UNITED STATES
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, 2003
COMMISSION FILE NUMBER: 0-25251
-------
CENTRAL BANCORP, INC.
---------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS
-------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
I.R.S. EMPLOYER IDENTIFICATION NO. 04-3447594
399 HIGHLAND AVENUE, SOMERVILLE, MA. 02144
------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 628-4000
--------------
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
-- --
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
-- --
Common Stock, $1.00 par value 1,663,133
- ----------------------------- ---------------------------------
Class Outstanding at August 13, 2003
CENTRAL BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2003 and March 31, 2003 1
Consolidated Statements of Income for the three months ended
June 30, 2003 and 2002 2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the three
months ended June 30, 2003 and 2002 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 12
Item 4. Controls and Procedures 12
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
(Unaudited)
June 30, March 31,
(Dollars in Thousands) 2003 2003
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,806 $ 5,996
Short-term investments 15,932 5,226
----------- -----------
Cash and cash equivalents 23,738 11,222
----------- -----------
Investment securities available for sale (amortized cost of $57,584
at June 30, 2003 and $59,500 at March 31, 2003) 60,823 61,111
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
----------- -----------
Total investments 70,699 70,987
----------- -----------
Loans held for sale 5,051 647
Loans (Note 2) 372,878 389,817
Less allowance for loan losses 3,354 3,284
----------- -----------
Net loans 369,524 386,533
----------- -----------
Accrued interest receivable 2,365 2,380
Banking premises and equipment, net 1,851 1,869
Deferred tax asset, net -- 719
Goodwill, net 2,232 2,232
Other assets 2,597 619
----------- -----------
Total assets $ 478,057 $ 477,208
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 3) $ 286,855 $ 287,959
Federal Home Loan Bank advances 144,400 144,400
Short-term borrowings -- 176
Advance payments by borrowers for taxes and insurance 938 999
Accrued expenses and other liabilities 4,103 4,231
----------- -----------
Total liabilities 436,296 437,765
----------- -----------
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;
2,028,427 shares issued at June 30, 2003 and
2,027,727 shares issued at March 31, 2003 2,028 2,028
Additional paid-in capital 12,805 12,751
Retained income 35,763 34,601
Treasury stock (365,294 shares at June 30, 2003 and
March 31, 2003), at cost (7,249) (7,249)
Accumulated other comprehensive income (Note 4) 2,007 1,002
Unearned compensation - ESOP (3,593) (3,690)
----------- -----------
Total stockholders' equity 41,761 39,443
----------- -----------
Total liabilities and stockholders' equity $ 478,057 $ 477,208
=========== ===========
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,
--------------------------------
2003 2002
------------- -------------
Interest and dividend income:
Mortgage loans $ 6,021 $ 6,204
Other loans 144 146
Short-term investments 18 27
Investments 840 1,186
---------- ---------
Total interest and dividend income 7,023 7,563
---------- ---------
Interest expense:
Deposits 1,157 1,494
Advances from Federal Home Loan Bank of Boston 1,756 1,789
Short-term borrowings 1 --
---------- ---------
Total interest expense 2,914 3,283
---------- ---------
Net interest and dividend income 4,109 4,280
Provision for loan losses 50 --
---------- ---------
Net interest and dividend income after
provision for loan losses 4,059 4,280
---------- ---------
Non-interest income:
Deposit service charges 161 129
Net gains (losses) from sales and write-downs of investment securities (5) 11
Gain on sales of loans 141 --
Other income 117 83
---------- ---------
Total non-interest income 414 223
---------- ---------
Non-interest expenses:
Salaries and employee benefits 1,800 1,638
Occupancy and equipment 270 281
Data processing service fees 281 291
Professional fees (Note 5) 130 249
Advertising 121 67
Other expenses 401 365
---------- ---------
Total non-interest expenses 3,003 2,891
---------- ---------
Income before income taxes 1,470 1,612
Provision for income taxes (Note 5) 182 585
---------- ---------
Net income $ 1,288 $ 1,027
========== =========
Earnings per common share - basic $ 0.83 $ 0.64
========== =========
Earnings per common share - diluted $ 0.83 $ 0.63
========== =========
Weighted average common shares outstanding - basic 1,546 1,606
Weighted average common and equivalent shares
outstanding - diluted 1,559 1,625
See accompanying notes to unaudited consolidated financial statements.
