1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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 Identification No.)
Incorporation or Organization)
399 HIGHLAND AVENUE
SOMERVILLE, MASSACHUSETTS 02144
- -------------------------------------------- ----------------------
(Address of Principal Executive Offices) (Zip Code)
(617) 628-4000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
--------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or 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 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 1,588,598
----------------------------- ----------------------------------
Class Outstanding at November 10, 2004
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CENTRAL BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30, 2004 and 1
March 31, 2004
Consolidated Statements of Income for the three and six months ended 2
September 30, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity for the six 3
months ended September 30, 2004
Consolidated Statements of Cash Flows for the six months ended 4
September 30, 2004 and 2003
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results 8
of Operations
Liquidity and Capital Resources 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 16
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
September 30, March 31,
(Dollars in Thousands) 2004 2004
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 5,737 $ 7,113
Short-term investments 17,561 27,224
--------- ---------
Cash and cash equivalents 23,298 34,337
--------- ---------
Certificate of deposit 1,223 1,211
Investment securities available for sale (amortized cost of $105,331
at September 30, 2004 and $80,201 at March 31, 2004) 107,604 83,771
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 117,480 93,647
--------- ---------
Loans held for sale 1,182 799
Loans (Note 2) 357,124 356,625
Less allowance for loan losses 3,606 3,537
--------- ---------
Net loans 353,518 353,088
--------- --------
Accrued interest receivable 2,333 2,203
Banking premises and equipment, net 2,300 2,113
Deferred tax asset, net 341 243
Goodwill, net 2,232 2,232
Other assets 1,092 1,024
--------- ---------
Total assets $ 504,999 $ 490,897
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 3) $ 316,310 $ 295,920
Short-term borrowings 651 845
Federal Home Loan Bank advances 138,100 141,100
Subordinated debenture (Note 4) 5,258 --
ESOP Loan 3,116 3,311
Advance payments by borrowers for taxes and insurance 1,317 1,182
Accrued expenses and other liabilities 1,913 5,085
--------- ---------
Total liabilities 466,665 447,443
--------- ---------
Commitments and Contingencies (Note 6)
Stockholders' equity (Note 7):
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;
2,031,026 shares issued at September 30, 2004 and 2,030,251
shares issued at March 31, 2004 2,031 2,030
Additional paid-in capital 12,989 12,920
Retained income 37,442 36,855
Treasury stock (442,428 shares at September 30, 2004 and 365,294
issued at March 31, 2004), at cost (9,904) (7,311)
Accumulated other comprehensive income (Note 5) 1,474 2,293
Unearned compensation - ESOP (5,698) (3,333)
--------- ---------
Total stockholders' equity 38,334 43,454
--------- ---------
Total liabilities and stockholders' equity $ 504,999 $ 490,897
========= =========
See accompanying notes to unaudited consolidated financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------
2004 2003 2004 2003
--------- -------- --------- --------
Interest and dividend income:
Mortgage loans $ 5,457 $ 5,793 $ 10,839 $ 11,814
Other loans 92 104 171 248
Short-term investments 56 75 120 93
Investments 1,321 844 2,410 1,684
---------- -------- --------- --------
Total interest and dividend income 6,926 6,816 13,540 13,839
---------- -------- --------- --------
Interest expense:
Deposits 1,216 1,100 2,366 2,257
Advances from Federal Home Loan Bank of Boston 1,713 1,775 3,431 3,531
Other borrowings 51 -- 90 1
---------- -------- --------- --------
Total interest expense 2,980 2,875 5,887 5,789
---------- -------- --------- --------
Net interest and dividend income 3,946 3,941 7,653 8,050
Provision for loan losses -- 50 50 100
---------- -------- --------- --------
Net interest and dividend income after
provision for loan losses 3,946 3,891 7,603 7,950
---------- -------- --------- --------
Non-interest income:
Deposit service charges 146 157 291 318
Net gains (losses) from sales of investment securities 214 (130) 348 (135)
Gain on sales of loans 56 68 119 209
Other income 83 68 189 185
---------- -------- --------- --------
Total non-interest income 499 163 947 577
---------- -------- --------- --------
Non-interest expenses:
Salaries and employee benefits 1,960 1,723 3,863 3,523
Occupancy and equipment 303 270 625 540
Data processing service fees 277 265 557 546
Professional fees 341 (117) 608 13
Advertising and marketing 265 126 403 247
Other expenses 465 489 949 890
---------- -------- --------- --------
Total non-interest expenses 3,611 2,756 7,005 5,759
---------- -------- --------- --------
Income before income taxes 834 1,298 1,545 2,768
Provision for income taxes (Note 6) 328 468 585 650
---------- -------- --------- --------
Net income $ 506 $ 830 $ 960 $ 2,118
========== ======== ========= ========
Earnings per common share - basic (Note 8) $ .33 $ 0.54 $ .62 $ 1.37
========== ======== ========= ========
Earnings per common share - diluted (Note 8) $ .33 $ 0.53 $ .61 $ 1.36
========== ======== ========= ========
Weighted average common shares outstanding - basic 1,538 1,549 1,549 1,547
Weighted average common and equivalent shares
outstanding - diluted 1,550 1,563 1,562 1,561
See accompanying notes to unaudited consolidated financial statements.
