
Balance at June 30, 2002 $ (293) $ (1,446) $ 39,071
=========== ========== ===========
Three Months Ended June 30, 2001
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Balance at March 31, 2001 $ (431) $ (237) $ 38,212
Net Income -- -- 530
Other comprehensive income net of tax:
Unrealized (loss) on securities, net
of reclassification adjustment (46) -- (46)
-----------
Comprehensive income 484
-----------
Proceeds from exercise of stock options -- -- 292
Director deferred compensation
transactions -- -- 2
Purchase of treasury stock -- -- (386)
Dividends paid ($0.10 per share) -- -- (168)
Amortization of unearned compensation -
ESOP -- 32 82
----------- ---------- -----------
Balance at June 30, 2001 $ (477) $ (205) $ 38,518
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See accompanying notes to unaudited consolidated financial statements.
3
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
(In Thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,027 $ 530
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 80 107
Amortization of premiums, fees and discounts 61 33
Amortization of goodwill -- 72
Stock-based compensation 104 82
Net gains from sales and write-downs of investment
securities (11) (203)
(Increase) decrease in accrued interest receivable (180) 200
(Increase) decrease in other assets (271) 42
Decrease in advance payments by borrowers for taxes and insurance (296) (199)
Increase in accrued expenses and other liabilities 811 439
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Net cash provided by operating activities 1,325 1,103
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Cash flows from investing activities:
Net decrease in loans 8,191 14,283
Principal payments on mortgage-backed securities 1,472 1,667
Purchase of investment securities -- (7,291)
Maturities of investment securities -- 7,990
Proceeds from sales of investment securities -- 784
Net increase in short-term investments (12,222) (8,569)
Purchase of banking premises and equipment (123) (67)
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Net cash provided by (used in) investing activities (2,682) 8,797
-------- --------
Cash flows from financing activities:
Increase (decrease) in deposits 9,166 (3,036)
Proceeds from advances from FHLB of Boston 28,500 --
Repayments of advances from FHLB of Boston (33,245) (7,000)
Net directors deferred compensation -- 2
Purchase of treasury stock -- (386)
Purchase of shares by ESOP (1,183) --
Proceeds from exercise of stock options -- 292
Dividends paid (164) (168)
-------- --------
Net cash provided by (used in) financing activities 3,074 (10,296)
-------- --------
Net increase (decrease) in cash and due from banks 1,717 (396)
Cash and due from banks at beginning of period 5,109 5,351
-------- --------
Cash and due from banks at end of period $ 6,826 $ 4,955
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,299 $ 4,377
Income taxes 360 81
See accompanying notes to unaudited consolidated financial statements.
4
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Central Bancorp, Inc.
and its wholly-owned subsidiary Central Co-operative Bank (collectively referred
to as "the Company") presented herein should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
March 31, 2002, included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation. Interim results are not necessarily indicative of results to be
expected for the entire year.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K for the
year ended March 31, 2002. For interim reporting purposes, the Company follows
the same significant accounting policies. As set forth in Note 1 of the Form
10-K, the Company initially applied the requirements of Statement of Financial
Accounting Standards No. 142 (SFAS No. 142) beginning April 1, 2002 and,
accordingly, no amortization of goodwill was recorded in the quarter ended June
30, 2002. Net income and earnings per share (both basic and diluted) for the
quarter ended June 30, 2001 would have been $602,000 and $0.36, respectively,
had the requirements of SFAS No. 142 been applied retroactively.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. Such reclassifications
have no effect on previously reported net income.
(2) LOANS
Loans as of June 30, 2002 and March 31, 2002 are summarized below (in
thousands):
June 30, March 31,
2002 2002
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Real estate loans:
Residential real estate $ 239,026 $ 246,045
Commercial real estate 88,044 87,013
Construction 18,824 20,998
Second mortgage and home equity lines of credit 9,298 9,154
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Total real estate loans 355,192 363,210
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Commercial loans 6,392 6,901
Consumer loans 1,551 1,596
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Total loans 363,135 371,707
Less: allowance for loan losses (3,293) (3,292)
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Total loans, net $ 359,842 $ 368,415
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There were no non-accrual loans at June 30, 2002 and March 31, 2002.