2
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other Unearned Total
Common Paid-In Retained Treasury Comprehensive Compensation Stockholders'
(In Thousands) Stock Capital Income Stock Income (Loss) ESOP Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002
- --------------------------------
Balance at March 31, 2002 $2,000 $ 11,934 $33,141 $(7,189) $ (626) $ (306) $ 38,954
Net Income -- -- 1,027 -- -- -- 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 -- 7 -- (7) -- -- --
Dividends paid ($.10 per share) -- -- (164) -- -- -- (164)
Amortization of unearned compensation -
ESOP -- 61 -- -- -- 43 104
------ --------- ------- ------- ------- ------- --------
Balance at June 30, 2002 $2,000 $ 12,002 $34,004 $(7,196) $ (293) $(1,446) $ 39,071
====== ========= ======= ======= ======= ======= ========
Three Months Ended June 30, 2003
- --------------------------------
Balance at March 31, 2003 $2,028 $ 12,751 $34,601 $(7,249) $ 1,002 $(3,690) $ 39,443
Net income -- -- 1,288 -- -- -- 1,288
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- -- -- -- 1,005 -- 1,005
--------
Comprehensive income 2,293
--------
Proceeds from exercise of stock options -- 13 -- -- -- -- 13
Tax benefit of stock options -- 4 -- -- -- -- 4
Director deferred compensation
transactions -- 23 -- -- -- -- 23
Dividends paid ($.12 per share) -- -- (126) -- -- -- (126)
Amortization of unearned compensation -
ESOP -- 14 -- -- -- 97 111
------ --------- ------- ------- ------- ------- --------
Balance at June 30, 2003 $2,028 $ 12,805 $35,763 $(7,249) $ 2,007 $(3,593) $ 41,761
====== ========= ======= ======= ======= ======= ========
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) 2003 2002
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,288 $ 1,027
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization 79 80
Amortization of premiums 65 61
Stock-based compensation 111 104
Net (gains) losses from sales and write-downs of
investment securities 5 (11)
Gain on sale of loans held for sale (141) --
Originations of loans held for sale (10,984) --
Proceeds from sale of loans originated for sale 6,721 --
(Increase) decrease in accrued interest receivable 16 (180)
Increase in other assets, net (1,978) (271)
Decrease in advance payments by borrowers for taxes and insurance (61) (296)
Increase in accrued expenses and other liabilities, net 40 811
----------- -----------
Net cash provided by (used in) operating activities (4,839) 1,325
----------- -----------
Cash flows from investing activities:
Net decrease in loans 16,939 8,191
Principal payments on mortgage-backed securities 1,365 1,472
Proceeds from sales of investment securities 482 --
Purchase of banking premises and equipment (61) (123)
----------- -----------
Net cash provided by investing activities 18,725 9,540
----------- -----------
Cash flows from financing activities:
Increase (decrease) in deposits (1,104) 9,166
Proceeds from advances from FHLB of Boston -- 28,500
Repayments on advances from FHLB of Boston -- (33,245)
Decrease in short-term borrowings (176) --
Proceeds from exercise of stock options 13 --
Purchase of shares by ESOP -- (1,183)
Dividends paid, net (126) (164)
Net directors deferred compensation 23 --
----------- -----------
Net cash provided by (used in) financing activities (1,370) 3,074
----------- -----------
Net increase in cash and cash equivalents 12,516 13,939
Cash and cash equivalents at beginning of year 11,222 7,564
----------- -----------
Cash and cash equivalents at end of period $ 23,738 $ 21,503
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,919 $ 3,299
Income taxes $ 546 $ 360
See accompanying notes to unaudited consolidated financial statements.