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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 ESOP Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended September 30, 2004
- -----------------------------------
Balance at March 31, 2004 $ 2,030 $ 12,920 $ 36,855 $ (7,311) $ 2,293 $ (3,333) $ 43,454
Net income -- -- 960 -- -- -- 960
Other comprehensive income net of tax:
Unrealized loss on securities, net
of reclassification adjustment -- -- -- -- (819) -- (819)
----------
Comprehensive income 141
----------
Purchase of shares by ESOP
(77,134 shares) -- -- -- -- -- (2,565) (2,565)
Proceeds from exercise of stock
options (775 shares) 1 15 -- -- -- -- 16
Tax benefit of stock option -- 3 -- -- -- -- 3
Director deferred compensation
transactions -- 33 -- (28) -- -- 5
Dividends paid ($0.24 per share) -- -- (373) -- -- -- (373)
Amortization of unearned
compensation - ESOP -- 18 -- -- -- 200 218
Purchase of treasury stock
(77,134 shares) -- -- -- (2,565) -- -- (2,565)
------- --------- -------- --------- ---------- --------- ----------
Balance at September 30, 2004 $ 2,031 $ 12,989 $ 37,442 $ (9,904) $ 1,474 $ (5,698) $ 38,334
======= ========= ======== ========= ========== ========== =========
See accompanying notes to unaudited consolidate financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
September 30,
--------------------------------------
(In thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 960 $ 2,118
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization 189 154
Amortization of premiums 95 97
Provision for loan losses 50 100
Stock-based compensation 218 127
Net (gains) losses from sales of
investment securities (348) 135
Gain on sales of loans held for sale (119) (209)
Originations of loans held for sale (9,678) (25,147)
Proceeds from sale of loans originated for sale 9,414 21,851
(Increase) decrease in accrued interest receivable (130) 337
Decrease (increase) in other assets, net 300 (94)
Increase (decrease) in advance payments by borrowers for taxes and insurance 135 74
Increase (decrease) in accrued expenses and other liabilities, net (143) (1,313)
--------- ---------
Net cash provided by (used in) operating activities 943 (1,770)
--------- ---------
Cash flows from investing activities:
(Increase) decrease in loans (480) 39,843
Principal payments on mortgage-backed securities 3,642 2,684
Proceeds from sales of investment securities 5,485 482
Purchases of investment securities (36,499) (3,000)
Maturities and calls of investment securities 2,495 4,000
Increase (decrease)in due to brokers (3,029) 3,000
Purchase of banking premises and equipment (376) (296)
--------- ---------
Net cash provided by (used in) investing activities (28,762) 46,713
--------- ---------
Cash flows from financing activities:
Increase (decrease) in deposits 20,390 (3,444)
Repayment of advances from FHLB of Boston (3,000) --
Increase (decrease) in short-term borrowings (194) (149)
Issuance of subordinated debenture 5,258 --
Repayment of ESOP loan (195) --
Purchase of shares by ESOP (2,565) --
Proceeds from exercise of stock options 19 13
Dividends paid, net (373) (311)
Net directors deferred compensation 5 4
Purchase of treasury stock (2,565) --
--------- ---------
Net cash provided by (used in) financing activities 16,780 (3,887)
--------- ---------
Net increase (decrease) in cash and cash equivalents (11,039) 41,056
Cash and cash equivalents at beginning of year 34,337 11,222
--------- ---------
Cash and cash equivalents at end of period $ 23,298 $ 52,278
========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 5,878 $ 5,762
Income taxes $ 264 $ 1,146
See accompanying notes to unaudited consolidated financial statements.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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, 2004, 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 owns 100% of the common stock of Central Bancorp Capital
Trust I (the "Trust") which has issued trust preferred securities to the public.