5
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002 (CONTINUED)
(3) DEPOSITS
Deposits at June 30, 2002 and March 31, 2002 are summarized as follows (in
thousands):
June 30 March 31,
2002 2002
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Demand deposit accounts $ 29,731 $ 25,370
NOW accounts 32,802 36,277
Regular, Club and 90 day notice accounts 73,661 72,944
Money market deposit accounts 26,825 17,997
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Total non certificate accounts 163,019 152,588
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Term deposit certificates
Certificates of $100 and above 27,496 27,233
Certificates less than $100 80,558 82,086
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Total term deposit certificates 108,054 109,319
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$ 271,073 $ 261,907
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(4) REPORTING 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.
The Company's other comprehensive income (loss) and related tax effect is
as follows (in thousands):
For the Three Months Ended
June 30, 2002
-----------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
------ ------------ ---------
Unrealized gains (losses) on securities:
Unrealized net holding gains arising during period $ 497 $ 156 $ 341
Less: reclassification adjustment for net
gains included in net income (11) (3) (8)
----------------------------------
Other comprehensive income $ 486 $ 153 $ 333
==================================
6
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(4) REPORTING COMPREHENSIVE INCOME (CONTINUED)
For the Three Months Ended
June 30, 2001
-----------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
------ ------------ ---------
Unrealized gains (losses) on securities
Unrealized holding gains arising during period $ 137 $ 53 $ 84
Less: reclassification adjustment for net
gains included in net income (203) (73) (130)
----------------------------------
Other comprehensive loss $ (66) $ (20) $ (46)
==================================
(5) CONTINGENCIES
Legal Proceedings
The Company from time to time is involved as plaintiff or defendant in
various legal actions incident to its business. Except as described herein, none
of these actions are believed to be material, either individually or
collectively, to the results of operations and financial condition of the
Company.
Central Co-operative Bank (the Bank) has been named as defendant in a civil
suit filed March 28, 2002 in Middlesex Superior Court under the caption Yi v.
-----
Central Bank in which it is alleged, inter alia, that the Bank committed an
- ------------- ----- ----
unfair or deceptive trade practice by failing to pay surplus foreclosure
proceeds to a junior lien holder in 1994. Plaintiff seeks damages of $160,000
plus interest of approximately $150,000 and has applied for a multiple damage
award under Chapter 93A of the Massachusetts General Laws which provides for up
to treble damages if a violation is found to be willful or knowing. The Bank
believes that it has meritorious defenses to all such claims and intends to
vigorously defend against them.
State Income Taxes
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535,000 plus interest with respect to its tax years ended March
31, 2000 and 2001. For the period April 1, 2001 to June 30, 2002, additional
state excise taxes would be $300,000 applying the methodology set forth in the
DOR's aforementioned Notice of Intent to Assess. The Bank is aware that the DOR
has sent similar notices to numerous other financial institutions in
Massachusetts that reported a deduction for dividends received from a REIT
during this period. Assessed amounts ultimately paid, if any, would be
deductible expenses for federal income tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Company intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
7
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(6) SUBSEQUENT EVENTS
Exercise of Stock Options
In July 2002, stock options for 25,639 shares were exercised. The proceeds
to the Company, including the related tax benefit, amounted to $529,000 which
was credited to stockholders' equity in July 2002.
ESOP Stock Purchases
During fiscal 2002, the Company's Board of Directors authorized the Central
Co-operative Bank Employee Stock Ownership Plan Trust (the ESOP) to acquire up
to an additional 5% of outstanding shares of Company stock. During the quarter
ended June 30, 2002, the ESOP acquired 38,874 shares at a cost of $1,183,003.
During July 2002, an additional 6,100 shares, at a cost of $184,495, were
acquired.
Dividend
On July 11, 2002, the Board of Directors voted the payment of a quarterly
cash dividend of $.10 per share. The dividend is payable on August 16, 2002 to
stockholders of record on August 2, 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on Form
10-Q, the words or phrases "will likely result," "are expected to." "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
changes in regional and national economic conditions, unfavorable judicial
decisions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND MARCH 31, 2002
Total assets increased by $5.1 million from $468.2 million at March 31,
2002 to $473.3 million at June 30, 2002. This increase occurred as a result of
net deposit growth of $9.2 million which was partially used to paydown FHLB
advances.