4
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(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, 2003, 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, 2003. For interim reporting purposes, the Company follows
the same significant accounting policies.
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, excluding loans held for sale, as of June 30, 2003 and March 31,
2003 are summarized below (in thousands):
June 30, March 31,
2003 2003
----------- ------------
Real estate loans:
Residential real estate $ 211,248 $ 236,649
Commercial real estate 115,849 107,140
Construction 30,315 30,294
Second mortgage and home equity lines of credit 9,420 9,128
----------- -----------
Total real estate loans 366,832 383,211
----------- -----------
Commercial loans 4,840 5,319
Consumer loans 1,206 1,287
----------- -----------
Total loans 372,878 389,817
Less: allowance for loan losses (3,354) (3,284)
----------- -----------
Total loans, net $ 369,524 $ 386,533
=========== ===========
There were no non-accrual loans at June 30, 2003 and March 31, 2003.
5
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(3) DEPOSITS
Deposits at June 30, 2003 and March 31, 2003 are summarized as follows (in
thousands):
June 30, March 31,
2003 2003
------------ -------------
Demand deposit accounts $ 32,432 $ 31,523
NOW accounts 38,406 38,047
Passbook and other savings accounts 72,126 71,629
Money market deposit accounts 41,628 42,687
----------- -----------
Total non certificate accounts 184,592 183,886
----------- -----------
Term deposit certificates
Certificates of $100 and above 25,965 26,259
Certificates less than $100 76,298 77,814
----------- -----------
Total term deposit certificates 102,263 104,073
----------- -----------
Total deposits $ 286,855 $ 287,959
=========== ===========
(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 and related tax effect for the
three months ended June 30, 2003 and 2002 are as follows (in thousands):
For the Three Months Ended
June 30, 2003
------------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
------- ----------- ---------
Unrealized gains on securities:
Unrealized net holding gains arising during period $ 1,623 $ 621 $ 1,002
Less: reclassification adjustment for net
losses included in net income 5 2 3
------- ------- -------
Other comprehensive income $ 1,628 $ 623 $ 1,005
======= ======= =======
6
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(4) REPORTING COMPREHENSIVE INCOME (CONTINUED)
For the Three Months Ended
June 30, 2002
------------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
--------- ------------ ----------
Unrealized gains 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
======= ======= =======
(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 $165,000
plus statutory interest of approximately $175,000 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. While
the Bank believes that it has meritorious defenses to all such claims and
intends to vigorously defend against them, a settlement offer has been made to
the plaintiff's counsel, however, no response has been received.
The Company and certain present and former directors had been named in
related federal and state court lawsuits brought by PL Capital, LLC and
affiliates ("PL Capital") and also by Lawrence B. Seidman and affiliates
("Seidman"), respectively, current and former stockholders, in which PL Capital
and Seidman had challenged the directors' determination that PL Capital and
Seidman secretly acted in concert in violation of the Company's Shareholder
Rights Agreement ("Rights Plan"). On August 4, 2003, the Company and the
directors, former directors and affiliated entities that were parties to the
litigation entered into an Agreement (the "Agreement") with PL Capital, LLC and
its affiliated persons and entities, pursuant to which all the parties settled
all of the pending litigation between them and filed with the appropriate courts
the filings necessary for the litigation to be dismissed.
STATE INCOME TAXES
During 2002, the Massachusetts Department of Revenue ("DOR") issued notices
of intent to assess additional state excise taxes to numerous financial
institutions in Massachusetts that have formed a real estate investment trust
(REIT) subsidiary. The DOR contended that dividends received by the banks from
such subsidiaries were fully taxable in Massachusetts.