In accordance with Financial Accounting Standards Board ("FASB") Interpretation
("FIN") No. 46 "Consolidation of Variable Interest Entities - an Interpretation
of Accounting Research Bulletin No. 51", as revised by FIN No. 46R ("FIN 46R")
issued in December 2002, the Trust is not included in the Company's consolidated
financial statements.
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, 2004. 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 September 30, 2004 and
March 31, 2004 are summarized below (in thousands):
September 30, March 31,
2004 2004
----------------- --------------
Real estate loans:
Residential real estate $ 163,593 $ 171,682
Commercial real estate 165,039 146,107
Construction 13,503 25,112
Home equity lines of credit 8,835 9,397
---------- ----------
Total real estate loans 350,970 352,298
---------- ----------
Commercial loans 5,148 3,198
Consumer loans 1,006 1,129
---------- ----------
Total loans 357,124 356,625
Less: allowance for loan losses (3,606) (3,537)
---------- ----------
Total loans, net $ 353,518 $ 353,088
========== ==========
There were no non-accrual loans at September 30, 2004 and March 31,
2004.
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CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(3) DEPOSITS
Deposits at September 30, 2004 and March 31, 2004 are summarized as
follows (in thousands):
September 30, March 31,
2004 2004
------------------ --------------
Demand deposit accounts $ 32,569 $ 27,881
NOW accounts 34,122 37,106
Passbook and other savings accounts 74,694 73,737
Money market deposit accounts 63,514 56,084
--------- ---------
Total non certificate accounts 204,899 194,808
--------- ---------
Term deposit certificates
Certificates of $100,000 and above 35,140 27,607
Certificates less than $100,000 76,271 73,505
--------- ---------
Total term deposit certificates 111,411 101,112
--------- ---------
Total deposits $ 316,310 $ 295,920
========= =========
(4) SUBORDINATED DEBENTURE
On September 16, 2004, Central Bancorp, Inc. (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 (the "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 $5,258,000 of the Company's floating rate junior subordinated
debentures due September 16, 2034 (the "Debentures"). The interest rate on the
Debentures and the trust preferred securities is variable and adjustable
quarterly at 2.44% over three-month LIBOR. At September 30, 2004 the interest
rate was 4.34%. The Debentures are the sole assets of the Trust and are
subordinate to all of the Company's 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 Debentures. Concurrently with the issuance of the Debentures and
the trust preferred securities, the Company issued a guarantee related to the
trust securities for the benefit of the holders.
On September 17, 2004, the Company completed the repurchase of 77,134
shares of its outstanding common stock, reducing the Company's outstanding
common stock to 1,588,598 shares. In addition, the Central Co-operative Bank
Employee Stock Ownership Trust (the "ESOP") completed the purchase of 77,134
share of the Company's common stock. The Company and the ESOP purchased the
shares pursuant to the terms of the Stock Purchase Agreement, dated September
13, 2004, by and among the Company and the ESOP and PL Capital, LLC, Financial
Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., Goodbody/PL Capital, L.P.,
Goodbody/PL Capital, LLC, Richard Lashley, John W. Palmer and Richard J. Fates.
(5) OTHER COMPREHENSIVE INCOME (LOSS)
The Company has established standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by, and distributions to, shareholders. Net income is a component of
comprehensive income, with all other components referred to, in the aggregate,
as other comprehensive income.