During the quarter ended June 30, 2002, cash and cash equivalents increased
by $13.9 million while investment securities and loans decreased by $4.9 million
and $8.6 million, respectively. These changes reflect the impact of higher than
normal loan prepayments due to the current lower rate interest environment and
the willingness of the Bank to hold a greater portion of its funds in short-term
instruments while interest rates are low. During the current quarter, the
Company originated $28.5 million in loans, including $16.7 million in commercial
real estate loans.
During the quarter ended June 30, 2002, the Company experienced core
deposit growth of $10.4 million, or 6.8%. While deposit flows can vary
significantly on a daily basis, the Company has experienced steady growth in
core deposits during the past five quarters. This growth has been aided by the
introduction and promotion of the Bank's Community Package Account product and
the continuing uncertainty in the stock market.
FHLB advances were reduced by $4.7 million during the quarter ended June
30, 2002. This decrease is consistent with the Company's overall strategy of
reducing its utilization of FHLB advances.
The increase in stockholders' equity of $117,000 to $39.1 million at June
30, 2002 resulted primarily from net income of $1,027,000 and an increase of
$333,000 in the market value of investment securities available for sale, net of
taxes, which were partially offset by cash dividends and stock purchases by the
Employee Stock Ownership Plan (ESOP) totaling $1,347,000. During the current
quarter, an additional 38,874 shares were purchased by the ESOP for a total
purchase price of $1,183,000 ($30.43/share) which was funded by an internal
loan. Approximately 38,000 additional shares may be purchased under the program
approved by the Board of Directors in fiscal 2002.
COMPARISON OF OPERATING RESULTS FOR THE QUARTER ENDED JUNE 30, 2002 AND 2001
Net income increased by $497,000, or 93.8%, to $1,027,000 for the quarter
ended June 30, 2002, compared to the same quarter in the prior year. The
significant increase was primarily due an increase of $1,045,000 in net interest
and dividend income, partially offset by a decrease of $186,000 in non-interest
income and an increase of $80,000 in non-interest expenses. The Company's
effective tax rate was unchanged at approximately 36.3% in both periods.
Interest Income. Interest income for the quarter ended June 30, 2002 was $7.6
million, essentially unchanged from the prior year quarter despite a decrease in
the yield on interest-earning assets from 7.12% in the first quarter of the
9
prior year to 6.62% in the current quarter. Average interest-earning assets
increased by $21.7 million, or 5.0%, to $456.6 million during the quarter ended
June 30, 2002 from $434.9 million for the quarter ended June 30, 2001.
The principal areas of growth in average balances for the quarter ended
June 30, 2002 were real estate loans (up $25.6 million, or 7.7%) and investment
securities (up $28.7 million, or 52.1%), partially offset by a decrease in
short-term investments of $33.0 million, all as compared to average balances for
the quarter ended June 30, 2001.
Interest Expense. Interest expense for the quarter ended June 30, 2002 was $3.3
million compared to $4.4 million for the quarter ended June 30, 2001, a decrease
of $1.1 million, or 24.8%. This significant decrease resulted from a 126 basis
points decrease in the cost of funds from 4.57% in the quarter ended June 30,
2001 to 3.31% in the quarter ended June 30, 2002. This decrease was partially
offset by an increase in average interest-bearing liabilities of $14.4 million
in the current year period.
The significant decrease in the cost of funds in the first quarter of
fiscal 2003 reflected the impact of the series of rate decreases initiated by
the Federal Reserve Board beginning in January 2001, the repricing of a majority
of certificates of deposits during the past year and a shift in deposits from
higher cost certificates of deposits which represented 52.9% of deposits at the
beginning of the first quarter of the prior year compared to 41.7% at the
beginning of the first quarter of the current year.
Provisions 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 future charge-offs of loans deemed uncollectible. In
determining the appropriate level of the allowance for loan losses, management
considers past and anticipated loss experience, evaluations of underlying
collateral, 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 in order to maintain the adequacy of
the allowance.
Due to the high level of asset quality, as measured by low delinquency
rates and the absence of non-performing loans during the past two years, the
Company made no provision for loan losses during the quarters ended June 30,
2002 and 2001.
Non-interest Income. Total non-interest income was $223,000 for the quarter
ended June 30, 2002 compared to $409,000 in the same period of 2001. The primary
reason for the $186,000 decline in the current year was the write-down of
$215,000 in certain equity securities which had experienced a decline in fair
value judged to be other than temporary.