The Governor of Massachusetts signed legislation on March 5, 2003, which
expressly disallows deductions for dividends received from a REIT, resulting in
such dividends being subject to state taxation. In addition, this law applies
retroactively to tax years ending on or after December 31, 1999. In the fourth
quarter of fiscal 2003, the Company provided additional state taxes, including
interest, net of the related federal tax benefit, of $835,000.
7
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(5) CONTINGENCIES (CONTINUED)
In June 2003, a settlement of this matter was reached between the DOR and
the majority of affected financial institutions. The settlement provides that
50% of all dividends received from REIT subsidiaries from 1999 through 2002 are
subject to state taxation. Interest on such additional taxes is also to be
assessed. Payment of such taxes and interest totaling $431,000 was made in June
2003. As a result of this settlement, the Bank recognized a recovery of $374,000
in income taxes, which increased net income by the same amount in the first
quarter of fiscal 2004.
(6) SUBSEQUENT EVENTS
On July 9, 2003, the Board of Directors voted the payment of a quarterly
cash dividend of $.12 per share. The dividend is payable on August 15, 2003 to
stockholders of record on August 1, 2003.
As more fully disclosed in Note 5, the Company entered into the Agreement
on August 4, 2003 with PL Capital. The litigation between the parties was
dismissed as part of the Agreement and a payment of $400,000, which was
reimbursed by insurance, was made to PL Capital.
(7) RECENT ACCOUNTING PRONOUNCEMENT
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS Statement
No. 123, to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule creates in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement 123 to require
prominent disclosures in both annual compensation and the effect of the method
used on reported results. The amendments to SFAS No. 123 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company is not currently considering the adoption of fair value based
compensation of stock options.
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.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting
policies. The Company considers the allowance for loan losses to be its critical
accounting policy. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The ongoing evaluation process includes a
formal analysis of the allowance each quarter, which considers, among other
factors, the character and size of the loan portfolio, business and economic
conditions, loan growth, delinquency trends, nonperforming loans trends,
charge-off experience and other asset quality factors. The Company evaluates
specific loan status reports on certain commercial and commercial real estate
loans rated "substandard" or worse in excess of a specified dollar amount.
Estimated reserves for each of these credits is determined by reviewing current
collateral value, financial information, cash flow, payment history and trends
and other relevant facts surrounding the particular credit. Provisions for
losses on the remaining commercial and commercial real estate loans are based on
pools of similar loans using a combination of historical loss experience and
qualitative adjustments. For the residential real estate and consumer loan
portfolios, the range of reserves is calculated by applying historical
charge-off and recovery experience to the current outstanding balance in each
loan category. Although management uses available information to establish the
appropriate level of the allowance for loan losses, future additions to the
allowance may be necessary based on estimates that are susceptible to change as
a result of changes in economic conditions and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND MARCH 31, 2003
Total assets increased by $849,000 from $477.2 million at March 31, 2003 to
$478.1 million at June 30, 2003. During the quarter ended June 30, 2003, loans
(excluding loans held for sale) decreased by $16.9 million consisting primarily
of a $25.4 million decrease in residential mortgage loans, partially offset by
an $8.7 million increase in commercial real estate loans. During the current
quarter, interest rates for residential mortgages reached a 45-year low
resulting in significant refinancing activity. Management regularly assesses the
desirability of holding newly originated long-term, fixed-rate residential
mortgage loans in 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 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 fixed-rate residential mortgage loans
originated during the current quarter should be sold in the secondary market.
This decision resulted in the aforementioned decrease in residential mortgage
loans and a $12.5 million increase in cash and cash equivalents during the
quarter ended June 30, 2003.
9
The Company experienced modest growth of $706,000 in core deposits in the
current quarter, which was more than offset by a $1.8 million decrease in term
deposits resulting in a decrease in total deposits of $1.1 million. While
deposits flows can vary significantly on a daily basis, the Company has
experienced a generally flat level of total deposits during the past two
quarters with a declining level of term deposits. Management sets its term
deposit rates to be competitive in its market area, however, the desirability of
term deposits has been adversely affected during this period of low interest
rates.