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9
The Company's other comprehensive income (loss) and related tax effect
for the six months ended September 30, 2004 and 2003 are as follows (in
thousands):
For the Six Months Ended
September 30, 2004
---------------------------------
Before-
Tax Tax After-Tax
Amount Effect Amount
------- -------- ---------
Unrealized gains on securities:
Unrealized net holding losses during period $ (949) $ (352) $ (597)
Add: reclassification adjustment for net
gains included in net income (348) (126) (222)
-------- -------- -------
Other comprehensive loss $(1,297) $ (478) $ (819)
======== ======== =======
For the Six Months Ended
September 30, 2003
---------------------------------
Before-
Tax Tax After-Tax
Amount Effect Amount
------- -------- ---------
Unrealized gains on securities:
Unrealized net holding gains during period $ 1,427 $ 458 $ 969
Add: reclassification adjustment for net
losses included in net income 135 46 89
-------- -------- -------
Other comprehensive income $ 1,562 $ 504 $1,058
======== ======== =======
(6) CONTINGENCIES
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.
TAX SETTLEMENT
During 2003, the Massachusetts Department of Revenue ("DOR") issued
notices of intent to assess additional state excise taxes to numerous financial
institutions in Massachusetts that had received dividends from a real estate
investment trust (REIT) subsidiary. The DOR contended that dividends received by
the banks from such subsidiaries were fully taxable in Massachusetts.
In June 2003, a settlement of this matter was reached between the DOR
and the majority of affected financial institutions. The settlement provided
that 50% of all dividends received from REIT subsidiaries from 1999 through 2002
were subject to state taxation. Interest on such additional taxes was also
assessed. Payment of such taxes and interest totaling $431,000 was made in June
2003. As a result of this settlement, the Company recognized a recovery of
$374,000 in income taxes, which increased net income by the same amount in the
quarter ended June 30, 2003.
(7) SUBSEQUENT EVENT
On October 21, 2004, the Board of Directors voted the payment of a
quarterly cash dividend of $0.12 per share. The dividend is payable on November
19, 2004 to stockholders of record on November 5, 2004.
(8) EARNINGS PER SHARE (EPS)
Unallocated ESOP shares are not treated as being outstanding in the
computation of either basic or diluted EPS. At September 30, 2004 and March 31,
2004, there were approximately 178,000 and 107,000 unallocated ESOP shares,
respectively.
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(9) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Interpretation No. 46R "Consolidation
of Variable Interest Entities ? An Interpretation of ARB No. 51, "to expand upon
and strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. Until now, a company generally has included another entity in
its combined financial statements only if it controlled the entity through
voting interests. FIN 46R changes that guidance by requiring a variable interest
entity, as defined, to be combined by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. FIN
46R also requires disclosure about variable interest entities that the company
is not required to consolidate but in which it has a significant variable
interest. Application of FIN 46R is required in financial statements for periods
ending after March 15, 2004. The adoption did not have a material impact on the
Company's results of operations or financial position.
In March 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105. SAB No. 105 summarizes the views of
the SEC regarding the application of Generally Accepted Accounting Principles
("GAAP") to loan commitments for mortgage loans that will be held for sale
accounted for as derivatives. The guidance requires the measurement at fair
value of such loan commitments include only the differences between the
guaranteed interest rate in the loan commitment and a market interest rate;
future cash flows related to servicing the loan or the customer relationship
should not be recorded as a part of the loan commitment derivative. SAB No. 105
is effective for said loan commitments accounted for as derivatives entered into
beginning April 1, 2004. The Bank adopted this SAB on April 1, 2004. The
adoption of SAB No. 105 did not have an impact on the Company as the Company was
valuing loan commitments to be accounted for as derivatives consistent with this
guidance.
In June 2004, the FASB's Emerging Issues Task Force ("EITF") issued
EITF Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF 03-1 contains new guidance on
other-than-temporary impairments of investment securities. The guidance dictates
when impairment is deemed to exist, provides guidance on determining if
impairment is other than temporary, and directs how to calculate impairment
loss. Issue 03-1 also details expanded annual disclosure rules. In September
2004, the FASB issued FASB staff position FSP EITF 03-1-1 which delayed the
effective date of the new guidance on recognizing other-than-temporary
impairments indefinitely. The Company will evaluate the impact of EITF 03-1 on
the Company's financial position and results of operations upon the issuance of
FSB EITF 03-1-a.
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.