Non-interest Expenses. Non-interest expenses increased $80,000 during the
quarter ended June 30, 2002 as compared to the same quarter in 2001. Exclusive
of the elimination of the amortization of goodwill in the current year as
required by generally accepted accounting principles (SFAS No. 142),
non-interest expenses increased $152,000, or 5.4%, due principally to increases
in salaries and employee benefits ($105,000) and professional fees ($57,000).
The increase in salaries and employee benefits of $105,000, or 6.8%, during
the quarter ended June 30, 2002, was due to overall salary increases averaging
4.7%, increases in staffing and additional ESOP expense due to an increase in
market value of the Company's stock.
The increase in professional fees of $57,000, or 29.7%, during the quarter
ended June 30, 2002 was primarily due to increases in legal and consulting fees.
Income Taxes. The effective tax rates for the quarters ended June 30, 2002 and
2001 were 36.3% and 36.4%, respectively. These rates vary from the statutory
income tax rate for banks of approximately 40.9% due to the Company's use of
both a securities corporation and a REIT subsidiary for state tax purposes.
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535,000 plus interest with respect to its tax years ended March
31, 2000 and 2001. For the period April 1, 2001 to June 30, 2002, additional
state excise taxes
10
would be $300,000 applying the methodology set forth in the DOR's aforementioned
Notice of Intent to Assess. The Bank is aware that the DOR has sent similar
notices to numerous other financial institutions in Massachusetts that reported
a deduction for dividends received from a REIT during this period. Assessed
amounts ultimately paid, if any, would be deductible expenses for federal income
tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Company intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are loan amortization, loan
prepayments, increases in deposits, advances from the Federal Home Loan Bank
(FHLB) of Boston and funds from operations. The Bank is a voluntary member of
the FHLB of Boston and as such is entitled to borrow up to the value of its
qualified collateral that has not been pledged to others. Qualified collateral
generally consists of residential first mortgage loans, U. S. Government and
agencies securities and funds on deposit at the FHLB of Boston. At June 30,
2002, the Bank had approximately $22.4 million in unused borrowing capacity at
the FHLB of Boston.
At June 30, 2002, the Company had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $54.5
million. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company anticipates that it will have sufficient funds available to meet its
current loan commitments.
The Company's and the Bank's capital ratios at June 30, 2002 were as
follows:
Company Bank
------- ----
Total Capital (to risk-weighted assets) 12.68% 11.69%
Tier 1 Capital (to risk-weighted assets) 11.63 10.64
Tier 1 Capital (to average assets) 7.93 7.22
These ratios placed the Company in excess of regulatory standards and the
Bank in the "well capitalized" category as set forth by the FDIC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's 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 rate, 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 Bank's
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 Company's 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 net interest income and preserve
capital, while adjusting the 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
11
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 use of forecasted cash flows
and management's assumptions is compared to net interest income projections
based on an immediate shift of 300 basis points upward and 150 basis points
downward. 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%.
The following table indicates the estimated exposure, as a percentage of
estimated net interest income, for the twelve month period following the date
indicated assuming an immediate shift in interest rates as set forth below:
June 30, March 31,
2002 2002
-------- ---------
300 basis point increase in rates........... (5.58)% (12.9)%
150 basis point decrease in rates........... (1.27)% 0.5%
For each one percentage point change in net interest income in the June
2002 projections, the effect on net income would be $108,000 assuming a 36% tax
rate.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 of the Notes to Unaudited Consolidated Financial
Statements presented elsewhere herein.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Other Information
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
10.16 Termination of Consulting Agreement, dated July 30, 2002,
between Joseph R. Doherty and Central Co-operative Bank
99.1 Certification under Section 906 of Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Registrant did not
file a Current Report on Form 8-K. On July 15, 2002, the
Registrant filed a Form 8-K which included the press release
announcing its earnings for the quarter ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
CENTRAL BANCORP, INC.
---------------------
Registrant
August 14, 2002 /s/John D. Doherty
- --------------- -------------------------------------
Date John D. Doherty
President and Chief Executive Officer
August 14, 2002 /s/Michael K. Devlin
- --------------- -------------------------------------
Date Michael K. Devlin
Senior Vice President, Treasurer
and Chief Financial Officer