The increase in stockholders' equity of $2.3 million to $41.8 million at
June 30, 2003 resulted primarily from net income of $1.3 million and other
comprehensive income of $1.0 million.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002
Net income increased by $261,000 to $1.3 million for the quarter ended June
30, 2003, compared to the same quarter in the prior year. Included in net income
in the current quarter was a recovery of income taxes of $374,000 resulting from
the settlement of the REIT tax dispute among Massachusetts banks and the
Massachusetts Department of Revenue (DOR). Exclusive of this item, net income
for the quarter ended June 30, 2003 decreased $113,000, or 11.0%, compared to
the corresponding quarter in the prior year. This decline was primarily
attributable to the reduction in net interest income and margin in the current
quarter due to management's decision to sell its current originations of
fixed-rate residential mortgage loans as previously discussed. The Company's
effective tax rate, exclusive of the tax recovery of $374,000, was 37.8% in the
current quarter compared to 36.3% in the prior year quarter due to the
elimination of the use of the dividends received deduction for state tax
purposes on dividends received by the Bank from its REIT subsidiary.
Interest Income. Interest income for the quarter ended June 30, 2003 was $7.0
million compared to $7.6 million in the prior year quarter. This decrease
occurred due to the steady decline in interest rates experienced over the past
year, which has caused an unprecedented level of loan refinancing and loan
modification activity. As a result, the yield on interest-earning assets
decreased from 6.62% in the quarter ended June 30, 2002 to 6.07% in the current
quarter. This decrease was partially offset by an increase in average
interest-earning assets of $6.1 million in the current year period.
Interest Expense. Interest expense for the quarter ended June 30, 2003 was $2.9
million compared to $3.3 million for the quarter ended June 30, 2002, a decrease
of $369,000, or 11.2%. This decrease resulted from a 39 basis points decrease in
the cost of funds from 3.31% in the quarter ended June 30, 2002 to 2.92% in the
quarter ended June 30, 2003. This decrease was partially offset by an increase
in average interest-bearing liabilities of $2.1 million in the current year
period.
The decrease in the cost of funds in the first quarter of fiscal 2004
reflected the impact of the series of rate decreases initiated by the Federal
Reserve Board beginning in January 2001, the repricing of certificates of
deposits during the past year and a shift in deposits from higher cost
certificates of deposits which represented 41.7% of deposits at the beginning of
the first quarter of the prior year compared to 36.1% 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 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, 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.
During the current quarter, the Company provided $50,000 for loan losses.
While the Company's asset quality, as measured principally by delinquency rates,
charge-offs and loan classifications, continues to be outstanding, the shifting
of the mix of the loan portfolio to a greater portion of commercial real estate
loans indicated the need for an increase in the reserve for loan losses in the
current quarter. No provision was recorded in the corresponding quarter of the
prior year.
10
Non-interest Income. Total non-interest income was $414,000 for the quarter
ended June 30, 2003 compared to $223,000 in the same period of 2002. The primary
reason for the $191,000 increase in the current year was the gain on sales of
loans which amounted to $141,000. During the second half of fiscal 2003, the
Company commenced its mortgage banking initiative. During the current quarter,
$6.6 million in fixed-rate residential mortgage loans were sold on a servicing
released basis. At June 30, 2003, loans held for sale amounted to $5.1 million.
Based on the balance of loans held for sale and loan commitments at June 30,
2003, management anticipates that the volume of loan sales will increase in the
upcoming quarter. With the recent increase in mortgage rates, loan refinancing
activity has declined, which could result in a decrease in the volume of loan
sales during the second half of the Company's fiscal year.
The Company also experienced increases in deposit service charges ($32,000)
and brokerage income on the sale of non-deposit products ($27,000) due to
increases in the volume of activity.