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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 SEPTEMBER 30, 2004 AND MARCH 31, 2004
Total assets increased by $14.1 million from $490.9 million at March
31, 2004 to $505.0 million at September 30, 2004. During the quarter ended
September 30, 2004, loans (excluding loans held for sale) increased by $0.5
million due primarily to an $18.9 million increase in commercial real estate
loans and a $2.0 million increase in commercial loans, partially offset by a
$8.1 million decrease in residential mortgage loans and a $11.6 million decrease
in construction loans. During the current quarter, prepayments of residential
mortgage loans were significant amounting to $20.8 million. 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 most fixed-rate residential
mortgage loans originated during the current quarter should be sold in the
secondary market.
The Company experienced growth of $10.1 million in core deposits and
$10.3 million in term deposits resulting in an increase in total deposits of
$20.4 million. The growth in core deposits was principally related to the
increase of $7.4 million in money market deposit accounts. Because of the
continuation of the low interest rates for deposits in recent years and the
tiered pricing used with this type of account, money market accounts have
attracted large average balances. The growth in core deposits was also aided by
growth in most other types of accounts. The Company began a major marketing
initiative in March 2004 to promote a new free checking account product which
contributed to this growth.
The decrease in Stockholders' equity of $5.1 million to $38.3 million
at September 30, 2004 was primarily attributable to the previously announced
purchase of 77,134 shares of common stock by the Company and an equal number of
shares purchased by the Central Cooperative Bank Employee Stock Ownership Trust
(the "ESOP") for a total of $5.1 million. The Company and the ESOP purchased the
shares pursuant to the terms of the Stock Purchase Agreement, dated September
13, 2004, by and among the Registrant and the ESOP and PL Capital, LLC,
Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., Goodbody/PL
Capital, L.P., Goodbody/PL Capital, LLC, Richard Lashley, John W. Palmer and
Richard J. Fates. At the same tine, the Company received the proceeds from the
issuance of $5.1 million of trust preferred securities which are included in
capital for regulatory purposes and shown separately in the liability section of
the balance sheet.
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COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2004
AND 2003
Net income decreased by $324 thousand to $506 thousand for the quarter
ended September 30, 2004, compared to the same quarter in the prior year. The
current quarter's results included costs of $178,700, net of taxes, consisting
primarily of legal and other professional fees incurred in connection with the
previously announced buyback of 154,268 shares of Company stock from PL Capital
LLC and affiliates by the Company and its ESOP Trust. Included in net income in
the prior year quarter, was an insurance recovery of $214,000, net of the
related legal fees and taxes, attributable to the dispute with certain
shareholders, which was settled during the quarter. Exclusive of the foregoing
significant items, pro forma earnings increased $69 thousand compared to the
corresponding quarter in the prior year. This increase was primarily
attributable to an increase in net interest income and gains on sales of
investments, partly offset by increases in salaries and benefits, data
processing and advertising and marketing expenses.
The Company's net interest margin decreased 19 basis points from 3.39%
in the prior year quarter to 3.20% in the current quarter. The unfavorable trend
in the net interest margin is primarily reflective of the limitations the
Company has in reducing its overall cost of funds. This limitation is due to two
factors. First, the Company's utilization of long-term FHLB advances, which
represented 33% of average interest-bearing liabilities in the current quarter,
has provided for limited repricing opportunities during the period of declining
rates. These advances cannot be prepaid without a substantial penalty, which
management has elected not to pay. Second, the ability to reduce deposit rates
continues to be limited after the past several years of rate reductions as well
as competitive market factors.
The reduction in the net interest margin is also partially attributable
to the shift in the mix of interest-earning assets from loans to short-term
investments and investment securities. During the current quarter, loans
represented 80% of the average balance of total interest-earning assets compared
to 87% in the prior year quarter. This shift to shorter-term, lower yielding
assets results from the Company's decision to sell most long-term fixed-rate
residential mortgages loans originated during the past two years due to the
historically low rates which existed during much of this period.
INTEREST INCOME. Interest income for the quarter ended September 30, 2004 was
$6.9 million compared to $6.8 million in the prior year quarter. Although the
yield on interest-earning assets decreased from 5.89% in the quarter ended
September 30, 2003 to 5.61% in the current quarter, average interest earning
assets increased by $31.1 million.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 2004
increased by $105 thousand to $3.0 million compared to the quarter ended
September 30, 2003. A decrease of 8 basis points in the cost of funds from 2.87%
in the quarter ended September 30, 2003 to 2.79% in the quarter ended September
30, 2004 was offset by an increase in average interest-bearing liabilities of
$27.4 million in the current year period.
10
13
The following table presents average balances and average rates
earned/paid by the Company for the quarter ended September 30, 2004 compared to
the quarter ended September 30, 2003:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2004 2003
-------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $ 354,393 $ 5,457 6.16% $ 364,104 $ 5,793 6.36%
Other loans 5,812 92 6.33 5,864 104 7.09
Investment securities 114,955 1,321 4.60 64,307 844 5.25
Short-term investments 18,694 56 1.20 28,519 75 1.05
--------- ------- --------- -------
Total interest-earning assets 493,854 6,926 5.61 462,794 6,816 5.89
--------- ------- --------- -------
Allowance for loan losses (3,618) (3,370)
Noninterest-earning assets 16,063 20,214
--------- ---------
Total assets $ 506,299 $ 479,638
========= =========
Interest-bearing liabilities:
Deposits $ 285,017 1,216 1.71 $ 255,550 1,100 1.72
Advances from FHLB of Boston 138,780 1,713 4.94 144,484 1,775 4.91
Other borrowings 3,636 51 5.61 0 0 0.00
--------- ------- --------- -------
Total interest-bearing liabilities 427,433 2,980 2.79 400,034 2,875 2.87
--------- ------- --------- -------
Noninterest-bearing liabilities 38,398 37,455
--------- ---------
Total liabilities 465,831 437,489
Stockholders' equity 40,468 42,149
--------- ---------
Total liabilities and stockholders' equity $ 506,299 $ 479,638
========= =========
Net interest and dividend income $ 3,946 $ 3,941
======= =======
Net interest spread 2.82% 3.02%
Net interest margin 3.20% 3.39%
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 quarter ended September 30, 2004 and 2003, the Company
provided $0 and $50 thousand for loan losses. The Company's asset quality, as
measured principally by delinquency rates, charge-offs and loan classifications,
continues to be outstanding.
NON-INTEREST INCOME. Total non-interest income was $499 thousand for the quarter
ended September 30, 2004 compared to $163 thousand in the same period of 2003.
The primary reason for the $336 thousand increase in the current year was the
gain on sales of securities which amounted to $214 thousand. This additional
non-interest income was partially offset by a decline in loan sale gains of $12
thousand in the current quarter. Overall, residential loan origination activity
has declined in the current quarter compared to the same quarter last year,
especially fixed rate loan originations, resulting in fewer loans being sold.
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NON-INTEREST EXPENSES. Non-interest expenses increased $855 thousand, or 31%,
during the quarter ended September 30, 2004 as compared to the same quarter in
2003 due principally to increases in professional fees ($458 thousand), salaries
and employee benefits ($237 thousand) and other non-interest expenses ($160
thousand).
The increase in salaries and employee benefits of $237 thousand, or
14%, during the quarter ended September 30, 2004, was due to overall salary
increases, increases in staffing, as well as increases in pension and health
care costs.
Professional fees increased $458 thousand during the current quarter
due to the costs associated with the previously discussed buyback of 154,268
shares by the Company and the ESOP and the recognition of a partial
reimbursement of legal defense costs from the Company's insurance carrier in the
prior year quarter. The legal defense costs were incurred in connection with
shareholder litigation, which was settled in August 2003.
Advertising and marketing expenses increased $139 thousand as a result
of the kick-off of a fall deposit promotion during the current quarter.
INCOME TAXES. The effective tax rates for the quarters ended September
30, 2004 and 2003 were 40% and 36%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004
AND 2003
For the six months ended September 30, 2004, net income decreased 55%
to $960 thousand, or $.61 per diluted share, compared to $2,118 million, or
$1.36 per diluted share, in the year earlier period. Exclusive of the favorable
impact of $374,000, after-taxes, resulting from the settlement of the Company's
REIT-related tax liability with the Massachusetts Department of Revenue and the
favorable impact of a net insurance recovery associated with certain shareholder
litigation, which increased net income by $276,000 in the first half of the
previous year, and the costs associated with the stock buyback noted above, net
income declined $329,000 compared to the year earlier period. This change was
largely the result of a $397,000 decrease in net interest income between periods
attributable to the factors previously disclosed herein.