Non-interest Expenses. Non-interest expenses increased $112,000, or 3.9%, during
the quarter ended June 30, 2003 as compared to the same quarter in 2002 due
principally to increases in salaries and employee benefits ($162,000) and
advertising ($54,000), partially offset by a decrease of $119,000 in
professional fees.
The increase in salaries and employee benefits of $162,000, or 9.9%, during
the quarter ended June 30, 2003, was due to overall salary increases averaging
4%, increases in staffing in the lending area, as well as increases in pension
and health care costs.
Professional fees decreased $119,000 during the current quarter due to the
recognition of a partial reimbursement of legal defense costs from the Company's
insurance carrier of $1.9 million. The legal defense costs were incurred in
connection with shareholder litigation, which was settled in August 2003.
Management is continuing to work with its insurance carrier to ensure that the
Company receives full reimbursement of all legal fees to which it is entitled.
No estimate of any additional insurance reimbursement is available.
Income Taxes. The effective tax rates for the quarters ended June 30, 2003 and
2002 were 12.4% and 36.3%, respectively. As previously noted, the Company
recovered $374,000 in taxes during the current quarter as a result of the
settlement of the REIT tax dispute with the DOR. Exclusive of this item, the
effective tax rate for the quarter ended June 30, 2003 was 37.8%. This increase
from the prior year is entirely due to the change in state tax law eliminating
the use of the dividends received deduction on dividends received by a bank from
its REIT subsidiary. The Company's effective tax rate is expected to be higher
throughout the current year as compared to fiscal 2003 as a result of this
change in state tax law.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are short-term investments,
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, 2003, the Bank had approximately $11.5 million in unused
borrowing capacity at the FHLB of Boston. The Bank is currently in the process
of pledging additional real estate secured loans in order to increase its
qualified collateral at the FHLB of Boston.
At June 30, 2003, the Company had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $58.0
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, 2003 were as
follows:
Company Bank
------- ------
Tier 1 Capital (to average assets) 7.92% 7.08%
Tier 1 Capital (to risk-weighted assets) 11.47 10.30
Total Capital (to risk-weighted assets) 12.50 11.33
11
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 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 both actual and
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 actual and
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
50/100 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,
2003 2003
-------- ---------
300 basis point increase in rates......... (4.9)% (7.6)%
50 basis point decrease in rates
(June 30 only).............................. (5.2)
100 basis point decrease in rates
(March 31 only).......................... (2.0)%
For each one percentage point change in net interest income in the June
2003 projections, the effect on net income would be $100,400 assuming a 38% tax
rate.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is
12
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain present and former directors had been named in
related federal and state court lawsuits brought by PL Capital, LLC and
affiliates ("PL Capital") and also by Lawrence B. Seidman and affiliates
("Seidman"), respectively, current and former stockholders, in which PL Capital
and Seidman had challenged the directors' determination that PL Capital and
Seidman secretly acted in concert in violation of the Company's Shareholder
Rights Agreement. On August 4, 2003, the Company and the directors, former
directors and affiliated entities that were parties to the litigation entered
into an Agreement with PL Capital, LLC and its affiliated persons and entities,
pursuant to which all the parties settled all of the pending litigation between
them and filed with the appropriate courts the filings necessary for the
litigation to be dismissed.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 Bylaws of Central Bancorp, 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 Certification
(b) Reports on Form 8-K
Date of Report Item(s) Reported Financial Statements Filed
-------------- ---------------- --------------------------
May 2, 2003 7, 12 N/A
May 12, 2003 5, 7 N/A
May 23, 2003 5, 7 N/A
June 24, 2003 5, 7 N/A
13
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, 2003 /s/John D. Doherty
- --------------- ------------------------------------
Date John D. Doherty
Chairman, President and Chief Executive
Officer
August 14, 2003 /s/Michael K. Devlin
- --------------- -------------------------------------
Date Michael K. Devlin
Senior Vice President, Treasurer
and Chief Financial Officer