INTEREST INCOME. Interest income for the six months ended September 30, 2004 was
$13.5 million, or $299 thousand less than the amount earned in the same period
in the prior year due to a decrease in the yield on interest-earning assets from
5.99% in the first six months of the prior year to 5.59% in the same period of
the current year. Average interest-earning assets increased by $22.5 million, or
5%, to $484.8 million during the six months ended September 30, 2004, from
$462.3 million for the six months ended September 30, 2003.
INTEREST EXPENSE. Interest expense for the six months ended September 30, 2004
was $5.9 million compared to $5.8 million for the six months ended September 30,
2003, an increase of $98,000 or 1.7%. This decrease resulted from a 10 basis
points decrease in the cost of funds from 2.89% in the six months ended
September 30, 2003 to 2.79% in the six months ended September 30, 2004. Average
interest-bearing liabilities increased $22 million to $421.7 million from $400.1
million primarily from the promotion of a 15-month CD product.
The decrease in the cost of funds during the first half of the current
year was entirely due to a reduction in the cost of deposits from 1.77% during
the prior year period to 1.70% during the six months ended September 30, 2004.
The cost of FHLB advances, the Company's other primary interest-bearing
liability, increased during the first half of the current year to 4.89% from
4.88% in the comparable prior year period. As FHLB advances can not be prepaid
without a substantial penalty, these longer term, fixed-rate borrowings have
been a significant factor in the compression of the Company's net interest
margin during the most recent period of declining rates.
12
15
The following table presents average balances and average rates
earned/paid by the Company for the six months ended September 30, 2004 compared
to the six months ended September 30, 2003:
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
2004 2003
-------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $ 353,660 $ 10,839 6.13% $ 372,936 $ 11,814 6.34%
Other loans 5,417 171 6.31 6,311 248 7.86
Investment securities 102,900 2,410 4.68 66,495 1,684 5.07
Short-term investments 22,526 120 1.07 16,607 93 1.12
---------- -------- --------- --------
Total interest-earning assets 484,803 13,540 5.59 462,349 13,839 5.99
---------- -------- --------- --------
Allowance for loan losses (3,618) (3,370)
Noninterest-earning assets 18,508 18,405
---------- ---------
Total assets $ 499,693 $ 477,444
========== =========
Interest-bearing liabilities:
Deposits $ 277,950 2,366 1.70 $ 255,389 2,257 1.77
Advances from FHLB of Boston 140,294 3,431 4.89 144,685 3,531 4.88
Other borrowings 3,469 90 5.19 -- 1 --
---------- -------- --------- --------
Total interest-bearing liabilities 421,713 5,887 2.79 400,074 5,789 2.89
---------- -------- --------- --------
Noninterest-bearing liabilities 36,517 36,123
---------- ---------
Total liabilities 458,230 436,197
Stockholders' equity 41,463 41,247
---------- ---------
Total liabilities and stockholders' equity $ 499,693 $ 477,444
========== =========
Net interest and dividend income $ 7,653 $ 8,050
======== ========
Net interest spread 2.80% 3.10%
Net interest margin 3.16% 3.48%
PROVISION FOR LOAN LOSSES. During the first half of the current year, 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 first quarter. $100,000 was
recorded in the corresponding period of the prior year.
NON-INTEREST INCOME. Non-interest income increased to $947,000 during the six
months ended September 30, 2004 from $577,000 in the prior year period. An
increase in gains on sales of investment securities of $483,000 was partially
offset by a decline in gains on the sale of loans of $90,000 caused by the slow
down in refinance activity this year.
Net gains from sales and write-downs of investment securities were
$348,000 for the six months ended September 30, 2004 compared to net losses of
$135,000 in the comparable prior year period. During the six months ended
September 30, 2004 and 2003, the Company recorded write-downs of $-0- and
$130,000, respectively, 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 $1,246,000 during the six
months ended September 30, 2004, as compared to the corresponding period in the
prior year. Exclusive of the impact of litigation and legal fees, net of the
related insurance recovery in fiscal 2003 and costs associated with the
repurchase of common stock during the current fiscal year, non-interest expenses
increased $624,000, due principally to increases in salaries and employee
benefits of $340,000 and increased advertising costs of $156,000.
13
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The increase in salaries and employee benefits of $340,000, or 10%,
during the six months ended September 30, 2004, was due to overall salary
increases, increases in staffing to support a larger asset base, as well as
increases in health insurance and pension expense.
INCOME TAXES. The effective tax rates for the six months ended September 30,
2004 and 2003 were 38% and 23.5%, respectively. As previously noted, the Company
recovered $374,000 in taxes during the first half of the current year as a
result of the settlement of the REIT tax dispute with the Massachusetts
Department of Revenue. Exclusive of this item, the effective tax rate for the
six months ended September 30, 2003 was 37.0%. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are customer deposits,
short-term investments, loan repayments, advances from the 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,
mortgage-backed securities and funds on deposit at the FHLB of Boston. At
September 30, 2004, the Company had approximately $30 million in unused
borrowing capacity at the FHLB of Boston.
At September 30, 2004, the Company had commitments to originate loans,
unused outstanding lines of credit and undisbursed proceeds of loans totaling
$67.2 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 September 30, 2004 were
as follows:
Company Bank
------- ----
Tier 1 Capital (to average assets) ........................ 7.88% 7.15%
Tier 1 Capital (to risk-weighted assets) .................. 11.54 10.48
Total Capital (to risk-weighted assets) ................... 12.58 11.54
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.
14
17
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 75
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
(dollars in thousands):
September 30, March 31,
2004 2004
------------------------- --------------------
Amount % Change Amount % Change
------ -------- ------ --------
300 basis point increase in rates ......... $(1,631) (10.2)% $ (1,236) (8.1)%
75 basis point decrease in rates........... -- -- (315) (2.1)
100 basis point decrease in rates.......... 133 0.8% -- --
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 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
Not Applicable
15
18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding the Company's
repurchases of its Common Stock during the quarter ended September 30, 2004.
TOTAL NUMBER
OF SHARES
PURCHASED MAXIMUM
AS PART OF NUMBER OF SHARES
TOTAL PUBLICLY THAT MAY YET BE
NUMBER OF AVERAGE ANNOUNCED PURCHASED UNDER
SHARES PRICE PAID PLANS OR THE PLANS OR
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
------ --------- --------- -------- --------
July 2004
Beginning date: July 1 -- $ -- -- --
Ending date: July 31
August 2004
Beginning date: August 1 -- -- -- --
Ending date: August 31
September 2004
Beginning date: September 1 77,134(1) 33.25 -- --
Ending date: September 30
--------------------
(1) All shares were purchased at a price of $33.25 per share in a
negotiated transaction pursuant to a Stock Purchase Agreement
with PL Capital LLC, Financial Edge Fund, L.P., Financial
Edge-Strategic Fund, L.P., Goodbody/PL Capital, L.P.,
Goodbody/PL Capital, LLC, Richard Lashley, John W. Palmer and
Richard J. Fates.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On September 20, 2004, the Registrant convened its Annual Meeting of
Stockholders. The only item submitted to a vote of stockholders was the election
of three directors. Gregory W. Boulos, John D. Doherty and Albert J. Mercuri,
Jr. were elected directors and the terms of office of the following directors
continued after the meeting: Joseph R. Doherty, Paul E. Bulman, Edward F.
Sweeney, Jr., John J. Morrissey and James F. Linnehan. The following is a record
of the voting in the election of directors:
ELECTION OF DIRECTORS FOR WITHHELD
Gregory W. Boulos 1,257,947 339,454
John D. Doherty 1,257,283 340,118
Albert J. Mercuri, Jr. 1,257,947 339,454
There were no abstentions or broker non-votes.
Item 5. Other Information
None
16
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated September 16, 2004, between Central Bancorp, Inc. and JP Morgan Chase Bank
4.2 Form of Junior Subordinated Debt Security Due 2034 (filed as Exhibit A to Exhibit 4.1 filed herewith)
10.1 Guarantee Agreement, dated September 16, 2004, by Central Bancorp, Inc. for the
benefit of JP Morgan Chase Bank, as trustee
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
17
20
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
November 15, 2004 /s/ John D. Doherty
Date -----------------------------------------------
John D. Doherty
Chairman, President and Chief Executive Officer
November 15, 2004 /s/ Paul S. Feeley
Date -----------------------------------------------
Paul S. Feeley
Senior Vice President, Treasurer
and Chief Financial Officer